Transforming personal finance since 2011

#89 — "Pessimists sound smart, optimists make money"


July 18th, 2023

By Andrew Craig

Reading time: ~ 11 minutes

The quote in the title of this article is one of my all-time favourites, if only because believing it to be true can have a significant, tangible and positive impact on your life.

Over the past few years I have more or less frequently described human progress as the most important investment theme of all.

In the century from January 1923 to the end of 2022, the S&P index of American shares returned "10.34%" per annum (7.25% adjusted for inflation).

Similarly, in the UK market, over the 66 years from 1955 to the end of 2021, the Numis NSI 1,000 Index of the smallest companies in the UK stock market returned an average of no less than "16.4%" per annum (11.3% after inflation - that is about four times the real return of UK house prices over the same time-frame for what it is worth).

If you stop for a moment to examine why this has happened, it is more or less obvious: You need only consider the extraordinary progress we have made as a species in those time frames.

In the last century we’ve enjoyed wave after wave of astonishing forward progress technologically. Whether that has been the development and spread of the automotive industry, aviation and shipping, the advent of the silicon chip, the internet and smart phones or, more recently, the explosion in the biotech industry, artificial intelligence and machine learning, the list of developments in the last hundred years is very long indeed.

The development, adoption and, crucially, convergence of all of the above technologies has driven the inexorable rise and rise of pretty much every sector of the economy decade after decade.

This has created many trillions of “currency units” (pounds, dollars, euros, yen etc…) of real wealth, lifted billions of us out of grinding poverty and insecurity and improved our lives immeasurably, including in much of the developing world – certainly in terms of most of "the things that really matter": Longevity, health(care), food, shelter, warmth, energy, light, literacy, leisure, travel, political, religious and sexual freedom and extraordinary freedom from violence, war and homicide for the vast majority of the global population as against the norm in every other previous age.

This, front and centre, is why “optimists make money” - because anyone who has taken the time and made the effort to secure investment exposure to all of the above throughout their lives has had a very good chance of becoming properly wealthy.

At the most fundamental level, owning the stock market is just a way of “owning” human progress. This is why my first book was called “How to Own the World”. It is also why investing in the stock market has some way more than a century’s track record of being arguably the most reliable way of becoming wealthy over time.

Doing this has never been more accessible or easier than it is today given the fantastic range and quality of investment accounts and products available in the developed world and even, increasingly, in the developing world. The kinds of investment returns given in the examples above are enough to make millionaires of “normal people” over a lifetime of considered investment.

Our biggest problem...

Sadly, however, vanishingly few people understand this reality and even fewer are taking advantage of it due to a toxic combination of ignorance, inertia and fear. Or, put another way, because “pessimists sound smart.”

Not only do they sound smart, they also get a great deal more air time and press coverage than optimists for two related and more or less intractable reasons: First, a very strong and inherent bias to the negative in our press and, secondly, a raft of cognitive biases we have as human beings which are the underlying driver of that negative press bias to begin with.

Estimates vary, but it is a "well-established empirical fact" that wherever you live in the world, if you consume traditional media, whether television, newspaper, radio or online, the vast majority of “the news” that you are presented with every day has a very "significant negative bias". We are all painfully aware that social media is no different.

This is true of news coverage generally. If you are lucky, there might be a light-hearted story about a water-skiing squirrel or similar right at the end of a given television news bulletin, but next time you watch or consume “the news”, please do take a moment to really observe and take account of the percentage of the stories which concern something exceptionally awful, as against the percentage which might be considered to be focused on anything even vaguely positive: War, famine, murder, rape, disease, political corruption? Tick. Every night. An uplifting piece about a transformational new technology? Not very often.

The reason that our news is the way it is has to do with how human psychology functions at a very fundamental level, how this impacts all of us as the audience for “news” and how journalists, editors and media companies conduct themselves as a result.

The problem is that we human beings have some extraordinarily problematic “software” in our brains. We are hard-wired psychologically to focus on the extraordinary (and negative) to the exclusion of the unremarkable (and positive). Journalists and news editors know this, which is why they are particularly prone to the same phenomenon. This is what sells copy and drives clicks after all - precisely because we are all hard-wired this way. As the well-known news room saying has it: “If it bleeds, it leads.”

...why this is relevant to your ability to grow wealth:

Crucially, this strong inherent negative bias extends to the coverage of financial markets. A financial market crash of any kind will be emblazoned on the front of the majority of our newspapers and will headline TV news bulletins. The slow and steady appreciation of the stock market over many decades that results from human progress, however, will never be front page news.

This also means that talking heads who are keen to tell us how awful things are and rant on about the possibility of a massive crash coming any day tend to get a great deal more attention than the small minority of industry commentators who have something rather more positive to say who seldom get invited on to TV studio sets.

As a result, the majority of the population tends to have a horribly distorted view of and understanding of financial markets because the only time they ever hear about financial markets on the news, or - by extension - at all, is when there has been a “massive crash”.

This is one of the key reasons why the majority of people don’t invest. They think financial markets are fundamentally riskier and scarier than they actually are. They think the stock market is a casino and equate investment with gambling – which is a huge failure of our education systems and incredibly damaging to millions of people’s chances of becoming wealthy.

I believe this is one of the biggest tragedies of our time, without exaggeration. It is also the underlying driver of so many of our biggest problems as a society in the UK and beyond.

Effective financial literacy and the considered use of investment products can be a kind of “silver bullet” – for individuals, and, more broadly, for societies as a whole. At the individual level, every person who learns enough about financial markets to become properly financially literate and optimise their financial affairs as a result, very significantly increases the chance that they will become wealthy – and almost no matter how much they earn – over a life time of investment at least.

This reality has two powerful knock-on effects for society more broadly: First, every person who does this will need far less state support – for them, and for their dependents. This is good for public sector balance sheets which are horribly challenged all over the world.

Secondly, by virtue of becoming investors, people are helping to provide capital for companies seeking to solve real human problems and / or deliver human wants and needs, primarily via technological development.

A depressingly small number of people know anything at all about financial markets or make use of them in an effective way, even in modern liberal democracies, even with the phenomenal access to information that most people have these days, and even given the fact that the fundamental “technology” of financial markets has now been with us for more than two centuries. This makes lives immeasurably harder than they might otherwise be and is also one of the key underlying drivers of inequality. It is also a massive challenge to national balance sheets all over the world and, perhaps most importantly, to companies who need capital to do any number of fantastic things and drive human progress.

In the UK, for example, fewer than 5% of the adult population have a stocks and shares Individual Savings Account (ISA) – one of the main tax-free investment accounts that a private individual in the UK might use to secure exposure to the stock market.

That is to say that something like 95% of the adult population are not knowingly or pro-actively investing in shares.

Millions of British nationals will have some exposure to the stock market via their pension funds, but a series of poor policy choices by successive British governments (both Labour and Conservative) over the last three decades have driven the level of that exposure to the lowest it has been in a generation, dooming so many British pension holders to structurally low investment returns and wreaking havoc with the British economy.

As an article in the Financial Times put it in March of this year:

“Over the past two decades, holdings of UK-listed companies by British pension and insurance funds have plunged from about half of their portfolios to 4 per cent…”

(Source: “Corporate rush to offload pensions adds to pressure on UK equities.” - Financial Times, 10th March 2023).

"Only 19 per cent of British pension fund assets are invested in equities overall (i.e. – when you include overseas shares from the US, Europe, Asia and emerging markets, over and above British shares alone). This is down from more than 60 per cent from as recently as fifteen years ago."

(Source: “Diagnosing London’s listing miasma…”. - Financial Times, 10th March 2023).

Why this matters...

This matters because it is hugely prejudicial to the trajectory of the UK stock market and, by extension, the UK economy and indeed society as a whole.

A lot has been written in recent years about the extent to which leading British companies are avoiding the UK stock market and choosing other overseas markets. When it comes to very large companies, recent high profile examples include the UK’s leading semiconductor chip designer Arm Holdings, FTSE100 building materials group CRH and formerly one of the very largest companies in the FTSE, Anglo-Australian mining group, BHP Group which took its main stock market listing to Australia in 2022.

Similarly, of 14 British biotech companies to float on a stock market since 2018, no fewer than "12 of them listed overseas", with 11 choosing Nasdaq in the US. The British IPO market has more or less ground to a halt in the last few years.

All of which has taken jobs, economic activity, tax revenues and innovation away from the UK.

Arguably of most importance, however, is the fact that the London stock market overall has lost a good deal more than 1,000 companies in the last 15 years. The total number of London-listed companies has fallen from 3,250 in Q1 2007 to "fewer than 2,000" today.

These things have all happened because of the gradual erosion of the UK's equity culture. Things have been particularly bad for smaller companies. This is extremely important and a big part of why Britain is struggling because of just how important small companies are in any economy.

In 2021, "smaller companies" accounted for more than 60% of employment and more than 52% of turnover in the UK private sector.

Even more important, numerous academic studies conducted over several decades have shown that smaller companies are extremely important for driving innovation and technological progress overall. They are also where larger companies come from – or should be at least, in a functioning economy.

Google, Tesla, Facebook, Microsoft and even $3 trillion Apple were all smaller companies once upon a time. Their development into the global behemoths of today, valued in the trillions, relied on a fully-functioning US stock market.

In the next few weeks and months I intend to write a series of articles about why the UK stock market has become so particularly challenged in recent years, what this means for all of us and what we might do about it. (For our overseas readers, many of these themes apply outside of the UK for what it is worth).

I will look at the role played by government policy and financial regulation, at the damage caused by the inexorable rise of passive investing as against active, and at the impact billions of pounds worth of crypto "investment" has had on real companies in the real economy.

Perhaps most importantly, we’ll look at what you might do about it all, and at the many reasons why it will still very likely pay you to be an optimist!


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