It Pays to Be Optimistic, But not Naive

I like to listen to dissenting views on global finance. I love to see people try to poke holes in my projections of the future. And that mostly does one of two things:

1. It confirms my projection and makes me more confident with it

2. It helps me to realize other factors I have not taken into consideration. And it helps me determine whether they matter or not

I use the same frame when listening to other finance and economics pundits. But I consider their bias too. This is why I never take things that people who work in banks (or wealth management firms) say seriously. That's because they are doing a sales job.

They are not really analysts or economists, they are salespeople. They want more clients. They want their existing clients to stay. They want their existing clients to buy more. So, naturally, they look for narratives that support what they want to sell.

And I have seen this at play many times. I have seen it too many times that I am not stunned by it anymore. So, I'll start here with my second point - don't be naive.

Free Market is Not Exactly Free

If you think you are investing in the free market because it is America, you kid yourself. None of those markets are “free markets”. The USA isn't, China isn't, Japan isn't, South Africa isn't, the UK isn't, the EU isn't and I can keep going.

There is not one "free-market economy" in this world. They are all manipulated in some form. Some are indirectly but stylishly manipulated. Others are direct and brutal.

But the idea that there is one that is completely free to the market forces of demand and supply, is nonsense. Don't be naive. They all get manipulated.

Why is it that a lot of people have been experiencing financial pain in the real economy, and the stock market is doing great? Not even a bit of that is reflected in the stock market in 2024 thus far.

That should tell you something. This is why I keep saying it is not time to short yet. Markets do not crash because the economy is bad. Markets crash when the major forces and manipulators run out of options.

A market crash will not happen because there is a third world war or because of record debt levels. Instead, a crash will happen when the Fed panics.

The question is this - what tool does the Fed have to deal with stagflation? I can't think of one. They will cut rates in an attempt to stimulate growth. But won't stop easing, which will accelerate the downward spiral.

And it will be like the old saying - when counterfeit money appears on the scene, good money goes into hiding. This has happened before. It can happen again. Don't be naive.

The Optimist is Right 80% of the Time

This is just an approximation though. And by default, you should be an optimist. But as an investor, you should be always on the lookout for pessimistic viewpoints.

Not so that they can change your mind, but so that they can either reinforce your position or show you a parameter you may have missed. In investing, pessimism has its moments. And they are single moments of brilliance.

Pessimism pays off in those single one-shot moments. But you can't continually run on those strategies. You will lose money.

Therefore you have to be optimistic most of the time, and try to pick your moment of pessimism very carefully. This is like picking a needle from a haystack.

Just because you spot the needle, doesn't mean you can barge in and take it. If you are not careful it will injure you and you will lose sight of it again. That is the way it is with investing too.

So, if I sound pessimistic about investing, it is not because I am a pessimistic person. Rather, it is because your success as an investor will be made or broken in those pessimistic moments.

No one cares if you are up 27% in a year when the S&P 500 is up 31%. But if you are up 23% in a year when the S&P 500 is down 14%, you earn a name for yourself.

No one can build a viable investment strategy by being a pessimist. The millionaire investing playbook is an optimist playbook.

However, if you can accurately predict the one-shot pessimistic moments, you will avoid trouble and make a fortune.

Conclusion

You should build your investment strategy on optimism. But your make-or-break moment is going to come in a pessimistic moment. It is not just enough to survive those moments, they can also be used as a catalyst to thrive if you are well prepared.

What have we learned? Don't be naive. There is no free market anywhere. Be optimistic, but the real test of knowing what you are doing will come in a pessimistic moment.

I sense a pessimistic moment is getting closer. Don't be naive.

Stay rich