Why The Stock Market Is Geared Towards Optimists

Investing at its core takes a leap of faith. As an outsider to a business, you need to be confident that the people running a business will have the ability and smarts to make it grow and thrive over time, making customers happy and building a self-sustaining enterprise. Many potential investors never get started because they cannot get over the fear they will make a bad choice and buy shares of a lousy company that does not make the grade to become a giant of its industry.

Yet when you look at some of the most successful businesses in history, you will see that many of them have leaders with an inherent sense of optimism about their business prospects. Often, optimism is itself a cause of success. Optimistic business leaders are slow to accept defeat and quick to switch gears to find better solutions, and they are the ones that we should back with our capital. 

Why Stock Investors Have Cause For Optimism

As investors, it is even easier for us to be optimistic. A business leader typically runs only one company at a time, and that leader’s immediate prospects are tied to that single company’s performance.

By contrast, investors get lots of chances to make smart investments. Having a portfolio of 20 stocks or more assures you that your risks are spread, and that no single company will be an obstacle to you reaching your financial goals, no matter how poorly its stock might perform.

Moreover, the very nature of stock investing lends itself to optimism. After all, a stock can never lose more than 100% of its value, but it can multiply to almost limitless heights. Having a single Apple or Amazon share in your portfolio over the long run can make up for dozens of complete losses on other stocks and still leave you with market-beating returns. 

Investing in Human Progress

Matt Ridley’s book The Rational Optimist makes this point elegantly. Essentially, Ridley argues that it is perfectly rational to be optimistic about stock markets because it is in a position that respects decades of economic history.

When we invest, we are essentially investing in human ingenuity. It is an infinite resource that improves our quality of life, tackles huge human problems, and drives progress. Consider some of the most iconic innovations of the recent decade, such as the Apple iPad, IBM Watson, Instagram, facial recognition technology, Netflix streaming, semi-autonomous cars, Uber, smart speakers, etc. 

We have overcome challenges before

Think back to these events:

  • After the 1987 stock market crash, many questioned whether the U.S economy would ever recover, but unsurprisingly stocks bounced back.
  • The bear market of 2000 to 2002 combined the bursting of the tech bubble with the 9/11 attacks. Yet similar national security threats still persist today, but the stock market has rebounded from their worst levels.
  • The financial crisis in 2008 and 2009 led many to believe that the banking system would collapse. But thanks to the efforts of policy makers and legislators, what followed was a 10-year bull market.
  • Not forgetting between February 12 and March 23, the Dow lost a stunning 37% of its value, triggered by the Covid-19 outbreak. Then it rebounded. With a vengeance. 

There are only so many times you can see things like this happen before you are convinced that the long-term trajectory of the stock market is towards the upside.  

Do Not Mistake Blind Devotion For Rational Optimism

Although there are good reasons for investors to be optimistic about their portfolios, that does not mean you should not be pragmatic as well. Blind devotion to a business or a corporate leader can lead to heartbreaking losses when things go poorly. Even smart people with great business ideas do not always succeed, and some of your stocks will end up being losers even through their business models seem infallible.

When you think like a business owner, however, you will be less prone to falling for investment pitches that are too good to be true. Understanding and learning more and more about the businesses in which you invest is a great way to make your investment decisions more rational.

The best investors have just the right mix of optimism and reason. Being an optimist will get you to invest in the first place, while being reasonable will ensure that you do not lose faith when companies faces inevitable setbacks. Combining those two favorable traits will set you up for investing success. 

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