Date: 2020-11-08
Equity investments for optimists, skeptics, and pessimists
I have met many who believe that good equity investors must be optimists in the long run. This piece is on how skeptics and/or pessimists (or realists, as they call themselves) may be able to live with equity rallies, without abandoning their world view. Especially this time around, when the asset prices run up so fast as so many things seem dire, this framework would become a good coping mechanism.
Terms:
In Korean language, there are two terms that differentiate two different types of optimists. One is 낙천주의자 (Naag-cheon-joo-eui-ja) and the other, 낙관주의자 (Naag-gwan-joo-eui-ya) - There must be suitable terms for the same concepts in English but I don’t know what they are. The former has no worries. The latter may or may not have worries. The former is those who believe that the outcome will just be good. The latter is those who believe that there will be developments for the better. The former is more of a believer. The latter is also a believer, but more of a doer. The former takes a passive take on optimism, while the latter takes an active stance on his or her optimism. So here, I call the former ‘passive-optimists’ and the latter ‘active-optimists.’
Should, would, could:
If one were to strongly believe that the world should be in a certain way (whether it were for the sake of righteousness or purely due to his or her certain forecasting), outcomes that deviate from that hope would occur to him or her as disappointments. And any investor obsessed with ‘should’ and is in denial against reality can at best yield disappointing returns and at worst can be wiped out. Whatever one thinks is right or correct, there tends to be someone who disagrees, and in the end the outcome is either the popularity contest of the idea within the system or whatever that happens to be the outcome based on the incentive structures and the game theory elements of it. In that sense, skeptics and/or pessimists surely stand a chance to outperform passive-optimists. And per active-optimists, issue becomes whether one can really be active-doer or not as an equity investor; most of the time, the answer is no. This way, skeptics and/or pessimists can continuously be skeptical and disappointed at the system, and the more skeptical and disappointed they are, the better their investment returns may turn out to be.
Then does it make sense for equity investors to be skeptics and/or pessimists, even just for the return sake?
From the beginning, I did it all wrong. Labeling one as an optimist or a pessimist is perhaps an approach too simple, given the complexity of the real world. People may define the terms optimism and pessimism quite differently. For a sociopath, as long as a situation is for his or her personal benefit, hope for that situation is ‘optimism,’ be it nuclear wars or earthquakes. For more normal and decent people (as you see here, I am an optimist deep inside), optimism is something that benefits themselves, as long as it is not too destructive to others. So perhaps one can put the self in the following situation and see how he or she feels: (1) make global equity index short position, (2) IF the position made a lot of money due to some sort of destructive macro event, what is the expected feeling? Pure joy? Bitterness? Sadness? Relief? Ecstasy? I would like to believe that the common placed cases of feeling smart and happy in such situation is due to silliness (case of selfishness and vanity overwhelming the human decency) and also just the types of personalities this sector tends to attract (again, I am an optimist). But another interpretation is possible, too. If one were to feel strongly about righteousness and if a fraud were taking place, making money from successfully shorting the fraud (=active-skepticism) could make the investor feel happy and meaningfully fulfilled, too; except, can shorting frauds ever be that pleasant? Haha. Do we need to have multiple personalities for different positions?
Again, the mindset problem is a conundrum.