Prophets, Predictions and Your Money

When I was growing up my parents took me to a church where I heard a lot of scary sermons. Perhaps taking a little too much liberty with some symbolic passages, I heard about the imminent coming of a great beast. Life would soon be unlivable on earth. As I recall, it was all supposed to happen by 1988. It was scary stuff for a young child to take in.

But the church didn’t have a monopoly on scary prophesy as I was growing up. Remember the book “The Population Bomb?” It came out 53 years ago when I was an impressionable kid. It rivaled anything I heard from prophesy preachers. For example, mass starvation, environmental collapse, and exhaustion of natural resources all would occur very soon because the battle to feed humanity had been lost.

Well, 1988 has come and gone, and life has mostly gotten better. And the wild predictions of The Population Bomb didn’t happen either. But that doesn’t mean the predictors of doom don’t still get an audience, no matter how spotty their track record is.  

Take Ray Dalio for example. He is a billionaire who owns a hedge fund called Bridgewater. He has been successful in getting a lot of media attention promoting his pessimistic views. His concerns include widening wealth gaps, civil unrest, debt, and populism to name a few. His concerns seem to point to a dark future.

The problem is Mr. Dalio doesn’t have a great track record in the prediction business. For example, he was convinced that the US economy was about to fall into a depression in 1981. That’s right before one of the longest expansions in US history started to take off.

Or, consider his prediction that bonds would outperform stocks in the 1990’s. In reality, 10-year treasury bonds returned 67% from 1992 to 1999, but the S&P 500 returned 316%. Wrong again.

But it could be argued that I am just picking on Mr. Dalio and perhaps other forecasters are much more accurate. Not really.

Consider a study of market forecasters from 1988 through 2017. In summary, the study proved the incompetence of market forecasters. Accuracy was found to be slightly lower than flipping a coin.

Or, as Warren Buffett puts it, “We’ve long felt that the only value of stock forecasters is to make fortune tellers look good.”

Investment Optimism in an Unpredictable World

Hopefully I’ve made the case short-term predictions are as unreliable as a soothsayer. But I think there is good reason for optimism if our time horizon is long term. Here are six suggestions to maintain an optimistic outlook when you hear scary forecasts as you make investment choices.

First, consider what is left out of the newspapers you read. I enjoyed a week of journalism training from a magazine called World a few years ago. One of the lessons I remember is that a good story is not about a “dog biting a man.” That happens all the time. Rather, if a newspaper finds a story about a “man biting a dog,” that’s a real story! Unusual, weird and unexpected.

More to the issue of investing, think about how many wonderful things are happening in the world that we never learn about. Very little of the good news is put into stories because, frankly, it doesn’t sell. Give us a good story about something awful happening somewhere and we will read it.

But, from the investment angle, it colors our view of the world. How can we not assume the world is getting worse if we only consume click bait headlines on social media? Perhaps it’s a great time to decide to dial back the amount of news we consume each day.

Second, look at the facts showing how much better the world is today. For example, there has never been a time in human history when those living in extreme poverty have had a brighter future. Here are a few facts that don’t make it into the news very often:

• Just 200 years ago, 85% of the world population lived in extreme poverty. 20 years ago, it was 29%. Before Covid set us back, only 10% lived in extreme poverty. Based on the trendline, we could come close to eliminating the most extreme poverty in our lifetime.
• In 1800, among all babies who were ever born, roughly half died during their childhood. Life expectancy was just 30 years and no country had a life expectancy above 40. Life expectancy at birth was only 45 years in 1870. The average life expectancy around the world today is around 72.

In short, the good news is all around us, but we may have to look for it.

Third, be aware of our attraction to pessimism. Despite the record of things getting better for most people most of the time, pessimism sounds smarter. It’s intellectually more engaging to discuss what’s wrong with the world. The optimist, on the other hand, can be viewed as an intellectual lightweight.

Fourth, recognize that none of us knows which way things will turn in the short run, so concentrate on the things you can control. A simple well diversified portfolio is easily established. Low-cost funds are not hard to find. Set these tools in place and put your savings on automatic to dollar cost average each payday.

Fifth, address your legitimate fears by allocating sufficient resources to liquid funds to allow you to handle the inevitable market downturns. I’ve seen some in the FIRE movement get comfortable with a close to 100% stock ratio. While the trajectory of history seems to be in favor of the world getting better, there are always setbacks, wars, recessions and pandemics that should keep us balanced from giddy optimism.

Finally, to those of you like me who are in the faith community, I won’t try to answer specifically how I reconcile my faith with my optimistic views. That’s another newsletter.

But let me just close with a quote I found next to a tree on the campus of the University of Montana from Martin Luther. “Even if I knew that tomorrow the world would go to pieces, I would still plant my apple tree.” I like that optimism of going about living fruitful lives regardless of what may come.

I’ve got to hit the send button, but I would love to hear from some of the SMWP readers on how you balance the optimistic and pessimistic sides to your personality as it plays out in investing.

Joe Kesler

Smart Money with Purpose