Optimism as a Default Setting

Josh Brown is one of Prof G Markets’ favorite guests. He’s funny, fearless, and genuinely insightful about the markets. Turns out, he’s also a great writer. We asked him to share the post below, making the case for optimism, as that is not our strong suit. I’m more of a “the glass is empty, we’re out of water, and it’s big tech’s  fault” kind of guy. This post is adapted from his forthcoming book, You Weren’t Supposed to See That, coming out September 4.

Optimism as a Default Setting

by Josh Brown

At the turn of the 20th century, banker J.P. Morgan was the most powerful man on Wall Street, perhaps the most powerful man in the world. Finance in those days was still the Wild West, largely unregulated and prone to boom and bust cycles much more violent than anything we see today. On several occasions, Morgan personally orchestrated emergency measures to stop bank runs that might have otherwise taken down the financial system — typically increasing his own wealth in the process.

Shortly after one of those near misses, the Panic of 1907, an old friend of Morgan’s from Chicago came for a visit. The friend was, in the phrase of Mark Skousen, from whom I got this story, a “perma bear” — no matter what the market did, his outcome was always pessimistic. As usual, he and Morgan got to talking about the markets. And as usual, Morgan’s friend saw poor omens in every market indicator, while Morgan saw only buying opportunities. Eventually they headed out for lunch, and, walking up Broadway, Morgan’s friend was admiring the towering skyscrapers that were starting to define the Manhattan skyline. Impressed, he acknowledged they had nothing like them in Chicago. Eventually, Morgan stopped and turned to his friend. “Funny thing about these skyscrapers,” he said, “not a single one was built by a bear!”

Six years before that conversation, Morgan had completed his purchase of Andrew Carnegie’s entire steel operation for the unheard-of sum of $480 million, hundreds of billions in today’s dollars. You don’t do that deal and amass that kind of wealth with a persistently negative outlook. Count the perma bears on the Forbes 400 list or the number of pessimists who run companies in the Fortune 500. You will find none.

Winners and other men and women of foresight and ambition do monumental things; pessimists watch them from the sidelines, making a list of all the reasons things won’t work out. The losers do get to win sometimes, too. But their victories tend to be Pyrrhic, as every calamity ultimately leads to opportunity when the dust clears.

Bullish

In 2009, deep in the depths of the Great Financial Crisis, I saw Sam Zell speak to an audience of real estate investors and developers. He told us that “kings would be made” in that moment. He had nothing left to sell anyone, having blown out of his massive real estate holdings just three years earlier in a time of optimism. Old Sam had seen too many of these cycles; he knew that you always bet on positive outcomes, and you bet heavily when you’re alone on that side of the trade. It doesn’t always work, but it mostly does.

Pessimism is intellectually seductive, and the arguments always sound smarter, especially when they dovetail with our own worries. In the early years of the recovery from that crash, Sam’s advice (which Morgan would have echoed) was hard to follow. Even four years later, in 2013, when the stock market finally made it back over the 2007 high, optimism was scarce.

I remember distinctly how hesitant investors were to think positively about the future back then. On financial social media, saying things might work out OK was practically an invitation to be mercilessly ridiculed.

There were all sorts of reasons not to trust the recovery, and if you know anything about the media, then you know they had been relaying these reasons to us morning, noon, and night, repeatedly admonishing us lest we get too optimistic. Valuations were high, they said, while earnings would surely disappoint. Interest rates would rise. Various debt crises would ensue. Demographics were unfavorable. Obama’s healthcare plan surely meant the end of America. A looming government shutdown that fall would undoubtedly be the nail in the coffin.

And yet, somehow none of those things sank us. The year 2013 turned out to be the best for stocks since the halcyon days of the late 1990s. The Dow Jones Industrial Average finished the year up 26.5%, its best finish in 18 years. The S&P 500 had its best annual return in 16 years, capping out the year with an almost 30% return, ending December at a new record. The Nasdaq soared 38.2%, led by an emerging group of biotechnology and solar stocks that put on an extraordinary show for a new generation of growth stock enthusiasts.

According to S&P Dow Jones Indices, 457 of the S&P 500’s large cap stocks — roughly 90% of the index components — were up on the year. More than two-thirds of them had gains of 20% or more.

A new car company came out of the woodwork, too, and its relatively unknown CEO, Elon Musk, appeared on the cover of Fortune magazine as “Businessperson of the Year” in December. Tesla’s stock was up over 350% in 2013, kicking down the door to a new era while clearing the cobwebs of the aughts decade crisis away. Tesla’s rise and Musk’s wholly unorthodox approach to building his business represented the start of something entirely different from what we were accustomed to. This brought out as many haters and doubters as it did fans and acolytes. What was clear to both sides, however, was that something was changing.

Netflix had made its transformation from the company that mailed you physical DVDs to a streaming platform that changed the way we watched television and movies forever. Its stock rose 300% that year, becoming one of the hottest growth stories in the market. Best Buy mounted a notable comeback, too, notching a 240% return for investors who hadn’t given up on the company. BlackRock’s shares returned more than 50% as the stock market recovered, and the company surpassed all others in terms of assets under management, with the ETF giant breaking above $4 trillion.

For every negative you could have cited about the environment of 2013, there were plenty of reasons for optimism, as stocks reached new heights and smashed through a wall of skepticism. You just had to work a little harder to find them. This was true then, and it is true now. It will always be true. And despite all that we were worried about, and all of the unimaginable things that have befallen us since then, the stock market has been just fine. During the last 10 years, the S&P 500, assuming the reinvestment of dividends, has returned over 230%, or roughly 12% per year.

Bear Hunting

Today we are once again contending with all sorts of threats to our future well-being. Earnings expectations, we are told, must ultimately revert lower once companies run out of price hikes they can put forth, while the cost of employing people and running a business will surely increase. Profits are too high and must come down.

There’s the 2024 presidential election to be fearful about, too. As of this writing, the contest features “an unhinged insurrectionist criminal-tyrant who wants to wipe his ass with the Constitution” and a vice president who’s been thrust into the role after her party chased the “bumbling old man” out, after spending the last 18 months telling us he was perfectly healthy and up to the job. Surely a nation of 350 million people could do better. Somebody has to win, despite the fact that millions of people wish their choices were someone — anyone — else. So we’ll vote and live with the consequences. A few people on the winning side will be elated. Most of us will simply be relieved that it’s over — or possibly terrified by the prospect of what comes next.

There is more. We’re surely on the precipice of World War III, with China, Iran, and Russia allying themselves against Ukraine, Israel, and the rest of the free world, which the United States represents (and supports, both financially and militarily). We’ve got thousands of gaslit students (and their mendacious professors) openly supporting terrorism, kidnapping, mutilation, rape, and murder on college campuses across America. TikTok’s China-controlled algorithms gleefully pump the most divisive content they can surface directly into the national bloodstream.

Higher interest rates have put the housing market into a deep freeze. You can’t buy, and you most certainly can’t sell, risking a 100% increase in your mortgage rate. The national debt is ballooning by trillions of dollars, and the cost of servicing it all threatens to become our budget’s single biggest annual line item, supplanting Social Security and defense spending. Gas prices are high, rents are even higher, food prices are outrageous, hotel rooms and flights are egregious, and, even though nearly everyone has gotten a wage hike in recent years, the cost of living still seems to have outpaced it.

Talk to the average person on the street, and there’s almost nothing good worth saying. The polls are nearly unanimously negative.

“It’s bad and likely to get worse.”

What is bad? What is likely to get worse?

“I don’t know. It. Everything.”

OK, nice talking to you.

My point is that it’s easy to make lists of problems. Of everything that could go wrong or get worse. I could do it with my eyes closed, and so could you.

It’s much harder to have the imagination and the courage to talk openly about what might go right. What might improve. What unexpected thing could have a remarkable impact on how we work and live and change things for the better. Paradoxically, these types of improvements come along all the time. Given the long-term trend toward progress and convenience and lengthening lifespans, we ought to be more comfortable discussing the positives than we are.

But the bad stuff lands like a thud, generating headlines and invoking worst-case scenarios that drown out the sound of anything else. The good stuff creeps up on us, occurring slowly and quietly in the background as we gradually (and unobservantly) grow acclimated to it without even realizing. It’s rare for us to feel it or remark upon it in real time. The media has no vested interest in reminding us of it.

But the optimists are eventually proven right. Not every day, but always and eventually. Indisputably. It just takes a while to be able to see it play out. Even if you don’t believe me, make your investment in the future anyway, just in case I end up being right again. Plant your seed regardless. If you end up being right in your pessimism many years from now, we will all have bigger problems than what our investments are worth. Being optimistic all the time is difficult. But having any other disposition as a default setting makes little sense when you’re investing for a future far out in front of us.

Josh Brown

P.S. NYU colleague Professor Aswath Damodaran joined me and my co-host Ed Elson on the Prof G Markets podcast this week to discuss the corporate life cycle. Listen on Apple or Spotify

P.P.S. Section’s hosting a fireside chat next Wednesday with my colleague at Stern, Conor Grennan, to talk about Deploying AI in the Enterprise. Join for free.

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