The Pessimists are always right!
(in the short term)
– Guest post written by Joel’s Dad! –
Do you ever get tempted to divide everyone up into optimists and pessimists? Optimists are always looking on the bright side; “glass half full”, ready to accept even the smallest chance of success against the odds. Pessimists, on the other hand; “glass half empty”, are realists. They look at the facts and are more detailed, analytical and some may say more “intelligent” than their more hopeful counterparts.
Let’s look at progress in many facets of life. It’s never a straight line.
Consider learning a new skill, for example, riding a bike. It takes a bit of courage, you expend mental and physical energy and you take a risk. All of these “cost” you personally, and there may even be financial cost. Your progress in learning may involve lessons, a trial with training wheels, a bit of embarrassment, and a realization of your own physical limitations.
You may fall and this may set your progress back. You may “plateau” which means that for the flat period you are not progressing commensurate with your effort. There will also be bursts of improvement. In the long run, progress will likely resemble a “sawtooth wave” trending upward.
Here’s the rub! – There will always, in the short term, be a point where your investment fails. These could be points 2 and 4 on the diagram above. If you throw in the towel or quit because of a setback, you’ll be proving a pessimistic view to be correct.
Now let’s look at some financial investments – say, Real Estate:
1. You expend copious amounts of time, money and emotional disappointment (just missed this opportunity, that deal fell through, etc.)
2. You pay a purchase price, plus, loan establishment fees, closing costs or stamp duty, conveyancing and other start up costs.
3. You take a risk, committing to a loan and committing your deposit – much of this non-refundable (you can’t ask for a refund a few months later if you change your mind or if the product is not “fit for purpose” like a department store).
The “value” of your property may be less than what you first paid and certainly less than your “base cost”. So your progress graph is already trending down! It may take 6-12 months before a property stabilizes, or even longer.
However, if you’ve chosen wisely, invested after all of your due diligence, whilst no guarantees, you should see a rise in your return and increased value of your investment in the long run.
So, your graph starts to resemble a sawtooth or a hilly incline.
Someone who is pessimistic on real estate investing will say “It’s too risky, and you’ll probably fail”. They are absolutely right – in the short term!
Same with stock market returns:
A typical investment portfolio or even a single share will look something like this:
Crashes and corrections can, and will, happen in the stock market. There will always be a point at which you could say, after taking into account the initial investment, all of the costs, the risks, the opportunity cost and all of the worry, “It wasn’t worth it!”.
But, given the general upward and long term trend, there will also be a point at which you could say “I’m glad I stuck through the rough times and didn’t sell!”
“Pessimists are usually right and optimists are usually wrong. But all the great changes have been accomplished by optimists.” – Thomas Friedman
Listen to the pessimists, they are always right in the short term – Then get working on your long term plans!