In an earlier post "
Anxious Financial Markets: How Fear Drives Investments" I indicated that pessimists and
optimists have different underlying assumptions, theories and realities that affect their approach to investment. Let's consider how an optimist might approach the current investment environment.
The Mind of the Optimist
The optimist is generally looking for opportunities to take reasonable risks to maximize profits. The optimist is "growth-oriented" rather than focused exclusively on protecting assets. (Of course, optimists can get into real trouble when they take foolish risks in bubbles-as the recent crash in the market indicates). Nonetheless, the optimist believes that she has sufficient current assets to warrant some investment. She also believes that she will be able to enjoy future earnings from other sources-something that some people may doubt in the current market given the threat of unemployment. The optimist might view the market as somewhat predictable, believing that the current market may have reached its bottom and that it would make sense to predict a rise in the market over time.
The optimist may have a longer-term time perspective, anticipating that she can stay in the market for a decade and watch occasional variations in prices while the moving average moves up over time. This future time perspective allows the optimist to take a longer-term strategy, such as dollar-cost-averaging. The optimist believes that she doesn't have to get back into the market with everything right now---she can replicate her investments over time, putting in a little bit every month for years. The prudent optimist doesn't feel she needs to make a killing in a hurry-she is not manic. She replicates, waits, tolerates fluctuation, recognizes that uncertainty comes with the game, and keeps playing.
Take a look at the table below. This is how the optimist views his or her current and future position:
Waiting or Deciding
The optimist also views her portfolio and strategy with a perspective quite different from the anxious investor. For example, the optimist may be able to stand back and see that she does have diversification-she has stocks, bonds, cash. She has different accounts. She has a salary, with more earnings coming in the future. She is diversified. As a result, a loss in one sector of her portfolio is offset by gains in other areas. Or, if all sectors lose, there are still future earnings.
The optimist does not believe she needs to wait indefinitely for perfect information and certainty in order to make a move. Her information demands are not excessive. She tolerates probabilities that are plausible rather than insist on definite "signs". Those who wait for the clear opening to the market may get in after all the lemmings have jumped on the bandwagon. The optimist is not overwhelmed with regret and disappointment when investments head south. She is able to view this as an inevitable part of being a player in a game with replicated hands. She plays over and over. One loss does not mean you quit the game.
Where Have all the Lemmings Gone?
The optimist doesn't mind sounding like an optimist. She may even tell others, "I'm optimistic. I think there are opportunities out there. It may take a while, but there may be profits to be gained if you play your hand right." She is not following the crowd. She is a leader when it comes to playing her hand.
As we have seen with the market, there are times when pessimism is adaptive and times when optimism is adaptive. A contrarian view might be to be optimistic when others are pessimistic and pessimistic when everyone says, "You can't lose". No one style of thinking works at all times. In fact, the optimist might say, "Everyone is optimistic, so it might be the time to short the market". We may have to wait a few years for the shorts to grow in stature again, but I feel guardedly optimistic that history will repeat itself as it always does.
I am not sure if that makes me an optimist or a pessimist.
