April 6, 2011
Investing is for Optimists
One of the many benefits of owning an iPhone is free subscriptions to interesting podcasts. Recently, I listened to Matt Ridley give a talk at the Long Now Foundation’s Seminar of Long Term Thinking called “Deep Optimism”. Ridley is the author of The Rational Optimist. In his book he argues that we all collectively prosper through trade and that we only productively trade with those we trust.
In his talk on “Deep Optimism”, Ridley presented a well-researched and documented case for progress in all areas of our lives. In one very illuminating example, Ridley showed how it takes less time each year to work for a constant benefit, say an hour of artificial light at night.
- In 1800 it took six hours of typical labor to purchase an hour’s worth of candles, so few working people did.
- In 1880 it took fifteen minutes of work to purchase an hour’s worth of kerosene for a lamp.
- In 1950 it took eight seconds of work to pay for an hour’s electricity for a light bulb.
- In 1997, it took only half a second of work to light a compact fluorescent bulb for an hour.
Ridley proclaims “we are becoming healthier, cleaner, smarter, kinder, happier, and more peaceful.” He argues that the root cause of global prosperity is the exchange of ideas and specialization. And, more importantly, our progress is real, enduring, and for the near future unlimited. That’s a lot of optimism in the face of the pessimism that’s peddled in our daily news.
To me, Mr. Ridley’s optimism is based on exchange leads inevitably to market efficiency. In a free market there are willing buyers and willing sellers. Both are motivated to exchange based on their ideas or expectations of future returns. This belief in market efficiency greatly simplifies the investing process. It allows us to focus on what’s important in the process:
- Understanding risk – How much risk are you willing, able or
need to take
- Diversification – Globally diversifying across various asset classes
- Control Costs – Lowest cost to gain exposure to an asset class
As an investment advisor, my job is to deliver a well-diversified portfolio based on my clients’ risk tolerance and goals. I continually focus on controlling costs and measuring results. Those are all very valuable services but there is something more valuable I offer clients. Recently, during the interview process, a prospective client asked me what my greatest value was. I don’t think anyone had specifically asked me that question before, but I had given it thought, especially after my experience during market meltdowns, most recently in 2008. My greatest value as an advisor is to keep my clients from making disastrous emotional mistakes in times of turmoil or deep pessimism. Investing is not an easy task especially undertaken on one’s own. While there is a cost to advice, it’s often worth the price to have someone optimistic by your side.