Triumph of the optimists.

December 21, 2015

"A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It's just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them. Usually because the recent past has been uneventful.
American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320 percent increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well."
-Warren Buffett, 2008
. . .
The universe we inhabit is infinite. The unknown expanse of which renders our cozy little nook as a grain of sand floating in an ocean of inestimable scope.
To some, this great, mysterious space is a frightening. To others, an exhilarating invitation. Physicists, tending to camp with the latter, embrace their ignorance by diving into the folds of the universe's most vexing perplexities. And as most of them will tell you, we know nothing. What is dark matter? How does it comprise 85 percent of the universe? Are there merely four dimensions? What is antimatter? Whereby the fate of the universe? What is sonoluminescence? The weight of a neutrino? The fate of man?
We inhabit the infancy of our discovery. Comprehending little. And people fear what they do not understand. By extension, we are a fearful species. Which does not bode well for many of the pursuits in which we engage. Particularly investing.
Nowhere in society does that fear more reveal itself than in our attitudes towards the stock market. We want to control it. And become frustrated when we cannot.
This frustration stems primarily from our intellectual lineage.
You see, for centuries, man thought he could control most everything. This misshapen philosophical bent was called "Determinism." Accordingly, nineteenth century scientists believed that, given enough information, they could forecast all outcomes. Weather patterns. Geological developments. Cosmological events. Even human action.
Isaac Newton, a renowned determinist, developed the laws of motion. Explained all movement in the physical world. Eventually, his descendents realized that the prognostic powers of cause and effect, upon which determinism was based, were not infallible.
Scientists like France's Henri Poincare discovered that planetary orbits did not follow deterministic patterns and ideas. Even then, as determinism faced philosophical obsolescence, its adherents refused the inevitable.
Today, when something appears beyond our control, we go so far as to invent false narratives to account for nature's unruliness.
Consider the stock market, and the hoax of Efficient Market Hypothesis (EMH).
Academics and EMH practitioners posit that the stock market is completely efficient. With underlying prices constantly reflecting any available information. Thus, EMH maintains that stocks are always perfectly priced. Making it impossible for investors to find price deficiencies and outperform the averages.
Created by Professor Eugene Fama in the 1970s, EMH provided safe harbor for all those seeking the holy grail of market outperformance. Essentially letting them off the hook. As nobody, Fama's theory held, could beat a perfectly priced market index.
Of course, Warren Buffett disagreed.
There are few proven laws in finance. But rather ideas that try to explain market operations. Which often fall short over the test of time.
Consider the historical performances of Mr. Buffett, George Soros or Joel Greenblatt. Each of whom has managed to exploit market inefficiencies. Outperform the indexes. And reveal the faulty constructs of EMH.
When theory fails to account for our inability to conquer unknown frontiers, we oft resort to another vestige of our deterministic roots. That being the practice of fatalism. Where our conceits degenerate from the academic to the apocalyptic.
On Wednesday, January 14, 2015, the S&P 500 sat at 1,990. A mere 4.9 percent beneath an all-time high. That day, Yahoo Finance posted an article with the following headline and subhead:
Disaster scenario comes into focus as stocks, commodities slump
Slumping commodity prices, a disappointing retail sales number and the World Bank's cut to its 2015 global growth forecast triggered a flight from "risk" assets Wednesday. Are central bankers powerless to stop it?
Financial journalists? Carnival barkers. Indistinguishable from each other at the gates of hell.
Little wonder investors remain cynical, if not terrified. Financial journalists, enjoined by the mainstream media, condition investors to expect the next shoe to drop with every headline.
In turn, investors consider Armageddon preparation as a form of financial planning. So, leaving a paranoid contingent of the investment community to bury their nest eggs in the proverbial back yard. Even as the S&P 500 returned 555 percent over the last twenty years,
Defying evidence to the contrary, these financial "preppers" continue readying for the collapse of the American dollar. And the extinction of most concerns making up the Fortune 500.
Failing to realize that profit-seeking companies, managed by competent agents with a discipline forged in the arena of the marketplace, will usually avoid unrewarding activities in search of more advantageous horizons.
War. Inflation. Deflation. Currency debasement. Natural disasters. Government confiscation. Meteorological catastrophes. All have proven incapable of holding down the efficient progress of efficiently allocated investment capital over longer periods of time.
Market declines have proven temporary. While advancement is permanent. With every passing disaster of the day, capital has realized a means of working around it. Providing superior long-term returns in excess of those produced by debt. In other words, history provides the perfect rational for a long-term investment outlook. Lacking any historical precedent that has degraded the capacity of a rational market to redress all problems and, in the long run, move higher.
Optimism trumps fatalism. Always and everywhere.
In 1953, immediately following World War II, the S&P 500 stood at 26. The stock market returned an annualized nine percent to investors for the next 50 years. Today, having navigated wars, financial meltdowns, epidemics, government collapses and other catastrophes of varying size and impact, the S&P 500 sits at 2040.
The determinists? The fatalists? Those possessing such vicious psychic wounds as to prevent them from comprehending a better, more optimistic future? They may be beyond help.
But, the rest of us shall side with the optimists. Envisioning a brighter future. Rife with new, life-enhancing technologies. Abounding opportunities. And the health, wealth and happiness that always accompany such enhancements to the human condition.

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