Why David Cameron's optimism is the mark of a good investor
By
Simon Nixon Oct 10, 2006
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I bumped into an old friend in the lobby of the House of Commons last week. I was on my way to see a member of the shadow cabinet; Lawrence was off to interview David Cameron for a book and radio series on “optimists”. He is trying to find out why some people are more positive than the rest of us, how they have kept their high spirits in the face of hardships or personal traumas, and how their optimism affects the way they live their lives. Perhaps something in his conversation with Cameron touched a nerve because, less than a week later, the Tory leader opened his party conference by telling delegates: “If you want to know what I’m all about, I can explain it one word. That word is optimism. I am optimistic about human nature.”
Why optimism is a useful trait in business and politics
Optimism is a trait that Cameron shares with most other successful political leaders: think of Tony Blair, or Bill Clinton. Appealing to people’s hopes is usually more effective than playing on their fears. The same is true of the most successful business leaders. They tend to be a remorselessly optimistic bunch, always confident of their own abilities to overcome any odds. After all, there aren’t too many monopolies in business, and even fewer original ideas. So business people have little choice but to go and compete in a crowded market. A pessimist would stay in bed.
The same is true of the financial services industry. It has a huge in-built bias towards optimism. Investment banks are in the business of measuring and pricing risk. But they are also in the business of flogging their clients’ securities for the best price they can get. Where the one is at odds with the other, you can be sure the big bucks will go to the person who always looks on the bright side of life. That’s why, despite the reforms introduced in the wake of the dotcom bubble, the number of analyst “buy” recommendations still far outstrips their “sell” recommendations. And it’s why brokers tend to be among the most relentlessly upbeat people on the planet. It takes an unswerving faith in benign providence to pick up the phone to your client after the stock you encouraged him to buy has just halved in value.
Markets need optimists and pessimists
But do optimists make such good investors? What’s odd about the financial markets is they can only function if there are buyers and sellers, bulls and bears, optimists and pessimists. At any one time and on any given subject, there will always be different point of views. If there weren’t, it would be impossible to trade. Some people make a living as professional pessimists. Hedge funds such as Kynikos, for example, only short sell shares, making big bets on stocks they think will fall. And the City has always been indulgent towards its favoured contrarians, licensed mavericks who provide the antidote to the City’s institutional optimism.
If you’re a glass-half-empty sort of person, there has certainly been plenty to worry about over the last few years: there’s the US trade deficit, with its implications for the dollar; the steep rise in oil prices and other commodities and the possibility of rising inflation; the huge rise in consumer borrowing in the US and UK; the slowing US housing market; instability in the Middle East; growing protectionism in Europe; record leverage in the private-equity industry. The snag is that if you allowed your pessimism to sway your investment decisions, you would have missed out on some fabulous opportunities to make money. You would have missed out on a three-year bull market in shares, which this week saw the FTSE 100 breach 6,000 and the Dow reach an all-time high. And you would be sitting in your rented house, railing against a property market that just keeps rising. Even your profit on gold, the traditional safe haven for pessimists, would have been partly eroded by the decline in the dollar.
What is there to be optimistic about now?
Of course, none of this means the pessimists are wrong. As Keynes said, the markets can remain irrational longer than most investors can stay solvent. Perhaps the markets have grown complacent. But the alternative explanation is that the risks are already in the price. After all, most of these risks have been around a long time. And with the oil price now back below $60 and the global economy growing at a fair clip despite rising interest rates all around the world, it is hard to argue that the outlook isn’t rosier than it has been for ages. Indeed, the Vix volatility index, the best gauge of the market mood, is showing investors have regained their optimism after the summer wobble.
Either way, the real lesson is the impossibility of trying to time the market. Few of the great investors claim to possess this skill. Even at the peak of the dotcom boom, Warren Buffett was warning that stocks could continue to rise for some time. Going around like Chief Vitastatistix in the Asterix cartoons worrying the sky will fall on your head is a recipe for doing nothing. Far better to adopt a sunny disposition, assume the world will muddle through, and focus on identifying great firms. Or, as Cameron put it: “Let sunshine rule the day!”.
Simon Nixon is executive editor of Breaking views.com
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