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Optimists Make More Money Than Pessimists

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November 29, 2012 – Comments (7)

Conventional wisdom says always protect the downside in investing.  To think of the worst possible things that could happen with an investment to try to poke holes in your initial bullish idea.  To short some stocks to hedge your bets.  Well, today I have decided to defy conventional wisdom and make the statement that "Optimists Make More Money Than Pessimists."  Investing is inherently an optimist's game.  Quickly, name for me the most famous investors in the recent history of investing.  Let's see, there's Warren Buffett, Peter Lynch, you get the idea.  You know what these individuals have in common...I'll give you a hint, they weren't short-sellers.  That's right they made money by going long stocks and being optimistic about their futures.

People who said that the sky was falling four years ago and completely pulled out of the stock market missed out on the astronomical gains that we have seen over the ensuing bull market.  A saying that my father came up with sums up this situation very well, "People who hate Obama and think that he's bad for the economy are people who didn't have enough money in the market during his term."  Many people will chime in here and say, this is a fake economy, that we're all doomed when this house of cards build out of funny money comes crashing down like the Roman Empire, and on, and on, and on.  Will stocks fall from time to time?  Of course.  I strongly contend thought that over time though the big money is made by going long stocks.  Sure one can pick up a ton of cheap CAPS points by shorting scams and triple super duper ETFs, but that's not how things work in the real world.  That's why I've closed most of my shorts here in CAPS.  I'm not saying that money can't be made by shorting stocks.  Some people seem to be pretty good at it, like David Einhorn and Jim Chanos, but over time more money can be made by being an optimist who goes long stocks.

Look at this list of numbers: +131.11%, +96.49%, +96.07%, +89.82%.  Know what they are?  They are a sampling of the gains that I have missed out on over the past couple of years by picking stocks here in CAPS but not buying them in real life for one pick reason or another.  I noticed a few months ago that while I am doing pretty darn well in my real world investment portfolio, I'm doing even better here in CAPS.  Why?  Because I'm not buying some of the stocks that I probably should be.  That's why I've stepped up my game and I'm trying to put at least a little real money behind every really good idea that I come up with here.  I've indicated which stocks I own with the "$" marker.

I enjoy being positive.  Shorting stocks works for some people and many believe, and probably rightfully so, that shorting is healthy for the market and it unveils a lot of scams.  I just can't do it.  I find there to be something that's just plain wrong about rooting for companies to collapse, for other investors to lose money, for people to lose their jobs.  It just seems wrong to me.

I have been blogging here on The Motley Fool's fun CAPS game since all the way back in 2007.  Some of you may have noticed a change in my posts over the years.  I make a concerted effort to be much more positive today than I used to be.  I truly believe that myself as well as everyone in my family have tremendously benefited from my being more positive.  Years ago people, even scientists thought that one was born with a certain disposition and that nothing could be done to change their brain or mind.  Flash forward to today and scientists have been able to prove using functional MRIs and other techniques that Neuroplasticity truly does exist.  In short this means that the brain literally physically changes over time in response to our thoughts and daily activities.  This means that one can literally use their minds to change their brains for the better.

I undertook an experiment around two years ago to see if this really was the case, that one could make themselves a more positive, relaxed, happier person by changing the way they think.  Let me begin by saying that doing so was no easy task.  Inertia is a powerful force, even in the mind.  When one starts thinking a particular way they tend to continue to do so.  This is both good and bad news.  It means that it's tough to change negative thought patterns, but...once you get that big boat turned around it becomes easier and easier to be positive.

One of the things that I have been blessed with in life is an ability to write well.  I have used this to my advantage during this process.  I have been corresponding with some of the world's leading scientists and minds in the field of positive psychology.  I'm not saying that we're best friends or anything like that, but I have corresponded with people like neuropsychologist Doctor Rick Hansen, Oxford's Mark Williams, the University of Wisconsin's Richard Davidson.  In my pursuit of greater happiness for myself and the people who I love I have read all of their fantastic works and much more.  I wish that I had even more time to read.  My in-depth research into positive psychology is probably one of the reasons why I haven't had as much time to blog as in the past.  Even so, I continue to crank out good investment ideas with pitches here in CAPS nearly every week.  My score has never been higher.

I certainly hope that this post didn't come across as being preachy.  That certainly was not my intention.  I just see so many negative posts here in CAPS that turn me off that I thought I would try to balance things out by staying positive in my posts.  I write this in the hopes that I can help others become happier and more positive like so many others who have written on the subject have helped me.

A few of the things that I have done to become more positive in my life include:

-  Trying to take in the good things in life whenever possible.  Both being in the moment and enjoying them when they are happening and reflecting upon them later.  During the course of every day I try to write at least three positive things that have happened during the day in the notepad of my iPhone.

-  Being more mindful of what I am doing at any given time rather than letting my mind wander to all of the mistakes I have made in the past and all of the worries that I have about the future.  When you're blogging...blog, when you're playing with your kids...play, when your having a nice conversation with your wife...just talk.  Something that has helped me with this is mindful meditation.  I try to practice 15 to 30 minutes of it per day.  A number of scientists and professors have proven that meditation can literally change the structure of the brain for the better over time.  This field was pioneered by Jon Kabat-Zinn and work in it continues today through Richard Davidson's study of monks and other skilled practitioners.

-  I also put up digital picture frames in most of the rooms of my house and on my desk at work that contain happy photos of me and my family.  I'm looking at one right now that has a shot of me going pumpkin picking with my two adorable children and my wife a few weeks ago.  Every time I see something like that it makes me smile and I think changes my brain for the better.

-  I have started trying perform random acts of kindness on a more regular basis for no reason at all.  Doing things like bringing my wife a cup of coffee while she's getting ready in the morning, buying a small toy for one of my kids, holding the door open for someone who has their hands full, sponsoring a child, making a small donation to charity.  I'm not looking for recognition in any of this.  Doing nice things helps both the giver and the receiver.

Well, I could go on and on about this subject.  This isn't a specific investment idea like almost all of my other recent posts contain, but I do think that it is very relevant to The Motley Fool's designated subject matter...investing.  I honestly believe that over time optimists make better investors and make the world a better place to live.  I know that I feel as though I am a better investor after training myself to see the good in things than I was before.  My journey is far from done.  I believe that each tiny positive action that I take is like a drop of rain.  One single drop won't do much, but over time enough drops together formed the Grand Canyon.  I believe that I am getting better and better every single day. 

I have put a tremendous amount of work into separating the wheat from the chaff, trying to find the best resources on this subject and to looking into the scientific evidence behind positive psychology.  Below I'm going to share a few of the books on this subject that I have read that have helped me in the hopes that someone reading this might find them helpful as well.  Thanks for reading everyone.  Have a great evening:

The Emotional Life of Your Brain: How its Unique Patterns Affect the Way You Think, Feel and Live - and How You Can Change Them - Sharon Begley and Richard J. Davidson

Harvard Medical School Positive Psychology: Harnessing the power of happiness, personal strength and mindfulness - Steven M. Allson and Ronald D. Siegel

One Day University Presents: Positive Psychology: The Science of Happiness (Harvard's Most Popular Course)

Buddah's Brain: the Practical Neuroscience of Happiness, Love and Wisdom - Rick Hanson

Raising Happiness: Ten Simple Steps for More Joyful Kids and Happier Parents 

The How of Happiness: A New Approach to Getting the Life You Want - Sonja Lyubomirshy

The Miracle of Mindfulness - Thich Nhat Hahn

Full Catastrophy Living: Using the Wisdom of Your Body and Mind to Face Stress, Pain and Illness - Joh Kabat-Zinn

Mindfulness: An Eight Week Plan for Finding Peace in a Frantic World - Mark Williams, Danny Penman

50 Shades of Grey...Just checking to see if anyone was still reading. 

Deej

7 Comments – Post Your Own

#1) On November 29, 2012 at 4:47 PM, TMFHelical (98.77) wrote:

Deej,

Have you read some of the early Martin Seligman work on the subject of learned helplessness.  It can be really really desctructive, and certainly investors in bad periods are subject to it.  But, my understanding is that unbound optimism is frequently destructive as well, and that what appears optimal is an overall optimisic outlook, but one that contains a nice dose of realism.

Ralph

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#2) On November 29, 2012 at 5:17 PM, EnigmaDude (94.14) wrote:

You may want to consider adding the Art of Happiness: A Handbook for Living by the Dalai Lama to your book list. It was a life changing read for me!

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#3) On November 30, 2012 at 12:12 AM, Mega (99.96) wrote:

Deej, I rec'd your post as usual, even though I don't totally agree on the investing side ... but I do agree on the positive thinking side.

Speaking of generosity, my parents mentioned the other day that over 20% of their spending is on charity. I thought that was pretty great.

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#4) On November 30, 2012 at 9:14 AM, shamapant (78.52) wrote:

Agreed with MegaShort, good post, but I do think there are some things that are not quite right here. I think both Buffett and Lynch were EXTREMELY concerned with their potential downside. I bet Buffett could've won as a short seller, but it didn't fit for him b/c of the limited upside. Still, I can definitely see your point to some degree. Optimism in investing can help you hold out through bad markets where a pessimism based psych would get you out of the market when things are cheapest.

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#5) On November 30, 2012 at 12:05 PM, TMFDeej (99.41) wrote:

Thanks for the comments everyone.  I definitely agree with you about limiting the downside.  I actually tend to be fairly conservative in my real-world portfolio in terms of position size, diversification, and asset allocation (I still have a slug of bonds that I bought during the meltdown).  I also tend to shy away from super risky situations.  I guess that my point was that if one is too picky and always focuses on what could go wrong they ru the risk of missing on a number of potential winners.

My other point is that the upside in going long stocks is significantly larger than it is in shorting them.  On a short, the upside is limited, but the potential for multi-baggers on the long-end and the impact that they have on your overall returns is imense. 

Thanks for the suggestion of The Art of Happiness, Enigma.  It sounds like it's right up my alley.  I know that Richard Davidson has done a lot of scientific work with the Dalai Lama.  I'll have to add that one to my reading list.

Have a great weekend everyone! 

Deej

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#6) On November 30, 2012 at 2:51 PM, lemoneater (78.89) wrote:

In other words, don't be a Scrooge!

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#7) On November 30, 2012 at 7:38 PM, ChrisGraley (29.75) wrote:

Gotta smile with this post, but I agree with all the others that optimisim in the market is just as bad. Also, Warren Buffet sells stocks too. Just to give a little credit to the guys that short, Jim Chanos does pretty well. There were a lot of optimists that invested in Enron, GM, Solyndra, etc.. 

I think emotionless investing and realism is more important. If you can take your emotions out of the picture, you can make money on either side of the market, no matter which direction it's moving. It's just easierr when the market picks the same side that you do.

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