The other week, I read something that has stayed with me ever since: an article by respected fund manager Nick Train, on the virtues of optimism. Having taught himself to be more optimistic, he reported, his investment returns have improved.
Train’s logic is very similar to that of renowned investor Warren Buffett. And I’ve also heard similar sentiments from Bill Gates, himself no slouch when it comes to wealth-building.
Simply put, goes the argument, the world is making progress, right across the board. Healthcare, productivity, crop yields, resource utilisation, education, technology – you name it, and over the long term, there’s progress.
Economic growth
Take a look at world’s economies, and you can see that same long-term progress in the statistics.
Across the world, GDP is powering ahead, as is GDP per capita. As individuals, we know that things that were unaffordable 25 years ago are often comfortably within our reach today.
The FTSE All-Share index, first constituted in 1962, has grown at a compounded rate of 7% ever since, although that, stresses Train, is just in terms of capital appreciation, and so disregards dividends. The well-respected Barclays Equity Gilt studies show the same thing, stretching back to the 1890s.
Sure, there were bumps along the way. Progress is not linear, growth is uneven, and setbacks occur. But the broad trend is upwards, and not flat or downwards.
Put another way, the economy, along with the businesses within it, and us as individuals, are all predisposed towards long-run wealth creation.
Don’t bet on it stopping
Why do I point this out? Because, from the very narrow perspective of today, it’s all too easy to overlook this bias towards long-term wealth creation.
Many investors subconsciously seem to assume that it isn’t going on. They see a steady-state world, a world with cycles, and reversion to the mean.
Train doesn’t deny that there are cycles. Instead, he points out that in fact, those cycles are super-imposed on a rising trend. And that to assume that long-term wealth creation won’t occur, going forward, is to belie hundreds of years of economic progress.
“For 240 years, it’s been a terrible mistake to bet against America, and now is no time to start,” is how Buffett put it in 2016, writing of America’s economic prospects. “America’s golden goose of commerce and innovation will continue to lay more and larger eggs.
Short-term thinking
As I write these words, my shares in high street baker Greggs (LSE: GRG) are down 15% on the day. Apparently, the ‘Beast from the East’ hit sales in March, and profits are expected to be flat this year. Am I concerned? Not in the least.
On the other hand, my shares in tobacco firm Imperial Brands (LSE: IMB) are nicely up, following a decent set of results and a 10% increase in the dividend. Having fallen to under £23 in mid-April, they are now within a whisker of £28.
And my shares in software firm Micro Focus (LSE: MRCO) (which acquired Hewlett Packard’s enterprise software division last year) are up 25% over the past few weeks. I bought them after they almost halved in a single day, after disappointing investors with a profit warning.
It’s behaviour that I’ve seen again and again. And that I have profited from very nicely, thank you, locking in an attractive entry point, and a high yield. My holding of Greggs, for instance, was acquired when the shares were just over £4, in a moment of similar market gloom. Five years later, they’re now changing hands north of £10, even after today’s 15% decline.
Take the long view
In these columns, it’s not unusual for me to warn of turbulence ahead. Because generally speaking, market turbulence throws up interesting opportunities, as investors overreact.
For as Warren Buffett points out, “you pay a high price for a cheery consensus.” To be presented with bargains, we need less settled times.
Yet such times pass, and the trend resumes.
So forget the short term: look to the long term, instead. Because over the long term, history suggests considerable cause for optimism.