Why Pessimists Never Make Money
The Dow Jones Hit 20,000 on Wednesday and seconds after it broke through, the nay-sayers made their appearance, citing everything from “rich prices” to “low earnings” as justification.
I could only shake my head in amazement for one simple reason…
…pessimists never make money.
Today I want to talk about why that’s the case, and how you can set yourself up for profits.
Humans Are Hard-Wired Towards Pessimism
You’re not imagining things if you think pessimists sound smart.
There’s actually an evolutionary reason for this.
According to social scientists, pessimism is a tendency born out of millions of years of evolution. That’s understandable given how dangerous the world was. (And still is.)
From an early age, we’re taught to view things skeptically because it helps us avoid loss. Harvard psychologist Steven Pinker says this is because the asymmetry of payoffs which come from overreacting to a threat is less than the cost of underreacting.
In plain English, you don’t touch a hot stove today anymore than you would have stuck your head out of the cave to look for a sabre tooth tiger millions of years ago.
Yet, that’s exactly what we need to do if we are to survive – and profit.
The markets are no different at 20,155 than they were at 8,245.
What’s changed is investor psychology.
We like to believe that all the things that have gotten us here in fact now threaten our very existence. In reality, though, what they’re doing is creating our next opportunity.
Case in point, many people believe that the Panic of 1907 (also known as the Knickerbocker Crisis) was actually worse than the Great Depression, but there’s nobody alive to tell us this today.
So, by virtue of having just survived the financial crisis, we’re left wondering if the Dow at 20,000 is a sign of better things to come, or a market that’s about to break down.
Yet, what’s happening now is no different than any other point in history.
Let me prove it to you.
Take a good, hard look at this chart.
(Click to Enlarge)
What’s more – and this is the really important part today – is that every single one turned out to be an opportunity for savvy investors who were able to poke their head out of the proverbial cave and go hunting.
Instead of being hunted.
So if you’re one of millions of investors who are fearful about the markets being at new highs, you’re not alone. The emotion you’re sensing is absolutely normal.
It’s what you do about it that matters most.
Until next time,