Optimism

Almost all successful people have it. Almost all unsuccessful people lack it. There is a specific strain of optimistic thinking that leads to better outcomes - both materially and psychologically.

It is important to be precise in our definitions here since there are many subtle meanings of the word optimism - not all confer the creation of luck.

First, consider the inverse: Pessimism is often a self-fulfilling prophecy. 

If you assume...

• You’re unworthy of love – You’ll never ask someone amazing to marry you.
• You can’t succeed in business – You’ll never start or try.
• Low investment returns – You’ll never put capital and risk and get paid for it

Optimism is a good strategy

Optimism is an asymmetrically good bet: The downside protection that pessimism brings is minimal. The upside potential optimism creates is unbounded. 

This positive impact seems to have both forward looking and retrospective value. 

In  Daniel Gilbert’s book Stumbling on Happiness where he discusses how an “optimism bias” serves an adaptive function: Making people more motivated and willing to pursue ambitious goals and experiences.

This motivation, of course, turns into results.

The authors of The Good Life - a book on the world’s longest running study on happiness found that a) interpersonal relationships are essential for happiness, and b) People who viewed their relationships positively—even seeing them as a little better than they were—tended to enjoy more satisfaction and well-being.

So - basically - being optimistic will both give you a shot at being more successful - and make you happier with whatever success you have.

Investing

In investing there’s a trope about how Bears sound smart - but Bulls make money.

Part of this is that it’s not only hard to know when good times or bad times will come - but if there is a rough patch for the market it’s going to be really difficult for most investors to perform well in that environment. 

In a recent interview Morgan Housel said: “That Goldman Sachs report this week says that over the next 10 years, the S&P will average 3% per year, or whatever it was. Let’s say that’s true. And that's a low return—that sucks. I guarantee you that 99% of trading strategies that try to earn higher returns, given that situation, are going to earn less than 3%.”

He differentiates the notion of being a “Perma-bull” - arguing that it’s not that you expect every period in stocks to be great for returns - but rather that staying invested will provide the superior long-term outcome:

“It just means that the alternatives—the strategies you’re proposing to try to do better—are almost certainly going to do worse. It’s like taking the Churchill quote: Buy and Hold is the worst strategy except for all the other ones. That’s the kind of thinking.”

Optimists are more likely to reach for more opportunities, try harder, stay working or invested longer, get up when they fail.

Pessimists don’t apply themselves, aim too low, and all-but-guarantee mediocre outcomes

Optimism is not complacency

If you find yourself in a conversation with a pessimist and advocate for an optimist’s outlook you may find yourself on the receiving end of a critical remark to the effect of “Oh, so you think everything is fine/good now do you?”

Nothing could be further from the truth - adaptive optimism is strongly forward looking: A belief that things will get better because we will make them better.

This is a sort of Deutschian (see Infinite Progress) optimism: The knowledge that there are problems, but problems are inherently solvable through the acquisition of knowledge

The critical factor here is believing that we can improve. This applies all the way from the most micro to the most macro. 

• We must believe that we can, at an individual level, make ourselves healthier, happier, more kind and loving, more productive.
• At an institutional level we can make our company or organization more effective, valuable, or respected.
• At a societal level we can elevate the experience of ourselves and the generations yet to come.

We must never accept the state of the world as it is - and always believe that more progress will be forthcoming - but know that we must be the ones to create that progress.

Optimism is not naivete

When I worked at Stripe our CEO, Patrick, often advocated a stance of “macro-optimist, micro-pessimist” - The near term focus on what could go wrong (and do something about it!) - but in the long term believe that you can deliver results.

I think the right mindset is “This will be difficult, but we are capable of doing difficult things!”

Expecting things to be easy will make us feel bad about ourselves if they’re hard.

When things don’t go well…

Bad leaders say “This is so easy, what Is wrong with you, why didn’t you do better?”

Great leaders say “This is difficult but I believe you can become so effective that in the future it will feel easy to you. You just have to keep at it and you will get there.”

I always try to respect the problems I’m working on. Respecting the problem means not assuming you know, preparing for difficulty, and knowing that your first, second, or third attempts may fail.

Confidence, not overconfidence

"You’ve got to know when to hold ’em, know when to fold ’em, know when to walk away, and know when to run." - Kenny Rogers

Optimism should motivate us to take risks. Taking risks pays off when you can repeatedly aim for success - even if you get knocked down or set back. The ultimate optimistic view is to say “Well, first try failed, but now we’ll try again”

I often think about positioning myself to take on risks that feature “losses that I can absorb” - and not more or less.

Believing in long term equity returns is an optimistic view. Preparing for short term volatility and losses is an appropriate risk management approach. 

In Fixed Income we looked at historical rates of return and showed how, over a long enough time period, equity investors will see a long term phenomenal performance. Too much reliance on “safe” assets actually results in failure of a portfolio to sustain an investor’s needs. Not enough safe assets means a few bad years - with no safety buffer - can wipe you out. 

The world’s greatest winners experience severe setbacks and losses. Steve Jobs was, famously, kicked out of Apple and spent 10 years struggling for relevance before his return.

Nvidia has been top of mind for every investor in recent years given the phenomenal performance of the stock.

However, if you look at this same chart looking at “% off the high” - showing how much the stock fell from a previous high, and for how long, there is a more sober picture:

Over the public life of the company the stock has spent most of the time in a savage drawdown. 

The same is true for any of the top performing companies and stocks - they all experience major losses.

In an interview Marc Andreessen was asked what made Elon Musk so effective - and an important part of his answer had to do with his approach to taking risks: 

"He's in this big fight with regulators over Starship launches. A normal rocket company would take a decade or even 20 years to design a new rocket, but he's putting out prototypes as fast as he can, launching them, and seeing what happens. Sure, they explode in midair. My nine-year-old and I love watching the SpaceX rocket explosion compilation videos on YouTube—they’re hysterical because they show these larger and larger rockets launching and then exploding.”

These risks are helping SpaceX move faster - and Andreessen makes the point that these risks are actually not a problem:

“He's just like, ‘Screw it, I don’t care—of course some rockets are going to explode. Nobody’s getting hurt, it’s totally fine.’ A big company can't tolerate that because it’s headline news, and everyone gets upset.”

Optimism is a choice

We can choose to change how we feel.

If any committed pessimists have made it this far in reading this article they are no doubt preparing an argument in mind or on keyboard about the direction of causality here: Surely successful people find it easier to be optimistic!

While this statement may have some merit it would be foolish to ignore the clear mechanisms by which optimism create the luck from which good things grow.

Some people do have a natural disposition to be optimistic, but we all have the ability to control our own thoughts and beliefs.

Here are five rules to cultivate adaptive optimism:

• Never accept the state of the world as fixed
• Nothing is impossible - we just haven’t figured it out yet
• Always position yourself to live to fight another day
• Be ambitious - go after prizes worth winning
• Detect and discard self-limiting beliefs

Remember that there is no strategic upside to being pessimistic. You should be optimistic - and not just a little optimistic. Be wildly optimistic.