Three Longs & Three Shorts

Same As It Ever Was

Author: Morgan Housel
Source: Collaborative Fund(

Back in mid-March when we were asking investors to be rational in their response to Covid, we cited a Morgan Housel piece which said that fighting Covid would be similar to fighting a war (see  That in turn led us to cite that whilst the American stockmarket had corrected from the beginning of World War II in 1939 to the bombing of Pearl Harbour in 1941, from that point on it was one way traffic i.e. from the moment America entered WW II, the US stockmarket rallied 130% over four years. Back in mid-March, inspired by Housel, we held up this analogy in our attempt to soothe frazzled investors’ nerves.
Now, with a little bit more rationality circulating in the air, Housel has published another insightful piece reminding us that no matter what happens in the world, there are four aspects of human psychology which never change.
“#1: Big risks happen when a bunch of small risks combine and compound. But small risks are easy to ignore, so people always underestimate the odds of big risks.”
Big risks are nothing but a whole sequence of smaller risks added up. Since most of us underestimate these smaller risks, by definition almost, we underestimate both the probability of the big risk and its potency. Eg. “A virus transferred from animal to human (has happened forever) and those humans interacted with other people (of course). It was a mystery for a while (understandable) and then bad news was then likely suppressed (bad, but common). Other countries thought it would be contained (standard denial) and didn’t act fast enough (bureaucracy, lack of leadership). We weren’t prepared (over-optimism) and could only respond with blunt-force lockdowns (do what you gotta do). None of those on their own are surprising. But combined they turned into probably the biggest event of our lifetime.”
Another example of this is the Great Depression and how it led to a cascade of consequences that no one had expected.
“#2: Optimism is the fuel of progress, and without it people will grind to a halt. So you will often find it even when the odds are stacked against you and the facts don’t align.”
Optimism in man’s way of dealing with adversity. Hence optimism soars when societies are faced with what look like insurmountable odds. ““The American Dream” was a phrase first used by author James Truslow Adams in his 1931 book The Epic of America. The timing is interesting, isn’t it? It’s hard to think of a year when the dream looked more broken than in 1931. When Adams wrote of, “a man by applying himself, by using the talents he has, by acquiring the necessary skills, can rise from lower to higher status, and that his family can rise with him,” the unemployment rate was nearly 25% and wealth inequality was near the highest it had been in American history.
When he wrote of “that American dream of a better, richer, and happier life for all our citizens of every rank,” food riots were breaking out across the country as the Great Depression ripped the economy to shreds….At few points in American history had the idea of the American dream looked so false, so out of touch with the reality everyone faced. Yet Adam’s book surged in popularity. An optimistic phrase born during the gloomiest period in American history became an overnight household motto…”
“#3 People will avoid even the slightest discomfort, even when the pain is manageable and trying to avoid the pain creates bigger risks.”
All of us are conditioned to avoid pain and discomfort however slight that might be. That is why we put off working out. That is why we put off making difficult decisions/choices. And that is also why we hate to see our portfolio fall even 10-20%. Behavioural scientists like Danny Kahneman call this “risk aversion”. Ordinary folks might call it a form of mental laziness. Those of us who have the mental capacity to endure this pain are therefore at an advantage: “Yet a large portion of the investing industry is devoted to avoiding the falls. They forecast when the next 10% or 20% decline will come and sell in anticipation. They’re wrong virtually every time. But they appeal to investors because asking people to just accept the temporary pain of losing 10% or 20% – maybe more once a decade – is unbearable. The majority of investors I know will tell you that you will perform better over time if you simply endure the pain of declines rather than try to avoid them. Still, they try to avoid them. The upside when you simply accept and endure the pain from market declines is that future declines don’t hurt as bad. You realize it’s just part of the game.”
“#4. Disagreement is constant because it’s rooted in individual experiences. Experiencing a major stressor can permanently change your behavior, leaving certain countries and generations with extreme feelings toward specific topics.”
Traumatic experiences leave mental scars and these scars change the way we behave, the way we think and the way we perceive the world. The most commonly known example of this is soldiers who go to war and come back with Post-Traumatic Stress Disorder. However, even ordinary civilians go through these life-changing events eg. “It’s why the generation who lived through the Great Depression never viewed money the same. They saved more money, used less debt, and were weary of risk – for the rest of their lives. This was obvious even before the depression was over. Fortune magazine wrote in 1936: “The present-day college generation is fatalistic. It will not stick its neck out. It keeps its pants buttoned, its chin up, and its mouth shut. If we take the mean average to be the truth, it is a cautious, subdued, unadventurous generation.””
Because some people go through these experiences and others don’t, such traumatic events create differences in opinion/perspective between similarly similar people/societies. Such schisms come to the fore when stressors like Covid are at work: “Two things tend to happen after you get hit with something big and unexpected:
  • You extrapolate what just happened, but happening with even greater force and consequence.
  • You forecast with great conviction, despite the original event being improbable and something few, if anyone, predicted.
The more impactful the surprise, the more this is true.”