Why Most Investors Get the World Completely Wrong

Article was originally posted here

In my last column, I quoted the French novelist Honoré de Balzac:
“The world belongs to me because I understand it.”

When I read those words years ago, they lit a fire under me.

I’d always been an avid reader of nonfiction. But now I set out with a more definite purpose: to become a better investor by developing a more comprehensive understanding of the world.

I devoured books on history, philosophy, economics, politics and science, convinced that if I read widely and deeply enough I would gain a thorough understanding of how the world really works.

There’s a problem, however. And it isn’t a small one.

It’s only when you delve into a subject wholeheartedly that you start to appreciate the vastness of your own ignorance, which – if we’re honest with ourselves – is oceanic.

Given enough time, almost anyone can become an expert in a specialized area. But in many areas the best we can do is to understand the broad outlines.

You could devote a lifetime to studying a small subset of a single branch of science, for example, and still have much to learn. But in a matter of hours you can appreciate how the scientific method allows us to get closer to the truth.

Similarly, you can understand the natural history of the earth (and even its pre-history) in a single volume of Big History. (David Christian’s Origin Story: A Big History of Everything is a fine example.)

And when it comes to the current state of the world, the important thing for investors is the trend lines… not the headlines.

“The trend is your friend” is perhaps the oldest maxim of Wall Street. Yet most people get the biggest trends completely wrong.

I’m not talking here about trends in the financial markets.

As an investor, you know the trend in short-term interest rates has been higher. (The Federal Reserve has raised them nine times over the past three years.)

You know that stock prices have trended up for the past nine years but that the trend was strongly negative in last year’s fourth quarter.

But how about larger trends that reflect the state of the world?

Here’s a short test:

  1. Where does the majority of the world’s population live?
    1. Low-income countries
    2. Middle-income countries
    3. High-income countries
  2. In all low-income countries across the world today, how many girls finish primary school?
    1. 20%
    2. 40%
    3. 60%
  3. In the last 20 years, the proportion of the world’s population living in extreme poverty has…
    1. Almost doubled.
    2. Remained more or less the same.
    3. Almost halved.
  4. What is the life expectancy of the average person in the world today?
    1. 50 years
    2. 60 years
    3. 70 years
  5. How did the number of deaths per year from natural disasters change over the last hundred years?
    1. More than doubled
    2. Remained about the same
    3. Decreased to less than half
  6. In 1996, tigers, giant pandas and black rhinos were all listed as endangered. How many of these three species are critically endangered today?
    1. Two
    2. One
    3. None
  7. How many people in the world today have some access to electricity?
    1. 20%
    2. 60%
    3. 80%

These questions are all taken from educator Hans Rosling’s 2018 book Factfulness: Ten Reasons We’re Wrong About the World – and Why Things Are Better Than You Think. The correct answers are…

  1. B (Middle-income countries)
  2. C (60%)
  3. C (Almost halved)
  4. C (70 years)
  5. C (Decreased to less than half)
  6. C (None)
  7. C (80%).

Congratulate yourself if you got even a single answer right. Most people miss them all.

Why? Because the correct answers are the most positive ones.

Thanks to unrelentingly negative news coverage, most of us believe the world is getting steadily worse, even though the vast majority of us are living longer, healthier, safer, richer, freer lives than ever before.

Not everywhere, of course. And it’s the exceptions – like Syria, Venezuela, Iran and North Korea – that dominate the newspaper headlines and our TV screens.

The nonstop negativity helps media outlets attract viewers. But what we get in return is an entirely unjustified pessimism.

And that can only hurt us as investors.

Here’s a not-so-small example. You can visualize developing markets – which hold 86% of the world’s population – as countries filled with uneducated people living short lives in dire poverty.

Or you can think of them as billions of mostly young, energetic people gaining access to energy and technology, who are our suppliers today… and our customers tomorrow.

An accurate perception causes you to hold an optimistic investment outlook. An inaccurate one causes you to shrug and say, “Why bother?”

Of course, emerging markets are just one area where investors have distorted perceptions.

By virtually every objective measure, life on earth is getting better not worse.

That may seem outrageous. (After all, you watch the news, right?)

But in my next column I’ll explain why things are much better than the media’s portrayal… and why the exceptions represent some of the biggest investment opportunities of all.

Good investing,

Alex

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