Optimism in Isolation can leave you vulnerable

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By Arthur Karas

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I’m not a huge fan of disaster movies. While as a genre they can be enjoyable to watch, they ultimately require suspension of disbelief,
are overly reliant on dubious science and use excessive computer generated special effects. Disaster stories are much scarier when they
are real. My preferred brand of true catastrophe is books about financial disasters. Reading about the Enron fraud in “The Smartest Guys in
the Room” by Bethany McLean or Roger Lowenstein’s excellent account of the meltdown at Long Term Capital Management (LTCM) in “When
Genius Failed” were highly informative in developing my view of the investment world. Both Enron and LTCM had terrifyingly huge impacts
on markets. Understanding how the fraud at Enron was missed by so many and how extremely successful investment managers at LTCM
nearly caused the collapse of the global financial system is essential reading for anyone seeking to understand how markets work.
“Those who cannot remember the past are condemned to repeat it.” George Santayana, philosopher and author Studying these financially catastrophic events provides perspective on how they developed, what the signposts were and, hopefully, how to avoid or mitigate them in the future. I also enjoy reading the success stories. I’ve ploughed through numerous books on Walmart, Nike, Amazon, Goldman Sachs, Alibaba and other winning companies. There is a lot to be learnt from studying massively successful enterprises. Reading about success can provide positive motivation and teaches us about the key ingredients of achievement in business. However, examining the failures provides a critical counterbalance. It reminds me to work actively to counteract an intuitive bias. That bias is optimism. I’ve always believed that to be a successful equity investor requires optimism. I’m very optimistic by nature. I’m always excited by my work. I’m always awake to the possibility that the next company report that I read or conference I attend or management team that I meet could reveal another investment gem. I believe that most investors and most people in business are positively biased. It’s difficult to imagine a confirmed pessimist holding Naspers shares over the past 10 years, on the back of the still nascent Chinese internet space, or buying Capitec post the African Bank collapse. Both are investments that we made at MacroSolutions. However, optimism in isolation can leave you vulnerable to investment traps – such as over hyped opportunities and overconfident management teams. A more balanced approach requires some counterweight, which comes in the form of healthy skepticism.

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