Are you bemoaning the loss of big money in the stock market because your retirement fund is sagging?  Unless you are within five years of actually liquidating the entire account (few people actually liquidate the whole thing, even if eligible to do so) . . . then, literally, ignore all doomsayers and hand-wringers.  Price volatility is a fact of life in the capital markets.  Once you decide to get involved with capitalism, whether through individual stocks and bonds or through the auspices of your retirement account's mutual fund choices, you must be prepared to deal with market forces forthrightly.  Keep in mind that in every down market there are pessimistic sellers of securities; however, someone is also the buyer of those very same securities (or else the seller couldn't sell).  The Consummate Capitalist may just be that buyer.  

Looking to other markets for a moment, buyers in a real estate market welcome downward volatility in home prices. The downward price movement provides opportunities to purchase property that was previously priced out of the market.  As of late 2008, some areas of southern California and Las Vegas saw home prices fall by 75% from their previous highs. The homes were the same; they were made of the same material and were located in the same location as they previously were when flying high. The market's appetite was the only thing that changed -- not the quality of the property being bought.  Returning to the capital markets, and employing the same logic for businesses, or "stocks", as that noted for real estate above, capitalists cannot help but welcome low stock prices.  They know that the businesses behind the stock symbols often remain just as good as before the great pessimism; its the market's appetite that suffers from temporary nausea.  As such, the Consummate Capitalist relishes, if not outright encourages, pessimism in the capital markets.  Pessimism in the capital markets creates great opportunities for those who want great assets on the cheap.  Capitalists see downward price volatility as the close friend of the asset buyer, not the enemy.

Now for the twist: the financial media, including major newspapers, financial journals, talk-shows, financial advice columns, etc. take the opposite perspective. The mainstream media reports financial news from the perspective of sellers of investment assets, not the buyers. That is, a sudden spike in upward volatility for asset prices is treated as good news; and a sudden slump is treated as bad news. The only way that the news can be interpreted as good or bad is that only one perspective (buyer or seller) must be taken at the expense of the opposite perspective.

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Example of how Pessimism creates opportunities

Pessimism has its own way of evolving into Optimism. Need an example? Study the economic pessimism that gripped the United States in the mid-1970s. The U.S. was at the mercy of OPEC, many commentators thought that the economy had passed its zenith in the 1950s and early 1960s. Further, and most troubling, high inflation, high taxes, and high interest rates kept the nation locked into what economists dubbed "stagflation". Stagflation meant that consumer prices were rising rapidly (compared to historic levels), particularly the price of gasoline and food, but economic growth remained utterly stagnant. Additionally, the Vietnam War had wiped out optimism and saddled the country with large amounts of debt. Violent crime in major cities was rampant and seemingly beyond control. So what happened?

The United States stood up, dusted itself off, and then led the world into the Computer Revolution. The Computer Revolution morphed into the Information Age; and the United States saw 20 years of stupendous economic growth and prosperity. An entirely new industry, personal computers, was established. And the advent of personal computers spawned multiple other industries (the Internet would still be relegated to information exchanges between university laboratories without personal computers). In short, from 1982-2001 the United States experienced in its economic evolution what Eric Beinhocker calls "punctuated equilibrium" in his book, The Origin of Wealth.

And how did investments fare with the change from pessimism to optimism? Stocks utterly exploded (even when averaging out the dot.com boom and bust of 1997-2002); and this unequaled expansion came after all the "woe is us" pessimism of the 1970s. Bottom line: the United States is filled with pockets of excellence (bio-tech, quantum computing, nanotechnology, etc.) that may lead the next revolution in the coming decade (the Teens of the 21st Century). As a result, you should not think in terms of current pessimism being the same as permanent pessimism. And where there is temporary pessimism, there is opportunity to buy more total assets than would have been otherwise possible . . . at a discounted price.  Warren Buffett has said, "When investing, pessimism is your friend, euphoria the enemy." [my emphasis]

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