When it comes to dispensing life-coaching advice, I go with optimism over pessimism every time. What's to be gained by embracing the blues?
In the world of finance, however, there are times when we have to work a little harder to keep our chins up. Like right now when the stock market has slipped into negative territory for the year.
At times like this, I'm prompted to Google Warren Buffett to see what he's up to. Now there's a long-term optimist who puts his money where his mouth is.
From the latest Fortune, I learn that he has sold "puts" on several of the world's major stock indexes that will begin expiring in 2018. People buying the put options are betting that the market values will have fallen between the purchase date years ago and 2018, because their options will be worth a lot of money if that happens.
Buffett's firm, Berkshire Hathaway, is basically guaranteeing that the company will buy those index shares at roughly today's prices (prices largely flat for the past decade.)
People buying that right to sell at current prices are assuming that prices in eight years will be lower than they are today. They will buy the index shares at presumably a cheaper price and immediately sell for a big profit at the higher price that Buffett will be obligated to pay. The put- option buyers make money in a falling market while Berkshire losesÂ big time.
But wait. Berkshire Hathaway charged $5 billion as their sales price for those options.
On a company that consistently makes about a 15 percent profit, it will have compounded that money over time to about $37 billion when it could be facing the need to honor those options contracts.
Moreover, the company has a long history of not having to pay anything on these bets, so odds are that it will pocket the $37 billion.
The real message here is the degree of optimism expressed by Buffett. He clearly expects the stock market to rise.
He said so in 2005 when he thought the market during the following 10 years would compound at a 7 percent rate of return -- below the long-term average of 10 percent, but still positive.
This gives us another five years to reach a level that will be double the 2005 number.
And, that will take a compound rate of around 12 percent from this point forward. It could easily happen. As a percent of sales, American corporations have more cash and less debt since the 1950s.
If we hitch our star to an optimist, let's find one who doesn't make many mistakes.
Berkshire Hathaway, measured by its book value rather than stock price, has outperformed the overall stock market since 1965.
In the 11 down markets since 1965, Berkshire has lost less. In 2010, for example, the company is up about 17 percent while the S&P 500 has lost about 5 percent. The current price of the "B" (affordable) shares is about $75.
Meanwhile, for those whose circumstances don't allow the patience that optimism sometimes requires, there's an upbeat antidote to pessimism.
It's a free 30-page online booklet, "Spending Your 401(k) -- How to Live Your Life and Not Outlive Your Retirement Resources" by me. It's available at www.pensiondynamics.com.