William Creekbaum: Maintaining a rationally optimistic outlook

"The pessimist sees difficulty in every opportunity. The optimist sees opportunity in every difficulty." - Sir Winston Churchill

As we approach the end of the year, I'm writing to share some thoughts on today's economic outlook and the pessimistic psychology many investors share - a frame of mind Winston Churchill commented on in his day.

Today we're seeing a mood of widespread fear and intense pessimism. Many investors feel overwhelmed by problems in the United States, led by high unemployment, government deficits, depressed housing prices, and gridlock in Washington.

Look to Europe and you've got many of the same challenges, as well as banking problems in countries like Greece and Ireland, with others such as Spain and Italy rumored to follow.

Clearly there are substantial issues that have to be worked through. That said, a key concern is that the positive, optimistic, can-do mindset that has fueled so much of the growth and success of the United States is being mired down in pessimism.

What's important to remember is that throughout history, people have regularly overcome problems of similar and larger magnitude. This is one of the themes of a thought-provoking new book by well-known science writer Matt Ridley, "The Rational Optimist: How Prosperity Evolves."

In it, Ridley makes the case for optimism about the future. Bill Gates reviewed the book in the Wall Street Journal, pointing out that Ridley documents constant predictions of a bleak future throughout human history.

Rev. Thomas Malthus, a contemporary of Adam Smith in the late 1700s, wrote that an increasing population would arrest advances in the quality of life. In the 1960s, you had Paul Erlich's bestselling book "The Population Bomb"; in 1972 "The Limits to Growth" was published by the Club of Rome. Both these books posited that an increasing population and finite resources would cap our ability to grow.

More recently, many will remember the end-of-the-world scenarios around Y2K computer shutdowns.

It's not that these weren't real issues. The point is that they were blown out of proportion. As Bill Gates wrote, "Despite them, our lives have improved dramatically in terms of lifespan, nutrition, literacy, wealth, and almost any other measure you'd care to name."

There are at least two reasons to be optimistic for the mid term. These are the role of innovation and some of the incredibly positive things that are happening in emerging economies in Asia, Latin America, Eastern Europe, and even Africa.

Thinking back to Winston Churchill's comment about optimists and pessimists, when pessimists read about China, India, and other developing countries, they conclude that they're going to achieve growth at the expense of Western countries, that all those super-bright, super-ambitious young kids are going to eat our lunch.

And while this could in theory take place, it doesn't have to happen. Many Western companies are well positioned to capitalize on the growing middle class in developing economies. A rising percentage of revenue and profits from top consumer goods firms like BMW, Procter and Gamble, Nike, Apple, Nestle, and McDonald's are coming from these emerging countries. More and more, the key to success for western companies is operating globally.

And the good news is that these multinationals have not only strong brands, but also strong balance sheets. Western consumers and governments may be stretched financially, but our companies have record levels of cash and are in good shape financially.

As for the argument that these emerging economies are going to win at our expense, this assumes that the size of the wealth pie we're dividing up is fixed. It's not. Through trade and globalization, those emerging markets are going to dramatically increase the amount of wealth in the world.

It also assumes that Western economies and companies won't adapt.

In light of this, as I meet with clients, we talk about three broad themes for 2011.

First, understand how much volatility you can live with. There's no reason to believe that markets won't continue to gyrate. So with every client, we work through how much short-term volatility and risk they can handle.

Second, concentrate on high-quality companies with strong brands and balance sheets and that also offer fair valuations. When deciding on equities to invest for clients, we rely on 18 years of experience and a conservative approach to buying quality companies at attractive prices.

Finally, we need to take a rationally optimistic view of the future, walking the fine line between succumbing to dire pessimism on the one hand and blind optimism on the other.

• William Creekbaum, MBA, CFP, a Washoe Valley resident, is senior investment management consultant of Morgan Stanley Smith Barney LLC. He can be reached at William.a.creekbaum@mssb.com or 689-8704.


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