Friday, March 14, 2008

Optimism Is a Double-Edged Sword

You know the economy is in trouble when the Wizard of Oz has to haul out the smoke and mirrors to bail out a private company on the brink of collapse — and then the President emerges from behind the curtain a few minutes later to give a speech urging Americans to remain optimistic.

Lest we forget the lessons of the last few weeks, it was optimism that got some of the largest companies on Wall Street into this mess. Optimism turns people who are supposed to be investors and money managers into gamblers. After all, why not bet if you know you’re going to win?

That’s the kind of thinking that nearly closed down a securities firm last night. They rolled the dice one too many times, crapped out, and had to spend a sleepless night calling in help from Washington so they could open for business today.

The company insists it’s fine, but one has to wonder if the purpose of the 28-day loan from the Fed is simply to allow an orderly shutdown (and not incidentally, avoid a stock market crash).

And if that shutdown takes place, which employees will come out better — the ones who are crossing their fingers and hoping everything works out, or the ones who tonight are already circulating their resumes?

Optimism is a virtue, but prudence has to come first. It is better to have the sunny outlook that leads you to work and build things than the gleeful disregard that leads you to gamble, cross your fingers, and hope for the best. The idea that investing is gambling has become so pervasive that the gamblers have taken over Wall Street. Yet the heart of investing is work — doing more work now so that you can do less work in the future. A friend spent two days last August sealing cracks and adding insulation to his house. The result of that effort was a heating cost that this winter was at least 10 percent lower. Google got where it is because its principals spent years working out algorithms for text indexing so that we could all have faster web searches. In all real investing there is this kind of connection between the work and the payoff. The fundamental problem with the hedge funds and the other airy investment vehicles that threaten to bring down Wall Street is that the link between investing and work has been lost. They are really just gambling. And when you gamble, no matter how optimistic you are, sooner or later you have to lose.