Is your glass half-full or half-empty?

One of my favourite books is Voltaire’s Candide. It’s an 18th century novel following the main character Candide, as he is indoctrinated into – and ultimately rejects – the philosophy of optimism. Despite being written in French over 200 years ago, it’s an easy read and remains a very funny satire.

This is largely due to the character of Candide’s mentor, Dr Pangloss.

Throughout Candide, lots of bad things happen which Pangloss tries to explain away. Even after witnessing earthquakes, wars and plagues, Pangloss sticks to his guns, declaring that he believes that “everything is for the best, in this best of all possible worlds”.

He’s clearly an absurd figure whom Voltaire uses to attack the philosophy of optimism and the similarly benevolent outlook of the 18th century establishment.

But despite Voltaire, I have to confess that I am also an optimist. Partly it’s down to my temperament. But it’s a trait I try to nurture because I believe it’s the best way to live your life – not least as an investor.

Optimism doesn’t equal stupidity

That’s not to say that I go round trying to put a positive spin on absolutely everything in the manner of Pangloss. Clearly, there’s a lot of depressing stuff out there: Ebola, Iraq, Syria, Ukraine, ECB monetary policy. I could easily go on.

Being optimistic doesn’t mean it’s OK to ignore these genuine threats and risks. Understanding and evaluating risk is a crucial part of staying alive and of being a successful investor.

But where investment is concerned, my first line of enquiry is to look for what could go right – not what could go wrong.

Of course, I consider the risks and potential downside well before I click the ‘deal’ button on my broker’s website. And a lot of the potential problems and challenges a company faces will come up naturally in the course of research – so I never just skate over them.

But ultimately, when I approach a new idea, I’m looking for reasons it might make me some money; rather than wondering how it could lose me a packet.

Sadly for the pessimist, he will always find plenty of reasons not to invest. And having an overly negative outlook means that you’ll miss some great opportunities.

My favourite example of recent years is the respected market commentator, Albert Edwards.

If you always expect the worst, you won’t make much of a return

Edwards was a long-standing bear during the previous decade – and had been right to be. But he refused to turn positive on equities with the S&P 500 index standing at 666 in early 2009. For this permanent bear it was still too risky, despite the market having fallen by 56% from its pre-crisis high. He wanted to see the index hit 400 before he would be brave enough to dip a toe in.

Now, we all make mistakes – but he was still calling for that same 400 target on the S&P in 2011, two years after the decisive turn in markets.

Today the index is over 1,900, so I’d argue that an overly pessimistic outlook is probably a lot more dangerous than an optimistic one.

But what troubles me most is how the pessimistic stance seems to have become fashionable and all-pervasive. There’s even a moralistic tone to the gloomsters – as if it’s virtuous to be negative and foolish to be an optimist.

This is dangerous territory.

You see, a major support for my optimism is mankind’s sheer ingenuity and drive to succeed. Even when faced with the most daunting challenges, man finds a way to overcome them. Whether it’s life-threatening diseases or economic crises, we usually find a way through.

You’d be amazed at some of the startling advances I’ve come across through my work in Red Hot Penny Shares. In just over a year, I’ve seen companies make astonishing breakthroughs in areas such as cancer treatment and cloud-based technology.

Fostering a ‘can-do’ approach is so much more conducive to solving these problems and improving lives than copping a ‘can’t do’ attitude. And when these tiny companies take off, they have the potential to offer astounding returns for investors – sometimes 200% or more.

Things are never as bad as they seem

Similarly, over the last year, I’ve felt compelled to point out how well our economy has been doing in various Penny Sleuths. It’s my attempt to counterbalance what feels, at times, like the media’s relentless focus on the negatives. I fully accept that we have problems – we will always have problems.

However, we’ve simply got a lot more to be happy about now. Over the last few years, the economy has recovered much better than the ‘experts’ predicted.

Take unemployment as an example. Our 6.2% unemployment rate compares well with history, and is close to half the European average. But rather than celebrate our success, we choose to focus on weak wage growth. It’s as if we’re desperate to tear down all that silver lining so we can revel in the clouds!

I suppose we could simply be in an extended period of mourning over the financial crisis, and at some point this mood will lift.

Meanwhile, I think optimistic investors like me simply end up with more opportunities as a result of the defeatism. Bull markets are said to “climb a wall of worry”. So as each cynic and doom-merchant is converted the market is able to move higher.

If that’s the case, it’s clearly a lot better to be an early optimist rather than a late convert.

So what do you think? Optimism or pessimism – which is the better outlook? Let me know your thoughts.