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How to lose the battle, but win the war

When I checked out the Australian Financial Review’s homepage yesterday morning, the headline was (and I wish I’d taken a screenshot) something to the effect of ‘Home loan arrears pose no threat to the economy’.

When I looked again, mid-morning, it had been changed to (and this time, I’m quoting directly) “Home loan arrears ‘highest in years’”.

(I can’t be 100% sure they were the same article. Perhaps it was a different one, citing the same presentation and the same data. It doesn’t really matter in this instance.)

Both headlines, of course, are accurate. The article, written by Matthew Cranston, cites a presentation given by Jonathan Kearns, the Reserve Bank of Australia’s head of financial stability:

“”The share of banks’ housing loans in arrears is now back around the level reached in 2010, the highest it has been for many years,” Mr Kearns said.”

And:

“However he said that rise was “by no means to a level that poses a risk to financial stability.”

“Arrears rates should not rise to levels that pose a risk to the financial system or cause great harm to the household sector.””

See, both headlines were spot on.

Can you guess which one is likely to get the most clicks?

Yep, me too. And I don’t blame the AFR.

Fear, and bad news, sell much better than ‘nothing to see here’, don’t they?

The reason? Because we’re biologically evolved to behave that way.

Deep down — and I mean deep, deep down, way past our conscious brain — we’re programmed to see optimism as expensive folly, and pessimism as gritty reality.

None of my ancestors — or yours — contributed to our DNA by thinking ‘yeah, there’s probably no lion around the next corner’.

If you only run 9 times out of 10 when someone warns you about the risk of a lion over the next hill, well, you don’t make it to any 21st-century family trees.

But, and here’s the problem: the law of the jungle and the law of money follow very different rules.

If you’re wrong one time in twenty on the African savannah, you’re dead.

If you’re wrong 4 times out of 10 as an investor, you’re good, according to superstar US fund manager Peter Lynch.

See the problem?

If you invest as though you’re fighting (or running from!) lions, you’ll never get ahead.

To put it more bluntly, if the investing lion doesn’t get you 30-40% of the time, you’re probably not investing properly.

Now, think about the last dozen or so headlines you read about the economy, the markets or pretty much anything.

I’ll bet you can’t recall a single positive one, can you?

Didn’t think so.

For fun, I just googled ‘Australian economy AFR’ and I used Google’s tools to search only for articles written in 2014 — an arbitrary year.

Here’s a selection of headlines from the first couple of pages:

“Economy enters danger zone”

“RBA may be forced to cut interest rates in 2015, not raise them”

“David Paradice eyes corporate earnings pain”

And

“Up to 500,000 jobs threatened by rise of robots, artificial intelligence”

The only positive story in the first few pages of results was ‘Australia’s capital markets compare well’.

Which is something, I guess…

You and I know — now — that 2014 was only part of the way through the current economic boom.

Is it coming to an end? No idea.

Was it in 2014? No idea then, either.

What I do know is that the stock market is up over the last five years. So is property, despite recent falls. That’s the benefit of hindsight.

But here’s the thing: Running from 2014’s ‘lion’ would have been an expensive mistake.

And the fact the market tends to — and always has, historically — go up over time means that there’s a real cost to ‘running’.

About 10% per year, on average — enough to double your money every 7 years.

Which means, as you likely know, it would quadruple over 14 years, and go up eight-fold over 21.

Looked at through that lens, isn’t it better to be wrong sometimes, but right overall. 

Or in parlance we all understand, lose the occasional battle in favour of winning the war?

Thought so.

Here’s what to do:

Save prudently. Invest regularly. Reinvest dividends religiously. Endure volatility stoically.

Fool on!

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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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