Successful investors work hard to avoid groupthink. They free themselves from mental anchors. The worst mental weights in the financial arena are stock market levels. Experts place too much weight on “getting back to Dow 10,000,†or not being able to “sustain 11,000.†What matters to investors are corporate profits and paying a reasonable price for them, not a market index number that happens to have a lot of zeros.
At Ariel Investments, our research team tries not to fixate on what a company earned a year ago or even three years ago. Rather, our analysts try to figure out a company’s normalized earnings. If you look at the long history of a given company, including peaks and troughs and those times in between, what might that company earn if its operations were standard and the economy was neither too hot nor too cold? That’s the earnings number that matters because it establishes the firm’s long-term history of growth.
We also try to stay away from groupthink. When we examine conventional wisdom, we strive to question it from all angles. Why might it be overly optimistic or pessimistic? What are the holes in this way of thinking?
With all these principles in mind, here’s what I think about the future: The United States experienced a deep and long recession starting toward the end of 2007, one that likely ended in mid-2009. We should not allow the bottom to serve as an anchor. Let’s take a longer-term, historic view. Over the decades, economic growth in the U.S. has trended up at a pretty steady rate with a few kinks during recessions. It doesn’t flatten for a decade at a time or even a few years. Growth is normal and it’s under way.
The groupthink-driven idea that the recovery will be slow and painful also strikes me as overdone. In the past, sharper downturns have given way to stronger recoveries. Fiscal and monetary stimulus has flowed plentifully, and corporate balance sheets are flush, so the recovery should be just fine. Despite–or actually because of–the prevailing pessimism and caution, I am optimistic.
Mellody Hobson is president of Ariel Investments L.L.C., a Chicago-based money management firm serving individual and institutional investors. She is also a regular contributor to ABC’s Good Morning America.