Why I’m Pretty Sure the Market Will Always Bounce Back

A catastrophe is always brewing. Or one is already happening. Sometimes more than one catastrophe is unfolding simultaneously. Such is life. 

Stocks are risky in part because investors assume that the future will be more or less like the present. It never is. Occasionally, we are reminded what an unpredictable world we live in, and the illusion of smooth continuity is shattered. Chaos reigns. Hence, some people update their valuations models, find that their investments aren’t worth as much as they thought, and sell. 

This would seem like a smart thing to do if it didn’t cost so many investors so many trillions of dollars. So why isn’t it a smart thing? 

Well, just as their initial expectations might have been a little too rigid, and a little too optimistic, their subsequent projections usually tend to be too pessimistic. Whichever way the short term business trend is going, they project that indefinitely into the future. Many of the sellers of businesses in 2020 assumed that these companies would earn lower profits for years, if not decades. Some thought we were on the brink of another Great Depression. While the economy basically ground to a halt for several months, it returned to growth much faster than anyone expected. And the stock market rebounded even more quickly.

Why was that? Moreover, why is that always the case? 

The most important reason is that humans are incredibly resilient and resourceful. Not only do we adapt to new situations and environments unbelievably well, we just as often turn crisis on its head. We use the very essence of the crisis to make ourselves more capable. Remember that we are the species that turned wolves (a fearsome predator) into dogs (mankind’s best friend). 

You’ve heard a similar story about Covid too, I’m sure. Video calling, Docusign, mRNA vaccines, yadda yadda… As a species, we emerged with new capabilities. And so did the companies that we own as investors. That’s just how we do things.

Crisis never continues in free-fall for very long. Almost as soon as a pain point emerges, there are thousands if not millions of people working to ameliorate it and improve upon what was there before. When the businesses you own are in crisis (such as during a recession, market crash, or whatever), you can be certain that there are millions of people working their butts off to make things better. And not just better than they are during the crisis. Better than they were before the crisis ever appeared on our doorstep. We just never stop wanting to improve things.

The human endeavor is antifragile, not just durable.

Durability means you have enough staying power to survive some setbacks. But durability eventually runs out, and you are worn out, weakened, and destroyed. Even the best designed Toyota Tacoma, a vehicle famously capable of lasting 300,000 miles or more, will wear out eventually.

Antifragility, however, means that something becomes stronger in the face of chaos and adverse conditions. A "durable" essay can withstand criticism. But the writer and essay combo is antifragile because the author can absorb the criticism, filter it, and make improvements to the paper. An antifragile approach to life means embracing many small and medium-sized failures. You learn from these, adjust, and set your sights on ever greater failures to come.

Comedians are antifragile too. You can say the meanest thing possible to them, and find that they have a new 5 minutes of material predicated on exactly your remark. They thrive on the attention, transforming it into something relatable and entertaining. This gives them a tremendous, larger-than-life quality. There is no tragedy which cannot turned into joy in their skillful hands.

Markets, as well, are antifragile. Not only do depressed prices produce higher returns going forward, but the underlying companies are adapting constantly to become more resourceful. That could look like more efficient ways of operating, or even creating entirely new resources. At really good companies, all the employees are encouraged to be creative and find new ways for the company to run better.

One of my favorite stories of this sort happened at Walmart. A store manager noticed the lights for the vending machines were always on, even when they weren't being used. He wrote a letter to his bosses, and ended up saving the company $1.4 million a year in energy costs.

Around that time, you might have read the major news headlines and though, "woah, high energy prices are really killing these companies." Mmm, maybe. That was true in the short run. But in the long run, I say, never bet against human ingenuity.

That's why I own stocks. Not because they aren't prone to short term setbacks, but because they are constantly using those setbacks and constraints to do more with less, such that in the middle of said setbacks you can be reasonably confident that these companies (in aggregate) will be more productive, more profitable, and more valuable in 5 years.