💰 Wall Street legend: “Pessimists sound smart – optimists make money”

💰 Wall Street legend: “Pessimists sound smart – optimists make money”

Jim O'Shaughnessy is a legendary investor on Wall Street. He shares what he thinks is the biggest opportunity for the future and explains how the world is going through a great reshuffle.

Mathias Sundin
Mathias Sundin

Share this story!

Every week we send out a free newsletter with fact-based optimistic news on technology, science and human progress. Sign up!

“Wow, do you think this is the Jim O'Shaughnessy?”, my Warp News colleague Eric Porper wrote to me on Slack. “He just became a Warp Premium Supporter.”

Yes, it was him.

Jim O'Shaughnessy is a legend on Wall Street. He has written some of the most influential books on investing, like Invest Like the Best and What Works on Wall Street, and he even holds several patents on investment strategies. Forbes named him a legendary investor, along with Warren Buffet, Peter Lynch, Benjamin Graham, and a few others.

Today he is active on Twitter and his podcast, Infinite Loops.

15 years ago he founded O'Shaughnessy Asset Management, which now has $7.5 billion under management and advisement. He recently sold the company and will resign from it later this year. But he is already starting a new company. This time to invest in what he believes is the biggest opportunity right now. In this interview, he reveals what that is.

But first, I had to find out one thing:

Mathias Sundin: How does one become a Wall Street legend?

Jim O'Shaugnessy: “Haha!”

Jim is quick to laugh.

“My wife loves to point out, correctly, that I am a legend only in my own mind. I think that if you have a certain level of accomplishment on Wall Street, journalists who are writing about you want to make you seem very important to their audience. And so they come up with terms like Wall Street legend, guru, and all of these various things. So I am neither a legend nor am I a guru.”

“I think that what I'm best known for are two things. The first is the book What Works on Wall Street, in which I systematically tested a variety of the most popular investment strategies. Second, my idea that human nature doesn't change.”

Human OS

That relates to what Jim O'Shaughnessy calls the Human Operating System, human OS.

“It's a term I stole from a guy by the name of Brian Roemmele. I love it because what it allows us to do is put aside the person. If we're human, we're running human OS.”

It is this human OS that is responsible for many of the errors we make when investing.

“The four horsemen of the investment apocalypse: Fear, greed, hope, and ignorance. They are more responsible for losses than any bear market or any depression.”

The success of Jim O'Shaughnessy and his O’Shaugnessy Asset Management is that they found a way to correct some of the flaws in the Human OS.

“David Deutsch wrote an amazing book called The Beginning of Infinity, which I regularly plug on Twitter and other social media. It's a fantastic look at why we are the way we are. And what we find is that even people who have been educated thoroughly in behavioral finance, and psychology, in all of these fields, nevertheless, continue to make the same mistake, time and time again. So essentially we decided to tie ourselves to the mast, so to speak, because we didn't want to hear the sirens call. Because if you hear the sirens call and you can jump the ship to go find the sirens – you will. And I include myself here.”

The constant negativity from the news media and in our feeds alerts the ancient parts of our brains and especially triggers our fears. That can lead to a feeling of helplessness, that you don't believe that you have agency, that you can't take action.


A mind virus

“I call it a mind virus. It would be very, very difficult for a person with no sense of agency to start a company, to create something, or to virtually do anything. Where instead an optimist would say, ‘we have to be like this, right, because the future has all this brightness’.”

MS: Where does the mind virus come from? Why do some people feel this way?

“Again, we're fear based creatures and therefore if I, for example, was in the news business, and my only charge was to maximize revenue, and maximize eyeballs. I'd probably be doing things very much like our traditional media around the world does today. I would be focusing on the unusual and the bad. Because, again, it's built into our human OS, to be highly attracted to novel dangers.”

“If we were going to be writing a daily newspaper, and all we were going to cover was regular events that happen with great frequency. No one would read it. If I was giving Warp News advice, I'd say: Go out of your way to find novel, optimistic things that have happened. Because if you get the novel part, people might read that because people are interested in furthering their own life and situation.”

Image: CNBC.

MS: In investing, is it better to be a pessimist or an optimist?

"Pessimism sounds smart, optimists make money. It's an asymmetric edge that everybody in the world who can read or watch, or listen, the evidence is overwhelming."

"It's easier to be pessimistic, much easier; it plays to that human OS bug, that things are all going to hell. I mean, people prophesizing the end of the world is the second oldest profession, right?”

Jim tells the story about the bet between the 1970s Mr. Doom, Paul Ehrlich, and economist Julian Simon. That story is also included in the Warp News book Naive Pessimists, by Ulrika Gerth.

Doomster vs. Boomster

In 1980, Paul Ehrlich accepted a $1,000 bet from his intellectual nemesis — economist Julian L. Simon, which maintains humanity will find solutions through technological advancements. Simon challenged Ehrlich to pick any natural resource and any future date.

If resources were getting scarcer as the population grew, the price should rise. Simon, of course, bet the opposite would happen.

The parties signed a futures contract. Then, as agreed, they waited ten years. During that decade, the population grew by 800 million, the greatest increase in history.

The stakes were high as the two intellectuals traded insults. Ehrlich, speaking at an Earth Day symposium, dismissed, with a laugh, Simon’s book on human ingenuity, ”The Ultimate Resource”:
“The one thing we'll never run out of is imbeciles.”

Simon, not to be outdone, delivered a speech a few blocks away in which he characterized the population increase as “victory over death” and mocked Ehrlich for “lamenting that there are so many people alive.”

So, who won the bet?

The five metals that Ehrlich and his group had chosen declined in price when adjusted for inflation. Ehrlich quietly mailed Simon a check for $576. Simon then proceeded to raise the wager to $20,000, an offer that Ehrlich declined.

Asked in an interview whether any lessons had been learned, Ehrlich replied, according to Times magazine:
“Absolutely not.”

“Paul Ehrlich believed that he could forecast based on the initial conditions. You can't, because as David Deutsch wonderfully makes the case in the Beginning of Infinity: 'What did physicists think about nuclear reactors or the internet in 1900?' Well, they didn't think about them. Because they didn't exist."

"Tie that to Buckminster Fuller's idea about being tuned in and tune out. It's not that we are resolute in our unwillingness to look at new information. It's just that we're not tuned into it. And Fuller makes the point that the microscopic world, it existed before we had microscopes. We just weren't tuned into it. When we got microscopes, we got tuned in. And we're like: Oh!”

Image: CNBC

“It’s also is one of the reasons why any new art, any new scientific discovery, it doesn't really matter what it is if it's new. The majority of people experiencing it for the first time are tuned out.”

MS: What is your advice on how to correct the fear being pushed both in news media and social media?

"I am not one to say don't use social media. When the radio was first introduced, there was a sizable minority who wouldn't buy radios because they thought the radio waves were harmful. At any time you would find a group of birds dead for no apparent cause; it was immediately: Those were killed by the radio waves!”

“My idea in all social media is sort of threefold. Number one is aggressive curation. The second thing is that every day, I sort of look for what interesting new thing am I learning about for the first time today. It's how I came to understand that the story that no one followed – that you could argue was possibly the most important story of the last decade – was the fact that more than a billion people emerged from abject poverty over that time period. It's mind-boggling how incredible this world that we live in is."

"And then the third thing is – this sounds woo-woo, so I don't often include it – but develop a gratitude practice. I don't know why this works, but I do know that it works. They don't have to be big things. So for example, every time I step into a hot shower, I say 'thank you.' I realized that I am maybe the one percent of all humans who've ever lived, who knows that I always get to have a hot shower every day. That's amazing.”

MS: You talk about the Great Reshuffle. What is that?

“We have reached a place with the confluence of things happening in technology, but also in a very, very large number of different disciplines. At the center of the great reshuffle sits the internet. And it's coming of age, so to speak, in that it is the largest variance amplification system in human history. The tools that it gives to normal human beings are quite breathtaking in their scope, and their numbers.”

There used to be a clear rulebook to play by, to get something done or have a career. But that rulebook has been cast aside.

“Before you would go to the most elite university, then you progressed into one of a handful of prestigious occupations. Sciences, media, McKinsey and the consultants, and  the large corporations, which ruled the roost at that particular time."

"The pandemic made one other thing possible in a much shorter time frame. And that was the destruction of location, physical location. If I wanted to hire you, I would have zero qualms about you being in Sweden, and me being in the United States. What's happened is a billion incredibly qualified people from emerging countries just came online.”

The Great Reshuffle also influences the information we get.

“The other part of the way things were was the classic bell curve, which is 68 percent, within one standard deviation, either way. Well, it doesn't take a genius to see that everything from government to entertainment, to news to virtually anything housing, was aimed at that 68 percent. Under the old structure, it was very easy to make people think what you want them to think. The majority of Americans did not know that Franklin Delano Roosevelt was crippled in a wheelchair. Can you even imagine that happening today?”

Image: explorable.com

MS: That explains some of the reactions from the news media.

“You're seeing the tantrum by major legacy media. Because they don't control things anymore, and they really don't like that. They're very, very angry.”

MS: They are not the gatekeepers anymore.

“Exactly. So that's the beautiful thing. The gate becomes your talent and your ability to attract and keep people's attention. And the example that I use there would be Substack. In the old days, writers who were really good writers would try to seek a spot at the New York Times, Rolling Stone magazine or the New Republic or The New Yorker, or National Review if they were conservative. Now, they don't do that anymore.”

MS: What do you see as the biggest opportunities in the Great Reshuffle?

“I think that the biggest opportunities are for creators of all stripes. Entrepreneurs who start new companies are creators. Painters who paint paintings are creators. Novelists or journalists who create interesting novels and or stories are creators, as are musicians. It's endless, endless. We now have the tools with which the talent of the world can rise in a fashion that they simply could not prior to the internet.”

“So for example, if you lived in Georgia in the old Soviet Union. If you didn't have the means to travel to Moscow to try out for the opera company there, it didn't matter that you had the greatest voice in the world. You were trapped by your geography. Now we can see all of these people. Geography no longer matters. And so, what we will see is a rise of incredible creativity.”

Jim O’Shaugnessy lives as he learns.

“With my podcast Infinite Loops, the majority of the people who work for me, I've never met physically write, and I didn't ask for their CV. I looked at their proof of work online.”

But he will do even more to grab this huge creativity opportunity.

"I'm retiring from O’Shaugnessy Asset Management, but I'm immediately founding another company. It's called O'Shaughnessy Ventures, and we are going to seek out those people. We're gonna find them, and we are going to finance them. And we are going to invest in their companies.”

“We are in a state where the possibilities are endless.”

Mathias Sundin

Make sure you follow Jim O'Shaugnessy on Twitter and listen or watch his many interesting conversations on Infinite Loops.

💡 David Deutsch: Optimism, Pessimism and Cynicism
With so much progress in the world, how can pessimism still be widespread? It is because of cynicism, denying that “so-called-progress” is progress, argues David Deutsch, professor at Oxford University and one of the world’s leading intellectuals on optimism.
💡 Kevin Kelly: The Case for Optimism
Kevin Kelly is the founder of Wired Magazine and author of several books, among them The Inevitable. For Warp News he presents his case for optimism.