The history of mankind is one of a thousand small steps forward followed by a giant step backwards recurring ad infinitum. Progress is incremental. It is difficult and there are no shortcuts. It takes time. It requires immense focus and energy compounding over a long timeline. Valuable companies, giant skyscrapers, brilliant treatises, beautiful works of art, moving symphonies, technological innovation, elite athletic ability… all involve incremental progress often so slow as to be imperceptible. An observer would never notice Michael Phelps’ improvement from one day to the next in the pool. But rigorous training beginning at age seven compounding for twenty-four years created the greatest Olympian of all time. Penicillin is probably the greatest medical innovation yet, but there were two hundred years between discovering germs and accepting them as the cause of disease and another ninety before we began treating infections with antibiotics.
While progress happens slowly, regression happens quickly. Building a house takes expertise, time, labor, and materials. Destroying one takes some natural gas, a spark, and twenty minutes. Construction of the Notre Dame cathedral began in 1163 and finished in 1260. Nearly a century. The fire that almost destroyed it lasted 15 hours. Bear Stearns was founded in 1923 and became one of the largest, most powerful banks in the world for nearly a century… until it went bankrupt in three days in March 2008. Warren Buffett famously said a reputation takes twenty years to build and five minutes to destroy.
Good news is the result of incremental gains compounding undetectably over a long period of time. Bad news comes for catastrophes that happen almost instantaneously and is impossible to ignore.[i] One thousand unnoticeable small steps forward followed by one conspicuous, giant step back. Progress’s compounded incremental improvements are far more powerful than regression’s cataclysms – compare any aspect of life today in America to just fifty years ago – but the setbacks get all the attention. It is far easier to imagine what can go wrong than it is to grasp the compound effect of a thousand little things going right. So we fixate on the bad news and anticipate more regression in the future all while things keep getting better.* The Paradox of Progress.
I was born in 1992 in Birmingham, Alabama. My parents are from Illinois and my grandparents still lived there. I remember long car rides to visit them on many occasions in my early childhood, but I cannot comprehend how my parents handled the directions to get there. Head North on I-65… then what? Use a paper map?! That must have been how they did it, and it is inconceivable to me. Now we plug in the address to one of our smartphones, which wirelessly connects to the giant touchscreen in the car showing real-time location, exact route to destination, estimated time of arrival, and suggestions for avoiding traffic. You don’t really notice the improvements in navigation technology until you look back over thirty years and realize it’s incomprehensible. Everything is like this.
Deaths of heart disease in the U.S. have declined by over 70% since the 1950s on an age-adjusted, per capita basis. Had the heart disease death rate remained constant, twenty-five million more Americans would have died from heart disease since 1950.[ii] Our progress in diminishing heart disease fatality is one of the most important achievements in the post-war era.
And no one noticed.
A 70% reduction in heart disease since 1950 works out to an annualized reduction of about 1.5%. Imagine a newspaper printing a headline trumpeting a 1.5% decrease in deaths from heart disease year over year. You would either ignore it or think something along the lines of, “that’s it?”
Real median household income in the United States in 1984 was $56,780.[iii] Today it is $74,580, an increase of 31% (remember, “real” is net of inflation). That is an absolutely massive increase in standard of living, and a testament to the mighty American economy. Of course, it only works out to about a 0.7% increase annually (remember, this is inflation-adjusted), so no one ever noticed it. Imagine a headline reading “After Inflation, American Median Income Increases by 0.7% Year Over Year” – it would be met with derision. The online comments would center on the horrors of the Federal Reserve, the declining American economy, and probably something about buying gold.
I wager the median American household will have an inflation-adjusted income of $100,000 when my grandchildren are in elementary school. That sounds like a bold prediction – six figures inflation-adjusted is a lot of money – but it is inevitable assuming 0.7% annualized increases over the next forty years. Another prediction: no one will notice that monumental increase in standard of living either.
The giant step back in the Paradox of Progress has a different cadence. Bad news happens almost instantaneously. It is a shock to the system. It grabs our attention. The headlines nearly write themselves. Pearl Harbor and 9/11 both took less than two hours, start to finish. Two hours that altered the course of history. Assassination attempts, terrorism, outbreaks of disease, bankruptcies, widespread internet outages… bad news happens quickly and demands our attention.
The Paradox of Progress thus creates a substantial sampling bias. If good news happens so slowly nobody notices while bad news happens so instantaneously everybody notices, then our worldview is tainted by a massive sampling bias towards bad news. It is easy to call to mind all the bad things that have gone wrong recently and even easier to ignore all the incremental progress occurring in the background. This is the dynamic Comedian Louis CK references when he observed, “everything is amazing, and nobody is happy.” We are the beneficiaries of millennia of unfathomable human progress, but we only notice the bad stuff. The internet and social media have further enhanced this sampling bias, which helps explain why everyone seems to feel the world is headed in the wrong direction.
This has horrifying consequences for investors, who, by definition, require a positive long-term orientation. If you do not have a positive outlook there is nothing to invest for or to invest in. Pessimism precludes the very act of investing, yet the Paradox of Progress shifts our default stance to pessimism. “I can’t invest now – not with the pandemic/war in Ukraine/supply chains/inflation/middle East instability/impending recession/upcoming election/etc.” is a common refrain. Even worse, pessimism sounds smart – bearish arguments are intellectually seductive. And, perhaps more importantly, bearish lines of reasoning are easy to comprehend. It is much easier to imagine in 2005 that people will stop watching DVDs, so you ought to short Netflix (back then their business model was shipping DVD rentals to customers – remember?) than it is to envision Netflix would revolutionize the television market with the introduction of streaming. If you thought this way you wouldn’t have been bemoaning the prospects for Netflix’s stock price, you would have been working on building a company to become the king of streaming. Netflix’s market cap in 2005 was $650 million. Today it is over $300 billion.[iv] So the pivot to streaming idea was worth about $299,350,000,000, but it is nearly impossible to comprehend that kind of innovation before it happens.
The pessimists sound smart, but the optimists make money. The Paradox of Progress.
Sean Cawley, CFP®
*This summons a favorite quote of mine from Peter Lynch: “Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.”
**I must credit Morgan Housel for the idea underlying this blog post – that progress happens imperceptibly in the background will setbacks happen suddenly and loudly. He describes it as overnight tragedies and long-term miracles, and this post is little more than an extrapolation of his brilliant insight. If you have not yet done so, immediately login to your Amazon account and purchase his book, Same As Ever. You will read it more than once.
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[i] Credit to Morgan Housel for this idea, found in the chapter entitled “Overnight Tragedies and Long-Term Miracles” in his latest book Same As Ever. It is a must read.
[ii] Morgan Housel, Same As Ever, pg. 110.
[iii]https://fred.stlouisfed.org/series/MEHOINUSA672N
[iv] YCharts, Fundamental Charts, Market Capitalization, NFLX, 01/01/2005 – 08/30/2024.