Beware of Blind Optimism

We could all use a bit of optimism in these tough economic times. In the face of adversity, a positive outlook gives us the strength to fight the good fight. But it's one thing to face challenges with the right attitude and another to insist on optimism no matter what.

I believe that blind optimism, with no regard for actual facts, will only lead us even deeper into our current mess. We can't afford to take a page from Voltaire's Candide, blithely insisting that "all is for the best in the best of all possible worlds," despite the looming presence of harsh reality.

How'd that work out for you?
The belief that everything will work out for the best, without any change or effort on our part, won't serve us well anymore. Neither will short-sightedly ignoring the possibility of trouble on the horizon. We're not being overly negative if we merely acknowledge that we might be facing the mother of all currency crises, or prepare for worst-case scenarios that might arise from economic mishaps or policy blunders.

Remember, blind optimism led people to believe that housing prices would never fall, leading them to ignore the risks posed by exotic loans. And for an entire decade, banks' confidence that all would be well even kept them from paying insurance premiums to the FDIC, falsely confident that the good times would never end.

Falling off the Wagoner
Yesterday's government-mandated ouster of General Motors (NYSE: GM  ) Chairman and CEO Rick Wagoner drew criticism from some Foolish corners. However, a recent New York Times article, "The Steady Optimist Who Oversaw GM's Decline," led me to wonder whether Wagoner didn't deserve a boot.

During his nine years in charge of GM, the article said Wagoner "never appeared to waver from his determination that GM would reclaim its spot as the unrivaled leader of the auto industry, despite steadily falling sales." Even in the midst of major problems, including three serious restructurings, the article said Wagoner remained stubbornly confident in the company's strength and his own abilities to right the ship.

U.S. automakers should long ago have seen the writing on the wall -- in bright red, 20-foot letters -- as their sales sputtered and rivals such as Toyota (NYSE: TM  ) and Honda (NYSE: HMC  ) gained on them. Yet Wagoner was still apparently head cheerleader last fall in a speech to GM employees, saying: "So, what's our assignment for today and tomorrow? Above all, it's to demonstrate to the world that we are more than a 100-year-old company. We're a company that's ready to lead for 100 years to come."

Optimistic? Definitely. True? Hardly.

Get a grip on reality
Such "optimistic" thinking can lead industries to make terrible mistakes as the world passes them by. Look at the recording industry's stubborn insistence on an obsolete business model, ignoring major technology changes and its own customers' growing resentment and anger. That short-sightedness keeps me from even considering an investment in Warner Music Group (NYSE: WMG  ) .

Or how about Sony (NYSE: SNE  ) referring to itself as the "official" leader in console gaming earlier this year, and its refusal to cut prices on its struggling PlayStation 3 console? Optimism can quickly slide into egotism when companies steadfastly ignore the changing conditions around them.

Yet we still don't seem to have shaken our habit of optimism at any cost. Investors recently became euphoric when Citigroup (NYSE: C  ) mentioned "operating profits." My Foolish colleague Morgan Housel pointed out the fantasy behind that statement; operating profits don't take the balance sheet into consideration, and banks' balance sheets have been the problem all along.

General Electric (NYSE: GE  ) has also made some pretty optimistic claims lately. (One member of our Motley Fool CAPS community pondered whether GE's lying or simply incompetent.) Questioning those upbeat assertions may seem like crabby naysaying, but that doesn't mean it's not worthwhile.

Choose honesty
Blind optimism is self-deception. People who demand a sunny outlook, even when confronted with plenty of legitimate reasons to worry, are essentially encouraging others not to be intellectually honest. We've had our fun ignoring the real world over the past decade, and now we're paying the price. Facing up to reality is the only way any of us will make true progress in business, investing, or life. I wish I saw more of this practical approach from the government, which seems to be spending money with no regard for its own solvency.

You want real optimism? Try calmly, honestly assessing the situation at hand, and then rolling up your sleeves and working to fix it. This may never be "the best of all possible worlds." But if we tackle our problems honestly and prudently, resisting self-delusion, we might just manage to make it a little better.

Alyce Lomax does not own shares of any of the companies mentioned, and she just won't drink the Kool-Aid. Try any of our Foolish newsletter services free for 30 days. The Fool has a level-headed disclosure policy.


Read/Post Comments (4) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 31, 2009, at 12:55 PM, Atrossity wrote:

    A voice of reason amid the clamor of those who believe their macro economic wishes will be fulfilled by employing the methods taught in "The Secret" and tapping their ruby slippers together while chanting, "there's no place like 10,000 Dow". It is my humble belief that if we as a country don't pull our heads out of our orifices then perhaps the gate keeper should just invite the Visigoths in.

    Another great article Alyce, please keep it up!

  • Report this Comment On March 31, 2009, at 2:39 PM, WildBillOH wrote:

    Alyce,

    I agree and disagree with your comments on blind optimism. This is a macro economic situation not to be taken lightly and certainly investors should realize that just because GE is up from its low doesn't mean it's a great buy.

    However, pessimism is not the way to go either. This economy's bloodstream is driven by consumer confidence. Proof already exists that confidence right now is halting this economy. Constant negative inputs into the bloodstream causes continued panick. I think the correct term should be caution and common sense. I am scared that the capital markets are drying up as investors like myself quickly hold on to their money without looking closely at companies that are the mainstay of our countries strength: GE GLW CAG GM MSFT INTC are examples of solid companies that have lost capital that they desperately need to grow and hire employees. Write about how to recover, not just about keeping your hands in your pockets.

  • Report this Comment On March 31, 2009, at 9:42 PM, trenton1ryan wrote:

    <Beware of Blind Optimism>

    You mean like TMF??

    Yeah, that I'll buy.

  • Report this Comment On March 31, 2009, at 11:52 PM, paxgaea wrote:

    Alyce,

    Will you marry me?

    Perhaps that is blind optimism, but well done on an article that goes against the grain, especially when it comes mentioning the looming currency crises.

    Printing money like a hyperactive counterfeiter may end up causing the most pessimistic predictions to look optimistic.

    The Visigoths may have been kinder to us I think than what may come.

    sean

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