Factfulness, by Hans Rosling, is a must read for anyone interested in learning the ‘real’ facts about global trends and the incredible progress made over the past 150-200 years. Rosling features real facts that do not get reported by the vast majority of journalists, the media, or even educators. Since reading this book, many of our client meetings now begin with the series of 13 questions about the world asked in the introduction of his book. Find the link here to take the quiz to test your global knowledge. We have yet to see anyone score over 5, and have several 0’s. Let us know how you do.

One of my many takeaways from this enlightening book is that, we as humans must work and think very hard to overcome inherent biases in understanding the real ‘fact based’ world around us. I will attempt to keep this blog short by providing two overarching thoughts about the interaction of Rosling’s book and the wealth management industry.

The lessons that can be applied to the world of wealth management are unequivocal. For example, it is very hard to focus on long-term incremental gains in both the real world and in the investing world. As well, overcoming our brain’s desire for dramatic news is difficult and leads to unwarranted pessimism.

First, long-term compounding of your investments is impossible to observe on a daily, monthly or even annual basis. It takes decades for your patience to bear fruit as compounding does its magic. This is analogous to the plodding and gradual real world changes in things like increased life expectancy, reduction in child mortality rates, and reduction in extreme poverty.  Because these progressive positive changes take decades to demonstrate results, they are almost never discussed in media. We rarely hear about the reduction in extreme poverty – where 200 years ago 85% of the world population lived in extreme poverty, 20 years ago it was 29%, and today, only 9% - this is truly incredible progress.

Reporting on turtle-like progress will surely make for poor viewership. This is not to fault the media – as their job is to profit from entertainment. Boring, stable growth from your investments may grow at a snails-pace, and in many years from now, you will see impressive results.

Second, our desire for dramatic news is reinforced by the world around us. Exciting news is much more frequently negative or pessimistic rather than positive or optimistic. The 106,000 planes landing safely each day doesn’t make for exciting headlines.

The 12 questions Rosling posits at the outset of his book each contain 3 multiple choice answers. A monkey would get 4 correct (or 33%) by randomly guessing. The average reader gets 2 answers correct (or 16%). These readers not only answer wrong, but they are wrong in the same direction. What this means is that the data shows readers pick the more pessimistic answer when the more optimistic one is true. In the investing world, investors continue to focus on pessimistic outlook and negative headlines, despite data that shows constant positive growth over long-periods of time. The chart below shows the growth of the S&P 500 since 1925 – from this one can see the slow methodical growth over long periods of time.

 

 

As investors, we need to remain focused on the long-term where real wealth can be generated (just like positive real world change take decades, so too does the generation of real wealth), and we need to think critically about dramatic news that distorts the data-driven economy.

 

                                                                       

For further reading, click here to Own Your Future or click here to contact any member of of our team.