Quality And The Opportunities In Pessimism

If nobody thinks it’s worth anything, it’s worthless. If somebody thinks it’s worth something, it at least can fetch a low price. The more people believe, the more it potentially can be worth it. Whatever product we are making, whatever service we are providing, whatever business we are assessing, it’s how disinterested or excited people feel about it that will drive its ultimate worth.

Quality can be both subjective and objective. The starving artist who makes crap no one cares about thinks he’s great while the world thinks otherwise. That’s just a harsh truth. However, there are enough cases of artists working away on quality in obscurity, surrounded by a range of disinterested to pessimistic non-fans, who eventually get discovered and rise to the top. This is the twist. Quality is separate from optimism and pessimism. High quality can exist surrounded by pessimism like a daisy through concrete. Warren Buffett wrote in the 1990 Berkshire Hathaway letter,

The most common cause of low prices is pessimism—sometimes pervasive, sometimes specific to a company or industry. We want to do business in such an environment, not because we like pessimism but because we like the prices it produces. It’s optimism that is the enemy of the rational buyer.

Buffett isn’t arguing for rarities and obscure businesses of no quality. Buffett isn’t arguing for things that are crap, priced like crap, that everyone agrees are crap. He is arguing for on the occasion when one can find a diamond in the rough we have to recognize that pessimism is what is putting it there, and pessimism is what makes opportunities.

When everything is going great, when everyone knows something is wonderful, all of the opportunity is already baked in. When everything is terrible, when only a few recognize the potential, when the cake is split up into all of its ingredients and the chef looks at them saying “I think I can work with this,” that’s when magic happens.

Never fear pessimism. Optimism shows up once everybody is celebrating an idea’s validated safety. Pessimism, in the presence of quality, is the signal for opportunity. If we can focus on what we personally know others will recognize as quality over time, especially at a time when others are discounting it, then the rest will take care of itself.

H/t Verdad Capital, “When Buffett Was A Quant.”