By Thomas Twombly

I identify as a “grim optimist.” I don’t recall when I first heard that term used, but it instantly struck me as a perfect descriptor for my general approach to life.

Readers of these missives know that one of the investment principles I espouse is a hard-nosed faith, grounded in historical fact, that no matter how challenging things might be at any given point, they will eventually get better. Honestly, I don’t believe one can make a successful long-term investor (in anything) out of someone who doesn’t hew to that belief. Whether one is leading a business, raising a family, or diligently investing precious capital to fund a multi-decade retirement, if we’re unable to retain that gritty faith through thick and thin, I think it’s impossible to maintain the discipline necessary to keep doing the right things, or to retain the patience required to avoid doing the wrong things – especially during periods when those very principles themselves appear to be threatened.

Grim optimism is an especially important character trait to exercise in the present environment. The alternatives, either outright despair, or worse, brash overconfidence, are potential recipes for disaster; the first because of its debilitating mental health aspects and because it just doesn’t square with the long arc of human history; the second because blithe overconfidence can result in the most debilitating and destructive setbacks of all.

Lately I’ve been rereading Good To Great, a book by Jim Collins that I bought shortly after it was published back in 2001. I’ve been struck recently by the brash assurance I’ve seen displayed by certain groups of people, whether it’s neophyte day-traders eagerly buying shares of bankrupt companies on Robinhood, or outspoken politicians promising their constituents we’ll have a COVID-19 vaccine by fall, and I wanted to revisit a lesson that has stuck with me since I first read it. Collins referred to it as “The Stockdale Paradox”, a term he coined after extended interviews with Admiral Jim Stockdale, the “highest-ranking United States military officer in the ‘Hanoi Hilton’ prisoner of war camp during the Vietnam War.”

Stockdale, as Collins wrote, was imprisoned from 1965-1973. He was brutally tortured over 20 times during that eight-year timeframe and suffered permanent impairment as a result. He eventually “became the first three-star officer in the history of the navy to wear both aviator wings and the Congressional Medal of Honor.” He is credited with leading many of his fellow prisoners through what can only be imagined as hell on earth, where they lived with no rights, no release date, regular and brutal torture and no certainty they’d survive ever to see their families again. Sadly, plenty didn’t. When Collins asked him “who didn’t make it out?” he replied “Oh, that’s easy… The optimists… they were the ones who said: ‘we’re going to be out by Christmas’… then they’d say ‘we’re going to be out by Easter’… and then Thanksgiving, and then it would be Christmas again… they died of a broken heart.”

To survive and eventually to thrive in adverse environments, Stockdale maintained, requires “a very important lesson. You must never confuse faith that you will prevail in the end – which you can never afford to lose – with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

People all over this country are feeling a massive sense of adversity now. We are going through a seismic shift, and we’re all being challenged to deal with a reality full of volatility, uncertainty, complexity and ambiguity that offers no simple solutions and no guarantees. None of us can know for sure exactly how things will play out. In addition to a pandemic, we are groping our way through a highly volatile social, political and financial environment characterized by suspicion, deep mistrust and an angry and reflexive oppositional defiance towards “the other side.” It’s not the time for brash overconfidence. Neither, however, is it the time for despair. We should all be taking deliberate steps now to steel ourselves and to bolster our emotional resolve. Examples of grit, determination and eventual triumph help.

Twelve years ago, in the very early stages of what we would all eventually come to know as The Great Recession – a massive and terrifying economic collapse whose social and political after-effects still resonate today – I was inflicted with a devastating personal injury. Worse, it was completely intentional.

While playing soccer, the opposing goalkeeper “took me out” on purpose. He slid, cleats-up, at full bore – Ty Cobb style – into the knee of my right leg, which was planted firmly into the turf. My reality changed instantly. My tibia fractured vertically up into the joint. My anterior cruciate ligament (ACL) avulsed. My posterior cruciate ligament and medial collateral ligament were later described by my surgeon as 3+ tears – the worst they could be without being fully detached. There were four tears in my meniscus. After a five-hour surgery the following week, the prognosis was that I would never run again. I would probably never walk normally again. And I had a 90% probability of requiring a full artificial knee-replacement within five years. Those were especially brutal facts for me to face, but as I hit the ground after that vicious and illegal tackle, it was Stockdale’s words I was thinking about first.

Simultaneously, from a corporate perspective, we were starting to face the worst financial collapse since the Great Depression. In the ensuing months, major equity markets fell -57% from peak to trough. The entire global banking system teetered under the weight of millions of fraudulent loans. Everyone’s sense of well-being was at risk. Our clients were experiencing financial duress. Our own livelihoods and futures were gravely threatened. Bernie Madoff became a household name and a global pariah. You know the story. This fear and anxiety continued for years. The faith that we as a team, or I personally, could prevail in the end in the face of those fearsome realities was not an easy belief to muster.

Somehow, we dug deep and found it. We didn’t give up as a team. And our clients certainly didn’t give up on us. In fact, four years later we took deliberate inventory and we found that more than 97% of the treasured folks who had been on our client list in June of 2007 remained loyal clients in June of 2012. Our firm grew stronger for the experience, and many of you are still valued clients to this very day.

I didn’t give up personally either. I couldn’t afford to lose faith. I was fortunate to have a brilliant surgeon, let there be no doubt. I was also blessed to have a tough, demanding and deeply committed physical therapist whom I fondly nicknamed “The Princess of Pain.” The odds were hard against us, but with their help I resolved immediately to give my recovery every last ounce of commitment possible.

Twelve years later, I can run. I walk quite normally too. I ride a bike hard and I hike long distances over rugged terrain as often as I can get out in the wilderness. I have climbed Mt. Wheeler, the highest peak in New Mexico at 13,161 feet above sea level, twice since then. I still have all my original parts (plus three titanium screws in my right tibia) and the only knee that occasionally hurts is the left one.

So, keep the faith! In my experience, grim optimism works. We will get through this together too.

Thank you again for your confidence and trust.

Thomas G. Twombly