On Simplicity

I’m coming to the hypothesis that, if simplicity is not embedded in the core of a strategy meant for the long-term, it will fail. The world is a complex adaptive system. The realm of investing is as well. How could it be in one’s best interest to put themselves in a spot where complicated decisions need to be recurrently made?

I am not speaking about the very nature of decisions. All of them are intrinsically undecipherable. But one can decide the region to be in, the area to operate, the industry to invest in. I get the sense that an intelligent investor would set himself in a state that counts with two elements:

• Iterations can be made. Although we carry within ourselves the work we do, the skills we’ve mastered, a familiarity with the environment helps build a framework. Find areas that allow for iterations and that will be here in the long-term.

• It’s understandable. What an investor wants is to build judgment. And the latter can only be done by making conscious, meditated, choices. Not understanding the rules of the game, and ignoring its fundamentals, makes this task impossible. Do what you understand and understand what you do.

I think that, if one escapes both, a regression to the mean is inevitable. A decision that’s made with none of these ingredients is a decision we will learn nothing from. More frightening is the idea that it might be a decision we try to repeat. Sometimes, good fortune strikes us and tilts a result in our favor. That were to occur, and stupid would it be to take the same path.

During February, which is where this article comes from, I decided I will not invest in the BIM industry. After spending more than a hundred hours researching the technology, reading a book on it, and studying companies in the space, I can confidently state that I do not understand BIM software. I, however, understand enough for there to be questions in place. Lacking the capability to answer these, I’ll simply pass.

Little action is what I want in investing. Not because it’s exciting, but rather because results are a byproduct of what I buy and how much of it. Importantly, the latter is the element I identified separates great investors from good ones. It’s the willingness to bet when circumstances are in one’s favor. And how can I tell if circumstances are in my favor if I do not understand the fundamentals of something? Trying to foresee the future of unknown variables seems unwise. It’s already difficult with variables that are perceived-to-be-known, why would one complicate it more than that?

Assessing an asset’s value requires proper acknowledgement of its purpose and elements behind it. I heard Warren once say that complex models are not the way to go for valuations. It’s about identifying the 1-2 key variables. The inclusion of infinite elements seems to me nothing more than delusion. A justification for what one learned. Oneself is the easiest person to fool. I will meditate more on these statements.

Simplicity, however, must be earned. Complexity needs to precede it. Otherwise, simplicity lacks substance. Without the latter, it resembles gambling. Assumptions need not be stated for them to be present. That’s what I suspect tricks people. Munger used to state and utilize simple scripts. Both are the tip of an iceberg. Thousands of books form their base. Although not explicitly mentioned, they were there, backing up his statements.

As a final note, I wanted to reiterate my commitment on aiming for worldly wisdom. I borrowed Darwin’s “On the Origin of Species” from a nearby library. Already went through some chapters. Fascinating read. I’ll be writing about the connection between Darwin and investing. Tried to go for Adam Smith, but there were no samples available.

For those who missed it, I published the first compilation of reads. It includes an article from Mauboussin, a letter from Buffett and an essay from Zeckhauser. Thank you very much for reading and hope you enjoy it.

Compilation Of Reads, Volume 1

1.62MB ∙ PDF file

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Personal Commentary

I tried to keep it short on this one. I didn’t see the thread very clearly and I’m planning on increasing production, so have to be careful on length. Anyhow, hope you found this article somewhat thought-provoking!

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If you have any project you are working on and think I can add some value:

Contact: Giulianomana@0to1stockmarket.com