Simplicity in Finance is the Ultimate Sophistication

The great paradox of this remarkable is that more complex the world around us become, the more simplicity we must seek in order to realise our financial goals….Simplicity, indeed, is the master key to financial success.

Jack Bogle
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In this story, Joel Greenblatt grew up in London in the 1970s and had three television channels. Joel says I still remember the magical evening in 1982 when the miraculous arrival of channel four blessed my motherland, which promised to deliver an unlimited feast of entertainment. Nowadays, in 21st century New York, I have at least one hundred channels, yet I cannot be bothered to turn on my TV. Except for the reliable disappointment of watching the England soccer team getting kicked out of the world cup every four years.

We often assume that additional choices will make us happier. Up to a point, it might even be the truth. But I am hardly alone in finding all of this added complexity overwhelming.

The psychologist Barry Schwartz argues in The Paradox of Choice: Why More is less that many shoppers become paralyzed by the first world problem of choosing from twenty-four different types of gourmet jams.

When it comes to investing, the proliferation of choices can make your head spin. Should you buy individual stocks, ETFs, hedge funds or mutual funds? Actively managed funds or index funds? Should you favour one investing style or mix and match such categories as growth, value, growth at a reasonable price, deep value, momentum trading, macro or market neutral? And how should you divide your money between local and foreign stocks and bonds?

In practical terms, the ability to reduce complexity is precious. Just think for a moment of the Old Testament, which contains about 613 commandments. Who can remember so many rules, let alone abide by them?

About 2000 years ago, a sage named Hillel was asked to teach the whole Old Testament while standing on one leg. He replied, “what is hateful to you, do not do to your neighbour. All of the rest is just commentary.” Just like when Jesus was asked about the most important of all commandments, he chose deep simplicity, declaring, “Thou shalt love the Lord thy God with all thy heart, and with all thy soul, and all thy strength, and with all thy mind; and thy neighbor as thyself.” The same goes for Buddha ” Refrain from what is unwholesome. Do good. Purify the mind.” All Hillel, Jesus and Buddha recognised that we lesser mortals are acutely venerable to confusion in the face of complexity.

Simplification is an equally important strategy in our modern world. Take Google homepage for an example. It only has a Google logo and a pill-shaped bar to search. Or consider sleek and uncluttered that Steve Jobs – inspired by the minimalistic esthetics of Zen Buddism-brought to Apple products. As Jobs often explained, his devotion to simplicity went far beyond the design. “The way we’re running the company, product design, the advertising. It all came down to this. Let’s make it simple. Really simple.” As far back as 1977, the company’s first marketing brochure featured a photo of a shiny red apple under the tagline “Simplicity is the ultimate sophistication.

Simplicity is considered inferior to complexity in the finance industry, which gave birth to mind-numbing innovations such as credit default swaps, Collateralized debt obligations, and structured inventment vehicles that came so close to destroying the world economy in 2008.

Warren Buffett has said, “Business school rewards difficult and complex more than the simple behaviour, but the simple behaviour is more effective.”

Buffett himself is the grandmaster of simplification. In his letter to the shareholder in 1977, he laid out his four criteria for selecting any stock.

  1. We want the business to be in a field that we can understand.
  2. The stock must have long term prospects.
  3. The company must be operated by reliable, honest and competent leaders.
  4. The company has to be available at an attractive price.

These may not strike as some of the most sophisticated rules, but these rules are as relevant today as they were back in 1977, with the addition of buying great companies at a fair price if a cheaper price is not possible.

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