Invest with simplicity, not complexity

Updated : December 28, 2018 07:10:42 IST

It was the summer season of the year 1784. In an elementary school, somewhere in Germany, a teacher entered the classroom of 7-year old students. Not in a mood to teach, she assigned them a complex task of adding up the numbers from 1 to 100. Thinking that they would take a lot of time to arrive at the solution, she decided to take some rest.

Just a few seconds later, she spotted Gauss (student) sitting idle on his desk. When asked why he wasn’t doing the addition, he quickly replied that the total was 5050. Everyone in the classroom, except him, was surprised.

With a simple approach that there were 50 pairs and each pair adding up to 101, he calculated the result instantly (50 x 101 = 5050).

His ability to approach complex ideas with simplicity made him one of the greatest Mathematicians of all times. By not chasing complexity, he brought a lot of improvements in other disciplines too. Astronomy, Physics, Number Theory, and Geometry to name a few. His simple rules are still valid today in modern science.

* * *

During my teenage days, I believed that simple things were not worth encouraging. I thought that I would need to add complexity in order to achieve remarkable results. Be it writing English essays with tons of vocabularies or elementary science exam with complex formulae involving alpha-beta-gamma symbols, students making it really complex were always appreciated.

Similarly, when it came to the financial market, I always considered that it required a complex decision framework to build wealth. I weighed upon investing in something that was presented in a complex and complicated language.

I appreciated the idea of investing in an organization that manufactured a bipolar disk with a floating-point data processor, an optimized 16 dual-port memory, a double diffused metal-oxide-semiconductor monolithic chip for the plasma display, a 16-bit dual memory incorporated with an application processor and an operating system designed for 1048 megaflops a minute with a high bandwidth of 6 Gigahertz, a metallization communication protocol with a peripheral bus architecture and a capability of processing the information in just 3 nanoseconds.

So many complications and yet I used to find it so exciting to invest.

On the contrary, in my quest of searching the answer, I found that it’s the simplicity that made the investing highly pleasing and less-complicated.

To validate this point, just look at the image below. It was shared by the financial blogger, Morgan Housel, in one of his presentations –What Other Industries Teach Us About Investing. The simplicity with which he has explained the subject is commendable. It can’t be any simpler than this.

How-To-Succeed-At-Investing-Morgan-Housel

Morgan Housel on How to Succeed at Investing | Source: MicroCapClub

All you need to do is spend less than what you make, invest the difference in a diverse set of great companies, and be patient.

But how to find a diversified set of great companies with simplicity? There are two ways that I can think of in this context.

Invest in what you already know (endorsed by Peter Lynch)

Once we wake up in the morning, we put on our Hush Puppies (Bata) slippers, enter washroom to freshen up and brush our teeth with Close-Up (HUL), Babool (Dabur) or Sensodyne (Glaxo) toothpaste. Thereafter, we sip a cup of Tata Tea (Tata Global Beverages) or Nescafe coffee (Nestle) with biscuits (Britannia, ITC).

After having dressed up in Allen Solly or Van Heusen formals (Aditya Birla Fashion Retail), we leave for the office in Maruti Baleno (Maruti India Limited) or Royal Enfield Bullet (Eicher Motors).

During these couple of hours, we come across many companies whose products we love using all the time. The companies whose business models are extremely simple to understand. The companies that are run by strong management with transparency. These are the companies that we should consider to invest once they are available at right valuations.

Consider this: During my childhood days in winters, I loved having a spoonful of Dabur Chyawanprash every morning. It’s a nutritious jam made up of Ayurvedic herbs that beats the side-effects of harsh winters and boosts immunity. Had I passed on the idea of investing in Dabur to my father, I would have been a multi-millionaire by now! Sadly, I wasn’t aware of this thought process then.

Just look at the graph of its growth engine.

Dabur-Investment

Dabur India Performance | Source: Dabur India

An initial investment of Rs. 1 Lakh in 2001 would have been worth Rs.66.47 Lakh as on today. With great products, efficient management, and simple business model, it has rewarded its shareholders extremely well.

"When searching for the next great company look for simple, easy to understand businesses. Simple businesses aren’t always great businesses but great businesses are almost always simple businesses. The market always pays a premium for simple businesses. Stay away from the onions where you have to peel back multiple layers to understand them." - Ian Cassel

We all are surrounded by ideas and great companies. A simplicity of thinking with common sense is what it takes to find them. That’s it!!!

Invest in a well-diversified equity mutual fund

What if you don’t have enough time to research and monitor the performance of individual stocks? Well, a well-diversified MF is another way. It’s one of the greatest ways to build long-term wealth without chasing complexity. Setting up an automated system that invests a specific amount from your bank account every month makes you avoid timing the market.

With a simple practice of investing in a diversified set of stocks, you can avoid falling into the traps of news channels forecasts and uncontrolled macro events. With this simplicity, you can avoid a situation where an individual stock touches its bottom most point. With this simplicity, you can keep investing without paying much attention to the short-term market fluctuations.

"An individual stock can go to zero. An entire index of stocks cannot. There are times when it won’t matter and everything goes down at the same time (like 2008), but in most situations, a well-diversified fund invested across sectors gives you the advantage of having investments that zig when other zag." - Ben Carlson, A Wealth of Common Sense

For instance, my maternal uncle has been simply investing in one of the equity funds since 1999. Due to confidential matters, I can’t share the real-time returns of his portfolio. But a simple search exercise on Value Research Online gives a hint about his patience, discipline, and simplicity while investing.

SIP-Returns

Did he speculate? No.

Did he bother about 2000 Dot-Com bubble crash? Absolutely not.

Did he pay any attention to the 2008 Recession? Not at all.

Without caring much about the events that shocked the world, he simply continued investing. Systematically. Consistently. Routinely. Without adding complexity to his disciplined practice, he has built up a sizable portion of his wealth today.

* * *

We are always made to believe that once we step out of our doorstep, it’s really complex out there. More the complications, the better it is. The complex the language one speaks, highly exceptional he/she is with the expertise. Thus, we live under a false impression that complexity is the only way to win the game. In reality, it isn’t.

Simplicity always stumps complexity in the long-term. You can beat the competition with a simple practice of applying common sense, patience, and discipline while investing. A simplicity is what you need.

Source: Moneycontrol

Published : December 27, 2018 07:36 PM IST

Invest with simplicity, not complexity

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