Sunday, October 13, 2013

Successful Investing is About Simplifying

The great architect Frank Lloyd Wright aimed for "the elimination of the insignificant" in his designs rather than try to dazzle the viewer with ornaments, extra rooms, and unnecessary complexity.

Clearly this didn't mean that his work was dull or uninspired.

Fallingwater by FLW. (Photo by K Wenning)
The ultimate aim of the investor should also be to simplify.

I'm not saying investing is simple -- far from it. But as we build experience, improve our skills, and perhaps have a little success, the temptation to make investing more complex increases, and the industry is more than happy to provide you with options to make it more complex than it needs to be.

As Vanguard founder Jack Bogle writes in Enough: "Financial institutions operate by a kind of reverse Occam's razor. They have a large incentive to favor the complex and costly over the simple and cheap, quite the opposite of what most investors need and ought to want."

From the industry's perspective, our strategy of focusing on income, buying good businesses at good prices, and monitoring our positions with the aim of holding for five-plus years might seem quaint, and perhaps even a little naive. We know different, of course, but then again we're not their target customers.

In our quest to become better investors, we should remember Wright's approach of eliminating the insignificant from our work. New research tools and investment vehicles can be great, but they must assist us in simplifying our processes rather than make them more complicated.


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