In Praise of Simplicity


One of the most important things you can do to improve your investment returns might be to overcome your bias against simplicity.
As Nicholas Vardy explains today, many investors are drawn toward complex solutions, but these are often not the best.

“Simplicity is the hallmark of truth – we should know better, but complexity continues to have a morbid attraction. When you give [an explanation] that is crystal clear… your audience feels cheated and leaves the lecture hall commenting to each other: ‘That was rather trivial, wasn’t it?’ The sore truth is that complexity sells better.”

– Edsger Dijkstra, pioneer in computing science

Last week, I wrote about the power of patience in investing.

It’s an insight shared by great investors ranging from Warren Buffett to George Soros to Jim Rogers.

But this week’s introductory quote about the importance of simplicity also applies to financial advice. Simplicity is simple. But it’s not easy.

Grasping – and applying – this insight is an enormous challenge. After all, you are struggling against your deep-rooted wiring to look for an ever more complete – and thereby complex – answer to the riddle of successful investing.

But overcoming this bias against simplicity just might be the single most crucial factor for improving your investment returns.

So, why are simple solutions so darn hard to accept?

No. 1: Simple solutions are hard to sell.

The power of simplicity cuts across all other areas of expertise. You must know your craft inside and out to be able to distill it down to its essence.

Nobel Prize-winning physicist Richard Feynman was able to teach the basics of physics in remarkably simple language.

Feynman didn’t dumb down the topic. He was able to explain it in as few steps as possible. Yet how many college physics courses are taught this way?

This highlights one of the problems with simplicity.

On the one hand, complexity impresses people who don’t understand a topic. It makes them feel like they are getting their money’s worth.

On the other, complexity makes those who master its intricacies feel smart. Understanding a complicated explanation gives the experts the satisfaction of executing a cognitive bench press.

No. 2: Longer solutions seem more credible.

A typical b­ook on a single business topic is about 250 pages long. That’s about 65,000 words.

Nevertheless, publishers expect authors to write books this long to be credible. It’s also very likely that today’s bestseller will be in the bargain bin this time next year.

The irony is that many of history’s classics – ones that have stood the test of time – are far shorter.

The U.S. Constitution consists of 7,591 words.

The Declaration of Independence boasts 1,458 words.

Abraham Lincoln’s Gettysburg Address is a mere 272 words.

Here’s a tip that will save you hundreds of hours: Most books reveal their fundamental insight in the first few chapters. The remaining chapters are often just padding or fluff.

When you read a book, don’t read it word for word. Read the table of contents, introduction and conclusion, and you can speak about its central insight like an expert.

No. 3: …read more

Source:: Investment You