Many in finance like to sound smart by making things complex. These people usually work for other people. Successful people simplify things. Warren Buffett is the best at making a complex subject like investing seem simple. It’s Buffett’s ability to focus on the meat of the subject and not the useless fat that so many other financial pundits like to debate. I was further reminded of this when I listened to this 9-minute interview with Warren Buffett (H/T @Sanjay_Bakshi):
Let’s dive into four of Warren Buffett’s “Keep it Simple” investment strategies:
- Any Good Investment Idea Can Be Put In One Paragraph
It’s human nature to want to prove how smart you are by writing and talking more instead of less. Albert Einstein said, “If you can’t explain it simply you don’t understand it well enough.” The quality of your investment thesis isn’t proportional to the length of your thesis. It’s why we specifically ask MicroCapClub Applicants for a 2-Page investment thesis and not a 20-page analyst report. When you turn over as many microcap rocks as we do, we don’t have time to read 20-pages. It takes a greater amount of talent to say more with less words. If investors like what they see, they should do their own work and verify/collaborate further details.
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. If it’s complicated, dumb money will never buy your shares multiples higher.
- Circle of Competence and No Called Strikes
The most important thing isn’t how big your circle of competence is but how well you define the perimeter. Buffett said, if you know where the edges are you are far better off than someone that has a circle of competence 5x as large but is fuzzy around the edges.
The market will throw you thousands of pitches. Wait for your pitch. There are no called strikes in investing. Focus on quality businesses and wait for the market to give you a fat pitch. You don’t have to be right on all of these companies you don’t understand. You just have to be right on ~1 decision per year on the companies you do understand. I love Buffett’s punch card analogy:
If you got a punch card with 20 punches on it when you left school and every time you made an investment decision you used up one punch, you’d get very rich…because you would think about every single decision you made… and when you knew enough to make a decision you would do it on a big scale… Most of the fortunes have been made in a relatively few securities.Warren BuffettMost investors go down quality when they can’t find new ideas that meet their checklist and it’s why most investors can’t beat the market. Invest every dollar like it’s your last. Keep your hurdle rate high, wait for your pitch, and when you get it… swing hard. Investing every dollar like it’s your last is a good mindset because we are geared to make our best decisions when we have to.
- Invest in great businesses that have a terrific person running it
In the video, Warren Buffett quotes Peter Lynch, “Buy a business that is so good that any idiot can run it because sooner or later one will”, but then laughs and says he would rather have a terrific person running it. Buffett is also quoted to have said something similar. Value investors love to take the quote out of context which Sanjay Bakshi refutes [HERE]. In my experience the smaller the company the more you should focus on management and qualitative analysis. Rose Blumkin (video below) couldn’t read or write but built Nebraska Furniture Mart into the largest furnishing store in North America. Rose was an intelligent fanatic. Invest with intelligent fanatics.
- Great businesses are so hard to find that I don’t believe in selling them very often
Buffett says if you can find a quality business with a durable product, universal appeal, with honest and competent management the time to sell is almost never. Wall Street and its pundits make money off activity (commissions, advertising, newsletters), but you will make money by embracing inactivity. A Long-Term Focus doesn’t sell headlines but it’s how you build wealth. If you are invested in great businesses and the story hasn’t changed, develop the conviction to hold and don’t let volatility and lulls in stock price scare you out of your positions.
In conclusion, Warren Buffett became one of the wealthiest people in the world by keeping it simple (Buffett’s Net Worth By Age), but he’s also quick to say “Investing is simple, but not easy”. Successful investing is hard work because it means disciplining your mind to do the opposite of human nature. It takes an incredible amount of long-term focus to not be distracted by emotion and short-term influences. Goals are accomplished through hard work and great discipline. Discipline is choosing what matters most over what you want now. Investors tend to add complexity to investing to rationalize why it’s so hard. Don’t do it. Keep it simple and focus.
That’s been one of my mantras – focus and simplicity. Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.Steve Jobs
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