STREET DOGS

HE HAS a cynical theory that at least half of what we see in life is unnecessary complication masquerading as added value, writes Morgan Housel on The Motley Fool. “(Likewise) finance is a simple industry made to look and sound complicated to justify fees. Active managers even use a Greek word — alpha — to describe what other industries call ‘doing your job’.

“Most of what you need to know about investing can be explained in simple terms, even if it’s based in complicated math.

“And just as with teaching, those who travel in simple terms perform far better than those who bury themselves in technical details. Lots of investors understand the math and technical details behind their investments, but not the simplified, real-world consequences of what they’re doing.

“The result is regular disappointment: quantitative hedge funds blowing up, unshakable faith in back-tested models, 4,000-word investment writeups that don’t say anything. If you can calculate an investment thesis but not explain it in common-sense terms to a group of non-investors, you’ll be eaten alive by your own brilliance. On the other hand, dollar-cost averaging, long-time horizons, value investing, inside ownership, shareholder yield … these concepts are so simple and easily explained, and capture the importance of investing without any added complication.”

A few years ago, Warren Buffett asked a group of students which classmate they would choose if they could have 10% of that person’s earnings for life. Students invariably pick classmates with traits such as integrity, honesty, and kindness. “Same applies here,” says Housel. “Common sense rules of thumb explain so much that technical details miss.”