Finweek English Edition

Keep it simple

Choose simplicity over complexity when considerin­g stocks.

- By Simon Brown editorial@finweek.co.za * The writer owns shares in Shoprite and Discovery.

as humans we tend to believe in complexity although we like simplicity. We want a simple life, dropping all the kids off in one school run rather than multiple trips to collect and deliver them. Yet, many of us have this inherent belief in complexity; we think a multi-layered portfolio with lots of moving parts must be better than a simple, single exchange-traded fund (ETF). We’re drawn to companies that we don’t really understand because that complexity fascinates and impresses us and we’re certain that it must therefore be valuable.

Yet, while complexity is indeed important and a large part of our everyday lives, truthfully, we tend to opt for the simple. Think of an iPhone. One of its key attraction­s is that it is extremely easy and intuitive to use. Sure, the insides of the device are deeply complex and well beyond any deep understand­ing for many of us, but our experience of it is about that simplicity and ease to use.

In investing I have often talked about the idea of a single large-cap global ETF as an excellent way of creating wealth over time. This is the core of my investment approach. I then do add complexity by adding individual stocks in a core or satellite approach. But as I get older (and smarter?) I am moving more and more to ETFs and that single global ETF becomes an increasing­ly larger percentage of my overall portfolio.

Recently I was shown a complex ETF portfolio that held some 20 different ETFs managed by a large asset manager. Yet, when checking the longer-term returns of the portfolio, it had been beaten by that large-cap global ETF which I hold and that was even before the asset manager’s fees. The simple approach was winning hands down while the complex one had hundreds of millions of rands invested in it by tens of thousands of clients.

We see the same in stocks. Yes, the high-flying tech stocks are doing great, but think of Facebook. It is really a very simple model, namely it helps to connect people. Microsoft at its core helps us work more efficientl­y while Amazon is about buying anything with a click of a button and getting it delivered super quick.

Locally, Cashbuild is a top-quality business that simply sells hardware and home DIY supplies. It is stressful to tile your bathroom and Cashbuild tries to make at least a part of that process simple. The actual process of tiling is far from easy, trust me, I tried it once. But the experience of getting the tiles and other bits required was simple and seamless. Shoprite’s* simple attraction is that it sells us what we need for our daily lives in terms of eating and cleaning. Within the business is a hugely complex logistical supply chain but all we know is that when we visit our local Shoprite store, they’ll have the product we need, and it’ll be well-priced. One stock where I have broken my rule of keeping it simple is Discovery*. The products are complex and the results even more so. But again, the core rationale for Discovery is changing customer behaviour so that we’re healthier and richer.

So, look for those stocks that make our lives easier even if the internals of the business may be complex. Find stocks that solve problems for us. A complex product that requires the reading of pages of instructio­ns is never going to be a long-term winner and even if the internals of a business is complex, we need to understand the problem they’re trying to solve. ■

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