Friday, 15 July 2016

Stock Investing Should Be Simple, Not Simplistic

An analyst on a business-news channel was saying this with gleaming eyes and feeling as proud as a peacock: “This housing-finance stock is just going to go up because the demand for new houses is just going to increase with time. This company is a direct beneficiary of the Indian government’s focus on housing for all.” Another bright chap I know bet on an FMCG company because he thought its products would never be out of demand. Yet another person justified his “long-term-investing” mindset saying that the Indian economy is only going to expand, so forget about everything and stay invested.

Most analysts and investors receive heavy doses of the tonic called “Keep It Simple.” It is said that the simpler the investment argument is, the better it becomes. And we all know many investors who have made huge money by just keeping it simple. The problem with being simple is that simple arguments frequently turn into “simplistic” ones.

What’s the difference? Something that’s simple solves complexity and something that’s simplistic disregards complexity. Getting to simple isn’t simple. Those who get to real simplicity are the ones who have dealt with complexity and know how to steer their way through it—just like driving. Driving isn’t simple for someone who is not trained in it. But a skillful driver makes things look so easy and effortless. If an amateur driver looks at a trained driver and thinks that driving is all about moving the steering wheel correctly, you know what fate he is destined to meet.

The simplistic arguments mentioned at the beginning overlook several important aspects. For instance, the first two arguments undermine the impact of competition and the last one overlooks history altogether.

How to get to “simple” then? Devote yourself to the trade in question and experiment. The trial-and-error method is the best way to unravel the puzzle. As you spend more time on something, you will naturally cut through complexity and arrive at simplicity. And those who unwittingly stick to the simplistic will only find that the path to their failure has just got simpler.

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