In my previous article, I highlighted a few points from Alice Schroeder's speech at UVA about Warren Buffett (Trades, Portfolio). One of the points was how Buffett always identifies the one or two factors that will make a business succeed or fail. This ties back to the simplicity mental model that I mentioned in my Charlie Munger (Trades, Portfolio)'s mental models article. Simplicity is enormously important but it's missing in almost all the investment write-ups that I have ever read. In this article, I'd like to share with the readers my thoughts on the subject of simplification and the application of this mental model in the investment process.
"Everything should be made as simple as possible, but not simpler." Such are the wise words from Albert Einstein. The message is clear and powerful. Yet it is rarely adequatly applied in our daily lives. Understandably and ironically, in the world of investing, the word "simple" is often misconstrued as unrealible and inferior. Just take look at all those strategies the hedge fund industry utilitzes. There are macro, quant, event-driven, credit, absolute value, low volitility and etc. The selling point to investors is often the high degree of sophistication of the system being deployed, as opposed to the risk-adjusted performance information. Continue Reading »