Charlie Munger (Trades, Portfolio) once said, "Our ideas are so simple that people keep asking us for mysteries when all we have are the most elementary ideas." This might seem like an odd comment at first, but it quite easily sums up the investment strategy of the billionaire investor and his partner, Warren Buffett (Trades, Portfolio).
What's fascinating about these two investors is that over the past six or seven decades, both of them have built a fortune on the straightforward principle of making the most of obvious opportunities. This might seem like a simple approach to investing, but in reality, it is not.
Elementary ideas
Munger and Buffett's most incredible quality is the ability to keep things simple. However, simple does not mean easy. They spend a considerable amount of time, possibly more than any other investment manager or analyst, reading and reviewing opportunities.
Munger, in particular, spends a lot of time developing his own mental models and thinking about cognitive processes which are best suited to solving different problems.
They also spend a lot of time learning from others by reading and studying. This process is time-consuming, but it keeps the process of discovering information and managing businesses simple. If you've already learned management lessons from a book, there's no need to learn them again.
On top of these principles, the duo also stays away from investments they don't understand, which keeps things simple because they don't have to do any additional research.
What's more, when they have found a company in a sector they like, they don't try and find other opportunities. They stay with one business, which they know and love, rather than diversifying to the competitors of their chosen business.
This is an oversimplification of the process. Nonetheless, the primary takeaway is the same. Buffett and Munger try and keep things as simple as possible. They stick to the sectors they know and the companies they understand. By doing so, they reduce the chances of making a mistake. They're also able to reduce the chances of making an error by finding good stocks and holding on to them.
Opportunity cost
The whole process can be illustrated by one of Munger's comments about opportunity cost:
"Opportunity cost is a huge filter in life. If you've got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that's the way we filter out buying opportunities."
This is an incredibly straightforward process one can use to compare investment opportunities. There's no need for detailed spreadsheets or extensive analyst research. If one opportunity looks good compared to another, it is probably the better option.
Too many investors and analysts try to overcomplicate the process of investing. Sometimes, this can yield results, but it's not necessary for the vast majority of the people.
Machines that are engineered with as few parts as possible can be the easiest to produce and maintain and least likely to go wrong. The fewer parts a mechanical device has, the lower the chances one will go wrong.
Investing is the same. If an investor uses 100 different inputs to try and arrive at a price target for a stock, 100 different figures could be incorrect in the equation, and if something does go wrong, trying to figure out which of the 100 points was incorrect is a monumental task. Analyzing this information may yield no useful information. Further, the more stocks one owns, the higher the chances one has of making an error.
This is why Buffett and Munger have always tried to keep things straightforward. It might seem counterintuitive at first, but as their returns show, it works.
