In Praise of Simplicity
- One of the most important things you can do to improve your investment returns might be to overcome your bias against simplicity.
- As Nicholas Vardy explains today, many investors are drawn toward complex solutions, but these are often not the best.
“Simplicity is the hallmark of truth – we should know better, but complexity continues to have a morbid attraction. When you give [an explanation] that is crystal clear… your audience feels cheated and leaves the lecture hall commenting to each other: ‘That was rather trivial, wasn’t it?’ The sore truth is that complexity sells better.”
– Edsger Dijkstra, pioneer in computing science
Last week, I wrote about the power of patience in investing.
It’s an insight shared by great investors ranging from Warren Buffett to George Soros to Jim Rogers.
But this week’s introductory quote about the importance of simplicity also applies to financial advice. Simplicity is simple. But it’s not easy.
Grasping – and applying – this insight is an enormous challenge. After all, you are struggling against your deep-rooted wiring to look for an ever more complete – and thereby complex – answer to the riddle of successful investing.
But overcoming this bias against simplicity just might be the single most crucial factor for improving your investment returns.
So, why are simple solutions so darn hard to accept?
No. 1: Simple solutions are hard to sell.
The power of simplicity cuts across all other areas of expertise. You must know your craft inside and out to be able to distill it down to its essence.
Nobel Prize-winning physicist Richard Feynman was able to teach the basics of physics in remarkably simple language.
Feynman didn’t dumb down the topic. He was able to explain it in as few steps as possible. Yet how many college physics courses are taught this way?
This highlights one of the problems with simplicity.
On the one hand, complexity impresses people who don’t understand a topic. It makes them feel like they are getting their money’s worth.
On the other, complexity makes those who master its intricacies feel smart. Understanding a complicated explanation gives the experts the satisfaction of executing a cognitive bench press.
No. 2: Longer solutions seem more credible.
A typical book on a single business topic is about 250 pages long. That’s about 65,000 words.
Nevertheless, publishers expect authors to write books this long to be credible. It’s also very likely that today’s bestseller will be in the bargain bin this time next year.
The irony is that many of history’s classics – ones that have stood the test of time – are far shorter.
The U.S. Constitution consists of 7,591 words.
The Declaration of Independence boasts 1,458 words.
Abraham Lincoln’s Gettysburg Address is a mere 272 words.
Here’s a tip that will save you hundreds of hours: Most books reveal their fundamental insight in the first few chapters. The remaining chapters are often just padding or fluff.
When you read a book, don’t read it word for word. Read the table of contents, introduction and conclusion, and you can speak about its central insight like an expert.
No. 3: “All professions are conspiracies against the laity.”
This (short) quote from George Bernard Shaw reveals much of what you need to know about the psychology of expertise.
Most experts rely on buzzwords and/or specific terms of art to enhance their credibility.
Just think about how you felt the last time you saw the results of a blood test. Or when you last spoke to a lawyer, a car mechanic… or a financial advisor droning on about the “efficient frontier.”
This highlights another psychological bias: If I understand things you don’t, you have a hard time judging my real level of expertise.
That makes you more prone to take my views at face value… even if I have no idea what I am talking about.
No. 4: Complexity creates an illusion.
A complex financial model supported by a massive spreadsheet gives a financial analyst credibility – and an illusion of control.
After all, the more knowledge you have, the more control you feel you have over the situation. But this ignores the declining usefulness of additional complexity.
Outcomes are generally driven by the Pareto principle, or 80/20 rule. Few variables dictate the results.
At the same time, if an expert pays attention to only a few variables, you’ll think they are not doing enough.
The Simple Solution to Investing
Some of the world’s most effective retirement advice could fit on an index card: “Save regularly, and invest in cheap index funds.”
But try to charge a client for that insight, and they will likely dump you.
Give them a personalized 80-page PowerPoint presentation, and they’ll pay your high fees… and happily refer their friends.
Overcome your bias toward complexity… and stick with the time-tested – and simple – principles to maximize your investment returns.
P.S. I recommend Mortimer Adler’s How to Read a Book. It is a classic work that has profoundly influenced how I absorb everything I read.
Interested in hearing more from Nicholas? Follow @NickVardy on Twitter.
About Nicholas Vardy
A widely recognized expert on the exploding asset class of exchange-traded funds (ETFs), Nicholas has been a regular commentator on CNN International and Fox Business Network. He has also been cited in The Wall Street Journal, Financial Times, Newsweek, Fox Business News, CBS, MarketWatch, Yahoo Finance and MSN Money Central. Nicholas holds a bachelor’s and master’s degree from Stanford University and a J.D. from Harvard Law School. It’s no wonder his groundbreaking ETF content is published regularly in the free daily e-letter Liberty Through Wealth.