Book Summary (8/31) : The Joys of Compounding

Chapter 8 : Simplicity Is The Ultimate Sophistication

1. The ability to reduce something to its essence is the true mark of understanding. But one of the great ironies in life is that when the smartest minds generously share the secrets of their success with us, we ignore them, because they sound too basic and simple for us to appreciate.“That’s it? It can’t be so simple!”
2. As investors, our job is simply to compound capital over time at the highest possible rate with the minimum amount of risk. We achieve this objective by seeking out undervalued stocks of companies within our circle of competence. Be completely indifferent to whether the market cap is large or small or to whether the company is relatively unknown or widely followed.As Charlie Munger says, “The goal of investment is to find situations where it is safe not to diversify.”
3. Reading the annual reports, filings, press releases, and footnotes to the accounts is important, and occasionally, we will be able to dig out some extra detail that might give us an analytical advantage, but, in my view, understanding the big picture (the two to three key variables that really matter) is equally, if not more, important.

If only one variable is key to a decision, and the variable has a 90 percent chance of going your way, the chance for a successful outcome is obviously 90 percent. But if ten independent variables need to break favourably for a successful result, and each has a 90 percent probability of success, the likelihood of having a winner is only 35 percent.

1. Do you hold more than fifty stocks, spread across multiple brokerage accounts? I urge you to simplify. Have you invested in more than ten different mutual fund schemes? I urge you to simplify. Have you invested in numerous “investment plans” whose “original purpose” was to provide life and health insurance? I urge you to simplify. Have you, over time, piled up loads of defunct, useless stuff on your office desk or at your home? I urge you to simplify. Clearing the clutter from the various aspects of our lives reduces decision fatigue and sharpens our focus on what we really want to achieve.
2. Much long-oriented analysis is simplistic, highly optimistic, and sloppy. Short-sellers, by going against the long-term tide of economic growth and the short-term swells of public opinion and margins calls, are forced to be crackerjack analysts.

Short-sellers shouldn’t be reviled or banned; most should be celebrated and encouraged. They are the policemen of the financial markets, identifying frauds and cautioning against bubbles. In effect, they protect the unsophisticated from predatory schemes that regulators and enforcement agencies don’t seem able to prevent.