The STRIDE Blog

Why You Shouldn’t be Sweating Over Complicated Investments

stride-why-you-shouldnt-be-sweating-over-complicated-investments-socialThe concept behind value investing is straightforward: buy stocks that are trading below their intrinsic value, allow for a margin of safety and have a long-term investment horizon. It’s an easy approach to get your head around, but investors tend to complicate things with no added benefit towards their portfolio performance.

According to Warren Buffett you cannot go wrong when you invest in a business that has enduring competitive advantages and is run by able and owner-oriented people.

Stock picking isn’t everyone’s forte. But it doesn’t seem to dishearten the majority of investors who keep trying to beat the market. ‘Stock picking’ can be regarded as a form of art. This form of art is similar to perfection, where perfection is unattainable, but if we chase perfection we can catch excellence. Only Warren Buffett and a handful of other investors have been able to achieve a level of excellence, which proves that stock picking isn’t particularly easy for the majority of investors. Could it be that value investors make the mistake of over-complicating investments, rather than following the simple value investing approach?

In the chase for excellence, investors tend to wander off course. They bury their noses in books, quarterly reports and financial statements, punching digits into their calculators and crunching out metrics to interpret and compare. Investor tend to lose sight of the fundamentals of value investing while focusing solely on complex metrics.

The secret lies in simplicity.

Buy a stock that is undervalued leaving a margin of safety, has an enduring competitive advantage and is run by a great management team and CEO.

Investors need to remind themselves that there are no extra points for doing complicated investments. Your performance scorecard isn’t computed using Olympic-diving methods. The degree of difficulty in your investments count for nothing. All that matters are the results. You are judged on whether you have beaten the market or trailing behind it, not by the method you used to do so. Don’t over-complicate things. You will only waste time and drive yourself mad over intricate metrics and calculations that won’t contribute to your portfolio.

By no means am I saying you don't have to do research or ignore financial data when making investing decisions. Research is vital. To understand a company you need to read through its financial statements, quarterly and annual reports. Rather use a few common metrics to calculate the value of the stock, than sweating over mathematical equations that deliver the same result.

Warren Buffett sums it up brilliantly in the following quote: “If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternative characterised by many constantly shifting and complex variables.”

Keep your strategy simple, do the necessary research and apply the proper principles and you will be one step closer to catching excellence.

Topics: Buffettology

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