Sophistication made Simple
by David Atwood
“All intelligent investing is value investing – to acquire more than you are paying for.”
Fans of any challenging pursuit appreciate reducing the complexities down to the simple and obvious. Warren Buffett, Munger’s business partner, is known for distilling financial complexity into down to earth simplicity. Buffett is often quoted as saying, “Investing is simple, but not easy”.
Leaders throughout history have risen above challenges that were once considered complex and they have passed along simple solutions that forever change the course of humanity. There is a common sense of purpose among those who inspire, guide and enable others by reducing complexity down to the lowest common denominator. Genius is minimalist, leaving only that which is necessary.
Price discovery is the simplistic skill set required for succeeding as an investor. Price is discovered by understanding value.
To be intelligent about investing, it is implicit that we understand the value of what we are paying for at an intrinsic level, not simply as a price quoted in a newspaper.
Mountains of Information
Gathering intelligence information about a business or investment is made much simpler with Google, but we still need to know what questions to ask. Completely free and open exposure to mountains of information can obscure important facts among the chaff.
If we knew what we didn’t know, we wouldn’t be surprised when we found out! For example, the black swan events described by Nassim Taleb exist; they are more frequent and common than we care to admit.
We often don’t know what we don’t know, until after an event happens.
Take Comfort in Certain Truths
We can take comfort in certain truths that we know exist and the inevitable results that follow. For example, we can know with certainty that when prices fall, there is scarcely anything we can do to stop money from scattering out of investment markets – it’s a vicious spiral that self-perpetuates. Few investors will have done the work to discover and know value when they see it and fewer still will have the means or the confidence to step in, pick up the deeply discounted and discarded – heirloom quality businesses.
Buy low, sell high – it doesn’t get much simpler. In practice it isn’t nearly as easy as it sounds. The practice of patiently waiting for deals to emerge is too much for most people to endure. In the absence of clarity, they drift away from a discipline, they second guess what they are doing, they follow the crowd or sit on their hands, and they are lulled into complacency. The importance of a margin of safety cannot be ignored without consequences.
The margin of safety is protection against market downturns and it is the discount we get when we pay less than something is worth. In the low return environment that we are in, a discount of 10% is about two years worth of gains. Most corrections go from peak to trough and back to the peak again within three to four months. Picking up 10% in a short period of time with a high degree of certainty is as reliable as hitting singles.
10% seems like nothing to the go-go investors who prefer to swing for the fences, lately with a bet on weed stocks. Last year it was cryptocurrency. Before that, it was something else and in the future there will be other shiny objects for speculators to fancy with their fun money! We manage the serious money, the money we can’t afford to lose.
Speculators will often feel good, even sensational for a time and many will be deluded into thinking they are smart because the price is high and they bought in when prices were lower – with no idea of what the intrinsic value was.
Over time businesses are returned to their rightful owners and disciplined investors safely and confidently get what they need.
Simple not Easy
Investor clients work hard, they pinch and save, they sacrifice small amounts today for a comfortable tomorrow. Many investors are moms and dads raising families. They may be struggling to operate a small business in a challenging environment and they are pressed for time. Many clients want to know what they need to know, when they need to know it.
The important message today about investment clarity is that there is something to be said for the simplicity of sticking to our knitting. Our job is to maintain our composure and continue walking confidently on the path less travelled. We are seeing developing opportunities in this correction. We have been careful up to this point while others were turning a blind eye to value and now is our time to step forward while others are losing their way!
Let’s be ready to take advantage of Mr. Market’s manic mood swings. We don’t have to concern ourselves about being too early. Our managers will finesse over the details of which businesses to buy and when to buy them.
PS – My son Grant and I are expanding our business and we’re offering free Dorito’s and a second opinion to anyone you know who may have been burned by owning weed stocks and looking to invest in something that doesn’t go up in smoke. 😉
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.