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By: Sam Instone

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July 26th, 2018

Why simple beats complex

Investment | Financial Education

“Any fool can make something complicated. It is hard to keep things simple.”

Said Richard Branson.

Da Vinci called simplicity “the ultimate sophistication.”

But simplicity is hard.

I see this struggle every day.

Ben Carlson CFA, recently said one of his guiding principles is that less is more and simple beats complex.

I agree.

It’s even part of our organisation’s culture code.

culture code_Page_055

Why?

While I can’t prove this principle to be an absolute truth…

Here are 11 reasons why I believe simple beats complex in the investment world…

1. Complexity makes it easier to be fooled by randomness

Ben says, if you torture the data long enough it’s bound to tell you exactly what you want to hear.

Complexity invites data-mining.

Over-optimisation and seeing trends where there are none.

Right or wrong, simplifying makes it harder to game your own system.

2. Intelligent people are drawn to complex solutions

There are plenty of intelligent people in the world of finance.

But that intelligence often comes at a cost.

Intelligent people tend to overthink things.

That can get you into trouble.

Simple is not stimulating enough for most people.

3. Complexity is about tactics; simplicity is about systems 

Tactics come and go.

But an overarching philosophy about the way the world works can help you make better decisions.

In multiple scenarios.

Simple doesn’t go out of style.

Complex does.

4. Simple is harder

You have to fight to keep things simple because our natural human impulses make us susceptible to complexity.

Simplicity is more of a psychological exercise.

Complexity is more about trying to outsmart the markets.

5. Trying harder does not guarantee better results 

Outsmarting the markets is easier said than done.

In fact, trying is futile.

It can’t be done.

Putting in more time and effort doesn’t automatically make you a better investor.

The best investors do nothing.

6. Complexity can lead to unanticipated consequences 

Simplicity has been called the art of thoughtful reduction.

Steve Jobs said,

“You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”

It’s about knowing what to overlook.

So you are left with the truth.

Complexity opens you up to far more possibilities and surprises.

And not in a good way.

7. Complexity can give you an illusion of control 

People usually look to avoid stress by giving themselves the illusion of control.

It’s a coping mechanism.

Certainty makes us feel more comfortable.

But it’s an illusion.

Investors seek out a feeling of certainty and control, even if it means being wrong.

Simplifying is about focusing on what you can control (fees) and understanding what you cannot (markets).

The things you should focus on

8. Simple does not mean easy or thoughtless

Simple actually requires more thought up front.

It forces you to filter out the endless noise in the markets ahead of time.

And to fight your natural behaviour.

9. Sophistication is used as a status symbol 

Complexity works as a much better sales tactic than simplicity.

Financial salespeople are renowned for bamboozling investors with jargon and small print.

Likewise, some people invest a certain way to impress others.

The markets don’t care about the degree of difficulty involved in your strategy.

behaviour-gap-hedge-funds

10. Complex problems don’t require complex solutions

It’s difficult to get people to buy into simplicity.

Can a complex problem really be solved by a simple solution?

Most people want to believe that the Holy Grail of investment sophistication exists.

If only….

11. Simple is easier to understand 

Simplicity allows for more transparency.

It’s easier to set reasonable expectations.

Charlie Munger once said,

“Simplicity has a way of improving performance through enabling us to better understand what we are doing.”

Simple.

One final thought

Financial advice doesn’t have to be complicated to be good. 

Be wary of sales spin.

Be wary of ‘the best funds to buy’.

Be wary of anyone who says their advice is free.

Complexity vs-simplicity behaviour gap

Hidden behind all of this ‘advice’ is complexity.

Avoid using a lot where a little will do.

It’s that simple!

(hat tip to Ben Carlson for his insights).

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About Sam Instone

Sam Instone, Director at AES International, is passionate about positive change and ensuring international investors get better results.

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