There is a philosophical principle called Occam’s Razor. Put simply, it states: “the simplest solution is almost always the best one.” This problem-solving principle argues that simplicity is better than complexity. Named after 14th-century logician and theologian William of Ockham, this theory has been helping decision-makers for centuries.
As I discussed in the Introduction to my book, Taking Stock, the advent of the Digital Age has radically transformed the investing industry. One certain change is that investing has gotten a lot more complicated. With far-ranging investment alternatives, such a mutual funds, exchange traded funds, derivatives, cryptocurrencies, short-selling and options buying, simplicity seems to be an undervalued principle in today’s investing climate.
I think it is time take a page out of Occam’s book in regards to investing: simply buy stock in a company that your research suggests would be a good investment.
Do You Know What You Own?
I have talked throughout this book about the definite trend toward investing through packaged products, pools of money opaquely managed by professionals. Although the seeming simplicity of owning a handful of mutual funds may square with Occam’s Razor, my experience demonstrates the opposite. Many investors really do not know or truly understand their investments, and they forego personal research and decision autonomy in favor of having their money spread across far-flung entities and financial instruments.
Granted, they may have a very basic knowledge of where their money is, such as knowing they own stock mutual funds instead of bond mutual funds, or that they have a certain percentage of their money invested outside of the United States. However, basic (and crucial) financial questions about profitability, return on equity, and valuation are lost on them.
Too Much of a Good Thing?
What started out as a good thing—diversified, professionally managed pools of money—have turned out to be opaque investing traps. Investors know they should invest to save for important life goals, such as funding a loved one’s education, planning for retirement, or enjoying future luxuries. However, generally speaking, they do not know into what they have invested.
This is one of the reasons why, when the market drops precipitously, they freak out—they do not have a firm hold on what they own, and therefore lack the confidence to sit out volatility. This lack of knowledge drives them to the one thing they do know—cash, which is almost always the worst thing to invest in after the market has dropped. When you’ve done your due diligence and know you invested soundly, you do not need to flinch at market blips, and you may even see an opportunity to buy more of what you own at a bargain.
The Big Lie—You Can’t Compete
Investors brave enough to wade into the waters of direct stock investing have a significant initial hurdle to overcome. I call it The Big Lie.
The Big Lie is this: “You can’t compete with the professionals. Don’t even think about investing in individual stocks because you will get creamed.” This is an idea propagated in the financial community, and one that many would-be direct investors have come to believe. The heartbreak is that most financial professionals have bought the same lie.
I was having a conversation with a truly experienced and well-intentioned financial advisor about the prospect of investing in individual stocks. When I expressed my belief on the subject, she held me in contempt. She was utterly convinced that neither she nor I could generate returns comparable, let alone better, than the many professional money managers who are out there. As a financial professional, she is not unique in her opinion.
The Big Lie Has Spread to the Professional Class
Back in 1994, when I first got into the investing business, the owner of the company I worked for insisted that at all times his brokers have at least two stocks to talk about to current and prospective clients—one income stock and one growth stock. This simple rule forced all of us to do enough homework regularly to become comfortable in the language of individual companies and individual stock ownership. The result was a clear-eyed confidence in the investments we recommended.
I get the distinct feeling that today, at most investing firms, the financial advisors would be viewed skeptically by their managers if they purchased too many individual stocks for clients, demonstrating how pervasive The Big Lie is in my profession.
Develop A Process and Put Research in its Proper Place
In this book, I have tried to share a basic thesis: direct stock investing has many advantages that have been dismissed and overlooked for too long. What is needed to succeed, beyond the basic commitment to be truly engaged as a shareholder, and hence owner of the companies in which you invest, is a well-defined process or approach.
Although you could develop your own process or approach to investing, it is far easier to simply copy-cat the approach of one of the great investors of all time. Buy a how-to book, a biography, or series of articles written by any one of a dozen or more investors who have demonstrated superior returns over multiple decades. Curiously, many of them have reached a point in their career where they openly discuss and write about exactly how they invest.
Many of the most successful investors have implemented Occam’s Razor and taken a surprisingly simple approach. Peter Lynch advises to “invest in what you know”, to find companies whose products you buy and research them until you truly understand them. As he has stated, if you can’t explain your reason to buy into a company to a fifth grader, it likely is not a sound investment. Warren Buffett employs a similar simplicity, advising to only own shares you would be comfortable keeping for ten years. He encapsulates his “long game” philosophy in the adage, “someone’s sitting in the shade today because someone planted a tree long ago.” His approach involves taking the long view and investing in unexciting companies, considering the long-term effects of today’s investment decisions, and stresses due diligence prior to purchase. These great investors, and many others, actually differ significantly in the particulars of their approach, but they have one key thing in common: consistency. They stick to what they know.
Therefore, once you choose, you should commit to your process or approach and not waver. You know the old adage: if you try to switch horses mid-stream, you are likely to end up all wet. Find the approach that makes sense to you, lean into it, and take the long view that so few are able to see. As long as you have done your homework and are following a tried and true approach, you can disregard the skeptics and Mr. Market on your way to long-term investing success.
