Simplicity in investing
Notes from Charlie Munger:
Complex, sexy, get-rich-quick strategies are not good. e.g. a cryptocurrency that nobody ever heard of, or the hot new AI company that is trending in the news. Complexity is not always good.
Peter Bevelin writes in his book Seeking wisdom, focusing on finding decisions and bets that are easy, avoiding what is hard, and stripping away anything that is extraneous, Munger believes that an investor can make better decisions. By tuning out folly, and strip away unimportant things, so that your mind is not cluttered with them. You are better able to pick up a few sensible things to do. The focus enables both simplicity and clarity of thought. It results in a more positive investing result.
To simplify what is most important in investing, Warren Buffet has said
If you understand chapters 8 and 20 of The Intelligent Investor, and chapter 12 of The General Theory, you don’t need to read anything else, and you can turn off your TV.
The first chapter he mentions here explains the mood swings of Mr.Market. We should become somewhat agnostic to the price quotes and focus more on the underlying value.
The second chapter explains that, after we determine a company’s intrinsic value, or what the company is worth, which is the present value of the future cashflows that an asset produces, then we should only purchase with a large margin of safety. Meaning, the price is significantly below the intrinsic value.
In the third chapter he mentions, he discusses the importance of having a long-term view and not trying to make short-term forecasts, which seem to be relatively unpredictable. I like to think that once we have a good idea of the price and the value, we can utilize patience to have a behavioural edge over most other investors.
These three basic concepts alone, when applied intelligently, can put you way ahead in front of other investors. Most investors are swayed by Mr. Market. You don’t want to become a slave to Mr.Market. Most investors don’t spend time thinking carefully about what the intrinsic value of an asset is.