investment: In personal finance products, simplicity is not just useful, it’s absolutely necessary: Here’s why

For decades now, as tech companies have taken the world by storm and started to eat up virtually every other industry, the world’s biggest investors have ignored it. For all intents and purposes, Warren Buffett and Charlie Munger have missed the tech bus. They only started investing in Apple and IBM recently, after the former transformed into a consumer durables company and the latter into a business services company. Why did they do this, and is there anything we mere mortals can learn from this?

For years, Buffett and Munger have often said that they don’t invest in the stocks of companies whose operations they don’t understand. A simplistic answer would be that they have missed out on a lot of great investments because of it. Although they have always had billions of dollars in surplus to invest, they have never won anything with companies like Apple, Google, Facebook and Amazon, which have delivered more than 20 times to investors in those years. .

Yet they seem to have no regrets. The reason is that they are still the most successful investors in the world. They are successful because they have invested in businesses that they understand. Looking back, it’s easy to tell that they missed Amazon and Google. However, they also missed Pets.com, Webvan, Myspace, and other costly failures. Since they didn’t understand the business, they were just as likely to invest in these hiccups as they were in Amazon and Google. After all, Rupert Murdoch bought Myspace for $ 580 million, then sold it four years later for $ 35 million. To avoid that 94% loss, all Murdoch had to do was learn from Buffett and Munger and not touch any investments he didn’t understand.

No matter what product or service we buy, nothing impresses us more than the features, jargon, and complexity. Perhaps our technological world has mentally trained us to accept that most of the New Wonders of the World are too complex to be understood by most people, and therefore anything complex must be good. Unfortunately, in personal finance, this idea is fatally wrong. In the case of personal finance products, simplicity is not only helpful or helpful, it is absolutely necessary. The reason is simple: if an investor does not fully understand a financial product or service, then they have no way of telling if it is even very unsuitable.

How can you be sure you understand everything? The easiest way to do this is to keep it simple. Unfortunately, the message we are hearing is the opposite. When I look at the market for savings and investment products and see the resulting investment portfolios that people are collecting, it is clear that there is a strong need for conscious and aggressive minimalism. The impact of marketing messages is to promote the idea that your investment needs are best met by spreading a small portion of your savings over a large number of investments. If you want to be in the minority of sensible investors, you have to stick with a minimalist approach. Simplicity is needed not only in the types of investments, but in your portfolio as a whole. Let’s say someone has a portfolio that has 20 different investments of varying amounts and varying intervals. In such a situation, even if these investments are simple, the whole is complex and difficult to understand.

I would say 99 out of 100 savers don’t need to do anything other than have a basic menu of a certain amount of emergency money, a heavy long term policy, and no more than three to four. mutual funds, one of which can be a tax saver. Such a combination is simple, so much so that anyone can understand everything and follow it to the extent necessary. Simplicity best serves your purpose because you always know what’s going on and why.

When it works, you can understand why and do more, and when it doesn’t, then you can understand why it didn’t work.

(The author is CEO, Value Research)