WHY SIMPLICITY TRUMPS COMPLEXITY IN ANY INVESTMENT PLAN -Ben Carlson

What is Common Sense ? A sense that is not common (rare in people). This book indeed is true to its title and contains common sense wisdom for investors.
But first let us understand the difference between Investment and Speculation.

Fred Schwed, a financial writer who worked on Wall Street during the Great Depression, once said,

“Speculation is an effort, probably unsuccessful, to turn a little money into a lot.
Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.”

Now let us understand who can be termed as Successful Investor-

Neurologist-turned-investor and author William Bernstein says that there are four basic abilities that all investors must possess in order to be successful:
(1) An interest in the investing process, (2) math skills, (3) a firm grasp of financial history, and (4) the emotional discipline to see a plan through.

Key Takeaways from the Book are-

Envy is perhaps the worst emotion that you can feel as an investor. It can only lead to problems.

  • There’s no logical reason to compare yourself to other investors—institutional or individual. Focus on your own situation.The basic investment principles apply to all investors, regardless of the size of their portfolio. The hard part is following them when those around you cannot.
  • Emotions are the enemy of good investment decisions.
  • Admitting the fact that you don’t know everything is a good first step towards becoming a better investor and understanding your own biased behavior.

Warren Buffett has famously said, “I would rather be approximately right than precisely wrong.”

  • Information alone will not help change your behavior, even with dire consequences. You have to systematically root out bad behavior by automating good decisions to stay out of your own way.

Hang out with people better than you and you cannot help but improve. —Warren Buffett

  • There are many lessons you can learn from some of the greatest investors of all-time—patience, simplicity, discipline— but that doesn’t mean you can expect to invest just like your favorite billionaire. Understand your own limitations and never try to complicate the investment process.
  • One of the best forms of risk management is having enough liquid assets on hand so you aren’t forced to sell your risk assets (read: stocks) during market crashes or corrections.

Stress is the difference between where you are and where you would like to be. It’s the difference between the expectations people have for themselves and the reality they are forced to live with.

  • It’s impossible to earn higher returns over the long term in the capital markets without subjecting yourself to the possibility of loss in the short term. You can have safety of principal in the short term but it comes at the expense of long-term gains. The only way to beat inflation over time is to take risk.
  • Intelligent investors view volatility as an opportunity, to both profit and keep their cool under pressure by following their process.

Investment wisdom begins with the realization that long-term returns are the only ones that matter. —William Bernstein

Investment philosophy is really about temperament, not raw intellect. In fact, proper temperament will beat high IQ all day. —Michael Mauboussin

  • Self-control is like a muscle. The more you use it, the more decision fatigue sets in. The human brain can only perform at peak levels for so long.
  • You have to force yourself to find a way to create that short distance between yourself and your investment decisions.
  • Even a good investment philosophy will be useless if you don’t have discipline and patience to follow it over time.
  • Understanding your limitations, including the amount of willpower, time, and energy you have to put into any investment strategy, should be a huge determining factor in the philosophy you choose to implement.

Rick Ferri summed this up nicely when he said, “Philosophy is universal; strategy is personal; and discipline is required. Philosophy acts as the glue that holds everything together. Philosophy first, strategy second and discipline third. These are the keys to successful investing.”

  • Your investment philosophy is much different than your portfolio or strategy. Your core beliefs should guide all future portfolio management decisions.
  • There are many important facets to consider when constructing a portfolio and creating an investment plan, but none of the technical building blocks will matter if you can’t control your behavior.
  • 80 percent of the results come from 20 percent of the work.
  • Investing itself is delaying current consumption for future consumption.
  • Asset allocation will never garner headlines, but it is by far the most important portfolio decision you will make.

Have a plan. Follow the plan, and you’ll be surprised how successful you can be. Most people don’t have a plan. That’s why it’s easy to beat most folks. —Bear Bryant

  • It’s the repetition of good decisions that leads to favorable outcomes over time. Good investors have a high tolerance for repetition, even when it requires doing nothing over and over again.
  • The investment policy statement (IPS) is a written document that outlines how you would like to implement your portfolio and maintain it over time.
  • The only benchmark that matters is achieving your personal goals, not beating the market.

Good advice rarely changes, while markets change constantly. The temptation to pander is almost irresistible. And while people need good advice, what they want is advice that sounds good. —Jason Zweig

  • The best investors always think in terms of probabilities. Even if you’re fairly certain of a particular outcome, always play devil’s advocate to your own line of thinking to have a contingency plan in case something goes wrong.
  • Your financial advisor should help you in this regard-
  1. To help you clarify your goals.
  2. To remind you of your goals.
  3. To stand between you and stupid.Standing between you and stupid is what helps close the behavior gap
  4. (a phrase coined by Richards, actually).

The gist of the book can be summarized in the following principles-

  1. Less is more.
  2. Focus on what you can control.
    Go through your portfolio and investment process. Write down each step in your process and focus only on those areas that are within your control.
  3. The best investment process is the one you are willing and able to stick with through any market cycle.
  4. Emotional intelligence and an understanding of behavioral biases are much more important than the level of your IQ.
  5. You’re not the next David Swensen, but that’s okay.
  6. Stock picking is sexier, but asset allocation is much more important for your overall performance and risk tolerance.
  7. Get rich patiently and never be in a hurry.
  8. You cannot expect to make money in the stock market without losing money on occasion.
  9. Simplicity, discipline, patience, and a focus on the long-run are generally lacking in the financial industry.
  10. Wealth means nothing if there’s no meaning attached to it.

In the end this book quotes

Nick Murray once said, “No matter how much money you have, if you’re still worried, you aren’t wealthy.”

This is indeed a book of common sense on building and retaining wealth. I liked it very much and I would definitely recommend it for reading.