Munger's mental models #9: Simplicity!
Oct 01, 2024
Mental models
In this short series of blogs and videos, in honour of the late Charles Munger, I take a look at some of his most powerful mental models.
KISS
Charlie Munger once said:
"Take a simple idea, and take it seriously".
While it was possibly an exaggeration, the Berkshire Hathaway duo have said that their strategies are too simple for most professional investors to imitate.
The benefits of simplicity
A few years back I went to the Commonwealth Games at Gold Coast, and variously watched athletics, hockey, and then some gymnasium events that I didn't understand...such as the floor routine, where the gymnasts can score additional points for degrees of difficulty.
You could just perform a simple routine, which would make life easy on yourself, but you'd also never win the event.
When it comes to business and investing, however, there's often no benefit to complexity.
In fact, the opposite may sometimes even be true.
For example, around 90 per cent of actively managed funds fail to perform better than the know-nothing investor who simply buys the S&P 500 index fund at regular intervals.
A long-term investment which compounds at a consistent percentage return might perform better than a more active trading strategy, using more complex ideas, such as derivatives or options.
A simple strategy can also lead to better performance through a greater understanding of what we are doing and why.
Furthermore, in my experience, when strategies are too complicated, folks seem more likely to ditch them when times are tough, such as in a recession or when markets become scarily volatile...the self-doubt can creep in!
I discussed this a little further in the short video below:
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