Investing and Complexity

Can you avoid complexity?  Possibly.  It depends on how it arises.

In finance, complexity exists because there are many parts that work together to make up the entire system.  Some pieces are connected clearly, while others are not.  It is a complicated problem to view all the parts together and to know what is happening and what could happen.

A thought:

“I believe it was the great ogre philosopher Gary who observed that complexity is, generally speaking, an illusion of conscious desire.  All things exist in as simple a form as necessity dictates.  When a thing is labeled ‘complex,’ that’s just a roundabout way of saying you’re not observant enough to understand it.”

A. Lee Martinez, In the Company of Ogres

Observant may not be enough.

When investing in the stock market, it is wise to notice that you are not alone.  A complication in the market is that price is created by the actions of both a buyer and a seller.  The price arises only when their positions converge.  There is nothing that implies that they need both be rational.  Sometimes they are both rational but it is not the same rational.  Price addresses the people involved at least as much as it addresses the value of the security.

At one time you would hear, “The smart money is buying.”  My question then was who are they buying from?  Presumably dumb money, but why does dumb money have any money?  It is possible neither side was smart.

Investing for short times like a month, is a fool’s game.  You are trading against other traders at that point and you are betting that you understand the emotional part of the market better than they do, or maybe sooner than they do.  That form is not really investing.

If you choose to invest for a long time, maybe five years, or forever if you are Warren Buffett, then the emotional complication disappears.  It is then possible, albeit still difficult, to estimate the value of a security and its likely future value.

Great ogre philosopher Gary is right.  Nature prefers simple.  Even atoms are organized to require the least energy to maintain themselves.

You have a challenge. You are a complicated being and that adds complexity to investment decisions.  Fear, greed, insecurity, the influence of others, fashion, and tired, all conflict with simple investing.  To compensate, choose simpler investing guidelines.

Simple includes the search for “free cash flow,” dividends, management discipline, competitive market position, a natural franchise (brand) and a few more.  Periodic review of your parameters and matching against all stocks, including your own, will keep you on track.

People who have trouble with complexity usually are trying to achieve returns for reasons unrelated to their financial needs.

Begin your investing decisions with the purpose of the investment.  Understand your time frame and available capital.  Then establish your “Goldilocks Yield,” the one that is just right.  For you.

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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

One Comment on “Investing and Complexity

  1. Don, I love reading your posts. Keep it up. Always good insight.

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