Fishing & Investing
A couple of weeks ago my family and I went on our annual vacation to my families cabin in Canada. It is by far my favorite place to be, especially in late July and early August. The cabin is on an island 15 miles by boat from the closest town. There is no electricity, internet, cell reception or water hookups provided by anyone. What we have is what we produce or build on the property. Without the usual distractions provided by our normal routines, life is simple.
Click HERE to see a couple of pictures of our trip.
One of my favorite things to do at the cabin is fishing. I am not known as an avid fisherman, but when I'm at the cabin I feel like fishing the whole time. I can honestly say I fished more this year alone at the cabin than anywhere else in my entire life combined. Over the last couple years I have been teaching my sons Drew and Max (7 & 4 years old respectively) how to fish. If you asked either one of them what the number one rule of fishing is they would say, "Fish where the fish are." The second rule is don't forget the first rule.
Like everything else at the cabin, it's a simple idea. It matters little the kind or color of your line, the action type or power of your rod, number of gears in your reel, amount of colorful grub in your tackle, or anything else. If you are not fishing where the fish are, you are probably not going to catch anything. In contrast, if you have nothing but a worm, 4lb test line, 2-foot pink cinderella rod, but you are fishing with a school of fish under your boat, you have a good chance of catching something. Fishing where the fish are counts for 80% of the success someone has at catching a fish in my opinion.
I must admit I didn't make that quote up myself. I first heard it from my favorite investor of all time. I mentioned it in the article Recognizing the Reasons for Success.
“There’s a rule of fishing that’s a very good rule. And the first rule of fishing is ‘fish where the fish are.’ And the second rule of fishing is ‘don’t forget the first rule,' Investing is the same thing. And some places have lots of fish and you don’t have to be that good of a fisherman to do pretty well. Other places are so heavily fished that no matter how good a fisherman you are, you aren’t going to do very well.” - Charlie Munger
I have read or heard Charlie say this quote (or something similar) a lot. When he expands his thought you will almost always hear him explain one of the following;
Occam's razor, “With all things being equal, the simplest explanation tends to be the right one.” or "Entities must not be multiplied beyond necessity." (1)
A paraphrase of Einstein, "Everything should be as simple as possible, but not simpler." (2)
Keeping it Simple
Keeping it simple in fishing is the same in investing (and life). People can make investing sound more complicated than it is. We see this with clients who often have a large number of accounts of the same type, a plurality of funds meeting the same objective in the name of diversification (Steve and I call this over-diversification, which results in underperformance), or have competing financial objectives occurring at the same time without the client realizing.
We see this with investment managers who over-diversify their investment strategy so they are just mimicking an index for a high fee, or create a "new" investment strategy that sounds complicated or unique for the purpose of outperforming the market (you can read about this in Steve's article Lets Get Real on Alternative Investments).
Having the mindset of “keeping it simple” is one of the highest virtues in my opinion. Keeping it simple doesn’t mean having low expectations or giving little effort. The key is finding that important variable that makes up 80% of the success and focus on that variable without getting distracted by things that make a minimum impact to the end result.
Focus on What Matters Most
As an investment manager, the companies I buy have to be within my circle of competence. The business model needs to be understandable to me. What I’m looking for is that one or two variables that matter most for the companies success. Just like my focus on “fishing where the fish are”, I need to find that simple variable that drives 80% of the success rate of the company. Some companies are so complex they need a lot of situations to work out for them to be successful. I tend to stay away from those businesses.
I'm amazed at most investment managers who can talk for hours about the ins and outs of a company but can't simply explain what variable(s) matters most. They focus on the length and action of the rod or the colorful grub they want to try. Then they wonder why things didn’t work out for them.
If I can understand the important variable(s), it’s within my circle of competence. If I can keep my investment process that simple, it helps me eliminate the companies to hard for me to understand. As with all things in life I want to make things as simple as possible, but no simpler.
Since Evergreen's founding, we have always held the principle of keeping things simple. We have an efficient business with a low amount of overhead compared to other firms our size. The strategies are simply in line to meet the specific objectives the client is looking for. Our financial advice doesn't have the bells and whistles or the fancy sales pitch. We want our advice to be understandable, realistic, and to the point (in other words, simple).
Does having a simple life, investment strategy, financial plan, etc, mean it's not as good as others that have more complexity? We have had the investor come into our office before who was shocked we didn't offer him a personal Monte Carlo simulation of his expected investment return, and he demanded it. It's not that we can't offer an array of numbers, charts, and graphs carried out to the fourth decimal place to support our investment thesis. Our view is it not only doesn't help but often makes the outcome worse. Instead, we keep things simple and focus on what matters most.
“It’s remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” - Charlie Munger
(1) Encyclopedia Britannica, Encyclopedia Britannica, Inc., 1998, www.britannica.com/topic/Occams-razor.
(2) “Everything Should Be Made as Simple as Possible, But Not Simpler.” Quote Investigator, 5 Oct. 2018, quoteinvestigator.com/2011/05/13/einstein-simple/.
Evergreen Wealth Management, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.