Finale – Make It Simple

The investment plan should be based on simple principles and as few decisions as possible. The fewer decisions you make, the better. If you have a concrete, but simple, investment plan, you force yourself to do less.

In Buffet’s shareholder letter of 2004, Buffett writes about an important feature for all investors – stay with simple propositions.

The logic is simple. If there is only one variable that determines whether it will be a good investment or not, and there is a 90% probability that it will happen, the probability of a good investment is 90%.

However, if there are ten variables that determine whether it will be a successful investment, and each of the variables has a probability of 90%, then the probability drops to 35%. An investment is not stronger than the weakest link.

Kahneman writes in Thinking, Fast and Slow that we overestimate the probability of positive outcomes.

For example, if you estimate that a stock has a 30% probability of quadrupling and a 70% probability of going to zero, this is theoretically a good investment because the expected return is positive. This is an investment with two rather extreme outcomes, either very good or very bad.

But you have to ask yourself how likely a quadruple is. Often such a scenario is greatly overestimated. A quadrupling is much more alluring than a 10% annual return.

Who can wait decades to get “rich”? Then it is more tempting to look for candidates who can multiply their efforts, and preferably in a short time.

But there are very few shares that multiply in a short time. In practice, most investors take on greater risk by looking for such candidates because they overestimate the likelihood of that happening.

For most people, it is much better to focus on simple and safe things that they understand, even though it may not be that exciting.