The Beauty in Simplicity

I’m back in the US from a multi-week hiatus. While traveling, I learned two things: I would gain 30 pounds if I lived in Europe, and Swiss trains make Amtrak look like an oxcart.

Along with catching up on the latest Presidential tweets and Jeff Bezos’ continued shock and awe campaign, I saw an interview with a writer I admire.

Morgan Housel of The Collaborative Fund (formerly of the WSJ and Motley Fool) revealed that, other than cash and his home, he keeps his investments in a bare-bones portfolio of two securities: the Vaguard Total Stock Market Index Fund (VTI) and Berkshire Hathaway (BRK.B).

I absolutely love this. I’m not suggesting this should be everyone’s portfolio, but there is an undeniable appeal in the simplicity of this approach. Housel gets equity diversification through the index fund and additional exposure to an individual stock. He has found two securities he believes will compound wealth over time and bought those, plain and simple.

He explains that this extreme simplicity is intended to manage behavioral risk. Because he knows investors tend to “buy and sell at the worst possible times” and “change their allocations based on emotional hunches”, Housel believes his simple approach can help limit his own mistakes. If he’s only thinking about two securities, he will be less likely to trade one for the wrong reasons.

Housel is making an admission of bias that’s rare among financial commentators and would be practically unheard of for a pundit on TV. The greatest challenge in investing is knowing yourself, and by using this simple approach, Housel admits his own faults. It’s also just a good idea, it’s inspired me to reexamine my own portfolio.

When in doubt, here’s a rule of thumb: be more inclined to trust people who admit their own weaknesses. Distrust the advice of those who don’t.


Postcript

In a previous post, I demonstrated that the volatility of an all-stock portfolio isn’t necessarily bad for a young investor. Just for fun, here’s how a 50/50 portfolio of the Vanguard Total Stock Market Index Fund and BRK.B would have performed during the time period I studied:

Berkshire, Buffett, and the Haters

The Berkshire Hathaway annual meeting takes place his weekend in Omaha. In honor of the so-called “Woodstock of capitalism,” I thought I’d take a few minutes to reflect on the careers of Warren Buffett and Charlie Munger and their influence on American business.

This short clip below is conversational; Buffett discusses how his investing philosophy changed (with Munger’s help) from simply buying cheap business to buying quality businesses at a reasonable price.

In this second clip, Munger describes the simplicity of his investing philosophy. He also pokes fun at those who obfuscate their strategies to give the appearance that they are indispensable.

Of course, even a simple investing philosophy is hard to use successfully. Having a simple set of principles does not relieve you from the burden of execution. But Munger explains that at Berkshire, there is no algorithmic trading or supercomputing going on,  just thoughtful analysis and discipline.

And the Haters

Renowned as Buffett and Munger are, they still get a helping of criticism, including some from other investors. This is a real tweet from a professional hedge fund manager:


I can’t help but be amused by this kind of thing. This tweet argues that Buffet’s use of leverage (insurance “float”) is the only reason for his success.

If Buffett isn’t an exceptional investor, you might ask, where did he get the money to buy insurance companies in the first place? If it’s that simple, why don’t all investors just do the same thing?

While it’s true that insurance float provides Berkshire Hathaway with a great investing tool, $400 billion businesses don’t just pop out of nowhere. You can’t build that kind of company with a simple trick. He was a successful investor long before he could buy insurance companies.

This type of criticism is like a guy playing pickup basketball trying to tell you that Michael Jordan wasn’t a great player, he just had great teammates, or coaches, or shoes.

Sure, plenty of factors helped Buffett and Munger along the way, but until you invest your way to a $400 billion business, let’s show some respect where respect is due.

Way to go, Warren and Charlie.


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