Albert Einstein once said, “If you can’t explain it to a six-year old, then you probably don’t understand it yourself.”
I admire Einstein, however, I can’t get my 6 year-old to sit still long enough to listen to anything I have to say, let alone my investment ideas. If it isn’t about Harry Potter or astronauts, I don’t have a chance. So, I need a new rule for keeping things simple.
We have three small children (6, 4, 1) and my wife is a resident at a fairly demanding residency program. She is usually coming off a string of nights or just finished a 6 a.m. to 6 p.m. shift, after which she needs to make dinner (unless we are having PB&J or Panera–my specialities) practice piano with the two older kids and help me get the kids into bed (I finally lend a hand). This isn’t the easiest of schedules for her and around 9 p.m. when this process comes to a close, she is visibly tired. I have given myself the rule that if I can’t explain my rational for investing in Company X in an understandable way before she falls asleep, then I either don’t understand it well enough or it probably isn’t a good investment. I typically have about 5 minutes before she nods off.
The financial world has come to put complexity on a pedestal. We value complexity for the sake of flexing our intellectual muscles without, in my mind, worrying about the real connection between the complexity of the underlying investment and its actual returns. Complexity has become the shiny object investors are striving for. I don’t care how many slides Bill Ackman creates regarding his Herbalife position, I want to know if he can convince my wife before she falls asleep at night. I don’t want complexity, I want simplicity. I don’t invest to win a Value Investing Congress medal (or whatever they hand out to the most elaborate power point presentation). If I can’t understand it, I am happy to let someone else try. I don’t need to make money off every single idea out there. Until I come up with my own metaphor, I will have to rely on Buffett’s quip, “I don’t try to jump over 7-foot hurdles: I look for 1-foot hurdles that I can step over.”
As a further note, my overly cynical side usually concludes that if something that can be explained simply (and most everything can be) is made overly complex, then the reason is that the speaker may be purposefully hiding something. Complexity and fraud tend to go hand in hand….