Joys of Compounding Chapter 8: Simplicity is the Ultimate Sophistication
- Simplicity is the art of thoughtful reduction.
- Five ascending levels of intellect according to Einstein: “Smart, Intelligent, Brilliant, Genius, Simple.”
Three Steps to Simplification
- Avoid unknowable and unimportant:
“There are two questions you ask yourself as you look at the decision you’ll make. (A) Is it knowable? (B) Is it important? If it is not knowable — as you know, there are all kinds of things that are important but not knowable — we forget about those. And if it’s unimportant, whether it’s knowable or not, it won’t make any difference. — Warren Buffet
- Focus: Decision making is more effective when we focus on one thing at a time. Focus on the top 20 percent of activities and deprioritize the bottom 80 percent. Spending time on secondary priorities is why we have twenty half-finished projects instead of five completed ones.
Warren Buffet’s advice on achieving goals
- Write down your top 25 goals.
- Circle the top 5 most important ones
- Separate the top 5 into a separate “to-do” list
- Put goals six through twenty-five on a “not-to-do” or “avoid at all cost” list. These 20 do not receive any attention till the top 5 are achieved.
- Reason Backward: Instead of trying to arrive directly at the solution, begin by eliminating the options that are not correct.
We don’t know for sure what makes us successful. We can’t pinpoint exactly what makes us happy.
But we know with certainty what destroys success or happiness.
This realization, as simple as it is, is fundamental: Negative knowledge (what not to do) is much more potent than positive knowledge (what to do). — Rolf Dobelli
Simplicity in Investing
- Avoid complex problems instead of solving them.
- Look for the greatest value (for the price paid) with the least risk.
- Make fewer and better decisions.
- Restrict to where the investment decision is a no-brainer.
- Look for simple businesses that require fewer assumptions and hypothetical scenarios to work out and that do not require discounting cash flows from the distant future to justify the investment.
- Understand the big picture (Identify and focus on the few key variables.)
- Look for reasons not to invest:
- How can I lose money?
- What is this stock not worth?
- What can go wrong?
- What is the growth rate being implied by the market in the current valuation?
We try to stick to businesses we believe we understand. That means they must be relatively simple and stable in character. — Warren Buffett
We have a passion for keeping things simple. If something is too hard, we move on to something else. — Charlie Munger
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