Professional Documents
Culture Documents
Why Simplicity Wins Abbreviated Saurabh Mukherjea
Why Simplicity Wins Abbreviated Saurabh Mukherjea
SAUR A B H MUKHER J EA , C FA
F OUND ER , MA RC EL LUS I NV ESTMENT MA NAGER S
The human mind is inherently flawed. While we like to think we are smart,
our decisions are based on miscalculated probabilities.
We love telling ourselves stories to suit our bias. This delusional thinking
spreads into our investment decisions as well.
How do we escape this trap? Keep things simple. There are enough
examples in business and in investing that prove that simplicity works.
2
Private & Confidential.
THE HUMAN MIND IS INHERENTLY FLAWED
Humans are inherently flawed creatures prone to making Thinking, fast and slow
reflex decisions and miscalculating probabilities around
risk-reward trade-offs.
Our brain simplifies shortcuts of intuitive thinking; biases How we see ourselves relative to others
are manifestations of these shortcuts (or heuristics).
3
Private & Confidential.
THE WAY OUR BRAINS ARE WIRED CREATES ISSUES
Early theories of rational minds are being challenged by As we learn more about our brains….
“The very idea that our minds contain ‘hidden depths’ is …we question previously held beliefs
utterly wrong.” [Chater- The mind is flat]
4
Private & Confidential.
MAJOR ISSUE: DELUSIONAL THINKING
The human mind struggles to look beyond the here and India’s GDP growth – secular uptrend
captain. 50%
40%
Fact: We have become better as our coaching facilities
30%
have improved, the fitness regime and the diet of our
20%
players have improved, as more technology has been
10%
used in training, selection and tactics, as the financial
0%
package of the players has improved, etc. 1970 1980 1990 2000 2010 2020
Source: Cricinfo. Ambit Capital research
5
Private & Confidential.
SOLUTION: KEEP THINGS SIMPLE
Simple strategies are easy to understand, easy to Simplicity works in business…
implement, easy to sell to others, and easy to course
correct from.
Simplicity has deep spiritual foundations which allows Source: Amazon.com [Author: Lord Saatchi]
6
Private & Confidential.
WHY SIMPLE ISN’T EASY
The world is a complex place. Our understanding of even Basic utilities backed by complex systems
simple concepts is still evolving. For example, science
tells us that time is NOT uniform, it flows at different
speeds depending on where you are and how you move.
7
Private & Confidential.
THE PHILOSOPHY OF SIMPLICITY
Simplicity has deep roots in philosophy and mythology. The Bhagavad Gita emphasizes duty
Detachment from material pleasures is a known concept
across ancient Greek and Indian texts.
Source: Amazon.com
8
Private & Confidential.
SIMPLICITY WINS IN BUSINESS
In the 1950s, Paul Meehl showed that the mechanical Apple, Amazon, Ikea – ideas of simplicity
Some of the world’s most famous, most celebrated Source: computerhistory.org, GeekWire, Ikea
Lidl Retail/Grocery
Steve Jobs: “It takes a lot of hard work to make Google Internet Search
something simple, to truly understand the underlying Netflix Media
9
Private & Confidential.
SIMPLICITY WINS IN INVESTING
Simplicity has also been espoused by investment gurus How the Bogle model beat endowments
like Warren Buffett - “I try to buy stock in businesses that Fiscal The Average Top Top
end June Bogle Endowm Quartile Decile
are so wonderful that an idiot can run them. Because 30th 2016 Model ent Endowm Endowm
ent ent
sooner or later, one will”, and Peter Lynch - "The simpler
it is, the better I like it”.
3 Years 6.4% 5.2% 6.3% 6.6%
Vanguard founder John Bogle’s advice: Split your
investment equally between a stock index fund and a 5 Years 6.5% 5.4% 6.2% 6.6%
Source: Amazon.com
10
Private & Confidential.
DEVELOPING A SIMPLE MODEL FOR INVESTING
1: Avoid group-think Jim O’Shaughnessy’s simple truths
Shun social media and minute-to-minute updates,
avoid live business TV, do not rely on or read broker
research, avoid developing biases, resist the
tendency to follow the herd.