Keep it simple, silly

“Simplicity is the ultimate sophistication.”

That was the tagline for the Apple II personal computer in 1977. It’s an admirable sentiment. But how do you define simplicity? #lmgtfy (let me Google that for you): 1) the quality or condition of being easy to understand or do and 2) the quality or condition of being plain or uncomplicated in form or design.

A prime example of the power of simplicity comes from the investment world—the systematic investment plan, or SIP in common parlance. For the uninitiated, an SIP is a way to automatically invest a certain amount every month into a mutual fund. Its simplicity lies in the fact that it takes the burden of “timing the market” off an investor. And it just works (for the details, take a look at the concept of cost averaging).

The SIP has exploded in popularity in India, a testament to its effectiveness from the average investor’s point of view. The Association of Mutual Funds in India estimates that there are 24 million SIP accounts, and total SIP collection was a whopping $1 billion (Rs 7,365 crore) for September (incidentally, a rough month for the markets). And yes, both of us are among the 24 million accounts.

Zoom out from the Indian to the global markets for another example—the exchange-traded fund, or ETF. It’s a type of mutual fund that, instead of having a fund manager actively pick out stocks or other assets, “passively” invests in markets by just tracking an index such as the S&P 500. Simplicity at work—and it trumps all manner of sophisticated investment strategies, according to the likes of John Bogle, founder of the Vanguard Group.

Through Vanguard—one of the biggest asset management companies in the world—Bogle has shown that the most sensible way to make money in the stock market is through a tracker fund. This is a type of low-cost mutual fund which merely mimics the main stock market index (and therefore does not need to pay a fund manager millions of dollars for potentially non-existent skills).

So useful are Vanguard’s offerings that not only does the firm manage $5.1 trillion of assets, investors as revered as Warren Buffett have also said that the portion of their inheritance which they will leave for their families will be invested in Vanguard’s tracker funds.

Simple businesses can also make for great investments. Branding firm Siegel+Gale runs the Simplicity Index, which surveyed 14,000 respondents in nine countries to gather perspectives on simplicity and how industries and brands make people’s lives simpler or more complex. Siegel+Gale even made a stock portfolio comprised of the publicly traded simplest brands in their global top 10 list. That portfolio rose 433% from 2009 till 2016, compared with 135% for the S&P 500.

However, simplicity is anything but easy to achieve. Think of the modern smartphone—it helps us get a lot of things done and we don’t have to put in much effort to figure it out. As far as we’re concerned, it just works. But a whole lot goes into making that happen.

The major components in an iPhone XS Max, for instance, include the screen, earpiece, cameras, logic boards, battery, SIM card reader, taptic engine, speaker assembly—all of which have their own components and subcomponents. And beyond the physical parts is Apple’s massive machinery of marketing, design, patents, employees and much more. The company employs more than 120,000 people, 9,000 in the design department alone.

Similarly, achieving simplicity in our own lives is not easy. So how can we do it?

Tip 1: Be different

In the early 1950s, Polish psychologist Solomon Asch conducted a series of groundbreaking experiments which redefined our understanding of how profoundly peer pressure influences us.

For the experiment, he placed one genuine student among seven actors who were trained to give pre-selected replies. All eight participants were asked which line from the card on the right below matched the line displayed on the other card.

Image courtesy Wikimedia Commons.

While the correct answer was C, the experiment ran many trials to see the response of the genuine student (who always responded last) versus the actors (whose replies were a mix of A, B and C).

What Asch found is that when the actors unanimously choose the wrong line, the genuine student often gave in and went with the mass opinion. To be precise, Asch found that “on average, about one-third (32%) of the participants who were placed in this situation went along and conformed with the clearly incorrect majority on the critical trials. Over the 12 critical trials, about 75% of participants conformed at least once, and 25% of participants never conformed.”

On the other hand, “in the control group, with no pressure to conform to confederates, less than 1% of participants gave the wrong answer.”

The Asch experiment shows us the perils of being plugged into consensus thinking generally (via mass media, colleagues or friends and family). It is hard to question conventional wisdom if you are immersed in the same information stream that everyone is drinking from. It becomes all too easy to start believing in nonsense just because everyone else appears to believe in it.

To think originally, to be different, we need to block out as much of the noise as possible (something we discussed in the first piece in this series). Once we do this, there are various methods to develop original thinking. For instance, organisational psychologist Adam Grant in a TED talk highlighted the following surprising habits of original thinkers:

  1. Procrastinate a little: Between people who rush to finish things first and those that wait till the very last minute lies a sweet spot. Spending long periods of time to develop an idea or solve a problem might not be a bad thing. Grant quotes a study where “first-movers” (who create a market) had a failure rate of 47%, compared with only 8% for “improvers” (who create a better version).
  2. Doubt the default: People who are sceptical of the default option and take the initiative to look for better alternatives open up themselves to look at the same thing with a new perspective.
  3. Fear of not trying: Everyone feels fear, but what sets original thinkers apart is not the fear of failure but the fear of failing to try. Trying and failing then opens a new area of learning and improving. But not trying at all prevents you from learning anything.

Tip 2: Deliberate practice and deep thought

As we’ve mentioned earlier, developing an area of expertise—through deliberate practice—goes a long way towards achieving simplicity.

The Knowledge—an exam that London taxi drivers need to pass—is an example of such deliberate practice. In his book, Peak: Secrets from the New Science of Expertise, Swedish psychologist Anders Ericsson writes,

To master the Knowledge, prospective cabbies […] spend years driving from place to place in London, making notes of what is where and how to get from here to there. The first step is to master a list of 320 runs in the guidebook provided to taxi-driver candidates.

For a given run, a candidate will generally first figure out the shortest route by physically travelling the various possible routes, usually by motorbike, and then will explore the areas around the beginning and end of the run […]

After repeating this process 320 times, the prospective cabbie has accumulated a foundational set of 320 best routes around London […] even after passing all the tests and getting licensed, London taxi drivers continue to increase and hone their knowledge of London’s streets […]

Thus, many years of deliberate practice gives London cabbies an extraordinary (and valuable) knowledge of London’s roads, just as it gives a gymnast highly developed arms and shoulders, and gave Apple founder Steve Jobs an extraordinary ability to perceive, understand and create simple, intelligent, yet highly functional designs.

Next, you need to reflect and spend more time thinking about the details, which is what we mean when we say “think deep”.

At the vanguard of the movement towards specialisation and focus is Cal Newport, with his hugely influential book Deep Work, and Daniel Goleman, who coined the term “emotional intelligence”. Newport’s book is a must-read for anyone who wants to excel as a knowledge worker. Here’s a sample:

Deep work is the ability to focus without distraction on a cognitively demanding task. It’s a skill that allows you to quickly master complicated information and produce better results in less time. Deep work will make you better at what you do and provide a sense of true fulfilment that comes from craftsmanship […] And yet, most people have lost the ability to go deep—spending their days in a frantic blur of email and social media […]

Daniel Goleman’s book Focus was published three years before Newport’s Deep Work. While both emphasise the positives of concentration, meditation and cutting out distractions caused by email and phones, Goleman makes a further point which is relevant for us.

As we get distracted by the inane chatter around us, he says, we become less self-aware and our “inner rudder” starts conking off. That, in turn, compromises our self-control.

As our emotional intelligence starts getting compromised, our relationships suffer

As our emotional intelligence starts getting compromised, our relationships with colleagues, friends and relatives suffer. Therefore, bringing “focus” back on our lives is not just essential for our mental well-being and for professional success, it is a prerequisite for a fulfilling social life.

Let’s take an example. You have a fear of water. The original thought would be to learn to swim—completely challenge the default. Not trying is worse than trying and failing. Go to a swimming pool, pay a trainer (even pay the lifeguard if you want), and force yourself to wade in the water.

Then comes the deliberate practice—once you learn to float, slowly learn to swim, then learn the various styles. Do this at least three to five times a week, a non-negotiable target. Be strict with yourself and be disciplined.

Finally, deep thought: focus on your strokes, on how your hand moves pushing the water and gliding ahead, how your feet kick to power your movement.

This might sound ridiculously easy to practised swimmers, but fear of water is a real thing. Overcoming that fear and knowing to swim can be liberating.

The next step: Build a decision-making framework

And finally, the practical aspect of living a simple life is developing a set of simple rules to live our lives by. This acts as a framework for decisions, but not a rigid one. We will change these rules as we learn and the environment changes.

This is something we touched upon briefly in our first piece; here, we take a closer look at how you can actually develop rules for yourself. In his seminal 1967 book The Effective Executive, management guru Peter Drucker laid out a five-step generic process for creating such rules. Drucker says,

All events but the truly unique require a generic solution. They require a rule, a policy, a principle. Once the right principle has been developed all manifestations of the same generic situation can be handled pragmatically; that is, by adaptation of the rule to the concrete circumstances of the case.

Therefore, he says, the five key elements of the decision process are as follows:

Step 1 is “the clear realisation that the problem was generic and could only be solved through a decision which established a rule, a principle”.

Step 2 is “the definition of the specifications which the answer to the problem had to satisfy…”

Step 3 is “thinking through what is ‘right’, that is, the solution which will fully satisfy the specifications before attention is given to the compromises, adaptations and concessions needed to make the decision acceptable”.

Step 4 is taking action on the basis of the rules.

Step 5 is “the ‘feedback’ which tests the validity and effectiveness of the decision against the actual course of events”.

This process leads to simple thumb rules which play a simple but powerful role—they force us to stay within our narrow circle of competence (and rely upon the expertise of others for matters outside that).

How do we use these steps to make thumb rules? Since at Marcellus Investment Managers our only area of expertise is analysing Indian companies and then buying shares in outstanding companies with clean accounts, we have implemented our own Drucker-like set of rules:

Step 1 is straightforward enough. Our practice requires us to set up a framework of rules that we can use to decide which stocks to invest in. Our thumb rules can be that we will look for companies which in the preceding 10 years have grown their business at a certain rate (say, revenue growth has been at least 10% each year) while delivering a certain minimum rate of profitability (say, return on capital employed of 15%).

Step 2 for us is to understand our client’s needs and ascertain whether buying the sort of stocks thrown up by Step 1 is appropriate for that client. If, for example, the client says that he is not willing to take any of the risks associated with stocks, then we should not apply the rule; he might be better off holding government bonds.

Step 3 is to implement the rule for the client with necessary adaptations. So, for example, if the client does not want to invest in cigarette companies, we have to take ITC Ltd out of the portfolio even though it satisfies the rule from step 1.

Step 4 is the ongoing management of the client’s portfolio, taking into account his specific financial circumstances.

And, finally, step 5 is taking feedback from the client as to whether he’s satisfied with what we are doing for him (and then acting on that feedback).

Focused repetition of these five steps should help us improve and hopefully cause our brains to develop like the London cabbies’ hippocampi.

The intent of this rule-bound investment process is to reduce subjectivity and make the whole process of investing in Indian stocks as rule-based as possible. This approach to investing is laid out in more detail in our bestselling books—The Unusual Billionaires (2016) and Coffee Can Investing: The Low-Risk Road to Stupendous Wealth (2018).

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By applying the suggestions we’ve given here, we hope you will be able to cut the largely self-created clutter out of your daily routine and live a more rewarding life of simplicity. We believe that doing a few things really well is more fulfilling than keeping multiple tabs open on our laptop and many apps on our smartphones, and always searching for time.

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