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Simple Ideas for Complex Times

With so many moving parts to the revival of the equity markets, simple approaches to investment are much better

Many years ago, I read the book 'Small is Beautiful: A Study of Economics As If People Mattered'. While Shumacher's ideas don't seem to be appreciated in today's world of business, I've always thought that the idea of 'enoughness' is something that would be a useful principle for investors to follow. It' s something that would help them keep a level head and save them from the worst excesses that seem to be committed when the equity markets are doing well. What is 'enoughness' in the context of investing? It's the idea that in most circumstances, simple is better than complex. It's far better to invest in way that requires you to do less, and do simple things. Far more people go wrong in their investment choices by trying to do much than by doing too little. In personal investments, the solution is not to do a lot, but to do only the minimum possible. In other words, 'simple is beautiful'.

This idea is particularly valuable at this point of time. Over the last month, as equity investments have gained in value, investors of all stripes have started getting interested again. Unfortunately, it also seems to be time for complex theories about which investments will do well and which will do better (there's no worse any more, apparently). Salesmen are building scenarios that combine monetary policy, commodity prices, the rupee and even diplomatic actions that the government is rumoured to be considering. It's heady stuff.

However, hard experience has shown that when they are in an optimistic frame of mind, investors have a high propensity to believe outlandish theories. Paradoxically, the more complex a scenario, the more likely it is to be believed. The only antidote to this is to understand that simple ideas are best, simply because when they succeed, the reasons are obvious. And when they fail, the reasons are obvious too. That's very different from complicated theories of which investments will do better and why.