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Make it easy

As an investor, do you want to make things more difficult for yourself, or easier?

Make it easy

'You get no points for difficulty'. That's the word from Warren Buffett in one of the best passages in his 2021 letter to the shareholders of Berkshire. All of us, whether in our personal or our professional lives, have a mental holdover from our student days. A good teacher would take the difficulty of a topic into account while giving marks. For a difficult topic, we would get extra credit just for making a good effort and for an easy topic, even a perfect answer would not yield those many marks.

Adult life is generally not like that and investing is absolutely not. In fact, it's the opposite. Making things easier for yourself is the best option and if you can find success by trying only the easy stuff, then nothing like that.

In his 2021 letter (which on an nth reading, I have come to feel is one of the best ones in the long series), Buffett has this to say: Charlie and I want our conglomerate to own all or part of a diverse group of businesses with good economic characteristics and good managers. Whether Berkshire controls these businesses, however, is unimportant to us. For those reasons, our conglomerate will remain a collection of controlled, non-controlled businesses. Charlie and I will simply deploy your capital into whatever we believe makes the most sense, based on a company's durable competitive strengths, the capabilities and character of its management, and price. If that strategy requires little or no effort on our part, so much the better. In contrast to the scoring system utilized in diving competitions, you are awarded no points in business endeavors for "degree of difficulty". Furthermore, as Ronald Reagan cautioned: "It's said that hard work never killed anyone, but I say why take the chance?"

Of course, you and I are not running a huge conglomerate, so things could actually be much easier for us. We can avoid making things difficult for ourselves if we want to. The strange thing is that a lot of investors don't do that. How do 'Charlie' and 'Warren' make things easier for themselves? By not bothering about control, unlike other conglomerates. That means they don't have to pay control premiums, and can let existing, proven managements continue having some skin in the game. They don't need to become competent in the businesses of the companies that they have invested in.

Of course, they have to understand those businesses, and that's helped a lot by not investing in too many businesses. As Charlie Munger said recently, on the same topic but in a different context, "I find it much easier to find four or five investments where I have a pretty reasonable chance of being right that they're way above average. I think it's much easier to find five than it is to find a hundred. I call it deworsification."

This is a major way in which far too many Indian investors make things too difficult for themselves. I routinely come across equity investors who have holdings in 50-60 stocks, some of them even more. How many listed stocks do you think Berkshire holds? The answer will probably surprise all these Indian retail investors whose number of investments are actually wholesale.

As per the last quarter's filing with the SEC, Berkshire Hathaway has investments in 33 companies. Think about that. Do you or I have more of a research and analysis bandwidth, or deeper investment experience than is available to Warren Buffett or Charlie Munger? Then why are you stretching yourself thinner than they are? Then why make things more difficult for yourself? Unlike the teacher in your childhood, there's no one to give you extra points for difficulty.