January 26, 2018
Somewhere near the staggering peak of the dot-com bubble, I was sitting in a drab Silicon Valley conference room explaining to Excite@Home engineers how Bluemountain.com, a sender of online greeting cards with lots of dancing turtles and happy rabbits, had managed to build the 9th largest website in the world without using a database. The conversation went roughly like this:
Me: "We took each web page, created a hash function for that page, and just stored it in a series of folders in unix (unix is a techie operating system)."
Them: "How did you get the hash function?"
Me: "We recorded birds chirping over the waves in San Diego, ran them through a software program, and used that to get the hash. Our founder used to be a hippie and he thought it added a touch of art to the project."
Them: "Huh? Who are you guys? Why didn't you use a database."
Me: "It wasn't needed."
Not only did they not appreciate our bird music, they couldn't understand why we didn't go the more complex route, because everyone else was doing so. They implemented a database, and almost immediately the web site ran into stability problems and began to have outages.
They violated an ideology know as Appropriate Technology, which means that the simplest, cheapest tool that still gets the job done is the best one. Appropriate Technologies are small-scale, labor-intensive, efficient, and do nothing more than meet the need at hand.
Both in investing, and in the operation of businesses (and life as well), I see this ideology ignored consistently. It's easy to slide down the road of complexity. New ideas sound exciting, but the long-tail (pareto distribution in mathematics) costs of those ideas don't get factored into decisions well.
But if you graphed "complexity" vs "future problems," you would not have a linear function, you'd have a quadratic. In English: if you move away from the simplest solution in any direction, the problems you will encounter will not go up proportionally: they will explode. In real life this is often referred to as "bureaucracy."
In the investment world, it's not just the investments themselves that we're trying to simplify. We're also trying to simplify people's basic financial structure. For example, I see many trusts and other vehicles that often are not needed. They add complexity but don't have a reason to exist that is worth the overhead incurred.
Why do we care? Two reasons. One, simplicity keeps our costs, and hence your costs, down. But more importantly, something that is simple is understandable. If you understand how something works, it is easier to believe in it. If you believe in it, the chance that you change your investing behavior at the wrong time, as in at the bottom of a deep recession, is lower.
It is difficult to look at a portfolio of 40 stock or fund positions and understand the purpose of each, and how that relates to the others, and how or whether that is changing over time, and if risk is creeping in somewhere. It's a much better idea to simplify the problem set to one that can be understood, and work from there.
Keep that in mind if you ever get a financial statement from a firm and it's so large you sprain your wrist getting it out of the mailbox.