The Easy Pile
Charlie Munger and Warren Buffett share that sometimes, certain investment ideas get rejected and end up in the “too-hard pile.” It’s the easier investment that they find appealing. In a recent conversation with a good friend Sophocles Sophocleous, the host of the Cyprus Value Investor Conference, we discussed how the best investments could be obvious. Let’s call them an easy pile, but as you’ll see in a moment, they are far from easy, at least in the common sense of the word!
When I started my investment career, I met a few analysts and portfolio managers that were proud of how complicated, intricate, and hard their investment ideas were. There was no way of explaining the investment case in a 5-minute presentation. I almost felt we needed a rocket scientist in the room to break it down for us.
Usually, their reports included long spreadsheets, graphs, details, and more. Their presentations would last two hours, and many of us would leave the meeting more confused than we were at the beginning.
I was young, and I was still shaping my own preferred investment style. Even the broadly defined value investing school of thought can range from easy-to-explain businesses like Apple to a much more complex investment in a bankrupt company with a complicated capital structure, opaque client relationships, a complex regulatory environment, etc.
Value investing simply means buying something for less than something is worth. What we buy is a very personal choice. It depends on both the portfolio manager’s circle of competence and clients’ preferences.
Reading more about Benjamin Graham, Warren Buffett, Charlie Munger, and many other followers of this particular school of thought, I slowly discovered that hard doesn’t always mean better.
If the investment case takes 100 slides and a few hours to explain, it doesn’t automatically mean the upside is 100x bigger than a stock one can explain on a single page. You can easily imagine how long it takes to research the 100-slide investment, and the time spent doesn’t correlate clearly with expected returns either.
If that’s the case, maybe Charlie and Warren are on to something having a “too hard pile” and choosing an easy pile.
Investing is hard enough on its own; why make it even harder?
The curious part of passing on hard investment ideas is risk avoidance. Easier, and simpler to explain investment ideas may hide fewer bad surprises. If it took so long to produce those 100 slides, how many little but important facts might we have overlooked in the research process?
The devil is in the details! I remember asking my now partner, Francois Sicart, about Enron, the famous fraud and bankruptcy that happened when I was in university.
I wondered if he came across it and how he knew to avoid it. I remember to this day; he told me he and his then partners looked at it, couldn’t make sense of the financials and the story, and walked away. That was a classic “too-hard pile” stock.
Not only did it not deliver on the promise of great returns worth the extreme effort to analyze it, it actually turned out to be a danger zone, a total loss.
When I say an “easy pile,” I mean it’s easy to explain why we like it and how we can make money in it. To get to that conclusion, we still need to do thorough research. The difference is that there is an endpoint where we can put all our facts together, and with a single page, we can explain the story.
I’ve been to many investment pitches that didn’t conclude in any purchase of a single stock. I know well that the research process is just a stepping stone, and the hard part is buying and holding the investment.
The secret to investing is not finding the hardest investment idea to research and explain; it’s to pick the easier ones and not only pick them but actually buy and hold on to them.
I find it to be the hardest part of the investment process. Talking yourself out of buying, or once you buy, talking yourself into selling prematurely, is a frequent mistake that many in the investment world face.
It’s the emotional discipline that lets us navigate the ups and downs of the market, the rollercoaster ride between panic and euphoria fueled by fear and greed.
Picking the right stock to research, buying it, and actually reaping the benefit of holding it long-term is where the real investment success lies. Can you imagine how much harder it would be to buy and hold on to a stock that was hard to even explain?
Why not make your life a lot easier, (and likely more profitable!), and focus on the “easy pile”? Let everything else land in the “too hard pile.” It worked beautifully for Warren and Charlie, and I think it can work well for all the rest of us.
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