When It Comes to Investing, Keep It Simple, Stupid
Jul 17th 2012 2:52PM
Updated Jul 17th 2012 3:00PM
"Everything should be made as simple as possible, but not simpler."
-- Albert Einstein
"Simplicity is the ultimate sophistication."
-- Leonardo da Vinci
"Less is more."
-- Mies Van Der Rohe
Some of the great thinkers in history have understood that simplicity is far superior to complexity, and as investors, we should learn that lesson well. Companies that are so complex that we can't understand them often turn out to be so complex that not even their own managers can understand them.
Great investors understand simplicity
One of Warren Buffett's most famous investments has epitomized the "keep it simple" philosophy. Coca-Cola (NYS: KO) , at its core, is little more than a manufacturer of syrup. Until recently, the company didn't even bottle most of the products sold on store shelves and still doesn't in many markets. What's simpler than a brand name and a formula for syrup?
Buffett also owns businesses like railroads, carpeting, and Dairy Queen. He understands simple and invests in successful, easy-to-understand businesses.
Steve Jobs brought the "keep it simple" philosophy back to Apple (NAS: AAPL) when he returned as CEO, jettisoning products for a product matrix that included four main products. Apple wanted to serve consumers and professionals and needed to offer a desktop and a laptop. Jobs felt that the company didn't need more than four products for that market and that mantra lives today with the company selling just a handful of products.
In restaurants, one of the greatest success stories in recent years follows the same line of simplicity. It doesn't come much simpler than Chipotle (NAS: CMG) . The company's menu is short and sweet and so is its pricing, helping make the company operationally efficient. If there's one word that explains the success of Chipotle over a similar product at Qdoba, it would be "simplicity".
Complexity is the enemy
Contrast Apple's success with Microsoft (NAS: MSFT) , which can't seem to get a grasp of what it is at its core. Is it an operating system giant, a search engine maker, an ad company, a news organization, a maker of tablets, or something else? It wasn't always this way for Microsoft. When the company was rising to dominance in the PC market, it primarily made an operating system and a suite of office software. But size has caused Microsoft to go after more markets and investors have been left with a flat-lined stock price.
Banking is another business that appears simple on the surface but has been full of complex dangers in recent years. If you read any accounts of what went wrong in the financial crisis, like former Treasury Secretary Henry Paulson's On The Brink, you can't help but be amazed at the complex web banks have woven for themselves. JPMorgan's recent "London Whale" debacle is just the latest example of how banks have become so complex that I avoid investing in them altogether.
This complexity has been the downfall of investors over the last five years, but one conservatively run bank in the Midwest has outperformed its more complex rivals. US Bancorp (NYS: USB) has quietly stuck to the age-old practice of collecting deposits and lending to borrowers, a crazy-simple strategy that appears to be working better than derivatives trading.
If you don't understand it, you can't value it
Part of the challenge in investing is valuing companies, something that is only made more difficult by complexity. A fellow Fool tweeted earlier today that Goldman Sachs is trading at a 23% discount to tangible book value, providing upside for investors. But do you trust Goldman's view of what "tangible book value" actually is? As JPMorgan's "profit" showed yesterday, banking is a game of shadows, and book values or paper profits mean very little.
Apple's simple, but it also makes a fortune. Get the latest on the iDevice giant in the Fool's premium report on Apple.
The article When It Comes to Investing, Keep It Simple, Stupid originally appeared on Fool.com.Fool contributor Travis Hoium manages an account that owns shares of Apple and Microsoft. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.The Motley Fool owns shares of Apple, JPMorgan Chase, Chipotle, Microsoft, Coca-Cola, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs, Chipotle, Coca-Cola, Microsoft, and Apple, as well as creating bull call spread positions on Apple and Microsoft and a bear put spread position on Chipotle. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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