The excerpt below is from a recent blog post of Tim Ferris, an investor and author. It talks about how we can make better-quality decisions in life (emphasis his):
“How can we create an environment that fosters better, often non-obvious, decisions?
There are many approaches, no doubt. But I realized a few weeks ago that one of the keys appeared twice in conversations from 2019. It wasn’t until New Year’s Eve that I noticed the pattern.
To paraphrase both Greg McKeown and Jim Collins, here it is: look for single decisions that remove hundreds or thousands of other decisions.
This was one of the most important lessons Jim learned from legendary management theorist Peter Drucker. As Jim recounted on the podcast, “Don’t make a hundred decisions when one will do. . . . Peter believed that you tend to think that you’re making a lot of different decisions. But then, actually, if you kind of strip it away, you can begin to realize that a whole lot of decisions that look like different decisions are really part of the same category of a decision.””
To me, Ferriss’s thought is entirely applicable to investing too. The more decisions we have to make in investing, the worse-off our results are likely to be. That’s because the odds of getting a decision right in investing is nothing close to 100%. So, the more decisions we have to string together, the lower our chances of success are.
I was also reminded of the story of Edgerton Welch by Ferriss’s blog. There’s very little that is known about Welch. But in 1981, Pensions and Investment Age magazine named him as the best-performing money manager in the US for the past decade, which led to Forbes magazine paying him a visit. In an incredible investing speech, investor Dean Williams recounted what Forbes learnt from Welch:
“You are familiar with the periodic rankings of past investment results published in Pension & Investment Age. You may have missed the news that for the last ten years the best investment record in the country belonged to the Citizens Bank and Trust Company of Chillicothe, Missouri.
Forbes magazine did not miss it, though, and sent a reporter to Chillicothe to find the genius responsible for it. He found a 72 year old man named Edgerton Welsh, who said he’d never heard of Benjamin Graham and didn’t have any idea what modern portfolio theory was. “Well, how did you do it?” the reporter wanted to know.
Mr. Welch showed the report his copy of Value-Line and said he bought all the stocks ranked “1” that Merrill Lynch or E.F. Hutton also liked. And when any one of the three changed their ratings, he sold. Mr. Welch said, “It’s like owning a computer. When you get the printout, use the figures to make a decision–not your own impulse.”
The Forbes reporter finally concluded, “His secret isn’t the system but his own consistency.” EXACTLY. That is what Garfield Drew, the market writer, meant forty years ago when he said, “In fact, simplicity or singleness of approach is a greatly underestimated factor of market success.””
Welch reduced a complicated investing question – “What should I invest in?” – into something simple: Buy the cheap stocks. By doing so, he minimised the chances of errors creeping into his investing process.
My own process for finding investment opportunities in the stock market is radically different from Welch’s. But it can also be boiled down to a simple sentence: Finding companies that can grow at high rates for a long period of time. I focus my efforts on understanding individual companies and effectively ignore interest rates and most other macroeconomic developments when making investment decisions. My process sounds simple, but that’s the whole point – and it has served me well.
To make better investing decisions, reduce the number of decisions you have to make in your investing process. Simplify!
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