Ask Colin

Do you belive people make investing too complicated?

The detailed question was:

I have been following your website and writing for a number of years. I have learnt a great deal on how to minimise my losses and thank you for this. It seems to me the simple way that you teach of buying and selling on trends and breakouts works well as long as you follow stop loss rules. Do you believe that people make this far too complicated with all their theories etc?  

I think there is an element of truth in what you say. Investing is not really that difficult if you have a sound method, discipline and patience to let the plan work. My plan in its essence is to manage risk, while buying up trending stocks that have a margin of safety. It is all in my book. However, as I remarked in the book, despite me saying that this is all I do, they keep failing to believe me and ask when I am going to run the advanced seminar where I teach the real secrets, or perhaps write another book with the rest of what I do in it. I guess no matter how many times I protest that there is no advanced seminar and no secrets I have held back, they will not believe me.

The thing is that so many people believe that complex is better than simple methods, the reality is otherwise. The way I like to think about it is this: Most of the ideas we have to exploit in the market are somewhat inexact. They work on the balance of probabilities. However, these ideas seem to resist all efforts to refine them by adding complexity. It becomes difficult to understand what is actually happening with these complex indicators and systems.

The other issue is that all beginners seem to have the totally mistaken idea that it is possible to predict the future with any accuracy or consistency. I have read widely in this area and all the evidence points to it being impossible to predict the future. It is interesting that Benjamin Graham reached this same conclusion by observation 70 odd years ago and devised a method that was independent of any prediction. My methods are different to his in some respects, but not in others. However the one thing we do absolutely share is to invest in a way that makes absolutely no attempt to predict the future.

Many of the gurus and theories you refer to are attempts to predict the future and are bound to fail. When one of their theories fails to predict accurately, they make it more complex in an attempt to make it work. In some things it is possible to refine methods and make something work. However, that thing has first to be possible. Nobody has yet demonstrated that it is possible to predict market prices.

The sad thing about all this enormous waste of energy in trying to make predictions is that it is not necessary. Ben Graham and his acolytes, the best known of which is Warren Buffett, showed you can succeed without predicting anything. I am not aware of anyone who has shown that methods relying on prediction come anywhere near their results.