Arjun Badola

Complexity in investing

If you are new to investing, avoiding complex situations can give you an edge over other investors as the possibility of making mistakes would reduce which would protect your capital and give you confidence to keep learning.

Here are two quotes from Warren Buffett which captures the purpose of this post:

I don’t look to jump over 7-foot bars: I look around for 1-foot bars that I can step over.” - Warren Buffett

Investors should remember that their scorecard is not computed using Olympic-diving methods: Degree-of-difficulty doesn’t count. If you are right about a business whose value is largely dependent on a single key factor that is both easy to understand and enduring, the payoff is the same as if you had correctly analysed an investment alternative characterised by many constantly shifting and complex variables.” - Warren Buffett

Here is a video in which Mr.Buffett explains that investing does not use the Olympic diving scoring method where the degree of difficulty of your dive determines your score. Rather one’s focus in investing should be on the execution - link.

One has to understand these quotes very carefully.

Returns won’t be determined on the complexity of the problem. You don’t need to enter stocks where there is complexity.

Most common example: Yes Bank. People doing all the analysis they can do in this world and coming up with a number that Yes Bank will go 2-4x from here.

One of my friends used to talk a lot about Yes Bank and kept telling me that the stock can’t go further down, it will double easily, etc.

All I want to say is, dear new investors out there it’s my humble request: PLEASE DON’T PLAY WITH FIRE. It is a stock in a complex sector where management is everything and it turns out the management was itself the cockroach in the kitchen.

Don’t aim for the moon if you don’t have the skill to even aim for the trees.

I have avoided so many stocks and told myself, “Don’t worry, take your time, keep reading about the industry and come back after a few years”.

I believe most of the stocks are cyclical stocks i.e, there are cycles when they are in favour due to industry tailwinds and sometimes out of favour due to headwinds.

So, I would not force myself too hard to understand the industry quickly just because I don’t want to miss the train, rather I would accept that I do not have the bandwidth to understand the industry today, but I will come back after a few years.

A better term to use here is “delay”. I delay my investing decision by a few months/years, that is until I understand the industry. Trust me, it takes time to understand any industry to a level where you can recognize patterns or get comfort to hold stocks because your understanding is solid.

Initially when I started out I avoided financial stocks completely but kept consuming material to keep taking small steps towards understanding the sector. Even today I don’t understand Banks but there are few niche NBFCs which are easier to understand (Few good sources on banking sector are: RC Capital blog on Banks, video of Ashish Kila sir, and SOIC’s Banking webinar).

Gold Financing NBFCs are a place to study and get started with financial companies because they are less riskier as they are asset backed, asset is highly liquid, and asset has independent value of the asset holder.

But do note: There is a thin line between not understanding due to your knowledge bandwidth vs your laziness of not working hard enough to understand it.

It’s okay to let go of a stock idea. There will be plenty of other opportunities which you are yet to discover. Don’t try to fit in an idea without understanding it because you have the urge to do something. I have made this mistake a lot of times. Buying stocks and lying to myself that I understood the business because I did not have any other idea to invest in.

Close twitter. Close your portfolio. Stop consuming investing content. Take a break and come back with a fresh mind, if you feel you might be doing the same thing.