Rethink Simplicity

Back when I was a kid, there was a sport called Figure Skating. Heard of it? Maybe the artistry and athleticism you get to see at the Winter Olympics included a sport called figure skating, but trust me, it wasn’t figure skating, at least in the way it was in the past.

When I was watching Dorothy Hamill, part of the competition was called compulsory figures. Skaters were required to trace and retrace designs in the ice. I remember the figure eight the best. Competitions could be lost by even the most talented and imaginative skater if their figures were sloppy.

While the compulsory figure portions demonstrated the skill and precision of the athletes, they were also considered some of the most boring events in the games. Viewers tuned out, tickets went unsold, and the skaters really didn’t seem to love it either. The last time they were used in International competition (at least according to Wikipedia) was in 1990.

The lost lesson: sometimes the easiest looking things are actually the hardest. The same is probably true with many things. I know it is true with investing.

For instance, folks spend hours, sometime days, pouring over charts, figures, spreadsheets, all to find the right investment to buy at the right time. Selling it, well, that tends to be more happenstance. The reason? It’s a lot harder. It takes more skill. After all, the odds are stacked against you.

Think about it. The stock market normally goes up, albeit with incredibly jarring down cycles as well. Since the long-term trend is up, any time you buy you are likely to make money if you wait long enough. However, selling, no matter how long you wait, may prove to be a bad idea. What if the market never drops below the point you sold at?

On the other hand, in the world of stocks and bonds, some things that look difficult that are actually quite simple. For some reason people think that stocks are hard to analyze and bonds are easy. I’m not sure why this is the case as most people who think this haven’t analyzed either.

At first glance, stocks are complicated: you have to determine the value of the company based on any number of statistics, interviews with management, tours of the facilities, and prospect for their services/products and their industry. It would seem that with bonds all you need to know is how much interest it is paying and when it matures.

An interesting thing about bonds: You really want the company to still be around and have cash on hand when a bond matures—otherwise how do you get your money back? Bonds are, after all, loans to the company or government that issues them.

To figure out the odds of that happening, you should probably look at a number of statistics, interviews with management, tours of the facilities, and prospect for their services/products and their industry—exactly what you have to do to determine its worth as a stock. See, that figure 8 is not as simple as you thought!

Next week we look at another surprise learning point for me during the last 20 years of my firm that is related to this: I get paid more when things are easy than when they are hard.

This article was published under the title "Rethink what you think is simple" in the Wichita Falls Times Record News on September 21, 2014.