Get Rich with Simplicity

davidThere are a couple of posts on this site that underpin all the others. You can think of them as the foundations on which everything else is built.

One of these is The Aggregation of Marginal Gains and the other is its less popular under-rated cousin The Principles of Lifehacking.

If you haven’t read The Principles of Lifehacking, then go read it.  If you have read it, you should know that Principle 3 is : Think 80 : 20.  In other words, focus on the 20% of things you do that provide 80% of your results.

Focus requires ignoring distractions. Focus means ignoring the noise. Focus means ignoring the clowns that are doing it wrong. Focus is easier when you have simplicity.

This takes us to Principle 4: Keep It Simple.

Wherever possible you should choose simplicity. This applies in all areas of life. In your investing, in your spending, in your career.  When all else is equal, choose the simpler option.

Simplicity is under-rated and its benefits are often over-looked. People selling you things make more money with complexity and by up-selling you to a premium product.

Simplicity is more robust and reliable. When I used to watch Formula 1 racing on TV, I was struck by how often the cars broke down. The cars are set up for peak performance but the complexity of the engineering makes them fragile and so many (most?) most cars didn’t last the race distance. Things that are complex are fragile.

Which is simpler: a bike or a car?  A car has maybe 100 parts whereas an F1 car has maybe 10,000 parts(?). As a result, the bike is cheaper to buy, cheaper to maintain, less prone to obsolescence, longer lasting and easier to fix.  And that’s before the regulations. Riding a bike represents liberating freedom compared to driving where you need to have passed a government test and have multiple certificates etc before you can use it on the road.  Riding a bike will not result in you ending up in prison, driving a car just might.

Yes, there are times where the F1 car is the more appropriate choice…when you are competing in a Grand Prix for example. But for most other journeys, the bike is the better choice.  If you are popping to the shop for a pint of milk, the bike is the correct choice. If you are going to your local gym, the bike is the correct choice.  Its the right tool for the job.

Once we’ve decided whether to bike or take the car, we then have to choose our route. Again, simplicity wins. A good decision making rule of thumb would be: take the most direct route…as close to how the crow flies as possible.  The more deviations and detours, the greater the distance and the greater the chance of you getting lost or distracted along the way.

Why we need to keep it simple

A critic of The Escape Artist might say that I’ve managed to make very little talent go a long way. I’d probably agree with that. I know how to focus and, to do that, I guard my headspace.  I try not to let things that don’t matter crowd out my limited processing capacity. I say no a lot.

Right now, I imagine you might be thinking something like:

Huh: so The Escape Artist is telling me that focus is important…no shit, Sherlock

But there’s a big difference between knowing something intellectually and actually putting into effect into your life.  So if you’re still watching The News or on social media and then complaining, you’ve lost focus.  Only if you actively seek simplicity do you really know how important it is.

The reason we need simplicity is not because the world is simple..its because the world is too complex for our monkey brains to understand.  We need mental shortcuts (heuristics) to make sense of the world. Without simplifications, we can’t function.

One of the reasons that modern corporate life is stressful is that big organisations are so unwieldy.  I worked at a big accounting firm with over 100,000 employees world wide. There was an “All firm” email address that people would use.  We’d get emails saying things like: someone has left a fountain pen in reception in the Ulaanbaatar office…would anyone like to come get it? Arrrrrggghhhh.

This meant everyone got about 1 zillion spammy emails a day…and those were just the ones from the other employees. No doubt, the management then wondered why productivity was not higher. In an environment like this, a focus on simplicity is essential for your sanity.

Keep it simple…with Ockam’s razor

The Escape Artist is not the first person to have noticed the benefits of simplicity.

Back in the Fourteenth Century, William of Ockham (Bill to his mates) came up with Ockham’s razor : the problem-solving principle that the simplest solution tends to be the right one. When presented with competing theories to solve a problem, you should select the solution with the fewest assumptions.

This is not an absolute. Its obviously possible to over-simplify. So another way to put this would be that everything should be made as simple as is consistent with reality but no more so.

The word razor is apt. You should aim to cut away complexity.  Imagine that in life you’re trekking in a jungle…complexity is like the vegetation: its always growing and will impede and confuse you unless you cut it back with a machete.  Only when you cut away complexity does The Path become clearer.

This process of paring back is how Michelangelo created his sculpture masterpiece David from a piece of rock. Apparently, when asked how he did it, he said: “I simply removed everything that was not David”.

Simplicity in Investing

One common mistake that I see people making when investing is over-complicating their portfolio.

Many portfolios remind me of a pick & mix sweet counter (remember Woolworth’s??).  In other words, people take a bit of this and a bit of that and end up with a mish-mash of funds and individual shares, bonds, P2P lending etc.

You often see rookie investors on online forums asking for suggestions as to how to invest a small amount (a couple of thousand pounds) and umpteen other readers responding, each with a laundry list of their favourite funds.

When it comes to investing, less is more. Everytime you do something there’s a charge: a commission, a bid-offer spread and a mental cost in terms of time and headspace.

Your % of income saved is more important than your % investment returns? So why not just stick it into VWRL (Vanguard’s All World Equities ETF) and do something more useful with your time? Something like tracking your spending that leads to spending less and therefore having more money to invest.

Simplicity in spending

Minimalism is a form of simplicity.  Everytime you bring a new possession into your life, things get a little less simple.  Physical possessions come with liabilities. Every physical asset you have potentially requires space, storage, maintenance, insurance and cleaning. In other words, hassle.

Most people spend their time and money accumulating stuff.  Even when they have almost zero net worth, they are buying more physical shit to clutter up their minds and their living space. Once they’ve filled up the attic and the garage, its off to the self storage centre where they pay more for the privilege (this is good money after bad).

We all come into this world travelling light. Unfortunately, over time we accumulate stuff like ships hulls accumulate barnacles, slowing them down and reducing their efficiency gliding through the water.

I don’t consider my life to be spartan.  By the standards of the past, we in The West have a standard of living that only Sultans and Emperors could have imagined. But I only have one car, one house and no mortgage. That means I’m saving a fortune on car finance payments and mortgage interest…not to mention the other benefits of reclaiming my collateral from The Bankers Jar.

Simplicity in writing

I write this blog using the simplest English possible.

It would be easy for me to write long, technical, jargon laden posts about investment strategies, the safe withdrawal rate, geo-political risk, tractor production in the Soviet Union etc etc.  The Escape Artist spent 20 years writing such reports for smart people in companies, government, hedge funds and banks.

If I was focused on making money from the blog, that’s what I do. But once you start down that road, it becomes about ego / money and no longer about clarifying things for as many people as possible.

Simplicity in food

Simplicity is usually more natural. And where possible, you should be trying to live a more natural life.

I eat simple, natural food that grew in a field or used to swim, run around or fly.  If you look at the ingredients list for processed food (any food made in a factory) you’ll see that it’s anything but simple. When it comes to the ingredients list, less is more.

The takeaway

Complexity is more expensive. Complexity is more fragile, less robust. Complexity leads to procrastination.

Simplicity costs less. Simplicity leads to clarity of purpose. Simplicity leads to action.

TL, DR : Keep it Simple Stupid.


Further reading:

fin-coaching-widget

  1. The Inestimable Advantages of Living a More Natural Life
  2. What if you know nothing about investing?
  3. Financial coaching

10 comments

  1. Such simple and great advice – yet again. We are in the Lifestrategy funds and nothing else. This is across our LISA, ISA and SIPPs. They are nothing but LS. It is somewhat complicated by the fact that it is 50% LS100 and 50% LS80, so we have made our own LS90, as per Buffet’s portfolio for his wife. But with the constant drip feed, they have never really needed a rebalance. LS100 is as we would expect in this market creeping ahead, so I reckon in about a years time, I may rebalance.

    You can get blinded by CAPE ratios, currency fluctuations etc, but if you have no edge, there is no point trying to think you have one. Isn’t that the Dunning Kruger effect?

    Keep it simple and bet on every horse, even if that includes a few horses named Carillion or those horses bred in Turkey!

  2. Entropy: the gradual decline into disorder.

    Things get more complicated naturally. A glass is dropped and shatters into pieces. It never happens the other way round.

    Maybe that’s why most people aren’t successful/wealthy; it’s just natural.

    It takes a remarkable act, or a series of remarkable acts to overcome what is natural. It’s a struggle against nature. A struggle most aren’t willing wrangle with.

    Don’t be Stupid. Don’t be Normal

  3. I feel as If I need to simplify my hobbies, often I am doing multiple different things rather than getting good at any one pursuit.

  4. Keeping it simple is something that lots of people can relate to …..but only because the complex stuff is difficult to understand so they would likely fuck it up.

  5. I totally agree with the idea of reducing complexity.
    Very simple in theory but difficult in practice. 🙂
    I think that simplicity must be an ongoing process and for me anyway, I’ve managed to manage our family finances with minimal interference. I would still like to spend less time doing it and have fewer ETFs or shares or accounts (and maybe to have never heard of P2P or VCTs) but it’s a process and I can only hope I’m getting better at it.

  6. I do miss the time when all my worldly possessions including the bicycle would fit in a small hatchback car. I’m finding that as I get older, the possessions matter less and the experiences are more important. My most numerous possessions are probably books, which I find hard to part with but logic tells me I will probably never read them all in the time remaining! I like that you talk about healthy eating, then the next heading is ‘The Takeaway’!

  7. buildingtopcompanies · · Reply

    I get so much from your posts. Thank you.
    Kind regards, Irene
    >

  8. “The Simple Path To Wealth” is the only investment book you need. Sure you can beat the strategy that the book recommends if you try hard but you’ll spend tons of time doing it and find it hard to sustain. Set it and forget it.

  9. Great post on simplicity and so accurate.
    I decided a few weeks ago to downsizing my ‘stuff’ for this very reason, so the designer clothes, expensive curtains and other clutter I’ve been hoarding for years just because they cost quite a bit but never seemed to be using was madness.

    Delivering another load to the local recycling centre yesterday I was amazed at how busy this place was. Maybe there’s a whole new movement out there trying to live a more simplistic lifestyle! What I will say is the sense of achieving beautifully organised cupboards and garage is wonderful and in a weird way I no longer have that nagging voice in the background telling me to sort my s**t out and can spend my time focusing on the important things in life.

  10. Great stuff. I apply the same to diet and investments. Cut The Crap.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

Mr. Money Mustache

You can escape to financial freedom...

Altucher Confidential

You can escape to financial freedom...

Monevator

You can escape to financial freedom...

Mad Fientist

Financial Independence

jlcollinsnh

The Simple Path to Wealth

%d bloggers like this: