The power of common sense

The Power of Common Sense

10/4/2018

So much of what we see in commerce is unnecessary complication masquerading as added value.

In the introduction to his book 23 Things They Don't Teach you About Capitalism, economist Ha-Joon Chang writes:

I do not go into many of the technical details that even a basic introductory book on economics would be compelled to explain. However, this neglect of technical details is not because I believe them to be beyond my readers. 95 per cent of economics is common sense made complicated, and even for the remaining 5 per cent, the essential reasoning, if not all the technical details, can be explained in plain terms.

What a breath of fresh air!

Finance is a simple industry made to look and sound complicated to justify fees.

Most of what you need to know about investing can be explained in simple terms, even if it's based on complicated mathematics. And those who can master these simple concepts invariably do better than those who bury themselves in technical details.

Lots of investors understand (or try to) the maths and the technical details behind their investments, but not the simplified, real-world consequences of what they're doing. Trying to speculate on market movements or pick next year's winner not only produces regular disappointment, but can seriously damage your financial well-being.

On the other hand, dollar-cost averaging, keeping diversified, rebalancing, managing your emotions, taking a long-term view, keeping a lid on costs, value investing... these concepts are so simple, yet are the true drivers of a better investment experience.

A few years ago Warren Buffett asked a group of students which classmate they would choose if they could have 10% of that person's earnings for life.

"Are you going to pick the one with the highest IQ?" he asked. "Are you going to pick the guy who can kick a football the farthest? The one with the highest grades?"

Nope. Students invariably pick classmates with traits like integrity, honesty, and kindness.

Same idea here. Common sense explains so much that the technical detail misses.

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David Seymour

5/12/2015 09:40:44 am

Hey mate, thanks for this summary Tony. I understand that many of the ideas are quite simple, it still doesn't make it any easier for me to know what is right for me though. For example, I know that we should all diversify, but I don't know how much of each investment I should have. Any tips?

Dave

Dave

5/12/2015 12:24:26 pm

Dave, if you are not sure, seek advice. If you are in an industry fund, most will have an advice service for which they may charge a nominal fee. It will be money well spent as choosing the right option will impact massively the end result and the journey you have along the way.

If you want to get advice from a financial planner, here are some tips to help you choose.

http://www.wetalkmoney.com.au/blog/the-most-important-questions-when-choosing-an-adviser

Contact me if you want to talk about things.

Tony

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