Which way the interest rates will move, what the stock market is going to do next, where the economy is headed, and so on, are all important but unknowable.
The second step for simplification is focus. When we try to accomplish too many things simultaneously, we end up doing all of them poorly. Attention is a scarce resource that gets depleted throughout the day. Yet, we act as if it can be divided unlimitedly with no negative consequence. Decision-making is more effective when we focus on one thing at a time. Multiple research studies have shown, time and again, that the human brain is not optimized for multitasking, especially when one is working on complicated and unfamiliar tasks. One of the hardest things to do in life is to avoid good opportunities so that you have time to devote to great opportunities—and having the wisdom to know the difference.
Buffett’s secret to success is his intense focus—instead of doing more, he does less. He once told his personal airplane pilot, Mike Flint, that Flint needed to do three things to reach his goals. The first was to write down his top twenty-five goals. The second was to circle the top five most important ones. Finally, he should separate the top five goals into a separate list—and put goals six through twenty-five on a “not-to-do” list. Buffett concludes by stating: “Everything you didn’t circle just became your ‘avoid at all cost list.’ No matter what, these things get no attention from you until you’ve succeeded with your top 5.”15
We have so many things in our life that we want to do. Who wouldn’t want to succeed at twenty-five different things? But when we chase after twenty-five things at once, that’s when we run the risk of becoming a jack-of-all-trades but a master of none. Our society rewards excellence and specialization. You need to excel at only a few chosen skills. And this is why Buffett’s “not-to-do list” is so helpful. Items six to twenty-five on your list are probably all important things that you care about. But when it comes to items one to five, items six to twenty-five are a distraction. Spending time on secondary priorities is the reason we have twenty half-finished projects instead of five completed ones. As the Pareto principle states, “80 percent of your results come from 20 percent of your activities.” Focus on the top 20 percent of activities and deprioritize the bottom 80 percent.
The not-to-do list concept is similar to the primary idea behind Gary Keller and Jay Papasan’s book The ONE Thing. It debunks the theory that multitasking is the path to success. Instead, ask yourself, “What is the most important thing I can do today? What is the one thing that would make everything else in my life either easier or unnecessary?”
The difference between successful people and very successful people is that very successful people say no to almost everything.
—Warren Buffett
When you say no, you are saying no only to one option. When you say yes, you are saying no to every other option. So be careful to what and to whom you say yes. This choice eventually will shape many things in your life. Every day we have the opportunity to make choices and shape our future; every day is the first day of the rest of our lives.
The third step for simplification is to reason backward. Instead of trying to arrive directly at the solution, begin by eliminating the options that are not correct. You get an enormous advantage by narrowing your problem space. You can then focus your time and attention on the more productive areas.
Let’s be honest. We don’t know for sure what makes us successful. We can’t pinpoint exactly what makes us happy. But we know with certainty what destroys success or happiness. This realization, as simple as it is, is fundamental: Negative knowledge (what not to do) is much more potent than positive knowledge (what to do).
—Rolf Dobelli
To make good investing decisions, you need to actively look for reasons not to buy the stock in question. Invert, always invert. Simplifying helps us make better decisions by breaking down complex problems into component parts. For example, I ask four inverted questions whenever I am looking at a stock. These questions break the mind-set of trying to find supportive bullish reasons and force me to actively seek out disconfirming evidence.
1. How can I lose money? versus How can I make money? If you focus on preventing the downside, the upside takes care of itself.
2. What is this stock not worth? versus What is this stock going to be worth? If you can identify the floor price or a cheap price for a stock, it’s far easier to make profitable decisions.
3. What can go wrong? versus What growth drivers are there? Rather than focusing just on the growth catalysts, think probabilistically, in terms of a range of possible outcomes, and contemplate the possible risks, especially those that have never occurred.
4. What is the growth rate being implied by the market in the current valuation of the stock? versus What is my future growth rate assumption? A reverse discounted cash flow fleshes out the current assumptions of the market for the stock. We can then compare the market’s assumptions with our own and make a decision accordingly.
Good investors demonstrate the flexibility to completely change their opinions if necessitated by the facts. They don’t hope they will be right; they keep evaluating why they might be wrong. A good source for disconfirming evidence (from which I have greatly benefited) is the analysis provided by vigilante investors on social media. These investors tend to express bearish or skeptical commentary on almost every single company they review. Another useful source for disconfirming evidence is short-seller or negative reports on the stocks I am contemplating buying or those on which I am bullish. Seth Klarman has spoken in the past about the benefit of this source of information:
From our experience, much long-oriented analysis is simplistic, highly optimistic, and sloppy. Short-sellers, by going against the long-term tide of economic growth and the short-term swells of public opinion and margins calls, are forced to be crackerjack analysts. Their work product is usually top-notch and needs to be. Short-sellers shouldn’t be reviled or banned; most should be celebrated and encouraged. They are the policemen of the financial markets, identifying frauds and cautioning against bubbles. In effect, they protect the unsophisticated from predatory schemes that regulators and enforcement agencies don’t seem able to prevent.16
Simplicity as a Way of Life
It is very simple to be happy, but it is very difficult to be simple.
—Rabindranath Tagore
To attain knowledge, add things every day; to obtain wisdom, remove things every day.
—Lao Tzu
Have you ever considered that there are way too many things that you need to evaluate day after day? Too many news items, too many questions, too many possessions, too many options for everything, too many stocks from which to choose, too many investment products that too many financial advisers want you to buy.
If that is the case with you, what you need to bring peace to your life is minimalism.
Minimalism is basically an extension of simplicity—you not only take things from complex to simple but also try to get rid of anything that is unnecessary. Few things in life really matter. Because few things matter, we must think carefully about what really matters to us and then commit our time primarily to those things. That way, we will remain focused on what matters rather than chasing the new thing, which probably will not really matter. The goal is not to have the fewest number of things but to have the optimal number of things.
Practicing minimalism has brought peace and simplicity to my life. I cherish it for the time it has freed up for me to focus on those aspects that are more meaningful to me—giving more time to my family, friends, personal health, and learning activities.
From traveling with less personal luggage, eating less junk food and sugar, and using fewer apps on my mobile phone to having fewer stocks in my portfolio, I have embraced minimalism as a way of