The easiest way of investing is to keep things simple. Here’s why

dheeru-1As technology companies took over the world and started transforming practically every industry, the world’s most famous investors ignored it. For all practical purposes, Warren Buffett and Charlie Munger missed the technology bus. They started to invest in Apple and IBM only recently, after the former transformed into a consumer durables company and the latter into a business services company. Why did they avoid technology? Is there anything that us mere mortals can learn from this?

Buffett and Munger have often said they did not invest in companies whose businesses they did not understand. A simplistic response would be that they missed out on a lot of great investments in the process. Despite having billions of dollars in investible surplus, they never made a dime out of stocks like Google and Amazon, which delivered more than 20X for investors over the years.

Yet, the duo is pretty sanguine about the opportunity lost. The reason for that is that they are still the most successful investors in the world. They are successful because they invested in businesses they understand. In hindsight it’s easy to say that they missed out on Amazon and Google. However, they also missed out on, Webvan, Myspace and other expensive failures. Since they did not understand the business, they were just as likely to invest in these duds as they were to invest in Amazon and Google. After all, the great media moghul, Rupert Murdoch, did buy Myspace for $ 580 million and then sold it four years later for $ 35 million. To avoid this 94% loss, all Murdoch had to do was to learn from Buffett and Munger and not touch investments he did not understand.

That’s exactly what we should do too.

No matter what product or service we’re buying, nothing impresses us more than features, jargon and complexity. Perhaps our modern technological world has mentally trained us to accept that most of the new wonders of the world are too complex to be understood by most people, and therefore, anything that is complex must be good. Unfortunately, in personal finance, this idea is fatally wrong. In the case of personal finance products, simplicity is not just something useful, it’s absolutely necessary. The reason is simple—if an investor does not fully understand a financial product or service, then he or she has no way of telling whether it is even minimally suitable, regardless of how good its seller may claim it to be.

How can you ensure you understand everything? The easiest way of doing so is to keep things simple. Unfortunately, the message we hear is the opposite. When I look at the market for savings and investment products, and see the resulting investment portfolios that people are collecting, it’s clear that there’s a strong need for a self-aware and aggressive minimalism. The impact of marketing messages is to promote the idea that your investment needs are best met by portioning out little bits of your savings into a large number of investments.

If you would want to be a part of the minority of sensible investors, then you should stick to a minimalist approach. Simplicity is needed not just in the types of investments that you use, but in your investment portfolio as a whole. Say someone has— and this is very common—an investment portfolio comprising 20 different investments of varying amounts and periodicities. In such a situation, even if those investments are simple, the whole situation is complex and hard to understand.

Ninety nine savers out of 100 need to do nothing but have a basic menu of a certain amount of emergency money, a hefty term insurance policy, and no more than three to four mutual funds, one for which can be a tax saver. Such a combination is simple, to the point that anyone can understand everything about it and track it to the extent required.