In my former corporate life, I frequently lamented needless complexity with the refrain, “They have a never-ending ability to turn simple stuff into rocket science.” At one point, a CEO made the infamous statement that “complexity is our friend,” releasing a torrent of complexity from minions aiming to please. It is my belief that complexity impedes speed while increasing errors. Maybe I was just too dumb to understand.
Then a few years ago, I ran into this bit of wisdom (see below) from one of the smartest guys ever to set foot on the planet.
Steve Jobs, another pretty smart guy, remarked, “Simple can be harder than complex— you have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”
Why do humans seemingly desire unneeded complexity? The following might contribute.
- Peer pressure — nobody wants to look dumb, so when someone explains something complicated, we might pretend to understand. This is the source of many financial scams.
- Expertise — experts are respected but can use complex language and unfamiliar jargon. True expertise includes the ability to explain in simple terms to those not versed in the discipline.
- Feeling useful — we often complicate our lives and waste money with unnecessary actions. How can doing nothing be better than doing something? Frequently, as in golf, less is more.
- Bureaucracies — the more people involved in a decision, the more likely a complex outcome.
- Computers — given Einstein lived prior to the computer era, they certainly can’t be blamed for creating a complexity problem, just enabling it.
Whatever the causes, complexity abounds. The KISS (Keep it Simple Stupid) principle has fallen by the wayside due to political incorrectness. Yet its wisdom remains.
From an investing perspective, following these simple principles is likely to lead to superior results.
- Invest in companies with decent valuations that look like they can be part of the portfolio for more than five years. The longer the better.
- Focus valuation criteria around cash flow.
- Build portfolios with representation from multiple sectors for broad diversification.
- In non-registered accounts, I apply leverage by selling long-term puts on companies that meet the above criteria.
I am not perfect in this approach, but apply consistency towards it. Even when things seem complex, following a consistent approach helps to simplify.
As a recent example, in late October, I set out to increase technology holdings in my newsletter account. Being a value-style investor, I had missed returns on many of the large tech and speculative companies the market has been enthralled with. With the aid of my two favourite websites, I looked at the financial results of numerous tech companies. How does a value investor invest in technology where most company valuations are astronomical? Yet, I uncovered a package of four small Canadian tech companies with exceptional cash flows.
Evertz Technologies, Photon Control, Celestica and Converge Technologies all looked promising. Have you heard of them? I suspect not, given they run business-to-business rather than consumer-oriented operations, haven’t been in the news and are much smaller than Tesla, Zoom, Netflix or Shopify.
They also have immensely better cash flow valuations. In the order listed, they had free cash flow yields of 13.8, 6.8, 20.9 and 30.3 per cent. This compares with 0.2, 0.9, 0.3 and 0.1 per cent for the high-flyers mentioned.
Given the higher risk arena of technology, I chose to buy a small position in each, totalling about the same amount as one normal-sized position in the portfolio. At the time of writing, just over a month after purchasing, they are up 9.4, 19.5, 31.3, and 49.0 per cent, respectively. This kind of return would have most market participants selling and on the hunt for replacements.
However, the average 27 per cent gain only brings their average free cash flow multiple down from 18 to 13 per cent. Still way above average and exponentially greater than the high-flyers mentioned. All four could become permanent fixtures in the portfolio.