We live in a complex and dynamic world with countless moving parts. When our surroundings are this complex, we often feel that the solutions to our problems must match this complexity in order to succeed.
It is easy to overlook simple solutions or feel they are inadequate for solving complex problems. The rest of this article illustrates how a simple solution to a complex problem can be just as effective.
Some time ago, a manufacturer of toothpaste had a problem with their production line. Due to the way the production line was set up, a toothpaste tube would often miss the box and the box would be sent down the production line empty.
After disgruntled wholesalers and customers started to complain, rather than redesign the production line, the company spent months and thousands of pounds on consultants and engineers to come up with a solution to the problem. Their answer was to fit a highly sensitive set of scales as part of the production line.
The scales would weigh the toothpaste boxes as they moved along the conveyor belt to be packed. When it detected a lighter box, without a toothpaste tube inside, a loud alarm would sound, and the conveyor belt would stop. Only once the empty box had been removed by one of the workers would the alarm stop, and the conveyor belt begin moving again.
After a couple of months, the managers of the firm were pleased with the results. The company hadn’t received any further complaints about empty boxes. However, when they phoned the factory’s production manager to let her know of the success, she informed them that since the second day of the scales and alarm being installed, she hadn’t heard it go off again.
Somewhat confused, the managers travelled to visit the factory. How were customers no longer receiving empty boxes, but at the same time the workers weren’t being alerted by the alarm to remove them from the production line?
Upon arrival they embarked on a tour with one of the workers and they immediately asked him why the empty box alarm was not sounding. At first, he looked confused and then he replied; “Oh that alarm, yeah we couldn’t bare the noise it kept making, so we just bought a desk fan from down the road”. Now utterly perplexed the managers rounded the corner and to their amazement they saw a simple desk fan blowing any empty boxes off the conveyor belt and into a well-placed basket.
So, after spending a huge amount of time and money coming up with a sophisticated and complex solution, a simple desk fan had proved to be just as effective.
Simplicity in investing is also just as effective, but our human instincts often draw us towards complex solutions and away from simple ones.
We see complex as sophisticated and therefore optimal. However, complex and sophisticated by their nature are difficult to understand and open us up to far more unintended consequences and possibilities. Conversely, simple solutions create transparency making it easier to understand exactly what we are doing and why.
Complex also suggests that there is more effort involved. Like most disciplines in life, it is easy to assume that the more effort you put into something, the better the result. Unfortunately, trying harder and applying more time to investing doesn’t always get you a better result. In fact, there is a lot of research indicating that making fewer decisions and changes can be far more beneficial in the long run.
By their very nature, complex solutions aim to harness a greater number of factors and therefore create a sense of control. However, financial markets are almost impossible to influence, and all complexity does is create an illusion of control.
One entity in the investment world that focuses on simple rather than complex is the Public Employees’ Retirement System of Nevada (NVPERS). This fund manages the pensions of over 191,000 working and retired people living in the US state of Nevada and at the end of June 2019 had a value of $41 billion.
In the competitive US pension market, NVPERS is one of the best performing pension funds. The fund has an annualised return of 9.4% since it began 34 years ago.
You would expect that a fund of this size and with this performance track record would have teams of investment professionals running complex investment strategies.
Instead, the fund is run single-handedly by one man, Steve Edmundson. This is possible because the investment philosophy and process focusses on low complexity and just a few key principles and objectives. The fund takes a long-term approach concentrating purely on asset allocation and regular rebalancing to achieve its objective.
The NVPERS is just another reminder that even in the most complex worlds, a simple solution or approach can be just as effective as a complex solution.
General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.