Thread by @arjunnarsi

warning: Long thread @Prashanth_Krish @dmuthuk
(applicable for long only style)

Occam’s razor, immutable laws, investments
Occam’s razor is a problem-solving principle (a guide / heuristic device) attributed to William of Ockham (c1287-1347). #pms #investing @Krishna49653296

The principle states that “Entities should not be multiplied unnecessarily”. Over time it has been used by scientists, logicians and thinkers to choose between competing answers to a problem and has taken more understandable and unrelated forms like:

-if you have 2 explanations the 1 that requires the fewest assumptions is most likely to be correct
-start with the simplest solution, and as you get more data, move to the next simplest
-the more assumptions you make the likelier you are wrong
-and my favorite “keep it simple”

In investing you could say while choosing factors to explain price performance use as minimum number of factors as possible. While it is fairly intuitive to understand these subjectively, it surprises you even more when you calculate the effects mathematically.

Assume your decision to buy a stock ABC is dependent on you getting all 7 factors right
1) Covid settling down in x months
2) Y amount of fiscal spending
3) that specific sector being the beneficiary of a rebound in the economy
4) valuations

5)market sentiment at the time of buying
6) FX impact
7) Oil impact.
Assuming one can get each of these (exclusive variables say)right 75% of the time (I’m being generous),the chances of getting all of the 7 right at the same time is 13%! You are better off tossing a coin

OR you can do even better by focusing on the 1 or 2 immutable theories of investing with a higher probability of success.

What are these immutable laws/ theories?

An important characteristic of these laws is that they have stood the test of time.The longer the better. #nifty

A law which has been in existence for 100 years is more robust than a law/theory in existence for only 10 years.Therefore, most likely these laws are found near the very base of the knowledge tree in any field of your endeavor, not at the cutting edge of that field.

Theory of consrvn of energy(1840s)
The theory of evolution(1859)
DNA replication,in understanding us(1860 DNA discovery,double-helix 1953)
force of electric charges(1820-1830)

these theories once formulated,require few patchworks to keep explaining empirical observations.

In long only investment style,
i) this fundamental theory is the nature of business(been around for a few decades and not yet disproved) .You can go on to build all kinds of bells and whistles around it of course and try to sharpen your tool, but the base is nature of business

Note that this "nature" is not a touchy-feely gooey stuff. It can be defined mathematically, described and measured and compared across other businesses. However,this does not ensure you will make extra normal returns it only ensures there is no permanent loss of capital.

ii)A key difference between science & a pseudoScience like investing is that investing is not deterministic its probabilistic.A 2 +2 is always = 4, every day of the year- deterministic. But good business is not always= to good returns, it only works on an average.-probabilistic.

Therefore, we can’t just buy 1 business with the right quality and nature. We need to diversify to have a reasonable chance that probabilistically the odds work in our favor if we pick 15 such businesses. But this is just the 1st step.

iii)Also flows from 2 above,investing has a twisted logic that whether one is right or wrong is decided by what the rest of the market does after you have bought the stock.Therefore,one needs a simple tool(one that itself follows Occam’s razor) to tell you the mood of the market

In summary,I think if you can do these 3 things well. Buy a bunch of quality businesses & respect price action(not just B&H),you should on an avg have good outcomes.This does not mean you do not build on this- remember we have to move on to the next simplest. I've added to this

But as a rule only add variables 2 your investment process if the new ones are also time tested &you've attempted to falsify.1st do no harm should be the mantra-"Primum non nocere "-the hippocratic oath that doctors take. take it.Because the more u add the more you are wrong.end