The world of finance in general and investing in particular can be extraordinarily complex. In addition, from time to time new innovative financial products of all kinds come onto the market that try to attract many savers, usually with poor results. Against this background, my recommendation is to focus on the KISS principle, which I will talk about in this article applied to investments and personal finances.
What is the KISS principle?
The KISS principle is an acronym that comes from the English phrase “keep it simple, stupid”, which we can translate as “keep it simple, stupid”. It is also a play on words since "kiss" means kiss in English.
The KISS principle is used mainly in the world of computer science and engineering, where it is necessary to minimize errors by trying to perform tasks effectively and efficiently while complicating as little as possible.
The KISS principle applied to investment and finance
The world of finance is one of the most complex that exists. Today, thousands of economists, mathematicians, physicists and engineers work every day in large investment banks to create new products to offer to savers around the world.
The problem is that this innovation is not focused on helping investors make better use of their savings, but rather what they are trying to do is find ways for these companies to profit at the expense of savers with commissions.
As James Montier said in his article “the 7 immutable laws of investment”, Which we already saw in this blog:
“The financial industry has perfected the art of turning simple into complex, and by doing so it earns commissions from it! If you can't see through the concept of investing and get to the heart of the process, then you probably shouldn't invest in it. "
What operations and products to avoid?
First of all, I would recommend dropping all kinds of leveraged trading as a general rule. Leverage will never turn a bad investment into a good one, but it can turn a good investment into a bad one. We have already seen in this blog how leverage is a double-edged sword in the article in which André Kostolany explains the reasons why we should not invest with borrowed money. Therefore, this implies fleeing most of financial derivatives, which are usually the fastest method to lose our money.
On the other hand, we must focus on investing only in products that we understand. Not only that, even if we understand what a share is, we should not invest in shares of a company if we do not understand well what it does and the competitive risks of the company and the sector. This is also one of the basic principles of value invesing.
Is it possible to obtain good returns applying the KISS principle?
Yes. What's more, some of the best investors in the world apply the KISS method to their investments. As a sample, I leave you two paradigmatic examples that the followers of this blog know well:
- Warren Buffett, the best investor ever
- Bestinver, the best management team in Spain
Both Buffett's investment style and Bestinver's are characterized by:
- Invest only in companies whose business model is easy to understand
- Run away from leverage
- Never invest short
As you can see, the simple investment is also the most profitable. So the next time a bank salesperson recommends you to invest in the latest in financial products, remember the KISS method and don't be fooled. Your savings will thank you.