The Power of Simplification

May 30, 2008

One of the fundamental problems that every value investor faces today is that there are too many financial reports, too many SEC filings and too many models… but we only have 24 hours a day. In the past, I used to work so hard absorbing so much information and so much accounting footnotes and still end up somewhat confused in the end. I would have a cluttered file and a cluttered desk, and still don’t have enough information to make up my mind and place my bet.

On the contrarily, successful investors like Warren Buffett are the masters at the art of simplification. They have a simple framework, a clear focus, and a strict discipline. They focus on what is knowable and what is important. They ignore all the noise and smoke. They don’t get confused at too many unimportant readings and models. And that’s how they become extremely focused, extremely disciplined, and extremely successful.

The amazing power of simplification was discovered hundreds of years ago in Shaolin Temple, China. The Buddhist monks there learned that a simple and focused mind can propel the human body to produce amazing power and strength during Kung Fu fights. This discovery of theirs in the primitive science of human body would later become the foundation of oriental Zen training.

Value investing is the martial art of the mind. In my opinion, there are three basic steps in any discipline of mental art:

(1) Beginner’s Step: The mind starts with a thin and small book of basics.

(2) Advanced Step: The mind accumulates more and more details and becomes a thick and huge encyclopedia.

(3) Enlightenment Step: The mind penetrates and cuts across all the details, and boils down the thick encyclopedia back into a thin booklet pointing direct at the heart of the matter.

This mind process is similar to how we help our kids to solve puzzles: You start with one piece of the puzzle. You then collect more and more pieces. And finally you put together all the pieces to form one big piece from which you see the light.

Only after the third enlightenment step, can the mind start to see the big picture and become a master. The enlightenment or simplification step is what separates true masters from the rest of us. And there is usually no giant leap but a series of small steps and continuous efforts.

In our research meetings at, we always try to focus on the first step to point to the right direction and the third step to get back to the basics. It’s just like the powerful KISS principle in America: “Keep It Simple, Sweetie!”

With that said, we also have to remind ourselves of another Universal principle: the law of yin-yang, that is, there is a flip side to every issue. So in terms of simplification, we have to remember that everything should be made as simple as possible, but not simpler. Einstein said that, if he didn’t, he should.

So the details in the second step is necessary and important. But it is the capacity to simplify and focus that leads to master hood.

What do you think? I appreciate your comment via this web form. (Brian Zen, CFA)