Investing is not complex, nor is it easy

In the context of recently paying $1.5bn for FlightSafety, Warren Buffett, in his 1996 letter to shareholders, emphasized that intelligent investing is not complex. Flightsafety’s technology might be complex but the evaluation of the business is relatively straightforward.  It was the dominant supplier of flight training outside of government and major airlines. It had the best trainers and an excellent team of managers.  It had a deep moat that is dangerous for potential rivals to try and cross because it has the reputation, the technical knowhow and the facilities, a combination hard to replicate.

While intelligent investing is not complex it is far from easy.  Not everyone has the focus, inclination or the business knowledge to be able evaluate matters such as strategic positioning, and competence and integrity of leaders.

Many would rather focus on squiggles on a chart, guess the mood of the stock market or get a feel for the next big thing (is it lithium or online payment firms or bitcoin this month?) than look at businesses.  To invest successfully you don’t need beta, option pricing theory, or modern portfolio theory (And I authored the best selling corporate finance textbook on this stuff! – but, after explaining the theory, I do take a sceptical line about practical application as well as theoretical problems).

Buffett tells us that “what an investor needs is the ability to correctly evaluate selected businesses.”

The word “selected” is very important. You cannot be an expert on every company, or even many businesses.

But that doesn’t stop you from being an intelligent investor. “You only have to be able to evaluate companies within your circle of competence.  The size of that circle is not very important; knowing its boundaries, however, is vital.”

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