Bill Ackman is quite possibly one of the world’s best investors. Having co-founded the hedge fund company Pershing Square in 2003, he has since led the firm to annualised returns of some 21%. Every $1,000 invested with Ackman back then would have become more than $8,000 today. According to a recent profile of Ackman by Bloomberg, there’s a funny little investing metric which is used regularly at Pershing Square: The return on invested brain damage. Bloomberg describes it simply as “is this deal worth the headache?” As a hedge fund manager, Ackman’s investing strategies and theses might often be…
Bill Ackman is quite possibly one of the world’s best investors. Having co-founded the hedge fund company Pershing Square in 2003, he has since led the firm to annualised returns of some 21%. Every $1,000 invested with Ackman back then would have become more than $8,000 today.
According to a recent profile of Ackman by Bloomberg, there’s a funny little investing metric which is used regularly at Pershing Square: The return on invested brain damage. Bloomberg describes it simply as “is this deal worth the headache?”
As a hedge fund manager, Ackman’s investing strategies and theses might often be very complex and way more than what individual investors (folks like you and me) can handle. But that interesting little metric – the return on invested brain damage – he apparently likes to use underscores a very important thought about investing: It’s not always complexity or difficulty which can generate the best returns.
Warren Buffett said as much when he once drew analogies between the world of business and the Olympics (emphasis mine):
“But the interesting thing about business, it’s not like the Olympics. In the Olympics, you know, if you do some dive off the – on a high board and have four of five twists – on the way down, and you go in the water a little bad, there’s a degree of difficulty factor. So you’ll get more points than some guy that just does a little headfirst dive in perfectly.
So the degree of difficulty counts in the Olympics. It doesn’t count in business. Now, you don’t get any extra points for the fact that something’s very hard to do. So you might as well just step over one-foot bars instead of trying to jump over seven-foot bars.”
Edgerton Welch, who was managing the equity fund of Citizens Bank & Trust Co., a small bank in the U.S., held one of the best 10-year investing track records in the country in the early 1980s (he actually came in third in 1980).
What’s his secret? A small Missouri-based publication called the Bulletin Journal once tried finding out by interviewing Welch (emphasis mine):
“Citizens Bank’s secret, said Edgerton Welch, board chairman and chief executive officer, is the weekly Value Line Investment Survey. Welch, 72, said he ignores all the stocks except those that Value Line has ranked No.1 [Value Line is an investment research publication; shares ranked No.1 are the cheapest shares around in the market according to the service], which means they should have the highest performance during the next year.
Welch said stocks that catch his eye are then researched by E.F. Hutton or Merril Lynch, Pierce Fenner & Smith Inc., the two brokerage houses with which Welch trades.
Welch said he prefers each of three investment sources to recommend a stock and won’t purchase one unless it is suggested by two of the three.”
That’s pretty much it for Welch’s investment process. It was nothing fancy, and nothing complicated. And for the record, despite his penchant for cheap shares (a hallmark of value investors), he did not even know who Benjamin Graham was.
Sticking to simplicity is not just for an investment process. It could also be about investing ideas. For instance, a pure-play food & beverage outfit like BreadTalk Group Limited (SGX: 5DA) would present a much simpler case to understand than a company like engineering outfit Singapore Technologies Engineering Ltd (SGX: S63).
The former runs its namesake bakeries and other F&B outlets whereas the latter’s involved in four distinct business segments, namely Aerospace, Electronics, Land Systems, and Marine. It’s tough enough to grasp each segment on their own – the difficulty compounds when one has to think about how each segment interacts with the other and where they fit in within the company.
Although it might be a sign of great analytical ability on the part of an investor to be able to make sense of ST Engineering as a whole, that endeavor might hardly be worth the effort as compared to spending time on a company like BreadTalk.
Over the past five years since the start of 2010, the bakery owner has seen its shares move up 170% in price. In contrast, ST Engineering is up a mere 3% and has even lost to the market in the process. The SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the market barometer the Straits Times Index (SGX: ^STI), is up by 12% over the same timeframe.
Sure – the two companies, BreadTalk and ST Engineering, were cherry-picked. But they’re meant to show that complexity doesn’t necessarily win in investing. Keeping things simple can produce great results too.
The next time you come across an exceedingly complex investing strategy or idea, think back to that investing metric you should pick up from Ackman: the return on invested brain damage. Is it worth all that trouble?
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Chong Ser Jing doesn’t own shares in any companies mentioned.