Simplicity

Mohnish Pabrai has compounded money at 29% annually for eight years in his investment partnership. He recently stated in an interview with the Motley Fool that “Usually two to three variables control most of the outcome. The rest is noise. If you can handicap how those key variables are approximately likely to play out, then you have a basis to do something.” This is such a simple idea but investors do not apply it in their endeavors. Every company has key variables and as Mohnish so eloquently put it “If I find myself reaching for Excel, it is a very strong sign to take a pass.” If one cannot figure out the key variables, look at a different company, do not stray outside one’s circle of competence.

“There are an infinite number of facts that you can learn about a company, but there are usually two or three very important variables that make the company succeed or fail. A lot of Wall Street gets so bogged down in the minutiae and details that it misses these two or three big things that make or break the investment. Part of what worked for me over the years is being able to distinguish what matters from what doesn’t. That’s one of Buffett’s great gifts. He focuses on the critical issues involved in analyzing. I don’t pretend to be able to do it like he does but it’s one of the most important things you can do.” – Wallace Weitz

[9/20/07] From a CIA report, "Once an experienced analyst has the minimum information necessary to make an informed judgment, obtaining additional information generally does not improve the accuracy of his or her estimates. Additional information does, however, lead the analyst to become more confident in the judgment, to the point of overconfidence. [via wreck_of_m_deare@chucks_angels]