Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition

Chapter 4. On Simplicity: How to Come Down to Where You Ought to Be

We live in a world where a seemingly infinite amount of information is available to just about everyone. Financial facts, figures, and theories once available only to investment professionals are now at the fingertips of individual investors. No longer must the investor depend on the services of an investment professional. Buy and sell to your heart's content over the World Wide Web. The information age has truly transformed the world of investing.

Today, investors are bombarded on all sides by investment information—whether they want it or not. Complex quantitative analysis, real-time stock quotes, and the like are available at any local library, if not through a personal computer. Investors now ask their mutual fund managers about their "alpha"; they want to know a fund's "Sharpe ratio"; they read articles about "complexity theory" and "behavioral finance."

Yet this barrage of information has not necessarily translated into better returns. Instead, we focus on the quantity of data. We want more sophisticated and complex information. Presumably it will enhance our returns. Our world may or may not be any more complex than it has ever been, but we have certainly made the investment process more complicated. In today's environment of a mind-numbing information flow that is at once electrifying and terrifying, where is the intelligent investor to turn?

Turn to simplicity. The great paradox of this remarkable age is that ...