In recent months I have, hopefully, shown you how different investing lessons can be learned from activities as diverse as eating marshmallows, buying trousers and assembling Ikea furniture. This week, I am looking at one man’s approach to problem solving that also helps us to navigate the modern financial world.
He is no modern ‘Flash Boy’ as depicted in the book I reviewed in my last blog. William of Ockham (c. 1287 – 1347) was an English Franciscan friar and scholastic philosopher who lived in the Surrey village of the same name and gave us the misspelled ‘Occam’s razor’. And Ockham should certainly be proud of him.
My own town of Spalding doesn’t quite hit the same heights on the philosophical map of the world, although I would be delighted to be corrected. We do have a blue plaque commemorating the visit of Jean-Jacques Rousseau almost 250 years ago, but he was here for just nine days.
William was no medieval Victor Kiam – the man who loved his Remington electric razor so much he bought the company. William was clean shaven, as was his tonsure, but ‘razor’ in this context is a rule of thumb in philosophy that rules out unlikely explanations for problems. It simply states that the most likely explanation for a problem is the one with the fewest assumptions. In other words, the most obvious when you think logically. And I’d wished I’d thought of applying it when I mislaid something a few years ago.
Unfortunately for me, the ‘something’ in this case was my youngest daughter who was seven at the time. My wife and eldest daughter were out for the day, and I was somewhat engrossed in setting up our new TV when I noticed she had gone.
So I followed a different philosophical maxim, ‘if in doubt, panic!!!’
I shouted after her, but there was no reply in the home and having pegged it up and down the street outside there was still no sign of her. I returned to the house and was on the verge of calling up a ‘posse’, when I noticed the cardboard box for the new TV in the middle of the lounge. I opened it to find this peaceful scene.
So, I’d missed two pretty obvious things. Given it was most likely she was in the house, it did not occur to me that she wasn’t answering me because she was asleep – I’d automatically assumed the less likely worse-case scenario. And a large cardboard box to a child is manna from heaven.
In the world of investing Occam’s razor is an invaluable tool in all sorts of situations, from debunking conspiracy theories to interpreting news. But a very simple application is perhaps better described with the phrase, ‘if it’s too good to be true, it probably is’.
This simple analysis raises the red flag for some of the poorer investment schemes. I deliberately keep an old email address alive just to capture the latest too good to be true offers of wonderful growth on land in Brazil, vintage wine or carbon trading schemes.
And on a larger scale, there have been outright frauds perpetuated where the returns offered could not reasonably be possible – not only were the returns too high, but too consistent and, therefore, likely to be fake. However, in order to understand this you also needed to understand all the underlying investments – and few do.
Equally, there are other legitimate investments where the returns available can only imply greater risk, whatever the marketing material might say. That is not necessarily a problem, where it is appropriate, but not where the return is being relied upon – or where the underlying instrument is poorly understood.
It is important to appreciate that I am not making a case against investing – far from it. The case for investing to meet long term financial goals is very sound. But before making our choices, we need to use as many tools as possible to increase our chances of success. And Occam’s razor is another weapon in our armoury.
Next week I will be revealing all about Fern Britain. Now before you think I am about to challenge the hegemony of OK!, Hello! and Bella, the clue is in the spelling.
- past performance is no guide or guarantee of future returns;
- the value of stock market investments can rise and fall over time, so it is quite possible to get back less than what you put in, depending upon timing