Singing the Right Tune

When I started learning guitar many years ago, I believed that people who sang and wrote songs had a special skill that others couldn’t possess. The top songs were not catchy simple chord patterns, but special things that only top musicians knew. Their accomplishments could not be emulated.

After many years I started to see that most songs were a compilation of chord patterns that simply repeated. For example, ABACAB is a song made famous by Phil Collins and his band Genesis. It is a formula for music and songs. 

I wont bore you with the a detailed explanation of the pattern. 

While ABACAB is not the only way to remember or write songs, music theory is basically a bunch of numbers with its own logic and patterns. 

When you first come to the stock market it can look very intimidating. You struggle to understand many aspects and these misunderstandings can cost you dearly. Hence the reason why most if not all investors lose money to start with. Alas, give money to ‘experts’ and they can apply their secret formula to making money!

But the results are similar to the music industry. A small group of musicians make a lot of great songs and get the lion's share of downloads. Most sing at the pub for a few bucks trying to make it big. And a few get a one hit wonder and then disappear. 

It’s the same with fund managers. Some have genuine talent and are able to produce above average returns most years. Some have a great year or two and then fade into obscurity (thus showing it was luck not skill) and many spend years underperforming the market. 

But after playing guitar for a while and learning more about music, I came to see markets in a similar way -  while there can be a lot of complexity (think is options, covered calls, straddles, and all the silly language like alpha, beta and other Greek letters), you don’t necessarily need to be able to understand all of it to make good returns. Most great performers understand that simplicity is the real skill. Same for traders. It is no better (and there is no correlation) to use 10 different technical indicators than 2 simple ones. 

As I have said before, the markets go up or down, that’s it. And we know it goes up over time. So not exactly rocket science.

The best songs are usually made from a few chords and a simple melody - the Beatles songs are very simple that most beginner guitarists can play them after a little practice.

The best investment strategies are the simplest. If you have to spend inordinate amounts of time trying to figure out what the edge is, it is probably not worth it and it probably isn’t an edge. 

So remember that simplicity wins in most cases. If you do this, you will most likely outperform most fund manager.