Charles Martineau

(full dis­clo­sure: this post was highly influ­enced by the work of Garr Reynolds from www.presentationzen.com)

On my sec­ond and recent trip to Japan, I have come to the real­iza­tion that the stud­ies of Zen arts (or the phi­los­o­phy of Zen) can teach us a lot about invest­ment but more par­tic­u­larly to our invest­ment approach that we advo­cate at Inde­pen­dent Investor. With this arti­cle, I hope to talk about three con­cepts of Zen to help lit­tle investors to remind them on how to become and remain a suc­cess­ful inde­pen­dent investor over time. First, what is Zen? In a sim­ple sen­tence, the phi­los­o­phy of Zen is the need for per­sonal aware­ness and the abil­ity to see and dis­cover with a prac­ti­cal con­cern of the “here” and the “now”. Zen helps to find order and sim­plic­ity within chaos. Zen is a neces­sity to Japan­ese cul­ture since it helps to find peace in a present moment in time in one of the most crowed and dense urban envi­ron­ment in the world. Look at the two pic­tures below:

(Chaos in Shibuya Tokyo Japan)

(Zen gar­den in Japan)

Now com­pare the two pre­vi­ous pic­tures with this:

(Stock Exchange)

(War­ren Buffett)

I am not stat­ing that Buf­fett equals Zen but he acknowl­edges the impor­tance of stand­ing away from the action and chaos of mar­kets and focus on the now: the true fun­da­men­tal value of a par­tic­u­lar invest­ment. This is not an arti­cle to learn how to become like Buf­fet but the neces­sity to acknowl­edge how the stud­ies of Zen can help us remain on the side­lines of daily stock mar­kets in order to become a suc­cess­ful inde­pen­dent investor.

Three prin­ci­ples of Zen for the inde­pen­dent investor

The three prin­ci­ples of Zen to be applied by the inde­pen­dent investor are: Restraint 拘束(Koosoku), Sim­plic­ity 簡素(Kanso), and Nat­u­ral­ness 自然(Shizen). Each of these prin­ci­ples can help any lit­tle investor becom­ing an inde­pen­dent investor and remain one over time.

Restraint 拘束 – the prepa­ra­tion stage

In Zen arts, the con­cept of con­straint or restraint is nec­es­sary. It relies on find­ing the core mes­sage that is impor­tant to evoke and ignore what is not. Take for instance Japan­ese poems known as Haiku (俳句). A Haiku has a long tra­di­tion of strict guide­lines yet it cap­tures both the details and the essence of a moment with 17 syl­la­bles or less. Restraint is key in finance. When I hear first time investor say: “What is the best way to invest and make money?” I try to explain to them that this is not the ques­tion to ask to be suc­cess­ful at invest­ing money. This ques­tion relies on too many invest­ment objec­tives. Mak­ing money should not be an objec­tive. It should be a mean to achieve a par­tic­u­lar goal such as retire­ment in 20 years, buy­ing a house, etc. Just like Haiku where you must evoke one core mes­sage, you must restrain your­self at iden­ti­fy­ing the core pur­pose of invest­ing money and not invest to sim­ply make money. Doing so, it helps the investor to focus its invest­ment strat­egy (such as asset allo­ca­tion, time hori­zon, and the amount of money you must save) to achieve a par­tic­u­lar desired goal — though you may have mul­ti­ple goals each with dif­fer­ent strategies.

Sim­plic­ity 簡素 – the invest­ment design stage

A key tenet of the Zen aes­thetic is sim­plic­ity. The famous Japan­ese gar­den designer, Dr. Koichi Kawana says that“Simplicity means the achieve­ment of max­i­mum effect with min­i­mum means.” So how can a lit­tle investor like you and me achieve the max­i­mum invest­ment return for our finan­cial goal with min­i­mum means? At Inde­pen­dent Investor we have stressed the neces­sity for lit­tle investors not to be afraid to become an inde­pen­dent investor if they are will­ing to fol­low these sim­ple invest­ment rules:

(1) Start sav­ing now, not later! Time is money. The only sure guide to wealth is reg­u­lar savings.

(2) Every dol­lar counts– elim­i­nat­ing invest­ment expenses is very important.

(3) Invest across the stock mar­ket gen­er­ally (what oth­ers call pas­sive or index invest­ing) and con­trol only what you can con­trol (asset allocations).

(4) Direct pur­chas­ing of bonds (espe­cially provin­cial gov­ern­ment bonds for Cana­di­ans) rather than through col­lec­tive invest­ment vehicles.

(5) Opti­miz­ing the use of your tax deferred accounts (RRSP/TFSA for Cana­di­ans) – Stiff the tax collector!

Dr. Bur­ton Malkiel of Prince­ton Uni­ver­sity says that the rules for achiev­ing finan­cial secu­rity through sav­ings and invest­ment are extra­or­di­nar­ily sim­ple. It may require a small degree of self-sacrifice, dis­ci­pline, and stick-to-itiveness but hav­ing suc­cess as a lit­tle investor is strik­ingly easy when fol­low­ing the sim­ple rules stated above. At last, “every­thing should be made as sim­ple as pos­si­ble” preached Ein­stein when con­sid­er­ing com­plex mod­els in phys­i­cal sci­ences. So is finance.

Nat­u­ral­ness 自然 – sur­viv­ing stage

One ethos of Zen con­cerns the nat­ural beauty of gar­dens, poems, and paint­ings. This nat­ural beauty can only beex­pressed through the pro­hi­bi­tion of the use of elab­o­ra­tion of design over refine­ment. The Zen scholar Daisetsu Suzuki said: “…the first prin­ci­ple of the art is not to rely on tricks of tech­nique. Most swords­men make too much of tech­nique, some­times mak­ing it their chief con­cern…” What this can teach us on invest­ment is that investors face mar­ket move­ment on a daily basis and finance news spec­u­la­tions where the media, your friends, golf part­ner, and neigh­bors amplify what asset class or stock the investor should invest in, should he or she buy or sell, what stocks or indus­try that are hot, etc.  Hence, investors face daily ques­tion­ing on its port­fo­lio assets, asset allo­ca­tions, and per­for­mance. Don’t make the media or your entourage your chief con­cern as would say Daisetsu Suzuki on how to improve invest­ment tech­niques to increase your port­fo­lio per­for­mance. Rather, you should rely on what has a direct impact on the true nature of your port­fo­lio per­for­mance and refine it over time such as:

(1) Trade lit­tle (with a dis­count broker)

(2) Rebal­ance your port­fo­lio (if necessary).

(3) Div­i­dend Re-Investment (DRIP) and reg­u­lar savings.

(4) Beware of psy­cho­log­i­cal pit­falls (i.e. over­con­fi­dence, illu­sion of con­trol, etc.)

(5) Your capac­ity to risk over time (linked to your age).

Con­clu­sion

In this short arti­cle, I wanted to use three con­cepts of the stud­ies of Zen to help lit­tle investors by remind­ing them the sim­ple rules of invest­ing. The con­cept of restraint, sim­plic­ity, and nat­u­ral­ness can be use to remind investors on the neces­sity to have a clear invest­ment goal, design a sim­ple port­fo­lio, and focus on what directly impacts your port­fo­lio return and risk.