(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:
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).
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.