KISS

In 1987, I took an advanced options theory class with a legendary Wall Street quant. The young wanna-be traders filed into a classroom and noticed that there was only one word written on the blackboard: “KISS”. We imagined that it was some sophisticated anagram that would help us utilize the Black-Scholes pricing model to make money for our firms. Instead our instructor said, “Do you know what that word means? It means KEEP IT SIMPLE, STUPID!” That’s it? Yup, that was it and it was probably the best advice I received before I stepped on to the trading floor.

I couldn’t help but smile when I heard another legendary investor invoke “KISS” recently in an interview in the New York Times (2/17/08). David F. Swensen, who has run the Yale endowment since 1988 with amazing success (the endowment earned 28 percent in its last fiscal year, which ended June 30, beating all other endowments. It finished the year with $22.5 billion), reminded us earlier this month that keeping it simple may truly be the brass ring of investing after all.

Oh sure Swenson and his staff comb through sophisticated investment strategies employed by genius financial engineers, but he recommends that most individual investors eschew these sexy model-driven portfolios and instead rely on tried and true investment rules of thumb like diversification, low costs and rebalancing that is in line with your long-term goals. “The only people who should get involved [with esoteric strategies] are sophisticated individuals who have significant resources and a highly qualified investment staff.” I have written about Swenson previously after he published his book, “Unconventional Success: A Fundamental Approach to Personal Investment” in 2005, which essentially paid out his KISS strategy for investors. At that time, I noted that Swenson was happy to pull back the curtain and demonstrate that the so-called “Wizard” was simply not there.

In fact, if investors were able to act without emotions and stick to their game plans, they would find far greater success than trying to follow self-promoting Wizards like Jim Cramer, the CNBC host, who lure you into thinking that there is magic in the world of investing. “There is nothing that Cramer says that can help people make intelligent decisions,” Mr. Swensen said. “He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World.” Amen to Mr. Swenson and his healthy reminder that in a very complicated world, sometimes the reminder of “Keep it Simple, Stupid” can reap terrific rewards.