Simplicity is beauty Henry Ford said: "My effort is in the direction of simplicity. People in general have so little and it costs so much to buy even the barest necessities (let alone the luxuries to which I think everyone is entitled) because nearly everything we make is much more complex than it needs to be. Our clothing, our food, our household furnishings—all could be much simpler than they now are and at the same time be better looking." It is easy to say simplicity is beauty but beauty needs efforts. If you are not simple and beautiful swans, you have to get the ugly and complicated covering over you away! But simplicity is not easiness. Do we know the simplicity enough to make a simple but very profitable trading/investing business? Let's put the efforts on it for sometimes! Extraordinary hypothesis is common in reality Nearly all businesses have within them chunks of business with widely varying profitability. The 80/20 Principle suggests something quite outrageous as a working hypothesis: that one fifth of a typical company’s revenues account for four-fifths of its profits and cash. Conversely, four-fifths of the average company’s revenues account for only one-fifth of profits and cash. This is a bizarre hypothesis. What is extraordinary is that when it is tested, the hypothesis generally turns out to be correct, or not very far wide of the mark. The truth is that the unprofitable business is so unprofitable because it requires the overheads and because having so many different chunks of business makes the organization horrendously complicated. It is equally true that the very profitable business does not require the overheads, or only a very small portion of them. You could have a business solely composed of the profitable business and it could make the same absolute returns, provided that you organized things differently. Simplicity is beauty And why is this so? The reason is the same. It is that simple is beautiful. Business people seem to love complexity. No sooner is a simple business successful than its managers pour vast amounts of energy into making it very much more complicated. But business returns abhor complexity. As the business becomes more complex, its returns fall dramatically. This is not just because more marginal business is being taken. It is also because the act of making a business more complex depresses returns more effectively than any other means known to humanity. It follows that the process can be reversed. A complex business can be made more simple and returns can soar. All it takes is an understanding of the costs of complexity (or the value of simplicity) and courage to remove at least four-fifths of lethal managerial overhead. The complexity scares most of market players. They hate the complicity so that they go opposite oversimplify everything in trading and investing, which didn't make simple profit but very complicated shirt-loss results. Every loser has his own stories in details. Simple goal, road map, and process are necessary How could we make our trading/investing business simple? It seems we could structure the simplicity in the following ways: 1. Get goals clear, simple, practical, achievable, and realistic 2. Get road map to approach the goals as simple as possible 3. Make a simple but effective and efficient processes to the goals by following the road map 4. At each step or stage to review what we have done and repeat the cycle from step 1 again. Why do we want simplicity? It reduces the costs and add value for business which is why business is setup! Simple is not small Does this mean that small is beautiful? No. This is definitely the wrong answer. There is absolutely nothing wrong with the belief long held by business leaders and strategists that scale and market share are valuable. Extra scale gives greater volume over which to spread fixed costs, especially the overhead costs that make up the share of all costs for efficient. Market share, too, helps to raise prices. The most popular firm, that with the highest market share, the best reputation and brands and the most loyal customers, should command a price premium over lower share competitors. Yet why is that larger firms are losing market share to smaller firms? And why does it happen that in practice, as opposed to theory, the advantages of scale and market share fail to translate into higher profitability? Why is it that firms often see their sales mushroom yet their returns on sales and capital actually fall, rather than rise as the theory would predict? The cost of complexity The most important answer is the cost of complexity. The problem is not extra scale, but extra complexity. Additional scale, without additional complexity, will always give lower unit costs. To deliver to one customer more of one product or service, provided that it is exactly the same, will always raise returns. Yet additional scale is rarely just more of the same. Even if the customer is the same, the extra volume usually comes from adapting an existing product, providing a new product and/or adding more service. This requires expensive overhead costs that are usually hidden, but always real. And if new customers are involved it is far worse. There are high initial costs in recruiting customers and they generally have different needs to existing customers, causing even greater complexity and cost. We may not have the cost of complexity of big firm now. But it is better we know the cost of complexity now. Internal complexity has huge hidden costs When new business is different to existing business, even if it is only slightly different, costs tend to go up, not just pro rata with the volume increase but well ahead of it. This is because complexity slows down simple systems and requires the intervention of managers to deal with the new requirements. The cost of stopping and starting again, of communication (and miscommunication) between extra people and above all the cost of the ‘gaps’ between people, when partially completed work is set down to await someone else’s intervention and later picked up and passed on into another gap. All these costs are horrendous and all the more insidious because they are largely invisible. If the communication needs to straddle different divisions, buildings and countries, the result is even worse.