Some people believe that if you want to show how smart you are, you should tell people how complex your investment process is relative to others. Wow investors with your skill and mental agility, this will win you new money. Be and act like the most intelligent person in the room.
The Power of Simplicity
Yet, in reality, there is elegance in simplicity and the ability to break down processes into simple language. Complexity may make a manager seem bright, but it may not raise assets. Investors will never give money to a manager they cannot understand, no matter how smart you are. Simplicity may actually show your actual skill. As Albert Einstein said, “If you cannot explain it to a six-year-old, you don’t understand it yourself.”
Investor Due Diligence: The Demand for Simplicity
This need for simplicity is certainly true with investor due diligence. Investors do not want to pick the most complex investment process but one that makes sense and is simple to understand. Of course, there is a desire for uniqueness and special skills, but the need for simplicity still exists. Hence, one of the key roles of managers is to conquer complexity by providing straightforward answers to the key questions.
Critical Questions for Investment Managers
- What do you do differently than other managers?
- What is your edge? Why or how do you do this differently than others?
- How will you perform during periods when your peers do poorly? Why?
- How will you perform during periods when your peers do well? Why?
- Why should investors have your strategy in their portfolio?
Surprisingly, these questions are not easy to answer and take a lot of work to explain effectively to investors; nevertheless, driving to simplicity helps the investors and the manager.