[Summary]
Occam's Razor is a way of thinking that prioritizes simple explanations over complex explanations.
When Occam's Razor is replaced with an example, it becomes easier to see the difference between situations where it is useful and situations where it is difficult to use.
In real investing, the starting point is to keep your investment thesis simple. However, be careful that it is easy to oversimplify and throw away important exceptions.
In this article, Occam's Razor is not defined as "knowledge" but as a step to check before buying or selling. Don't rush to conclusions, read according to your financial amount and time horizon.
First, divide with Occam's razor
When looking at Occam's Razor, first determine what you want to judge. The information you need will change depending on whether you want to know the meaning, confirm before buying or selling, or review your current holdings.
Especially for beginners in investing, the easier the words are, the more they tend to take them as a conclusion. Occam's razor is not the only material used to make decisions. If you want to check it, it is more realistic to look at it in conjunction with fund management, holding period, and opposing materials.
Consider Occam's Razor as an example
If we look at Occam's Razor as an example, we first make narrow assumptions. It is important not to mix up whether you are talking about the market as a whole, individual stocks, NISA or long-term funds.
Checking the following points will make things a lot easier.
| Axis to check | What to see with Occam's razor |
|---|---|
| purpose | What do you use to judge? |
| Time axis | Which is closer to short-term trading, long-term holding, or NISA? |
| basis | Which one is more important: price, business performance, interest rates, exchange rates, or psychology? |
| risk | When things go the other way, where should you look again? |
| action | Will it lead to buying, selling, or doing nothing? |
Points that can easily cause trouble in making decisions
Occam's Razor doesn't just trip you up when you don't know enough. In fact, there are situations where we interpret something conveniently because we know a little bit about it.
- Focus on one situation where Occam's razor works well.
- Even if the price movements are similar, if the background is different, they are treated as different things.
- View not only successes but also failures using the same criteria.
- Check if you can reproduce it with your own amount of funds
The important thing here is not to use Occam's Razor to decide on a single correct answer. In investment, the meaning of the same material changes depending on the market, holding period, and amount of funds. When in doubt, prioritize confirmation over conclusion.
Checklist before buying and selling
Before using Occam's Razor as a basis for making an actual decision, check at least these five things.
- Can you explain in one sentence the purpose of watching Occam's Razor?
- Have you confirmed one or more countermeasures or failure conditions?
- Are you investing your living funds or money that will be used soon?
- Have you decided in advance the criteria for cutting losses, taking profits, and continuing to hold stocks?
- Are you making judgments based only on social media or short headlines?
Checklists are simple, but they prevent you from adding reasons after making a decision. The purpose of checking Occam's razor is not to make you act faster, but to reduce unnecessary errors in judgment.
Summary
Occam's razor is a tool for organizing investment decisions. Even if you read it as an example, your judgment will be inaccurate if you treat it as a standalone buy/sell signal.
The points to keep in mind are as follows.
- Decide the purpose of looking at Occam's Razor first.
- Do not mix time axis and amount of funds
- Check not only good materials but also negative materials
- When using NISA and long-term funds, consider how to handle losses
- When in doubt, reduce your position or postpone it.
The more knowledge you have, the safer it seems, but in the market it can become dangerous if you use it incorrectly. Occam's razor should not be used as a word to rush into judgment, but rather as a tool to pause before buying or selling.