Peter Drucker was a friend and a regular consultant to Greenwich Associates. He was a superb writer and always a provocative, original thinker. As active investing centered on the portfolio manager was in ascendancy in the late 1960s, this good-humored piece borrowed and applied some of Drucker's ideas and insights. Readers will smile at the admonition—over 50 years ago—that charging high fees was a good way to attract the best clients.
Peter Drucker's new book, The Age of Discontinuity, is an appropriate source of “scripture” for a consideration of how to get organized for managing large, aggressive equity portfolios, because recognizing, evaluating, and capitalizing profitably upon the discontinuities of our age are truly the mission of portfolio management organizations.
“We have learned, by and large, how to use organization to do efficiently what we already knew how to do,” Drucker writes. “This is a tremendous step forward, and one on which our present society rests. We now need to make possible organization that can innovate …” An innovative organization requires a different structure in the relationships between people. It requires an open-team organization rather than a closed-command organization, and it requires flexibility in relationships. Team structure is largely unknown to classical organization theory—though a jazz combo or, for that matter, a surgical team in the operating theater both exemplify it.
The innovative organization needs a new attitude on the part of the people at the top. In the traditional pyramidal command managerial organization, the top people sit in judgment; in the innovative organization, it is their job to encourage the development of new ideas. It is the job of the top people in the innovative organization to try to convert the largest possible number of ideas into serious proposals for effective, purposeful work. It is not their job, as it is in the traditional managerial organization, to say: “This is not a serious proposal.” It is their job to say: “What would this idea have to become for it to be taken seriously?” Drucker concludes that “no idea for the really new ever starts out as a realistic, serious, thought-through, worked-out proposal. It always starts out as a groping, a divining, a search.”
The need to organize “knowledge workers” to produce and implement innovative thinking is particularly acute for investment management organizations seeking to achieve superior performance. Performance depends upon three extremely difficult feats:
Most of us know this triple crown is not easy to win, although some organizations do not yet seem to understand why it might be difficult. In any event, let us draw some guidelines that are useful to the investment management organization which does not have a heroic genius who can do it all alone. We are concerned with the investment firm that has bright, well-educated, ambitious, responsible people who are good, but not perfect.
To help such a capital management group achieve superior performance on a regular basis, I propose seven laws. While it may sound all too obvious to say we ought to define where we want to go before starting off, very few investment managers can answer with clarity or conviction such basic questions as: What are you organizing for? What are you trying to do? Without defining your goals, you cannot possibly know how well you are progressing. Hence, the first law is:
Very few investment managing organizations can effectively perform superior services for all types of clients. Diverse client goals and needs are a great centripetal force, and the people and methods required to meet each of these contrasting needs are not harmonious. Any attempt by one organization to serve several kinds of investors will almost automatically result in mediocre accomplishment. And when this happens, the most desirable client—the one who is willing to pay handsomely for performance—will go elsewhere. Hence, the second law:
The third law requires no explanation:
Since you can only perform well as a “creative” for a rather small number of clients, you might just as well do this for those who like to pay well for the services you render. Really, there is no excuse for low fees; if we cannot earn high fees, we are just playing around with our clients very precious money—rearranging the deck chairs—and should quit the business. Clients who do not understand higher fees are almost inevitably the same clients who are a nuisance to work with, expect too much, and criticize your best efforts at the worst times and places.
On the other hand, high fees have the happy effect of attracting that ideal client who expects to pay for what he gets. There is also a peculiar snob appeal to paying a higher fee. (The success of private hedge funds bears eloquent witness to these thoughts.) Hence, law number four:
A superb investment manager does very little. At most he will make only two or three really worthwhile decisions in a year, and two or three important decisions is more than enough to assure outstanding performance. No more are needed. Yet, most investment managers intentionally try to make hundreds of decisions annually. They like to think that long hours, high piles in the “in” and “out” boxes, stacks of telephone messages, and a lot of personal hustle are good. It shows we work hard. But the decisions made by these harried managers are almost necessarily inferior decisions in that they can only be used once or twice in specific transactions.
What we need are more superior decisions—decisions that are used over and over again in different areas and at different times because the creative energy unleashed by these rare superior decisions is so powerful. The fifth law thus follows:
The environment in which we work is the most dynamic known to man. Social, political, technical, religious, international, climactic, cultural, and competitive changes must all be considered continuously. Consequently, we must be flexible in response and swift to take the initiative. In general, an organization designed for efficiency in our business is not particularly effective. Analysts who are long-established experts in particular industries all too often become financial bigots who have spent years confirming and refining their prejudices. Ours is the business of change, and rigidity is not helpful. Hence, the sixth law:
We must prepare ourselves for creative excellence. While the data is a bit sketchy, it consistently supports the conclusion that the less intensively we work, the more we contribute. I know of only three money managers who have been away from their offices for at least three months (one for a leisurely convalescence, one for a series of long trips abroad, and one for a political campaign). In every case, their associates found the value of their contribution in the remaining nine months to be far greater than usual. In every case, these investors made very few decisions. But they were all superior decisions because they had made time for deep reflection and new ways of thinking that had major impact. Thus, as rational people, we must conclude that long and frequent vacations are essential to outstanding performance. The seventh and final law brings this brief article to its conclusion:
Source: Institutional Investor, April, 1969.