Aurora Borealis
1 September 1980 Financial Analysts Journal Volume 36, Issue 5

Organizing for Superior Investment Returns

  1. David D. Williams, CFA

Two essential elements of successful stock market investing are early recognition of change and prompt implementation of the investment decision that will take advantage of it. Unfortunately, the familiar types of organization—the hierarchal and the democratic—cope badly with both elements.

Delegating responsibility for all decisions to a few people, as the hierarchal organization does, works against the early recognition of change. Individuals are prone to biases borne out of their most recent successes. Only a variety of people with a variety of viewpoints and perceptions can counter this problem.

On the other hand, investment decisions are rarely a matter of a simple yes or no; they involve many options. How can a democratic organization operating on the one man, one vote principle reach consensus with speed and flexibility? By the time consensus is reached, it is probably too late to act.

The solution may be to model the formal organization after the informal one. In the well-functioning informal organization, communications cut across hierarchal lines; each person has duties and responsibilities outside his primary job function. Portfolio managers, for example, are independent decision-makers, but they are also members of policy-making groups.

If policy decisions are formulated by a group, how can individuals be held accountable? The only solution is for management to be involved, observant and unbiased—a big order!

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