Two years after the end of the great bear market of 1974 the large investment institutions are still refusing to invest in anything but a handful of the giants of industry. The tragedy is not only that these institutions are doing less well than they should for their clients, but that capital is not moving freely to its most productive uses.
Unfortunately, institutional investors do not behave like rational capitalists. Too often their objective is neither to create wealth nor to keep it, but rather to avoid losing their sinecures. In short, they act like what they are, which is bureaucrats.
Consider, for example, how some large institutions manage money: In theory, analysts are their chief point of contact with the outside world. In fact, their analysts are little more than journalists sitting at the feet of corporate managers, faithfully reporting what they are told. Worse, some buy-side analysts merely read and repeat the work of their sell-side counterparts, thereby avoiding as much as possible the humbling experience of going after the facts in the real world. It is rare for them to be genuinely independent in their thinking, since they have more to lose than to gain by being unconventional.
The portfolio manager is charged with the responsibility of deciding what to buy and sell and when. If he is convinced that taking proper care of his clients dictates a course of action contrary to the conventional wisdom, he must have unusual courage if he is to act according to his convictions. Unfortunately, a bureaucratic system rewards most handsomely those in whom such convictions never arise.
In such institutions, everyone involved pursues a course of strictly conventional action which is then, with a mean vigor, termed prudence.