The Hindu Business Line : Undiversified portfolio poses risks

The stock market should be a good case study of whether crowds have some wisdom, writes Barton Biggs in ‘Wealth, War & Wisdom’ ( www.wiley.com ). Not wisdom on little things, but insights on the ebb and flow of great events, he adds.

The diversity and decentralised nature of the market brings in a lot of tacit knowledge, and also a variety of intuitions to the process, argues Biggs. “In addition, it is a relatively intelligent and well-informed crowd. All investors are not rocket scientists but they are not complete idiots either. Just the fact that they have sufficient money to be investors suggests there is some natural selection process at work.”

A comforting thought, therefore, for the players on the bourses is that the stock market is ‘a wise and farseeing old thing,’ though ‘it can get panicky and crazy in the heat of the moment, and… it can get suckered into frauds and blow enormous bubbles.’ Despite the fog of war and the smoke of statistics, the stock market has a great nose and amazing intuitions, assures Biggs.

However, nothing lasts forever, he cautions, in a chapter ominously titled, ‘Preserving wealth in a time of cholera.’ No company has ever had a sustainable, forever competitive advantage, observes Biggs. “Studies of organisational ecology show that while there is immense innovation in the world economy as new companies create new businesses, there is far less innovation in large, mature companies.”

If you live a stable country and you know with a high degree of certainty you can achieve a long-term real return of 400 to 700 basis points in an index fund why fuss with anything else, he asks? “Maybe if you still believe in fairies and are a skilled professional investor you can do better but don’t count on it… The risks in holding an undiversified portfolio are astronomical.”

Imperative read before you find ‘barbarians at the gate’!
Track leading indicators

A key way to ensure top-line growth and profitability is to track leading indicators about the health of each brand or business unit, says Leslie Wilk Braksick in ‘Unlock Behavior, Unleash Profits’ ( www.tatamcgrawhill.com ).

Her guidance includes points such as striking a balance between transactional efficiency and the human touch if you are a customer-facing organisation in the evolving e-commerce world; and boosting innovation across your organisation. For the latter to happen, your employees must first believe that the organisation and its leadership value innovation more than status quo. “More important, when suggestions are offered, that behaviour needs to be encouraged, listened to, and acted upon.”

Effectively and rapidly integrate cultures and organisations following mergers and acquisitions, advises Braksick. “Any merger generates an avalanche of new documents that disclose legal and business due diligence about both companies. But these documents don’t reveal the full picture – they don’t disclose the depth of cultural differences or reveal how work gets done in each organisation.”

She rues how, in a merger, the players abruptly change, and behaviour becomes ‘less predictable, less reliable, and less aligned with what made the individual companies so successful prior to the merger.’

Convincing presentation.
Don’t fall in love with ideas

Selling your ideas within your organisation can be tough. The first obstacle is that the people you must persuade are fully aware of your shortcomings and at the same time totally blind to their own prejudices, explains Norbert Aubuchon in ‘The Anatomy of Persuasion’ ( www.phindia.com ).

“By contrast, people from outside the organisation, coming with the status of consultants and honoured guests, gain the undivided attention of the big boss… These people last until their warts become visible through the glitz or until their lack of talent betrays them.” Lack of knowledge of the internal competition can be another obstacle, says the author. “Many otherwise excellent projects have come a cropper because someone else got the ear of management first. There were just not enough resources for two projects.” Third, don’t fall in love with ideas, especially your own. For, when you do, your biases destroy objectivity, distort perspective, enhance rationalising, test honesty, and set you up for narcissistic failure, warns Aubuchon.

Persuasive and coherent.
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D. Murali

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