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The Effective Investor

CIO Bob Browne recommends a book that has influenced him as a manager and an investor -- and explores how its lessons can be instrumental for investors when evaluating today’s market.

  • A Habit to Be Learned
  • The Biggest Thief
  • Opportunity Ahead

Hello, I'm Bob Browne, the Chief Investment Officer at Northern Trust. Once before, I talked about my love of reading and recommended some books dealing with US, China history and relations. And today, I would like to recommend another book, which has greatly influenced me as a manager and an investor in how it has taught me to look at today's markets. Let's talk about effectiveness.

This book is an oldie, but a goodie. The Effective Executive by management consultant Peter Drucker. It was first published in 1967. And in my opinion, has made every management book published since then seem redundant. I always give copies to my direct reports and just about anyone else who drops by my office and seems genuinely interested in self-improvement.

The book is an easy to read 174 pages, but it's full of lifetime insights, and it highlights that effectiveness is a habit that needs to be learned. It is a habit based upon established practices. This is true for people and teams. I know that an effective investment team is one which has the ingrained habit of evaluating risk and return opportunities in a deliberate, consistent way.

We have all heard that the biggest thief is the one who steals your time, because it can never be returned. So much of Drucker's book really comes down to time management and prioritization. Are you spending time on the right issue? And are you doing what you should be doing with that time or should someone else be doing it? Are you concentrating on the right issue?

This is so true for investors. There is so much information to absorb, so many potential distractions and behavioral biases to avoid. An effective investment team is one which uses precious time wisely and methodically discards useless information in order to focus on the critically important facts. Geopolitical risk events are often the culprit when it comes to distracting investors and sucking up their time. But usually they have very limited lasting impact on market returns.

One of the established practices used by effective executives is that they focus on opportunities rather than problems. All senior executives inevitably must deal with the problems of declining market share, a new innovative competitor, a change in regulatory regime, or a failing business activity. Effective executives quickly identify these problems and diagnose the solution. Turning what seems like a guaranteed negative event into potentially a very promising one.

Declining market share can be viewed as a catalyst for exiting a mature, low margin business. And free up capital for growth areas. A new innovative competitor can force introspection and change in long delayed business practices. A change in regulatory regime can create opportunities for industry consolidation. And a failing business activity can highlight the necessity to fail quickly and cheaply, or maybe force the need for new leadership.

The best investors also see opportunities when others see problems. They understand that problems, negative market events, are often discounted quite quickly. While opportunities, such as long-term trends, are usually underestimated.

When looking at the investment landscape today, many investors see the Federal Reserve's low interest rate policy as a problem. I see the most important risk-free rate in the world as a critical fact on the ground, providing a solid foundation for global asset markets. There is so much to learn from this book. And I hope you enjoy it.