Systematic Investment Management and the 85% Trap

Systematic Investment Management and the 85% Trap
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Systematic Investment Management and the 85% Trap

What can you learn about systematic investment management from Henry Ford?

Ford Model THenry Ford is recognized as the father of the auto industry, largely on the strength of one innovation: the automotive assembly line. Looking back at the process he pioneered, Ford recalled the inefficiencies it replaced:

A Ford car contains about five thousand parts. … In our first assembling, we simply started to put a car together at a spot on the floor, and workmen brought to it the parts as they were needed in exactly the same way one builds a house. … The rapid press of production made it necessary to devise plans of production that would avoid having workers falling over one another. The undirected worker spends more of his time walking about for materials and tools than he does in working; he gets small pay because pedestrianism is not a highly paid line.† 

Ford knew that in his new system, the assembly line, there were high-value tasks, such as welding the parts of a car together, and there were tasks with little or no value, such as fetching tools and parts. The more workers were occupied by the former tasks and not the latter ones, the more efficient the overall system became.

The same principle applies to investment management, which is why I consider a good system to be the first pillar of financial strength. Strong investors focus on tasks that have the most impact. They understand the difference between a low-value activity, like day trading stocks, and a high-value activity, like strategically identifying and moving funds into asset classes that are undervalued. They know there is a world of difference between activity and progress, and they avoid tasks that create the illusion of progress while providing scant results.

By contrast, most investors who strive to actively manage their assets often do so in a haphazard or ad hoc manner. They might have good decision-making skills, but these skills are wasted by looking at various issues in isolation. They do not see their assets, tangible and intangible, as an interconnected whole—as a system, in which the function of one component always affects some other component. It is impossible to make a system operate more efficiently if you fail to see the connections, or worse, fail to recognize that you’re dealing with a system. Such failures lead inevitably to a problem I call the 85% Trap.

The Essential 15% Versus the 85% Trap

85% Trap

The 85% Trap. Where are you putting your effort?

The 85% Trap is derived from the work of W. Edwards Deming, whose ideas helped to revolutionize the way industries engineer quality into products. Deming observed that 85% of the problems that businesses encounter are due to the systems and processes put in place by management. Just 15% of problems could be traced to mistakes made by workers.

Consequently, if we want to improve the quality of a product or service offering, we need to focus on the system, not on isolated actions. Conversely, if we assume the system is fine and focus solely on actions, we can waste enormous time and expense and have very little to show for it.

Unfortunately, this mistake is very common in investment management. Investors typically put 85% of their effort into activities that influence just 15% of their results. That’s what I mean by the 85% Trap.

There is a simple reason that most investors fall into this trap: They do not follow a systematic approach to investment management, so they have no system to optimize, just an endless series of one-off decisions and actions. They might understand the value of a good system in theory. They might even use one in their business or professional pursuits. But they do not have the time or knowledge to apply this crucial concept to their finances. This is a huge mistake—the flaw at the root of all other problems.

Investment management requires more than just knowledge

Investors who lack a system tend to get absorbed by secondary activities. “Robert,” the gentleman I discussed in a previous post, spent a lot of time sifting through mail and paying bills. Other investors devote large chunks of time staying abreast of financial news. They learn a great deal about individual companies or the ups and downs of overseas markets. There is nothing inherently wrong with increasing knowledge, but there is something wrong in imagining that knowledge alone will insure success. As Warren Buffett put it, “If past history was all there was to the game, the richest people would be librarians.”

Investors who are stuck in the 85% Trap have an “outside-in” view of success. They behave as though the key to mastering wealth is “out there somewhere,” and the challenge lies in finding that key and putting it to good use. Tangled in complexity, they end up being reactive, undisciplined, and inflexible. Many high net worth investors are stuck either attempting to manage their portfolios on a part-time basis with amateur tools or with financial service representatives who may have impressive credentials but lack the system and expertise to avoid the 85% Trap.

One of the critical steps in mastering wealth is to escape the 85% Trap by focusing on what I call the Essential 15%. Do not waste 85% of your effort on activities that influence only 15% of your results. Focus instead on the 15% of investment management activities that lead to 85% of your success.

The best investors recognize that success in any endeavor starts on the inside and then moves outward. To master wealth, begin by investing in yourself. Your habits, attitudes, talents, and support system have a much larger impact on your long-term success than anything that lies outside your control. Ensuring you have a good system for crafting plans and making financial and life decisions is an excellent place to start.

† From My Life and Work by Henry Ford. New York: Doubleday, Page & Company, 1923


Joseph J. Janiczek is the founder and CEO of Janiczek Wealth Management. This article is adapted from his book Investing from a Position of Strength

Joseph Janiczek, ChFC, MSFS

Joseph J. Janiczek, ChFC, MSFS is Founder and CEO of Janiczek® Wealth Management, which exclusively serves high net worth investors (individuals with $2 to $20 million portfolios) and ultra-high net worth investors (individuals with $20 million+ portfolios) across the country. After founding and serving as the president of an oil company, Mr. Janiczek recognized that financially successful individuals were greatly underserved by the investment and wealth management industries.

Mr. Janiczek spent decades in the trenches with those experiencing life-changing liquidity events and ultimately developed and patented Systems and Methods of Optimizing Wealth. He is a pioneer in the disciplines of Evidence Based Investing (EBI) and Strength Based Wealth Management™ (SBWM), award-winning author of Absolute Financial Freedom (Prosperity Press) and Investing from a Position of Strength. Mr. Janiczek’s education includes Master of Science Degree in Financial Services (MSFS) and Graduate Certificates of Specialty in Asset Management and Income and Estate Taxation from the American College. He also has his Chartered Financial Consultant designation. Mr. Janiczek has served as a Board of Governor of Legatus International, President of Rotary International Club and Foundation and Board of Director of Spitzer Center for Ethical Leadership. Mr. Janiczek is the majority shareholder of Janiczek® and leads its executive Leadership Team.
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