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Why Active Investing Matters in Times of Uncertainty

My appearance last year on the TD Ameritrade Network was fairly typical of the interviews I’ve done recently about leadership and my new book, but this one took a different turn about halfway through our discussion.

Given that TD Ameritrade is a brokerage firm, I shouldn’t have been surprised when the host asked a bottom-line investment question.

“Why now for this book,” she said, “because I want to get to money. I’m not going to leave out money. This is a money show. People like to invest. They want to know what’s next. I’m all about feeling good, but I’m also about money. So, why now for this book?”

In other words, how can your book help investors make money in the current environment? The book, Transfluence: How to Lead with Transformative Influence in Today’s Climates of Change, is about how leaders can make a positive difference in the lives of people, and, as I told the host, that type of leadership is essential to running a profitable company, especially in challenging times.

Later, as I’m prone to do, I thought more about the question and additional insights I might have shared. That’s when I started thinking about the question more from the perspective of individual investors who are trying to make sense of the markets. So, you might consider this Part II of my answer.

I am not a financial manager and Transfluence isn’t about investing in the stock market. But at different times over the years I held the roles of CFO, COO, CEO, and president of Prologis, a global company that trades on the S&P 500. Part of my job was to understand the company’s relationship to its shareholders, and I met regularly with industry analysts.

None of that qualifies me to tell you what stocks investors should buy, but it has given me some insights into some factors to consider when making investments.

For instance, as I started thinking about what those analysts wanted to know about Prologis, it hit me that it seems wise during times of uncertainty to work with active financial managers who dig deep and find out what’s really going on inside of companies – especially as it relates to their people.

There are two basic approaches to investments – active investing and passive investing. A passive approach to investing would be  in a balanced index that represents the larger market (such as the S&P 500 index) and requires very little buying or selling. It’s a strategy that doesn’t bet on individual stocks as much as it does all the stocks within a certain targeted market (large companies, technology, health care, etc.).

Active investing employs more detailed, daily analysis and results in choosing certain stocks over others. Active investors (who often are professional wealth managers) make decisions based on the idea that their thorough knowledge about the inner workings of companies and the prevailing market conditions will help them spot big wins.

Each strategy has its merits, and many investors use a combination of the two. But the benefit of a high-quality active manager during turbulent times is that he or she is doing the hard work it takes to really understand how companies are dealing with certain issues, including the crisis.

The best active managers, however, don’t just look at financial statements. When I met regularly with analysts, they also often asked tough questions about our culture. They wanted to understand how we were leading, how we managed the organization, and how people felt about it.

In other words, they understood the value of people and continually probed about them.

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Technology is a major driving force in the economy these days, but businesses are still powered by people. Vision matters. Strategy matters. Cash flow matters. Analytics matter. Every component of business acumen you can name is important to the success of an organization. But none of those things will keep a business financially healthy for the long haul if there are significant, unresolved people issues.

Research consistently shows that companies with leaders who understand and address their complex, challenging people issues are more likely to ride out the storms and grow stronger. By taking care of their people and building a healthy culture, for instance, they are more likely to increase share price, lower employee turnover, recruit top-tier talent, see less absenteeism, increase productivity, and, of course, get higher employee engagement ratings.

I believe it’s almost always worth it to invest in companies that win with their people – and, at least equally important to avoid risking money on companies with rotting cultures. There are no guarantees, of course. But active investment managers help sort through the good, the bad, and the ugly, so you can put more of the best eggs in your investment basket.

Comments

  1. Craig Calle

    Walt: I enjoy your updates. You’ve built a nice platform to express your views. I wrote a short article for CFO magazine that you might like because it answers a question you’ve probably asked in board and C-level roles:  https://www.cfo.com/data-security/2021/01/what-good-looks-like-in-cybersecurity/.  Keep writing! Craig ccalle@sourcecalle.com

    Reply to Craig Calle

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