Yoda on Portfolio Management, Part I

 

Is there a dark side to portfolio management? You bet your tauntaun there is. In that famous mythological universe far, far away, adherents to The Dark Side are (usually) easily recognizable by being dressed head-to-foot in black, glowing yellow eyes, and a predilection for spreading misery during a personal quest for near-absolute power. In the management world, such external indicators are not usually present, at least not in such apparent manifestations; however, the signs are there, if you know what to look for.

As with The Force, the prime differences between the light and dark sides of portfolio management are centered on motivation. In the management world, there’s a certain naïve assumption that all businesses are ongoing concerns, and that managers seek to keep their enterprises going as long as possible. But that’s not what’s taught at college-level business schools around the world – they’re not instructed to “maximize shareholder wealth for as long as possible.” They’re simply taught to maximize shareholder wealth.

The differences between organizations that are on-going concerns and those that are not are as stark as those between Yoda and Emperor Palpatine. The ongoing concern will seek to enlarge its customer base by providing better, more economical products and services, whereas the organizations that have a pretty good idea of when their time is up will seek to exploit the existing customer base, maximizing the amount of money to be taken from them while minimizing the expense of providing goods or services.

The Dark-Side portfolio managers don’t (necessarily) taunt their perceived adversaries during one-on-one combat situations, but they do, by necessity, communicate differently. Organizations with a known term date range simply can’t be honest in their communications with employees or customers, since such honesty would dramatically accelerate such organizations’ demise. Employees would know that they had better seek employment elsewhere, and the higher the level of talent, the quicker they will be able to do so. Likewise, customers would instantly recognize the futility of entering into or maintaining any kind of an economic relationship with such an organization, and explore alternatives (i.e., seek their desired goods/services from providers who can be expected to be available long-term).

Okay, so if these portfolio managers’ eyes don’t glow yellow, how are their Dark Sided motives displayed? Consider the following table:

“For once you start down the Dark path, forever will it dominate your destiny!” While much of what is offered up as galactic theology in Star Wars sounds like it was written by a fortune cookie fortune writer on drugs, Yoda was largely correct about this particular insight, which leads me to speculate: which side is more consistent with the whole “maximize shareholder wealth” meme?