What How To Succeed In Business Without Really Trying teaches you about herding
Matthew Partridge explains what the business-based musical can teach investors about the dangers of going with the crowd.
How to Succeed in Business Without Really Trying is a musical based on a book by advertising executive Shepherd Mead. It tells the story of J. Pierrepont Finch, who rises from window washer to chairman of the World Wide Wicket Company via the mailroom and advertising departments, by following the book's advice.
The original 1961 production ran for four years. It has been revived several times, with versions starring Matthew Broderick and Daniel Radcliffe (pictured). It was also made into a film in 1967.
The key moment
After being taken on, Finch is assigned to a job in the mailroom. He congratulates Twimble, the head of the mailroom, on Twimble's 25 years at the company, prompting Finch's boss to attribute Twimble's longevity to "a combination of skill, diplomacy and bold caution".
Twimble further advises Finch always to do things "the company way": shamelessly agree with management. When Finch queries what happens "when a man of genius makes suggestions" Twimble cynically replies that you can "watch that genius get suggested to resign".
Lessons for investors
Keynes famously said that in the financial sector "it is better for one's reputation to fail conventionally than to succeed unconventionally". As a result, people have little incentive to take the intellectual risks necessary for success, especially when their employers are willing to tolerate poor performance, provided it is in line with what everyone else is doing.
So many decide to follow Twimble's example and keep their jobs secure by copying their colleagues' behaviour, even if this results in mediocrity or a crisis as the herd loads up on dangerous financial instruments.
Other financial wisdom
Intellectual laziness is a particular problem in fund management as performance is assessed against a benchmark (such as the FTSE 100 or S&P 500).
This has led to the problem of "closet tracking": funds that claim to be actively managed, and charge investors relatively large fees, while holding an investment portfolio that is almost identical to the index that they are following. Avoid closet trackers by buying funds with a high active share ratio (which measures the difference between the funds' portfolio and the index).