Profitable but Complex Investments

Wall Street Charging Bull. Photo Credit: Ingfbruno Wikimedia Commons
Wall Street Charging Bull. Photo Credit: Ingfbruno Wikimedia Commons

A good investor does not put all the eggs in the same basket; this one is a way to reduce risk and the basement of the diversification. Following this principle we decide to manage a portfolio of investments. We can compensate a high uncertainty investment with less risked ones.

When we are managing innovation, we will be able to follow the same scheme. It is true that innovation process introduces uncertainty in the company results, and this uncertainty must be limited. A logical focus can be diversification. An innovation manager will have a portfolio of projects with a different profitability and risk level.

But we must not forget an important aspect. Financial investments do not affect physically our company but innovation activities have a physical reflection on our company. The former ones increase the complexity of the financial activity basically, but the latter ones can increase easily the complexity all over the organization.

If we think in terms of risk, we will find that diversification is a correct option, but if we think in terms of complexity we will need a deeper analysis.

Classic risk analysis techniques try to reduce external uncertainty. If we do not know what market will demand our product, we can serve to different markets in order to assure that we will be increasing incomes.

A complexity approach shows us that it can be true but you are increasing the complexity inside the company and the operation can be more error prone and inefficient. You would be compensating external uncertainty with internal uncertainty. This cannot be always a good business.

When you are managing a portfolio of innovation projects complexity must be taken into account.

On the other hand, in a crisis period we should select investments trying to reduce our complexity, because this internal uncertainty reduction is balancing the uncertainty of the external world.

If we want to go further, we must use this principle in our financial investments too. Although a financial investment cannot seem able to increase extremely the complexity of our production process, a financial asset is related to a real economy: a share is related to a business, public bonds are related to a national economy, etc. And those real economies have their own complexity level. Nowadays, it is interesting to invest in financial assets related to less complex economies.

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2 thoughts on “Profitable but Complex Investments

  1. Turning complexities into simplicity allows revaluation of perspectives on the whole (portfolio) or the part (particular investment). Value-driven events and pure speculation events are different types of risk profiles that often are made complex when they are simple in nature.
    1. produce something valuable
    2. let it ride (gamble)
    When taking accountability and responsibility (or ownership), approach to risk(s) differs at origination and therefore doesn’t have a negative systemic effect. At that level of management excess doesn’t get dumped into markets creating devaluation and uncertainty into panic events that adds complexity to risk profiles.

    1. Accountability is an excelent way to reduce uncertainty, it was very difficult to manage everything without that tool, but it only shows you a fixed photo of the past of the company, and it does not provide a direct measure of the complexity. When you are selecting investments you must think about the future of the company and it is always uncertain and you must know well how complex your organization is. Purely, a investor wishes to know the future incomes not past ones, the past can provide an indicator of the health of the company, but it cannot provide us a vision of the future that depends sometimes on intangible assets that are not accounted or well valued in the balance sheet. As complexity is related to production capability and performance, it can be a useful measure to analyze investments.

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