It is not easy figuring out how much structure to put into an investment process and exactly how to make that happen.  Every organization is different and the culture of one might tolerate quite a bit of process and even thrive as a result of it, while a kind of “process lite” might fit better at another.

As always, what you do and what you say you do ought to be in sync.  While that sounds obvious, if you say, “We’re top-down sector rotators,” what does that really mean?  How does it work?  What structural elements have you put in place to deal with the most common errors that can occur?

Whatever your investment approach, there is a body of knowledge available to you about it.  From the industry performance data on that strategy, to academic research on the market drivers of it, to the trail of decisions at your own organization, there is plenty of evidence available to you on the patterns of errors you are likely to make.  What are you willing to do to avoid them?

A read of The Checklist Manifesto by Atul Gawande (this is the last in a series of postings about itthe research puzzle | This PDF has links to all of the postings.) piqued my interest in the use of checklists within investment organizations.  But while I can see the power of them to significantly improve decision making, I know how unwise an overbearing implementation of them would be.

Discipline is a necessary component of an investment process.  The right kind and the right amount, applied at the right time, doesn’t impede the creativity of decision makers, but rather nourishes it.  “The checklist gets the dumb stuff out of the way,” wrote Gawande, so that our brains can deal with the hard and interesting and important matters at hand.  But tell that to a portfolio manager and I can predict the response you’ll get; most would see a checklist as anything but liberating.

A good first step is the documentation of decisions and the institution of feedback loops so that those decisions are evaluated in a systematic way as time goes by.  To repeat what I wrote in the second-ever posting on this blog, “a regular look back at assumptions and decisions — a series of feedback loops, if you will — that is woven into the fabric of an organization increases its chances of success over time.”the research puzzle | It was about “the wayback machine.”

That will yield an idea of the pressure points in your process where failure tends to occur.  An in-depth look at those individual decisions may reveal that in the heat of the market battle the same mistakes are made over and over, just as a doctor can forget to do little things during a stressful operation unless there’s someone else (perhaps using a checklist) there to remind him.

The chances are that the use of checklists in certain parts of your process would improve performance.  If that’s the case, how much disruption of your current culture are you willing to endure in order to get that better performance?  Perhaps I should ask that of your clients.

Asset managers in particular need to be able to tell their story by talking about process to their clients and prospective clients, and to the gatekeepers that assist them in the allocation of their capital.  And what do they want?  “A systematic and repeatable investment process” is what they say — and great performance, of course.

Checklists would seem to be made to order, since they lead to a process that is more systematic and repeatable.  But an overlooked issue comes into play here:  Making changes in your process can be viewed as a negative development by others, even if you are doing it to increase the probability of success in the future.

Just as the structure of a process must balance the need for discipline and that for creativity, the process of today must yield to that of tomorrow, thoughtfully improved for the challenges ahead.  Too often “systematic and repeatable” turns out to mean “static.”  Instead, a process should be evolutionary.

It will come as no surprise after these five postings that I think that checklists, as boring and rudimentary as they can be, can result in better decisions by those that operate in the exciting and complex world of investments.  That they aren’t more prevalent says more about the culture of the business than about their efficacy.