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Pension-Fund Capitalism

Capital market decisions are shifting from the people who are supposed to invest in the future to the people who have to follow the “prudent man rule.”

The capital market decisions are effectively shifting from the “entrepreneurs” to the “trustees,” from the people who are supposed to invest in the future to the people who have to follow the “prudent man rule,” which means, in effect, investing in past performance. Herein lies a danger of starving the new, the young, the small, the growing business. But this is happening at a time when the need for new businesses is particularly urgent, whether they are based on new technology or engaged in converting social and economic needs into business opportunities.

It requires quite different skills and different rules to invest in the old and existing as opposed to the new ventures. The person who is investing in what already exists is, in effect, trying to minimize risk. He invests in established trends and markets, in proven technology and management performance. The entrepreneurial investor must operate on the assumption that out of ten investments, seven will go sour and have to be liquidated with more or less a total loss. There is no way to judge in advance which of the ten investments in the young and the new will turn out failures and which will succeed. The entrepreneurial skill does not lie in “picking investments.” It lies in knowing what to abandon because it fails to pan out, and what to push and support with full force because it “looks right” despite some initial setbacks.

ACTION POINT: Consider directing a portion of your pension-fund assets to trustees who have authority to invest in new ventures and who have had success doing so in the past.

The Pension Fund Revolution

* Source: The Daily Drucker by Peter F. Drucker

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