Lean Investing

"Lean" is a theory that has revolutionised how many organisations manage their processes. The origins of lean thinking started with Toyota, the japanese auto manufacturer. During the 1940's, the company needed a way a way to cheaply manufacture cars - After the war, people did not have much money, let alone money for expensive cars. The question for Toyota was how could they keep production volumes low whilst at the same time keeping the cars as cheap as mass-produced cars?

From this dilemma emerged the ideas that formed the foundations of the Toyota Production System (TPS) that forms the basis of the lean models that we have today. The basic ideas behind being lean are simple- eliminate waste and concentrate on what works.

Toyota was able to greatly reduce lead times and cost using the TPS, while improving quality at the same time. Moreover, lean has enabled Toyota to become one of the ten largest companies in the world. It is currently as profitable as all the other car companies combined and Toyota became the world's largest car manufacturer in 2007. Lean has also been used with great success in the software development world so it is viable for more than just manufacturing cars. For a more information on the beginnings of lean see:

Wikipedia Page on the TPS
Mary Poppendieck's Articles on Lean

What has lean got to do with investing and asset management? When taking a holistic view of the investment management process, from the asset manager to the end client, lean may be an effective way to increase the profits for the portfolio manager whilst continuing to be ethical and loyal to the end client.

As a discipline and by its very nature, value investing lends itself very well to the ideas behind lean. For example the ideas of infrequent trading and portfolio concentration are both ideas that reduce the problems associated with market timing, stock selection/analysis costs, transaction costs. As an investment manager, costs equal waste so this is a natural area to address. Although simplistic, this may form the basis for possible appications of lean principles in investment management.