Peter Drucker, management consultant, once said:
“Efficiency is doing things right; effectiveness is doing the right things.”
What is the difference between being effective and being efficient? Which one leads to success in investing and in life in general?
You can spend a lot of time developing your efficiency in a certain skill or in performing a particular task. But is this the best use of your time? Before investing time and energy in a particular task, remember Peter Drucker and ask yourself whether you are doing The Right Thing, or if your energies are better spent elsewhere.
A strategy lets you be effective AND efficient
In order to achieve a goal, you first need to build a strategy with the most effective way to accomplish it. Just as a chess player won’t win if he just moves his pieces around without any kind of strategy, you can’t achieve any goal if you don’t know the specific steps of what is needed to get there. Even if you can do many things efficiently and very well, if they are not relevant to your purpose they will not help you. But, once you know what you need to do (effectiveness), you can work on improving your skills in order to master the task at hand (efficiency).
A great example of being effective versus efficient in the world of investing is the investor who shops around for the lowest trading commissions at discount brokerage firms. While cutting costs on trades is a great idea, it is not a great strategy if lower trading fees encourage you to trade more often. If you trade too often, you can end up underperforming the markets, not to mention spending money on commission costs.
In order to win any race, you must know where the finish line is (your goal), how to run (sprint versus maintain a steady pace), and practice to master the skill (training).
For more about the differences between efficiency and effectiveness, listen to this podcast. Don’t just be busy. Make sure you are busy with the right things. Then, you will come out a winner, whether on the chess board, in investing, or life in general.