Investing Lessons From ‘The Hedgehog and the Fox’

Doc’s note: If you want to gauge your own investing style, there’s one simple question you need to ask yourself…

Are you a hedgehog or a fox?

Today, Extreme Value editor Dan Ferris explains the difference between hedgehogs and foxes, why it’s important to know which you are, and how it can help you become a better investor…

Over the past year or so, I have come back to a timeless piece of advice every now and then…

You must learn to “know yourself well” in order to become a better investor.

Whether you believe you’ve already discovered a system that will work for you or are struggling to improve, the rewards you seek as an investor require greater self-knowledge.

As you can tell, I like simple insights that can help you quickly learn a lot about yourself.

I’ve recently found another one of those, and when all is said and done, I’m confident that you’ll get to know yourself much better…

It starts with a simple question that has profound implications…

Are you a hedgehog or a fox?

If the question rings a bell, maybe you’re familiar with the 1953 essay by philosopher Sir Isaiah Berlin, “The Hedgehog and the Fox.” The topic is introduced in the opening line…

There is a line among the fragments of the Greek poet Archilochus which says: “The fox knows many things, but the hedgehog knows one big thing.”

Berlin starts by explaining the figurative difference between hedgehogs and foxes. According to the essay, hedgehogs…

… relate everything to a single central vision, one system, less or more coherent or articulate, in terms of which they understand, think and feel – a single, universal organizing principle.

Meanwhile, foxes…

… pursue many ends, often unrelated and even contradictory, connected, if at all, only in some de facto way… without, consciously or unconsciously, seeking to fit them into, or exclude them from, any one unchanging, all-embracing, sometimes self-contradictory and incomplete, at times fanatical, unitary inner vision.

The idea of determining if you’re guided by “one big thing” versus “many things” is a valuable way to gauge your own investing style. Do you invest in “one big thing” like the hedgehog… or in “many things” like the fox?

Before you answer that question, know this…

Most successful investors are hedgehogs…

Hedgehog investors come up with their own system – their “one big thing” – and they eliminate everything that doesn’t conform to it.

In a recent Stansberry Investor Hour podcast, I interviewed a classic hedgehog investor – author Chris Mayer of Woodlock House Family Capital.

Like all hedgehogs, Chris has created his own original investment framework. It was honed over many years… And he can describe it easily. Chris calls it the “CODE” system…

  • C is for “cheap.” He’s looking for stocks that are undervalued.
  • O is for “owner operator.” He wants companies run by folks who own large chunks of their own stock.
  • D is for “disclosure.” He relies heavily on public disclosures as an outside, passive, minority investor… So they must be good.
  • E is for “excellent financial condition.” He doesn’t like companies with too much debt or other risks on their balance sheets.

 

Most stocks don’t conform to Chris’s framework, so he doesn’t often find new investing opportunities. But more important, he also doesn’t waste his valuable time looking at the thousands of companies he would never invest in, no matter how popular or profitable they might be.

Berkshire Hathaway (BRK-B) founder Warren Buffett is a classic hedgehog, too…

Like Chris, Buffett has a simple, four-part “filter” that eliminates a huge number of opportunities. This helps him home in on the businesses that appear most attractive.

Buffett only wants to own businesses – publicly traded or not – that have these four characteristics. In order to get his attention, the business must be one that…

  1. He can understand
  2. Holds a durable competitive advantage
  3. Has a management team he can trust
  4. Is available at a price that’s not too expensive

Like Chris’s CODE system, Buffett’s four filters constitute “one big thing.” He has built a huge, cash-gushing company by focusing like a hedgehog on finding as many businesses as possible that conformed to his standards and ignoring those that didn’t.

Although most successful investors are hedgehogs, foxes do exist…

Take Jim Rogers, for example…

Rogers founded the Quantum Fund with George Soros in 1973. The two legendary investors made 3,365% from 1970 through 1980, while the S&P 500 Index rose just 47%.

According to Rogers, when he was younger, he got confused listening to other people… So he just ignored them, did his own work, and made up his own mind.

From there, Rogers became a financial maverick…

He traveled the world, learning about many different countries and their markets firsthand. He even drove around the world twice – once on a motorcycle and once in a car.

Rogers doesn’t stick to “one big thing”… He’ll buy any currency, stock, bond, or other financial instrument from any country. And he’ll buy any commodity, any futures contract, or anything else… anywhere, anytime… as long as he believes it’s a good bet.

A fox like Rogers is ready for anything, so he’s a lot less specific about what he’s looking for compared to a hedgehog.

When it comes to daily life, most folks seem more foxlike to me…

In that way, a hedgehog with zero foxlike characteristics is rare, too.

To underscore that point, I encourage you to check out the book Range. Author David Epstein opens by comparing golfing legend Tiger Woods with tennis great Roger Federer…

With a lot of encouragement and coaching from his father, Woods focused on nothing but golf as soon as he could hold the golf clubs… At age 2, he used a club that came up to his shoulder to drive the ball far enough to impress comedian Bob Hope on TV.

Federer enjoyed sports from an early age, too. But unlike Woods, as Epstein wrote…

As a boy, [Federer] played squash with his father on Sundays. He dabbled in skiing, wrestling, swimming, and skateboarding. He played basketball, handball, tennis, table tennis, [and] badminton over his neighbor’s fence, and soccer at school.

Federer later credited his broad interest in various sports as a child for helping him with coordination and general athleticism. It clearly paid off… He has won 20 Grand Slam men’s singles titles in his career. And he has pocketed more than $130 million in prize money.

Woods is one of the most pristine hedgehogs in history… The singular pursuit of golfing mastery has ruled his existence from birth.

But what about Federer?

He started out dabbling like a fox in a wide variety of sports. But it was only when he focused like a hedgehog on tennis that he became a world-class athlete.

So in reference to my opening question (which one to choose), maybe the answer is more complex…

Maybe the point of the fox-or-hedgehog dichotomy is just to understand how each mode of thinking can help you achieve great success at investing (or anything else worth doing).

Maybe we’re all destined to be foxes until we learn how to be hedgehogs…

For example, although Buffett focused on investing from his youth, he dabbled like Federer in other areas before starting to concentrate on companies that fit his four core filters…

While running his hedge-fund partnerships in the 1950s and 1960s, Buffett bought many types of classic value plays… He bought stocks trading at discounts to book value, stocks with low price-to-earnings ratios, merger arbitrage opportunities, and myriad other so-called “special situations.” He also speculated in the silver market on at least two occasions.

At that point, Buffett was ready for anything… He was an investment fox.

Now, I want you to ask yourself this…

In your life so far, have you been a full-blown hedgehog, filtering out everything that didn’t coincide with your one big thing?

Or have you been more of a fox, trying different jobs, investments, and other pursuits… ready for anything that felt like the right thing to read, think, or do next?

I’m willing to bet most of you are more foxlike.

So when it comes down to it, the hedgehog-or-fox question is really about self-discovery…

It’s not about making up rules that all investors must follow. Every situation is unique. You need to make your own rules or find the ones that work best for you.

However, there is one way in which all investors must become hedgehogs.

A hedgehog’s top priority is to avoid being eaten by a fox. Because of that, he evolved to have an ironclad defense against them – his sharp quills. That’s a hedgehog’s “one big thing.”

For investors, not getting killed by a fox means avoiding catastrophic loss. All successful investors are hedgehogs when it comes to risk… It’s absolutely impossible to succeed as an investor without learning to recognize, understand, and control risk.

Now, let’s put things together into a prescription for investors…

First, begin with the simple question… Are you a hedgehog or a fox?

Unless you’re like Tiger Woods, you’re probably more foxlike than hedgehoglike in life. You’ve probably done many things rather than focus on “one big thing” since childhood. It’s OK to recognize aspects of both hedgehogs and foxes in your style of living and investing.

Next, you must confront the one non-negotiable fact: All investors must be hedgehogs about risk. Hedgehogs know “one big thing”… and risk is that thing for all investors.

After you self-reflect and learn to become a risk-focused hedgehog, I recommend reading broadly on many topics…

Don’t be afraid to start a bunch of books and not finish them. (That’s OK… You’re gaining a wealth of knowledge with every page.) Check in with multiple news sources each day.

Imitate Jim Rogers, too… Travel as much as possible. Get your boots on the ground in places where few others have been. Do your own thinking and ignore advice that confuses you, no matter how much you might admire the person giving it.

I highly recommend studying lots of individual businesses and becoming familiar with many different assets, one at a time – even if you think you’ll never invest in them.

The more different businesses you learn about, the more you’ll integrate that knowledge into the “one big thing” of growing wealth by investing your capital.

In the end, most successful investors end up as hedgehogs. But almost everyone winds up living and learning like foxes until they get to that point.

So if you look in the mirror and see a fox today, keep reading and learning. One of these days, you’ll catch your reflection and see a hedgehog staring back at you.

Good investing,

Dan Ferris