Investing Lessons From 'The Hedgehog and the Fox'

Editor's note: You must understand your own investing style, as we covered yesterday. Today, our holiday series continues with a deeper look at this idea. In this essay – adapted from the last time we shared it in an August 2021 DailyWealth Weekend Edition – our colleague Dan Ferris explains two unique approaches to the markets... and reveals why all investors must be the same in one critical way.

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?

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.

Berkshire Hathaway (BRK-B) founder Warren Buffett is a classic hedgehog...

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.

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 with 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 by David Epstein. It 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, played squash with his father on Sundays. He dabbled in skiing, wrestling, swimming, and skateboarding. He played basketball, handball, tennis, table tennis, 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.

Maybe most of us are 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.

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 nonnegotiable 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 you learn, 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

Further Reading

"'The coffee-can portfolio' is all but forgotten today," Dan writes. Most of us are biased toward action. We think "doing more" is the way to improve our returns. But as one money manager's story shows, it pays to simply ignore the noise, buy great businesses, and invest for the long term... Read more here.

Time is one of the biggest advantages you have as an individual investor. Unlike the professionals, you don't have a boss looking over your shoulder. Patience is on your side. Add three more simple steps, and you'll stand a great chance of outperforming over time... Learn more here.