Market insights and analysis

How dynamic, risk-managed investment solutions are performing in the current market environment

4th Quarter | 2021

Market insights and analysis


Updates on how dynamic, risk-managed investment solutions are performing in the current market environment.

Are you a fox or a hedgehog in your investing?

By Jerry Wagner

A short fragment of poetry over 2,600 years old set the academic world ablaze when it was cited in 1951. Attributed to one of the greatest Greek poets, Archilochus of the Greek island of Paros, was this simple phrase: “Πόλλ᾽ οἶδ᾽ ἀλώπηξ, ἀλλ’ ἐχῖνος ἕν μέγα.” The fox knows many things, but the hedgehog knows one big thing.

Russian-born philosopher Isaiah Berlin used the phrase in his essay “The Hedgehog and the Fox,” which was about Tolstoy’s philosophy of history. Afterward, it was adopted as a comparison tool in many fields around the world, going viral in a time before the internet. I learned about it in Cold War historian John Lewis Gaddis’ book “On Grand Strategy.”

Gaddis, who taught grand strategy at Yale University for almost two decades, begins his book by relating how Berlin’s dichotomy stirred much debate when it was written. The hedgehog and the fox: “The distinction was simple but not frivolous: it offered ‘a point of view from which to look and compare, a starting point for genuine investigation.’ It might even reflect ‘one of the deepest differences which divide writers and thinkers, and, it may be, human beings in general.’”

“Hedgehogs, Berlin explained, ‘relate everything to a single central vision’ through which ‘all that they say and do has significance.’ Foxes, in contrast, ‘pursue many ends, often unrelated and even contradictory, connected, if at all, only in some de facto way.’”

The differences between “fox investors” and “hedgehog investors”

Like many others, I was struck with the simplicity of this dichotomy and the meaning it held for inquiries into fields not addressed by its originators. I have written articles about how active and passive investors are based on a distinction that is not real. Each type of investor uses elements of the other.

The Gaddis book made me realize that the subject could be approached in another way. The two types of investors may be separated in much the same way as the hedgehog and the fox.

Passive investors are the hedgehogs. They have a larger and longer view. They take big risks for large gains. They can sit with a position and sustain large losses in pursuit of the long-term gains that the stock market has delivered.

Foxes respect their environment. They study and understand the risks. They realize that there are “known unknowns” and “unknown unknowns” that can upset even a carefully laid plan. They do not believe that they can flatten anything that gets in their way, like the hedgehog, but instead employ twists and turns to make their way to their goal.

The hedgehog sometimes fails. Even though the goal may be correct (the stock market has moved higher over the centuries, and setbacks have finally rewarded the patient), the time may not be right to pursue it. The losses sustained may be too great to endure.

The fox can fail too. The fox’s many twists and turns may leave it lost. Its realization of all of the risks that exist may leave it paralyzed, unable to reap the profitable investment opportunities around it.

In other words, both types of investor can struggle and even fail. Yet Gaddis points out the findings of a study cited in Philip E. Tetlock’s 2005 book “Expert Political Judgment” that offer additional insight. The study looked at more than 27,000 predictions on politics over the 15 years ending in 2003 by almost 300 of the world’s top “experts from private, government and academic sources.” It found that those who self-identified as foxes were far more proficient predictors than the hedgehogs.

Tetlock discovered that the foxes relied upon “stitching together diverse sources of information,” not deductions derived from “grand schemes.” In contrast, hedgehogs aggressively deployed big explanations, displaying a “bristly impatience with those who ‘do not get it.’” As Gaddis summarizes, “When the intellectual holes they dug got too deep, they’d simply dig deeper.”

Tetlock concluded, “self-critical thinkers are better at figuring out the contradictory dynamics of evolving situations, more circumspect about their forecasting prowess, more accurate in recalling mistakes, less prone to rationalize those mistakes, more likely to update their beliefs in a timely fashion, and—as a cumulative result of these advantages—better positioned to affix realistic probabilities in the next round of events.”

What investors can learn from both the fox and the hedgehog

Given these findings, it is easy to see why I have proudly associated myself with the active, dynamic, risk-managed type of investor. And it has served me well over my 50 years of investing. Yet this does not mean that I reject all that the passive-investing philosophy holds dear.

Berlin seems to have thought of hedgehogs and foxes as mutually exclusive. Gaddis realizes that they are just two ends of the spectrum. Most people, he believes, are somewhere in between. Or better yet, like F. Scott Fitzgerald’s test for “a first-rate intelligence,” a wise investor’s strategy should be capable of holding on to both of these opposing concepts, the hedgehog’s and the fox’s, at the same time while investing.

In this vein, I accept and hold to the passive investor view of the stock market. Stocks in America have tended to go up more than they go down, so far. If you had one decision to make—to hold stocks or not hold stocks—you should hold stocks. Stocks do cycle up and down, and in doing so, they have recovered, so far, from every decline and eventually moved higher. And finally, no one can sell at every top and buy at every bottom of that cycle.

But I also see that if an investor were to plow ahead and just “buy and hope,” the path, while it could be successful in the long term, could also fail badly. Hedgehogs can fail because the means are not there to reach their lofty ends. Not everyone has the time to bail themselves out. They may have commenced investing at the wrong time (think November 2007 or March 2000). They may not have the intestinal fortitude to stomach a 50% to 70% loss and stay the course.

Thinking like a fox may be needed to get more investors to their final goal and reduce the chance of failure. Foxes understand that they don’t have to restrict themselves to only one decision. Appreciating the risks of passive investing and steering around the obstacles that can appear in its practitioners’ path allows for evolution and growth. Taking a shorter-term view tactically better matches the means with the end.

Let’s be hedgehog investors when it comes to adopting a goal of long-term profits and using the stock market as an instrument in reaching that goal. But let’s also adopt the tactics of the fox by being responsive to the market environment—not only understanding the risks but taking actions to avoid them whenever possible.

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