Saturday, May 7, 2011

Hedgehogs and Foxes

The fox knows many things, but the hedgehog knows one big thing.” -Archilochos

In the book Boombustology (which I’d put in my list of ‘Top 10 Most Important Books on Investing’), Vikram Mansharamani states that:

The basic underlying logic of Boombustology has been that when it comes to spotting financial bubbles before they burst, it is better to be a fox. Foxes are more suited to attack mysteries. Hedgehogs, with their depth of understanding, are more effective in solving puzzles.

He also mentions Phil Tetlock’s study which produced the book Expert Political Judgement, in which Tetlock also concluded that “foxes are better forecasters than hedgehogs.” This discussion reminded me of a couple of paragraphs we wrote in Chanticleer’s Q2 2010 Letter, which are below.

In the book Good to Great, Jim Collins writes about an idea he calls the Hedgehog Concept, in which he compares the fox to the hedgehog. Foxes, Collins writes, know many small things while hedgehogs know one big thing. Hedgehogs survive because the big thing they know is that when there is danger, they can roll into a ball of spikes and survive. Collins makes the case that companies that go from good to great are all hedgehogs. We disagree, and not just because 2 of the 11 companies the book sites as great are now basically or literally bankrupt; and another one might be if it weren’t for government support of the financial system.

When it comes to survival in business and investment management, we believe it is better to be the fox. It is better to view the current state of the world as a complex, interwoven, evolving system and to not take a static view of the world. There are different types of markets, cycles, and risks and it is important to constantly examine the rationale behind a business or investment decision to see if there are any dangers being missed. The hedgehog may survive an attack from a fox by rolling into a ball of spikes, but if the danger is a car driving toward it at 60 miles per hour, running might be a better defense. Warren Buffett is quick to remind people that the chains of habit are too light to be felt until they are too strong to be broken. Investors would be wise to keep this in mind. In our business, value still applies, but a world full of debt and interdependence is a fragile one, so building a portfolio that is resilient and takes this fragility into account is difficult, but essential.


Related essay: The Hedgehog and the Fox - by Isaiah Berlin