August 17, 2021
Yesterday, we published the first half of Dan Ferris’ must-read essay, “Are You a Hedgehog or a Fox?”. (Missed it? Need a refresher? Click here to see it.)
Read on for the conclusion to Dan’s story…
Are You a Hedgehog or a Fox?, Part Two
Now, I want you to ask yourself this…
In your life so far, have you been a full-blown hedgehog, someone like Tiger Woods, who from birth eliminated everything from his life that wasn’t golf?
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 that most of us have experienced more varied lives and careers than Woods. He’s the exception in human development, not the rule.
I think I’m pretty typical. Since age 18, I’ve shelved books in a library… worked in a music store… ran an ice cream store… ran an ice cream factory… published electronic data codes for the transportation industry… worked as a freelance publishing consultant… waited tables… played guitar and keyboards… conducted music theater orchestras… worked a bunch of odd temporary jobs too numerous to mention… and probably more beyond that.
Overall, I bet your story is more like mine than Woods’.
When it comes down to it, the hedgehog-or-fox question is 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. It’s one skill set that all investors must master – and without it, they will not achieve sustained success…
As Isaiah Berlin quickly points out in his essay, Archilochus’ fragment…
… may mean no more than that the fox, for all his cunning, is defeated by the hedgehog’s one defense.
A hedgehog’s top priority is to avoid being eaten by a fox. Because of that, ensuring that he has an ironclad defense against foxes – his ability to roll up in a ball, offering predators nothing but sharp quills – is the one critical thing in his life.
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.
The hedgehogs are unanimous on this point…
When I interviewed Chris Mayer during a March 2019 Investor Hour episode, he said…
I was talking to a friend of mine the other day who manages money. We were talking about what’s the first question you ask yourself when you look at a stock…
And for me, it’s… “Am I going to lose money?”
That’s really the first thing… If it doesn’t go anywhere for a year or two or three, that’s OK. I just want to have the odds of permanent impairment being very low…
Permanent impairment being, of course, money that you can’t get back.
Buffett is famous for saying…
Rule No. 1: Don’t lose money.
Rule No. 2: See Rule No. 1.
In his must-read classic, The Most Important Thing, Howard Marks writes…
Trying to avoid losses is more important than striving for great investment successes.
Peter Cundill once wrote…
We try not to lose… The losses, of course, work against you in establishing decent compound rates of return.
The Market Wizards traders all say something like, “Cut your losses quickly and let your winners run.” Even Jim Rogers, the lone fox, once said…
So my basic advice is don’t lose money. Stay with what you know, and then find something that you can make a lot of money in.
Whether they’re technical analysts (like most of the folks in the Market Wizards series)… or fundamental investors (like many equity-fund managers)… they all had to learn to control their risk exposure. They all prioritize not losing over making money.
The worst thing you can do is to sit idly by and do nothing. Find out exactly what’s going on in America, why this grocery store billionaire is so concerned about this coming October, and four steps every American should take right now, right here.
Now that we’ve covered this from different angles, let’s put it 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’ll probably feel more like a fox in life than a hedgehog. 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.
To paraphrase Isaiah Berlin, it’s the “single, universal organizing principle” upon which all successful investment strategies are built. Hedgehogs know “one big thing”… and risk is that thing for all investors.
After you self-reflect on the question and learn to become a risk-focused hedgehog, I recommend reading broadly on many topics…
For example, imitate Charlie Munger and learn many different mental models that underlie reality. (Blogger Shane Parrish has listed more than 100 different models on his website.)
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. (Have you ever been to the wilderness of remote northern Labrador? I won’t forget that trip any time soon!) 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 wake up… walk into the bathroom… and see a hedgehog staring back at you.
P.S. So do you think you’re a hedgehog or a fox? Dan is a value guy… known to invest conservatively, like a hedgehog… And right now, in this age of “meme stocks” and risky cryptos, Dan is worried that the market is filled with so much fear and greed, a lot of folks are going to lose a lot of money.
Dan suggests not to let these emotions force you into an investing mistake that could cost you your savings… Let the rest of the crowd overreact to the headlines – he says that’s no way to build real wealth.
Dan is excited today, however, about a stock he’s discovered that has huge potential for life-changing gains.
Now, his Extreme Value newsletter is responsible for some of the most lucrative recommendations in the 20-plus year history of Stansberry Research… tons of triple-digit winners for his subscribers.
And this newest recommendation could beat them all. Click here to find out all the details.
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Contributing Editor, American Consequences
With Editorial Staff
August 16, 2021