August 16, 2021
Frequent American Consequences contributor Dan Ferris writes one of Stansberry Research’s high-end newsletters called Extreme Value. It’s a monthly advisory that focuses on safe investments… great businesses trading at steep discounts.
Dan has helped his subscribers book impressive gains over the years, including a whopping 629% return on Constellation Brands that earned him a spot in the company’s infamous Top 10 Highest-Returning Recommendations.
Dan’s value strategy may not be flashy… or sexy… But it works to bring in consistent winners.
Before we dive into Dan’s story today, he asked that we first share with you the five specific criteria he uses to pick his big stock winners. Now, this isn’t some marketing ploy – the five criteria are listed right here in the video (or if you’d prefer to read them, you can choose the transcript option instead).
Dan disclosing his five “must haves” for any investment is valuable in itself.
But he’s also super pumped about a new opportunity that not only meets his five criteria but seems destined to soar in the coming months… You should hear what he has to say.
With all that in mind, Dan writes to you today about an unusual question you need to ask yourself. The answer will give you great insight into what stock you should buy next.
Are You a Hedgehog or a Fox?
Over the past year or so, I have discussed 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 now found another one of those insights, and that’s what we’ll discuss today. 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.”
It’s a long essay about Russian novelist Leo Tolstoy. 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.
… 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.
Berlin was engaging in literary criticism… But folks have been seeing hedgehogs and foxes in all walks of life ever since he wrote the essay. And the idea of determining if you’re guided by “one big thing” versus “many things” is a valuable dichotomy for investors, in more than one way…
The hedgehog-or-fox theme also applies to your investment 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…
Hedgehog investors come up with their own system – their “one big thing” – and they eliminate everything that doesn’t conform to it.
For a recent episode of the 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.
By sticking to the CODE system, Chris saves a lot of time… And it comes directly out of his decades of experience and knowledge as a former banker, analyst, and money manager.
Most stocks don’t conform to Chris’s framework, so he doesn’t often find new opportunities. But importantly… 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 Mayer, Buffett has a simple, four-part screen that eliminates a huge number of opportunities… And it helps him focus on only the businesses that appear most attractive.
Buffett only wants to own businesses – publicly traded or not – that have the same four characteristics. In order to get his attention, the business must be one that…
- He can understand
- Holds a durable competitive advantage
- Has a management team he can trust
- Is available at a price that’s not too expensive
Like Mayer’s CODE system, those four filters constitute “one big thing” for Buffett and Berkshire Hathaway.
He has built a huge, cash-gushing company by focusing like a hedgehog on finding as many businesses as possible that fit that description… He doesn’t bother with those that don’t.
The various traders featured in Jack Schwager’s many Market Wizards books bear little resemblance to Buffett in what they buy and how long they hold it… But they’re all hedgehogs, too.
Each of those “wizards” has either learned or created a system that has two primary traits… It quickly gets them out of losing positions and keeps them in winning positions as long as possible.
Many of these short-term traders operate in dozens of futures and currency markets all over the world. But importantly, they only trade when they find an opportunity that fits their own system – just like longer-term-focused investors like Mayer and Buffett.
Hedgehogs learn to ignore the opportunities that don’t fit their system…
Mark Minervini was one of the traders featured in Schwager’s book Stock Market Wizards.
Minervini took 10 years to develop his own successful system. He only trades stocks. And in two posts on Twitter yesterday, Minervini expressed the hedgehog perspective well…
Those who say it’s hard to sit on their hands and do nothing have no rules or they have no discipline to follow their own rules.
Regardless of how much the indexes rally, I NEVER buy into a market unless there are stocks that meet my criteria.
Again, hedgehogs stick to their system no matter what. They pass on anything outside of it.
Author and investor Howard Marks is a hedgehog whose “one big thing” for decades has been finding bargains in the bond market. As he once said…
To be a disciplined investor, you have to be willing to stand by and watch other people make money that you passed on. You don’t have to invest in everything. You don’t have to catch every trend.
Like I said, most great investors are hedgehogs. True investment foxes are rare, but they do exist…
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.
One of the best examples of a successful investment fox is Jim Rogers…
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 first-hand. Incredibly, he 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.
Many times over the years, Rogers has described his style by saying, “I just wait until there is money lying in the corner and all I have to do is go over and pick it up.”
A hedgehog would be a lot more specific… A fox like Rogers is ready for anything, so he’s a lot less specific about what he’s looking for
A good example is late Canadian value-investing legend Peter Cundill… He managed the Cundill Value Fund from 1975 through 2007, making investors more than 100 times their initial investment over that span.
The title of Christopher Risso-Gill’s book about Cundill, There’s Always Something To Do, suggests Cundill believed you don’t need to wait for an opportunity that fits a specific system, the way all hedgehogs do. This thinking is more like a fox. As Risso-Gill wrote…
[H]e had taken the view early on that he would be prepared “to put money into anything, anywhere, provided that the downside is measurable and acceptable and the chances of a good profit appear to be better than 50%.”
That sounds rather foxlike. But Cundill himself once wrote that…
I like to think that, if I stick to my formula, my shareholders and I can make a lot of money without much risk.
Cundill’s formula led him all over the world… He became interested in investing in Sweden as early as the mid-1960s. And obscure, undervalued, and misunderstood foreign opportunities became a staple of his investment style after a trip to that country in 1977.
But it’s hard to hear the word “formula” – which implies a system like Buffett, Mayer, or Minervini – and not conclude that you’re looking at 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.
Maybe the answer is more complex than I first thought…
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).
And maybe we’re all destined to be foxes until we learn 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. And in 1954, he swapped the stock of a chocolate-making company for cocoa beans… then sold the beans on the commodities exchange for a profit.
At that point, Buffett was ready for anything… He was an investment fox.
Plus, Berkshire Hathaway Vice Chairman Charlie Munger – Buffett’s business partner and friend of nearly 50 years – has a foxlike intellect. And he has succeeded at investing in a big way… He’s worth billions of dollars, and he excelled even before he met Buffett in 1959.
Munger is well-known as a voracious reader across a broad array of disciplines… He has said that “developing the habit of mastering the multiple models which underlie reality is the best thing you can do.”
In other words, at age 97, Munger is ready for anything… And he always wants to get ready for even more by mastering as many new modes of thinking as possible.
WAIT, THERE’S MORE…
The conclusion of Dan’s Hedgehog/Fox essay will run tomorrow morning.
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Contributing Editor, American Consequences
With Editorial Staff
August 16, 2021