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So the fox said to the hedgehog...
It is noticeable that there are certain subjects around which everybody seems to be an expert. Health is a good example. We don’t visit doctors to get diagnosed anymore. No, we go for confirmation that our own diagnosis, cobbled together from the internet and any family member who has completed a first aid course, is correct. Woe betide the hapless doctor who has the audacity to suggest that their thirty years experience and degree in medicine outranks the hallowed font of knowledge known as ‘Aunty Mary’.
Investing is another. If there is one sure-fire subject upon which almost everyone is happy to divulge their pearls of wisdom, it is where you should be investing your money. ‘You want to be in China you see, that’s where the money is’ or ‘Greek bonds, safe as houses my son, you mark my words’.
These nuggets of razor sharp insight are normally dispensed over a pint or two by someone who regards themselves as a bit of an expert because they watched ‘Wall Street’ and have a Stocks and Shares ISA with the Halifax. If however, you ask the said ‘knowledge dispenser’ how much he has invested in ‘China’ or ‘Greece’, the answer is invariably, ‘well I just missed out you see…. I was going to put my money in but my grandma died / was made redundant / realised I didn’t know what I was talking about (delete as appropriate)’
They will however go on to espouse about how much they would have made, if they had invested, despite the fact that they didn’t. This is akin to boasting how Bill Gates came to you with a looney tunes idea for a computer system called Windows and how you proudly sent him packing because you wanted to put your life savings into a funny little electric car called a C5.
The point that we are lurching towards is that the average anecdotal idea about what a well thought out and structured investment should look like, is normally pretty different to how it should be.
Most people will fall into one of two types of investor. Foxes and Hedgehogs.
A fox is an opportunist, light on its feet. It will look for opportunities in the market and invest some or all of their capital in that area, hoping for a short to medium term gain. Assuming it makes a profit it will withdraw from that investment and invest its gains in the next opportunity.
To be a fox you need to have extraordinary foresight and knowledge about what you are investing in. You need to be absolutely sure that what you are putting your money into is going to increase in value, and quickly.
The advantage of being a fox is that when it goes well, swift gains can be made. The downside is that when it goes wrong, it goes very wrong indeed. In fact if your investment goes down in value it can leave you with no option but to hold on until it goes up again, because you can’t afford to take the loss.
The hedgehog is a different beast. He doesn’t run around looking for the big opportunity. Instead he spreads his money across a range of different investment types, spanning lots of different asset types.
Instead of spending time looking for opportunities in the market, he focuses on researching the best managers for each element of his portfolio and building a robust long-term management team.
Imagine the scenario where a fox and a hedgehog were each given a budget to build a football team. (stay with us)
The fox would spend the majority of the budget on a star striker or two and not worry too much about the defence whilst the hedgehog would spread the money evenly and build a balanced team.
The fox will hope that he wins big enough in the first few games to be able to buy more strikers but also risks plummeting through the divisions if his strikers don’t perform. The hedgehog accepts that not all of his players will perform well in every match, but that as an overall team they will win more than they lose. Whilst the fox may win goal of the month on a regular basis, it is the hedgehog that is likely to win the league.
And if you are in any doubt about the whether the fox or the hedgehog is most successful, ask yourself when you last saw a skinny hedgehog? Or a fat fox for that matter?
Steve - 14:36 on the 18th May 2010
My father does exactly that, he lectures us all on where we should be investing our money but never actually invests a penny himself!