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 a new book by Cold War historian John Lewis Gaddis entitled “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.’”
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. Last week, I wrote 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 course of 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.”
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 true 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 long term 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.
The easy guess would be that Donald Trump is a hedgehog. He has big ideas, lofty goals, and sets himself up for big wins and big losses. He believes he can just plow through obstacles, whatever they may be.
Certainly, that has been the impression he has conveyed when it comes to trade policy. His goal of a new trading relationship with our trade competitors is one of those lofty goals he tosses out to his supporters. And threatening increased tariffs seems like one of those high-risk policies that could cause big losses down the road.
At least that is what the financial markets seem to believe. Each time tariffs are mentioned, stocks tumble. Once the North Korean summit was history, stocks turned south two of the next three days, and the S&P 500 finished the week lower than where it ended the previous week.
Yet as the last year and a half of North Korean/U.S. relations demonstrates, President Trump can be a bit of a fox as well. Like in Spielberg’s “Lincoln,” where the president employed all kinds of shifting and devious tactics in his pursuit of the 14th Amendment, President Trump’s different approaches to the volatile Korean premier; the varying caricatures he concocted; and the on-again, off-again summit suggest that he is fully capable of adopting the tactics of the fox when conditions demand it.
Trade may be yet another battlefield where our president turns his enigmatic behavior into a policy success. Or it could prove to be, as many believe, a set up for a colossal failure. It is just too early to tell. It may be that the market this summer will be held hostage until the smoke of battle dissipates and we are able to discern a winner or a loser.
This remains the greatest risk in the financial markets. Most everything else seems to point to a higher stock market ahead.
Sure, summer seasonality trends tend to point lower. This is even more the case in a midterm election year. The Fed is tightening, inflation is starting to trend higher, and the S&P has not made new highs and remains overbought.
Yet while that’s the stuff of stagnation or even of a mild downturn in stock market prices, it is not likely to call for a complete reversal of the bull market or the start of a bear.
We remain in a pronounced uptrend. Our intermediate strategies and short-term indicators remain bullish. Rather than having market breadth trail the S&P, it seems to be leading stocks higher.
Earnings are on a tear. Projections are for near 20% earnings growth each of the next three quarters. Such growth makes price-earnings ratios even lower than they were earlier in the year.
The earnings growth reflects the strong state of the economy. While Europe seems to be reversing course, the U.S. economy appears to be riding a tax-cut head of steam higher. We are in an unprecedented period of full employment, with expanding manufacturing and housing industries. And the Consumer Discretionary and Technology sectors are soaring.
Yes, the Fed is tightening. It increased rates another quarter of a percent last Wednesday. But as we have pointed out, rising rates in a low-interest-rate environment have been good, not bad, for stocks in the past.
Furthermore, while the yield curve is tightening (the rates of long- and short-term government bonds are converging), trouble doesn’t seem to arise until short-term rates exceed long-term rates. History since 1962 shows that at the present percentage gap between long-term and short-term rates, stocks have risen almost 90% of the time, with an average gain of better than 11% over the next year.
Both of our environmental indicators (our composite of stock, gold, and bond volatility and our All-Terrain measure of inflation and GDP) maintain their stock-friendly postures. There do not seem to be many obstacles (one being the end-of-June dip mentioned last week) for this fox to twist and turn around at the present time.
All the best,
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