Sunday, July 24, 2022

Isaiah Berlin's hedgehogs and foxes - Why be a top-down investment hedgehog and a bottom-up investment fox

 


One of the best classification of intellectuals was by the Isaiah Berlin who said that there are either hedgehogs or foxes. The hedgehog knows one big thing very well and tries to explain the world through or within this conceptual framework. The fox, on the other hand, knows many small things and develops explanations on a case-by-case basis as needed. The hedgehog will focus on a grand strategy or approach that both requires and generates consistency. The fox focuses on trying to find the tools or explanations that best fits the situation. While Berlin's work focuses on politics, it can provide a useful framework for thinking about investing. 

The hedgehog investor thinks about the world through a single lens or view about markets or strategy. The hedgehog could be a believer of efficient markets as his world view. He could think of the world through the framework of value investing. The hedgehog could be a trend-follower who undertakes his actions based on the direction of price. The hedgehog could have a single macro view of the world which impacts forecasts on inflation and growth. The investment fox may meld several strategies or ideas together to form a portfolio. The multi-strat manager could be considered the ultimate investment fox. 

Is one approach better than another? They will have different return profiles and make different errors. The value investor may do very well, but usually only during those times when value is in favor. There are regimes when value will under-perform. The investment fox may do better in general but will diversify away some of the potential returns that would be received by a focused hedgehog. The choice may not be an either-or decision. The important issue is knowing whether you are a hedgehog or fox and what that may mean for potential returns and volatility.

Nevertheless, I like to think that an investor can be a little bit of both. An investor could be a macro or top-down hedgehog with a well thought through framework for making broad investment decisions. The investor can also be a bottom-up investment fox who uses different models and information to make the actual purchase or sale decision. Trading requires fox skills while strategy may require hedgehog skills. The best managers may have characteristics of both.

For more on hedgehogs and foxes: 

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