The Hedgehog vs. The Fox
Politics, Investing and Literature
Frameworks are mental shortcuts that, while inaccurate, organize reality. An ancient but useful one is the distinction between the hedgehog and the fox. “The fox knows many things, but the hedgehog knows one big thing,” wrote the ancient Greek poet Archilochus. Hedgehogs rely on one trick to survive—playing dead—while foxes employ many. Similarly, some thinkers rely on a single idea used again and again to make sense of reality while others shift tactics and frameworks.1 On social media and in politics, hedgehogs do well. But if the goal is understanding and preserving wealth, it is helpful to find your inner fox.
Politics
A combination of economic shifts (the rise of tech and finance) and information shifts (Twitter versus TV news) has led to a weakening of the center and a strengthening of the fringes. The center is by definition the territory of foxes, while the fringes are solidly hedgehog.
For instance, because a former colleague was running for office in Pennsylvania, I tracked the primary there with more attention than I normally would have. The Republican nominee for Governor, Doug Mastriano, ran on a campaign that asserts President Biden didn’t win.2 This is a classic hedgehog strategy—Trump is always right, the only way he lost is because the election was rigged.
The fox’s perspective is different. On the one hand, Trump less led a movement than was created by one. A combination of forces (not just one), including flat real wages driven by global competition, 2008 housing market volatility, a collapse in traditional media, the opioid epidemic and the arrival at the pinnacles of power of Black leaders like Obama disturbed a portion of the population.
The particular issue that riled varied by voter. It’s less that Trump is right than that the forces that created him are real. That’s why these forces are so similar across countries. Macron versus Le Pen, Putin versus Navalny (though Navalny is in the role of the fox), Zelensky versus Yanukovich, the ousted Ukraine leader who fled to Russia.
This hedgehog/fox trade-off is more acute in authoritarian countries like Russia and China. In Russia, the hedgehog strategy is to say that the government successfully defended the motherland against fascism in the 1940s and is doing so again now. The fox perspective recognizes that Russia was the victim of fascism in the 1940s, but is now the perpetrator. A fox realizes order can be turned on its head. Similarly, in China central planning both created enormous wealth but could also destroy it.
Investing
In investing, the hedgehog strategy is to hold a portfolio of stocks and bonds for the long-term and add to it when the portfolio declines in value, as it has this year. This philosophy is espoused in lots of investment books and mutual fund companies. The 60% of the money in stocks makes most of the money, and the 40% of the money in bonds offers some cushion when the stocks falter. It is indeed true that over time, particularly in the US, this strategy has provided fantastic returns over the long-term.
A fox looks at this differently. Most of the return of this type of investment strategy occurs when the central bank is printing money. When they are tightening, reducing the amount of money in circulation, this is a money losing strategy. (THIS IS NOT INVESTMENT ADVICE. INVESTING INVOLVES RISK). In fact, when the liquidity tide goes out, it is better to do the opposite—sell stocks and bonds, as the chart below from Rose Technology shows. Note how bad the losses are in the 1970s when inflation became a big issue.
Right now the Federal Reserve needs to tighten a lot to get inflation from 8% or higher down to something like 2%. Of course, this involves timing the market, which is notoriously difficult.
To make money in this environment, one needs to be very comfortable with “shorting,” not for the faint of heart. Losses when the strategy doesn’t work are essentially unlimited. But the basic idea is that you can make money when prices are too high, just as you can make money when they are too low. You just need to flip your perspective upside down. You sell the S&P 500 to someone at the price where it began the year—4785—and buy the shares back and repay the loan wherever the stock market settles, or you think it settles.
The fox’s perspective gets more support when you look at returns from an international perspective. When things get really messy, like the 1923 German Weimar inflation, an investor can suffer losses from which, essentially, they never recover. I’m not saying that will happen now. I’m saying it has happened and the fox is ready to abandon an entire school of thought if needed to survive and flee to a different country. That sounds extreme from a US perspective, but not from a German, French, Venezuelan, Brazilian, Chinese, etc. perspective.
There is also an important point about emotion in this. A lot of investment advice argues the need to be “rational,” to look at the numbers act mechanically, like a machine. Rationality is certainly critical, though also pure hedgehog. A fox recognizes that emotion and intuition have power and can sometimes lead logic. The best strategy is incorporating logic and emotion. Hedge fund legend George Soros famously sold his positions when he developed a back ache. It’s also true that jittery investors often buy and sell at the wrong times, so this strategy too can lead to terrible problems, which is why hedgehog thinking is comforting.
Literature
The hedgehog/fox dichotomy was brought back to life by Isiah Berlin in an essay I attached in the footnote. He applied his analysis to Leo Tolstoy and War and Peace. He argues that Tolstoy was in fact a fox—he viewed things from multiple perspectives—but tried to act as if he was a hedgehog and it is this tension that tortured Tolstoy and made his great novels so intriguing.
Tolstoy’s hedgehog idea was that the way history was told was essentially a lie, a grand distortion. As opposed to big figures like Napoleon shaping history, in reality many small decisions by individuals coalesce to create an impossible to precisely describe reality. Napoleon and other leaders have the arrogance to think they could organize and direct, but in reality the great Leader is as much a person in the flow of history as anyone else, according to Tolstoy.
The truth, Tolstoy realized, was somewhere in between. Individuals do have a degree of free will, to move their arm or drink a coffee, and in positions of great power (like a Federal Reserve chief or Putin) can undertake actions that will influence millions. But at the same time, there are also limits to how much free will there is. Certainly Putin’s ideas about Ukraine have, particularly with the Nordics now looking to join NATO and Ukraine advancing, spectacularly backfired as have the Fed’s predictions about inflation.
By the way, that’s one of the reasons I push all people, particularly young people, to read both fiction and non-fiction. Non-fiction is the idea, facts. Fiction is emotions, individual lives. War and Peace is remarkable because it tries to do both.
Where We Are Now