Invest Like a Fox... Not Like a Hedgehog

Investors, no matter what strategy they are using, can be placed into two categories. Single-minded, inflexible hedgehogs lock into one strategy and stick with it through thick and thin. Dynamic, adaptable foxes, on the other hand, are alert for changes, learn from experience, embrace new ideas, and make the most of new trends and technologies. The key lies in being flexible and realizing that markets are dynamic. Invest Like a Fox . . . Not Like a Hedgehog shows investors how being a hedgehog can reduce returns while increasing the risk of a portfolio, and how acquiring the cunning and adaptability of the fox will improve returns while reducing risk. It reveals the shortcomings of popular but hedgehog-like investment strategies and shows how a fox-like investor adjusts to new market realities. Readers learn how to use the renowned Bayesian Theory of Probability and other guideposts from outside the world of finance to adjust their strategies and react to new information.

Foreword ix

Preface xiii

Acknowledgments xxi

About the Author xxiii

Chapter 1 Foxes vs. Hedgehogs 1

Chapter 2 Classic Hedgehog Investment Strategies 25

Chapter 3 The Modern Hedgehog Theory 45

Chapter 4 How Foxes Look at Markets 85

Chapter 5 The Valuation Cycle in Action 111

Chapter 6 Foxes and Reverend Bayes: Rational Investing in Irrational Markets 133

Chapter 7 Advice for Foxes and Hedgehogs: Key Investment Mistakes to Avoid 177

Chapter 8 Portfolios of the Future 195

Index 227

ROBERT C. CARLSON is Editor of the monthly newsletter Retirement Watch. He is also the managing member of Carlson Wealth Advisors, LLC. Carlson is Chairman of the Board of Trustees of the Fairfax County Employees’ Retirement System, which has over $2.4 billion in assets, and was a member of the Board of Trustees of the Virginia Retirement System, which oversees $42 billion in assets. He has been interviewed by or quoted in numerous financial publications and has appeared on many national television and radio programs.

Why do most investors earn less than they should?

Why do widely followed investment strategies fail to meet investors’ goals?

Is there an explanation for market volatility and for long-term bull and bear markets?

A venerable investment axiom is: The most dangerous sentence in investing is “This time it is different.” Yet, something always is different. Investment markets are dynamic—they reflect the interaction of millions of people each day—and things change. Successful investors learn to distinguish between the relationships that do not change from those that do.

The fact is, if you want to excel in any type of investment environment—and improve returns while reducing risk—you must move away from the inflexible mindset of a hedgehog, who sticks with one strategy through thick and thin, and become an adaptable fox, who learns from experience, embraces new ideas, and makes the most of new trends and technologies. With Invest Like a Fox … Not Like a Hedgehog, financial professional Robert Carlson will show you exactly how to do this, and much more.

Filled with in-depth insights and expert advice, this detailed guide examines the distinct differences between hedgehogs and foxes; reveals the shortcomings of popular but hedgehog-like investment strategies; and helps you develop fox-like investment strategies that will allow you to achieve long-term success as well as avoid unnecessary losses. Along the way, you’ll also discover how to use the renowned Bayesian Theory of Probability and other guideposts from outside the world of finance to adjust your strategies and react to new information.

Challenging the concepts of Modern Portfolio Theory (MPT), Efficient Market Hypothesis (EMH), and the Capital Asset Pricing Model (CAPM) every step of the way, Invest Like a Fox … Not Like a Hedgehog:

• Explores market volatility and the long-term bull and bear markets that most investment assets are subject to
• Explains how to use your knowledge of the Valuation Cycle and Rational Beliefs Theory to build and manage an investment portfolio
• Addresses mistakes commonly made by both foxes and hedgehogs, and discusses how Behavioral Finance can benefit fox-like investors
• Outlines the trends and tools that will shape portfolios of the future
• And much more

There are a number of strategies that can help investors achieve their goals, but the only way they will work is if investors change the way they think about the markets and their portfolios. With this book as your guide, you’ll quickly learn how to think differently about investing and discover how to use that new way of thinking to develop a winning investment strategy.