The InvestMentor

June 18, 2002

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Isaiah Berlin, in his classic essay "The Hedgehog and the Fox," describes the difference between two visions of the world, those of the monist and the pluralist. He relates these two viewpoints to those of a fox and hedgehog by borrowing from the Greek poet Archilochus who said, "The fox knows many things, but the hedgehog knows one big thing." The hedgehog (the monist) needs only one principle that directs its approach to life. The fox (the pluralist) pursues many ideas, often accepting equally valid but mutually incompatible views on life.

The hedgehog and fox philosophies can be found in all the big arenas: religion, politics, history, literature, and yes, (he says, tying it together now...) the stock market. Essentially, all investors are either a hedgehog or a fox, and that becomes no clearer than during a tumultuous period, such as the one we find ourselves in.

Being a hedgehog simplifies your investing life. Be a fox complicates it. A hedgehog believes, above all else, that being, and staying, invested in good companies, is the key to maximizing the growth of long-term investment assets. A fox may believe parts of that, but that there are times and places when that may not be true; and often, conflicting perspectives override the hedgehog’s view, in the fox’s mind. Not sure what beast you are? Consider:

Hedgehog: The key to investing is finding a diversified list of good companies, and riding out stock price and overall market fluctuation.

Fox: The key to investing is knowing when to get in and out of stocks and the market and that a crafty fox can gain an edge over everybody else enough of the time to come out ahead.

Hedgehog: Stocks are a long-term investment.

Fox: Stocks are a long-term investment (except in bad times when you should dump them because a fox can tell when its time to get invested again).

Hedgehog: Agrees with legendary investor Sir John Templeton (of Templeton Fund fame) who said, "The most expensive words in the market are, ‘This time it’s different.’"

Fox: Believes that one has to be on guard for the next "New Paradigm."

The biggest risk to the fox at his this point in time is the Bear Trap—the temptation to exit the market at these levels. This ensures that the fox realizes the losses to-date, likely results in the fox assets take longer to reach their past highs, because assets are transferred to a "safer" but lower-yielding asset class.

One company this hedgehog’s finds interesting is Blockbuster Entertainment (BBI). At home entertainment is one of those long-term growth areas that hedgehogs love. The stock trades at a very reasonable PEG of 1.05—derived by placing their forward P/E of 19 atop their growth rate of 18. (Because it was recently spun off of Viacom, the unit doesn’t have it’s own historical financial figures, but they can be parsed out of Viacom’s historical numbers.)

You know Blockbuster as a video store, once thought to be threatened by the emerging "video on demand" (or VOD) technology which would allow viewers to purchase any movie for viewing from their TV at home. But the DVD craze has trumped interest in VOD for now, and when VOD eventually permeates the market place, expect Blockbuster to have hedged its bet, by participating directly in VOD distribution.

At the time of publication, the author was neither long nor short any of the stocks mentioned in this article, either in client accounts or personal ones. Positions may change at any time.