Learning How to Think (like a Fox, not a Hedgehog)

May 24, 2012

Early March, I sent out a letter to all my clients with the byline ‘It is scary’. The basic premise of that admittedly long letter was that we were experiencing what I’d like to call a ‘bubble of pessimism’. I recommend a reread of that letter – the lessons have since been burned into your portfolio.

The ‘bubble of pessimism’ has since popped. Almost to the exact day that letter hit your mailbox the markets experienced their strongest four-week rally since 1933!

Practically all my clients enjoyed the full benefit of that rally. A small number did not. I’d like to address the mental heuristics (or thought shortcuts) that seem to be consistent with failing to perceive the value in an extraordinarily depressed market.

I’m going to quote extensively from a significant piece based on a study of prognosticators that came out just this last month: ‘Learning How to Think’ by Nicholas Kristof.

 

The essence of the study was to separate ‘thinkers’ into hedgehogs and foxes. Hedgehogs tend to have a focused worldview, an ideological leaning, strong convictions; foxes are more cautious, more centrist, more likely to adjust their views, more pragmatic, more prone to self-doubt, more inclined to see complexity and nuance. The study showed that while foxes don’t give great media sound-bites, they are far more likely to get things right.

 

It was discovered that the distinction that mattered most among forecasters was not their degree of expertise, but their thinking style. Overall, the foxes did significantly better, both in areas they knew well and in areas they didn’t.

The rational investor asks ‘just how does this benefit me?’ Take your news and views with a grain of salt. No one man influences the world or human behavior.

 

 

Markets are human and humans overreact – in both directions. The previous month proved only one thing, and that is that market timing is a fool’s errand. Those standing on the sidelines for the opportune time to get back into the market may have just missed the boat. The lesson to take from this is that one may profit from learning to think like a fox.

 

Thank you for your continued confidence in Efficient Wealth Management.

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