Book Review: Invest like a Fox, Not like a Hedgehog

Invest like a Fox, Not like a Hedgehog, by Robert C. Carlson, tries to convince its readers that one should be like a fox (multi-facet, multi-perspective) and not like a hedgehog (sole perspective) in investing.

Personally, I feel that this book is pitched for those people who either understand finance theory or have read Peter Berstein's books (Capital Ideas and Capital Ideas Evolving). Even with the background understanding, it may be a struggle to fully understand what the Robert is conveying. This is because the book touches on a wide range of topics which includes CAPM, Modern Portfolio Theory, Valuation Cycle, Behavioural Finance, Complexity and Chaos Theory, Hedge Funds Strategies & Portable Alpha etc. And not to worry, the book sticks to the principle of having no maths equations.

Some ideas that are found in the book:
1) Hedgehog strategy may not work. For example, an all-equity portfolio or 60/40 equity/bond portfolio may fail in certain circumstances, especially if the investors have a short investment horizon. Even those people with long investing horizon (e.g. 20 years) may not get their ideal/required return using all-equity portfolio or 60/40 equity/bond portfolio.

2) Modern Portfolio Theory has useful principles:
Diversification reduces risk.
Investors should pay attention to risk and not only returns.
More attention should be paid to total portolio risk and return, instead of individual assets in the portfolio.

3) Investors may go from optimism to pessimism. This leads to Valuation Cycle (I have not seen this term before), where one goes from Euphoria to Panic and back to Euphoria with a few other stages between Euphoria and Panic.

4) Why indicators (or automatic investoment rules) fail. There are several reasons in the book. I shall point out two. One is due to the chosen data period. For example, a certain investment rule may only work in 1970-1990 and if one stretches the period from 1960-2000, the rule may not be profitable anymore. Second is that the rule may become to overly used once it is well-known. Hence any potential profits found in the rule may have been effectively earned (or arbitraged) by the market players.

5) The foxlike investors, in future, may adopt or incorporate absolute return strategies/funds in their portfolios. This reflect the belief that risk reduction is as crucial as potential returns. Analysis will be based more on the total portfolio characteristics, rather than its underlying components/assets.

The book contains more ideas than what I have briefly describe. If you're interested, you may want to read it from the bookshop or from NLB (332.6 CAR).