“The Fox knows many tricks, but the Hedgehog knows one great trick.”

― Archilochus of Paros (~660 B.C.)

If we think about how most people view investing, it includes just two simple steps:

That’s about all there is to it.  The “something” that the investor buys might be different:  an individual stock, an index/collection of stocks, a rare baseball card, a cryptocurrency, a piece of land, etc.  But the idea is the same - buy it and cross your fingers!  This approach can involve some prediction in choosing the thing to buy in the first place.  And if the person is trying to be extra clever, it may involve some postdiction as well.  “I see conditions repeating that caused this type of investment to gain value in the past, so I’m buying again now!”

The ancient tale of the Fox and the Hedgehog runs something like this:  Every day the sly Fox would try to catch and eat the poor Hedgehog, and he would employ an endless variety of tricks to do so.  But no matter what new scheme he tried, the Hedgehog would simply roll up into a spiky ball forcing the Fox to give up and leave the scene.  And the whole cycle would repeat again the next day: another fresh attempt by the Fox to catch the Hedgehog with a different strategy, and another disappointment for the Fox.  The lesson is that having one proven all-weather strategy set (like the Hedgehog rolling into a ball) can be better than a constant process of trying to generate novel ideas to accomplish the task at hand.

The first time I came across this story, it immediately reminded me of the old “Road Runner” cartoons.  In each of those, Wile E. Coyote would come up with an overly elaborate plan to catch the Road Runner.  This usually involved high explosives, rickety vehicles, and perilous traps.  Each time the Road Runner would simply run away, and the Coyote would inevitably blow himself up or fall off a cliff for all of his cleverness.

We frequently see our friends and neighbors frantically digging through financial news articles, racing after the latest stock tip, day trading volatile investments, or panicking about the latest crash.  In these cases I always picture that poor Coyote preparing to ignite the rocket engine he strapped to his body, all while wearing a backpack filled with dynamite.

In my corporate career, I’ve worked at multiple companies that use code names for special projects. This is done either for temporary secrecy (to allow the project team to refer to it without giving anything away to the uninitiated) or as a rallying cry for the organization to get behind the effort.  Over the years I worked on Project Maximus, Project Sunflower, Project Depth Charge, Project Flicker and many others.  I felt like this writing project deserved a similar special name, and landed on “Project Hedgehog” as a reference to the hero of Fox & Hedgehog story.

Let’s be very clear about what we are trying to accomplish.  The goal of Project Hedgehog is to create a stable set of long-term investing strategies that achieve several goals at the same time:

Let’s go through these four Core Hedgehog Principles one by one in detail:

Given my disdain for both prediction and postdiction, our strategies will not require any opinion about how we expect an overall market or any individual investment will perform, or why it performed a certain way in the past.  The principle here is we have made the concession that we have no idea what’s going to happen in the future, and we don’t believe anyone else does either.  We don’t know what decision the Fed will make on interest rates six months from now.  We don’t know what the contents of the next non-farm payroll report will be.  We don’t know what geopolitical events will begin or end in the next year.  We don’t know who will win the next election cycle. And even if we did know any of these outcomes ahead of time, we still wouldn’t necessarily know why they happened or how financial markets might react to them.

This may seem counterintuitive to any type of investing.  When we study economics, we’re taught that everything is a trade off, one party wins and one loses in a trade, there’s no “free lunch”, etc.  How can we invest without making a decision about what we think will happen next? What we will learn in Project Hedgehog is that the types of trading and investing that are most prevalent in financial markets actually create a different set of small free lunches all over the place.  We just need to learn where to look.

So we will set up investments using only information that’s right in front of us.  And all adjustments and decisions that we make during the lifecycle of each position will be made after the stock or overall market moves, not in prediction of possible future moves.

We’re going to assume that you have something better to do with your time than sit in front of a computer screen all day watching a line on a stock price chart move up and down.  None of the strategies we will cover require ongoing daily monitoring of investments or snap timing to get in or out of positions at exactly the right moment.  Most of our investments run for 8-15 months, and many will run on autopilot once they are set up.  In most cases, we can go for many weeks without checking on anything at all.  So feel free to do your work, take care of your family, feed pigeons in the park, sit on a beach, whatever you were already planning to do.

We also will know well in advance which days we will need to make an adjustment to an existing position.  And researching new investments to make when capital frees up can be done at any time that’s convenient.  No constant market gawking required.

And since we are combining this core principle with the one above on not caring about market direction, we can entirely skip out on keeping up with the financial entertainment industry. Apologies to the hardworking folks at CNBC, Wall Street Journal, Fox Business, Bloomberg, et alia.

Because we do not like to make any assumptions about what may or may not come to pass in the future, we will not have any positions in the portfolio that have undefined risk of losses.

Think of the simple act of buying and holding stock in a single company.  The company might be very reputable, have a long track record of generating profits, have a CEO who looks the part on the occasional television interview, etc.  That single stock still has within it a large amount of risk.  Surprise earnings results, an overall market downturn, bad news about the company, etc.  Any of these can cause a stock to fall unexpectedly.

All of our positions will have limited and predefined risk at all times.  In other words, we will know at all times exactly what our maximum exposure is if everything in the portfolio goes as badly as it possibly can.  And we will strive in many cases to have zero downside risk as much of the time as possible in the lifecycle of each trade and it’s possible to have zero downside risk in the total portfolio if that’s your desire.

This is the most important one.  It would be easy to find investments that achieve all three of the Core Principles above as long as we didn’t care about how little money we’re making.  We could simply buy 10-year US treasuries and do nothing for ten years and it would meet our first three rules.  But we need something that performs better than other commonly-used strategies to make the effort worthwhile.

Let’s state the goal here very clearly. The objective of Project Hedgehog is to create and maintain a portfolio of investments that exceed compounding averages of the broader stock market over the long term. This is the principle that would make it worth the trouble in the first place.  And we need to achieve this goal at the same time we still meet the other three principles above.

There is a secondary issue long-term investing that happens as a person approaches retirement age.  Most financial professionals will advise that we should be invested broadly in the stock market through an index type fund or ETF while we are are working in our careers and accumulating savings. This usually works quite well, if the stock market crashes and we are still actively buying into the market on a steady basis, we get the advantage of buying into the market bottom and can make significant gains when the market rebounds.

As time goes on, however, the amount that we already have stashed away will eventually greatly exceed the amount of new investments that we make. As time passes, we gain less and less benefit from buying into the bottom after a crash compared to what we lose in compounding efficiency. As the nest egg grows, a drop in the market just signifies a loss of compounding opportunity because we need to wait for the rebound before previously accumulated investments start gaining again.

As retirement approaches, most financial advisors will start switching the strategy to include more and more “safe” (and much lower-performing) investments like bonds to avoid a nasty market downturn that delays or otherwise impacts retirement.  Project Hedgehog solves this problem as well, allowing an investor to continue making strong compounded returns by eliminating the downside risk of stocks alone.

One last note on this principle.  One excellent way to assist long-term compounding returns is to grow wealth inside of tax-advantaged accounts.  Therefore, all the investments that we will learn here can be set up in Roth and Traditional IRA accounts, as well as ordinary taxable brokerage accounts of course. 

Next up: Introduction: Before You Buy....

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