The Fox and The Hedgehog

Published On: July 5, 2018

Written by: Ben Atwater and Matt Malick

“In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could.” – Rudi Dornbusch, economist

“The fox knows many things, but the hedgehog knows one big thing,” wrote the Greek poet Archilochus.  This statement has undergone much interpretation over the ages.  Most agree that foxes are more knowledgeable, more nuanced and more comfortable with contradiction than hedgehogs.  Whereas, hedgehogs focus on finding an organizing principle, a big idea, to attack a problem.  Foxes are complex, hedgehogs are simple.

For years now, we’ve been writing you with nuanced opinions regarding investing (and a variety of other topics).  But, from the beginning, we’ve also had a simple long-term view of our investment strategy.  We believe that markets have reached an inflection point.  Below, in simple bullet point form, we’d like to share with you our hedgehog view of the last ten years (2008-2018) and what we see over the next ten years (2019-2029):

Looking Back, The Last Ten Years

• Based on compelling valuations, we emerged from the financial crisis bullish and overweight equities versus fixed income, cash and “alternative assets.”
• We predominantly invested in U.S. equities, which carried much more attractive valuations than foreign stocks. This proved prescient as the U.S has been the big winner this decade.
• Value-bias (owning dividend paying and reasonably priced stocks) equity selection has been a headwind, especially in 2018, as growth outperformance accelerates into the end of the cycle.

Looking Forward, The Next Ten Years

• Corporations are approaching the peak earnings cycle for stocks as inflation, a strong dollar, trade frictions and higher interest rates reduce profit margins.
• S. growth stocks (technology and consumer discretionary) will likely experience a significant price readjustment from bubble levels that will last a decade.
• Developed international, emerging market and U.S. value stocks should meaningfully outperform U.S. core given substantial valuation discounts and reversion to the mean in asset class performance over the next decade.

This is our hedgehog view of equity markets.  Our big themes served us well over the last decade and our shifting view of where value exists should serve us well in the decade to come.

For a definitive record of our nuanced analysis, check out our book, The Disciplined Contrarian.  If you’d like a copy to share with friends, family or colleagues, please let us know.

Please visit www.atwatermalick.com/ria for full disclosure materials related to recommendations contained in this update.