“The fox knows many things,
but the hedgehog
knows one big thing.”
— Isaiah Berlin, “The Hedgehog and the Fox”
I have long believed that, as an asset allocator and security selector, it is imperative to understand the difference between behaving like a fox and behaving like a hedgehog.
Isaiah Berlin’s thoughtful essay utilizes these two mammals to contrast competing philosophical approaches. There are periods when knowing many things—and thus, being a fox in Berlin’s world—and skillfully implementing them is the primary source of alpha. However, this has not been the case since the financial crisis. The emergence of the technology platform companies in the 2010s has substantially changed the paradigm. These companies have free cash flow generating attributes the market has not been exposed to before, compounding cash flow with a speed and consistency that makes them truly anomalous in market history.
This has made big tech the hedgehog’s “big thing”—the margins are so high (21% free cash flow margins for entrance into the top decile) that deviating from their massive weights in a portfolio carries huge implications, one way or another.
