The Tale of Chicken Little and Investing
Chicken Little Story
A chicken named Chicken Little is walking in the woods and is struck by an acorn falling from one of the trees. Convinced that the sky is falling, Chicken Little rushes to go warn the king.
On her way she meets a number of her friends and tells them the sky is falling and that she has evidence of this. All of the birds became convinced and join Chicken Little to go warn the king.
On their way, they came across Foxy Loxy (a fox). Foxy Loxy offers to take them to the castle and the birds accompany him. However, the cunning fox leads them not to the castle, but to his den, and the birds are never seen again.
Chicken Little Story Conclusions
From an investing point of view, here are what I consider the story morals:
- Don’t form conclusions from insufficient data;
- Don’t take other people’s opinions for facts – do your homework;
- Don’t bet your life on one scenario – consider the implications if you are wrong;
- Even if you are right that the sky is falling, you can still be wrong, like due to timing (consider Long Term Capital Management);
- Don’t extrapolate a situation and assume it is a foregone conclusion; it is only one possibility. There may eventually be a reversion to the mean;
- Diversify, diversify, diversify;
- Patience – as investments are impacted based on supply and demand, you need to buy when the sky is falling and be patient to profit as it can take time until everyone else realizes the sky isn’t falling.
Summary
In today’s information age, we live with bias and repeated groupthink. This can impact us emotionally and logically where, if we are not careful, can make irrational decisions.
Our job is to remain cool and unemotional, sift through information to arrive at rational views on different types of investments, weigh the risk and return probabilities of the investments, and decide which are the best risk-adjusted return possibilities to form part of our portfolio. By making several risk-adjusted investments, we reduce the impact of one wrong investment.
We hope that this approach will help us avoid becoming Foxy Loxy’s dinner.
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