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Oct232011

Herd Behavior and the Outside Zebra

To [compete for] food, some of the newly hungry primate species moved to the forest edge. Their new habitat put more food in reach, but it also placed the primates within reach of big cats, canines and other savanna predators.

This predation spurred two key evolutionary changes.

The primates became bigger, giving individuals more of a fighting chance, and they started living in bigger groups, which provided more eyes to keep watch and strength of numbers in defense.(The Gregarious Brain, David Dobbs)

This is taken from an article about a brain disorder,"Williams Syndrome", which appeared in my browser one morning.

It sparked a memory of a book by Ralph Wanger, an investment fund manager, and the President of the Acorn Funds. The title of his book is "A Zebra in Lion Country" and here is one of the more interesting passages: the opening of the first chapter:

"Zebras have the same problems as institutional portfolio managers like myself.

First, both have quite specific, often difficult-to-obtain goals. For portfolio managers, above-average performance; for zebras, fresh grass.

Second, both dislike risk. Portfolio managers can get fired; zebras can get eaten by lions.

Third, both move in herds. They look alike and stick close together.

If you are a zebra, and live in a herd, the key decision you have to make is where to stand in relation to the rest of the herd.

When you think that conditions are safe, the outside of the herd is best; for there the grass is fresh, while those in the middle see only grass that is half-eaten or trampled down.

The aggressive zebras, on the outside of the herd, eat much better.

On the other hand - or hoof - there comes a time when lions approach. The Outside zebras end up as lion lunch. The skinny zebras in the middle of the herd may eat less well but they are alive.

A portfolio manager for an institution such as a bank trust department, insurance company or mutual fund cannot afford to be an Outside Zebra.

For him, the optimal strategy is simple: stay in the center of the herd at all times. As long he continues to buy the popular stocks, he cannot be faulted.

On the other hand, he cannot afford to try for large gains or unfamiliar stocks that would leave him open to criticism if the idea failed.

Needless to say, the Inside Zebra philosophy doesn't appeal to me as a long-term investor."

Wanger wrote his book years ago, before the S&L meltdown, the Asian currency crisis, the explosion of the securities market, the dot.com boom and bust, 911, the real estate crash or the Great Recession.

Even so, I wonder how much has really changed.

Perhaps a few Zebras forgot there were ever lions about. Maybe some of the Zebras grew to be so large, so many, and so fast that they believed themselves immune to the perils of the ordinary Zebras.

Then again, perception is everything. Rather than large and powerful, a hunting lion might instead see them as fat and slow - the perfect meal.

And lions, though we think them rare these days, still exist. They still need to feed. They are still something a smart Zebra should always consider.

Wanger makes many interesting points in his book.

He took his first "pounding" (expensive lesson) in the stock market during the crash of the "Nifty Fifty" stock market episode in the early 70's. Although he correctly anticipated the correction, he didn't realize (at the time) that all actions have consequences.

He goes on: "I learned a lesson that's been repeated many times over the years: when a large segment of the marketplace gets overpriced and eventually corrects, everybody gets nailed. The guilty, the less guilty, and those who are just standing around watching - all get into trouble."

Something to think about, yes?

Which are you right now - Outside or Inside Zebra?

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