What Aesop can teach us about investing

A dog with a large piece of meat in its mouth was hurrying home to eat it when he came to a narrow bridge over a deep and swiftly moving stream.

A dog with a large piece of meat in its mouth was hurrying home to eat it when he came to a narrow bridge over a deep and swiftly moving stream. As he crossed the bridge, he noticed his reflection, which he thought was another dog with an even larger piece of meat. He quickly lunged at the other dog to try to steal the larger piece of meat. In the process, he dropped the meat he had been carrying, which was quickly lost in the current, and he went home hungry.

The moral of the story is:

a) Dogs are stupid.

b) -Greed can lead to foolish choices.

c) -Taking undue risk to capital in the pursuit of incrementally higher returns can lead to significant losses in an investment portfolio.

d) All of the above.

Although Aesop was probably going for answer b) when he first told this story some 2,600 years ago, for my money, the correct answer is c). Taking too much risk with your money — to snap up bigger gains than you already have — can turn out to be a very, very bad idea, especially if the money you already have is enough to satisfy your needs.

Too big an appetite for risk can turn an investor into a glutton for punishment. That’s why we think managing risk is such an important part of the investment process. A lot of people seem to enjoy speculating with their “play money,” or adding a specialty investment here or there.

That’s fine as a side dish or garnish, but we think the meat of a portfolio should satisfy the hunger for returns while keeping a tight grip on your serious money.

Like anyone else, we’re occasionally tempted to jump after big, juicy returns by taking more risk. As investment managers, though, our goal is to keep from being distracted by the tempting illusions all around us, so we can help our clients achieve their financial goals — without dropping the prize along the way. It’s by keeping to the straight and narrow of disciplined risk management that we hope to keep from ending up all wet.

As a thirsty stag bent to take a drink from a pond, he noticed the reflection of his magnificent antlers. While he was proud of the spectacular display he wore on his head, he was very disappointed in his feet, which he felt were small and ordinary by comparison. Just then, a lion sprang from hiding. The stag raced away, easily keeping his distance from the lion as they ran across the plain.

As soon as he entered the woods, however, his magnificent antlers tangled in the branches of a tree, leaving him helpless. As the lion approached, the stag realized that the feet he despised could have saved him, and the antlers he so admired would be the cause of his destruction.

The moral of this story is:

a) Stags are stupid.

b) -True value is often unappreciated.

c) -The diversifying investments owned as risk management tools may be the least attractive parts of a portfolio, but in a crisis they may turn out to be what saves you, while the flashy, high-return investments in a portfolio could end up being your undoing.

d) All of the above.

We can accept answer d) on this question.

It’s no secret that high-risk, high-return investments are the most fun to talk about and the most admired — especially when markets are going up. After all, when was the last time you heard someone bragging at a cocktail party about how Treasury bills added stability to their portfolio?

Of course, it’s often the investments with the most sizzle that produce the biggest fizzle when times get tough. Boring old cash, bonds, dividends, non-correlating assets — the risk management tools in a diversified portfolio — can seem so uninspiring compared to investments sporting impressive returns.

But when trouble springs up unexpectedly, the dull investments can be the very things that keep your portfolio a step or two ahead of disaster. In the end, the magnificent and the mundane can be equally important to financial survival.

Aesop was clearly a pretty clever guy. His fables, “The Boy Who Cried Wolf,” “The Tortoise and the Hare,” “The Ant and the Grasshopper,” as well as others, were studied by Socrates and have survived to the present. Born a slave, Aesop was ultimately rewarded for his wit with his freedom.

Based on my reading of his fables, I think he probably would have been a pretty good investment manager. Then again, he met a violent end at the hands of the citizens of Delphi, possibly over a disagreement about his handling of their money. Yikes! I guess he should have stuck to fables.

The moral of this article is:

a) Fables are stupid.

b) -Don’t chase performance without regard for risk.

c) -Embrace diversification even when it’s boring.

d) Don’t try to steal another dog’s meat, keep your head low when running for your life in the woods and be very careful when vacationing in Delphi (or handling other people’s money).

e) All of the above.

Gary E. Stroik is vice president and portfolio manager at WBI Investments in Little Silver, N.J., and co-author of “All About Dividend Investing” (McGraw-Hill, 2004).