Some Lessons for Investors by Aesop, the Ancient Storyteller

I sometimes read Aesop's fables so that I can provide lessons to my children without appearing to preach too much. But as I read, I realise that Aesop's stories have more valuable lessons for us, the adults.

So, here are two of them:

On greed...

"A man and his wife had the good fortune to possess a goose which laid a golden egg every day. Lucky though they were, they soon began to think they were not getting rich fast enough, and, imagining the bird must be made of gold inside, they decided to kill it in order to secure the whole store of precious metal at once. But when they cut it open they found it was just like any other goose. Thus, they neither got rich all at once, as they had hoped, nor enjoyed any longer the daily addition to their wealth."

(The Goose that Laid the Golden Egg, translated by V. S. Vernon Jones for Wordsworth Classics)

I guess that in terms of the theory of finance this couple would have a utility function with a convex shape. In other words, their utility would increase at an increasing rate as their level of wealth increases... It would look something like this:

They would be risk-loving. Of course the risk of killing the bird did not pay off! Luckily, modern financial theory assumes investors whose utility increases at a decreasing rate as wealth increases. Investors are risk-averse or 'moderately greedy'...

On Investment Styles...

"A hare was one day making fun of a tortoise for being so slow upon his feet. 'Wait a bit,' said the tortoise; 'I'll run a race with you, and I'll wager that I win.' 'Oh, well' replied the hare, who was much amused at the idea, 'let's try and see'; and it was soon agreed that the fox should set a course for them, and be the judge. When the time came both started off together, but the hare was soon so far ahead that he thought he might as well have a rest: so down he lay and fell fast asleep. Meanwhile the tortoise kept plodding on, and in time reached the goal. At last the hare woke up with a start, and dashed on at his fastest, but only to find that the tortoise had already won the race."

(The Hare & the Tortoise, translated by V. S. Vernon Jones for Wordsworth Classics)

Choosing good companies (tortoises) and holding on to them may be a better strategy than jumping on bandwagons (hares) for long-run races (investment returns). There was a story recently at the Wall Street Journal discussing the case of an old fund (structured in 1935) invested in 'boring' companies which has outperformed recent and more 'dynamic' allocations. Have a look here.