An Unexpected Journey

What can The Hobbit teach us about investing?

Like all literature, the real subject of Tolkien’s Hobbit isn’t the story it sets out to tell. Its subject is human nature, in all its infinite variety. As such, the story has a lot to say to investors, because investing is just another way of addressing our human nature—fear, greed, mania, complacency—where the tally is marked in dollars and cents, rather than in words on a page.

And what can investors learn from Bilbo Baggins’ adventures? At least three lessons stand out: diversification, flexibility, and perseverance. Diversification is easy to see. Thorin Oakenshield’s troop of dwarves contained many types—fighters, scouts, cooks—but it didn’t have anyone good at being quiet. That’s obvious both in the book and in the movie. Bilbo is selected for just this purpose. He might not be skilled with a sword—at least, not to start—but he has abilities they will need later. In the same way, a diversified portfolio will contain all kinds of investments. Not all are ideal in all environments, but each has its place.

Flexibility is necessary when you deal with the unknown; investing for the future is an exercise in forecasting, analyzing, and adjusting your plans—because the best laid plans often go astray. So when you own Apple and it declines from $700 to $500 per share, do you buy more or sell out? If you planned to steal a troll’s purse and get grabbed by the troll instead, how do you respond? Bilbo shows imagination and initiative. And he is thoroughly versed in the fundamentals of troll-dom.

Finally, investors need perseverance when things don’t go well. That was clearly the case in The Hobbit when Bilbo found himself alone and lost in a tunnel at the root of the mountain. He kept moving forward with little to guide him. In the same way, investors need to know when to stick to their guns when things look dark—as they did in the winter of 2009. Often you have to hang in there in spite of the news.

Diversification, flexibility, and perseverance all require us to lean against our nature, when we would rather narrow our focus and hole up, or give up. But they are good tools with which to approach markets. Tolkien’s work offers sound—and profitable—lessons to us all.

Douglas R. Tengdin, CFA

Chief Investment Officer

By | 2013-01-03T10:58:09+00:00 January 3rd, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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