What do Zebras and Portfolio Managers have in common?

Zebras have the same problems as institutional portfolio managers. First, both seek profits. For portfolio managers, above-average performance; for zebras, fresh grass.

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

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

If you are a zebra, and live in a herd, the key decision you have to make is where you stand in relation to the rest of the herd. When you think that the conditions are safe, the outside of the herd is the best, for there the grass is fresh, while those in the middle see only grass which is half-eaten or trampled down. The aggressive zebras, on the outside of the herd, eat much better.

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

A portfolio manager for an institution such as a bank trust department cannot afford to be an Outside Zebra. For him, the optimal strategy is simple: stay in the centre of the herd at all times. As long as he continues to buy the popular stocks he cannot be faulted. To quote one portfolio manager, "It really doesn't matter a lot to me what happens to Johnson and Johnson as long as everyone has it and we all go down together." But on the other hand, he cannot afford to try for large gains on unfamiliar stocks which would leave him open to criticism if the idea fails.

Needless to say, this Inside Zebra philosophy doesn't appeal to us as long-term investors.

We have tried to be Outside Zebras most of the time, and there are plenty of claw marks on us.

"Worldy wisdom teaches us that it is better for reputation to fail conventionally than to succeed unconventionally."

Above is the case of Fund Managers. They cannot think long term but quarterly performance of their schemes.

There are exceptions. These exceptions are few in number. Who have delivered consistent returns over long period of times.

Individual investors can have a long term approach to investing not bothering about the quarterly performance.

Tools with Individual Investor:
Independent Thinking
Power of Compounding
Contrarian Investing
No need to follow Herds

Reference: Zebras in Lion Country by Ralph Wanger