How to Survive in Volatile Markets–Lessons from a Vampire Bat


As night descends, a tree hollow in Uruguay awakens with the budding energy of its inhabitants, hundreds of Desmodus rotundus have begun to stir. Soon the night sky will be filled with flying sheets of these vampire bats as they scour the countryside to find their nutrient-rich food. Unfortunately, each search for sustenance is filled with unpredictable pitfalls, and many bats are destined to come up empty.

Failure to find a meal leaves the bats with more than just hunger pangs. The lack of a regular return on hunting investment is particularly problematic because of the bats’ nonexistent body fat and exceptionally high metabolism. Even a single night without food can cost them their lives.  Instead of succumbing to the whims of chance, however, vampire bats have devised clever insurance policies to improve their survival in unpredictable environments. It is here that vampire bats have much to teach us, and their approach offers salient advice to individual investors in volatile markets.

So what can a nocturnal, winged mammal intent on draining blood from unsuspecting ungulates teach investors?  Surprisingly, there are fundamental similarities between vampire bats and individuals working to secure their financial future.  To begin, both vampire bats and investors are after net gains—for the bats that requires finding calories from blood, for investors survival is dependent on securing a positive return. Because both groups are dependent on capturing a sought-after resource, and because failure to do so is disastrous, the similarities begin to emerge.

Also comparable between the blood-seeking animals and investors is the nature of their environments. Both bats and investors exist in equally unpredictable circumstances where they are not exclusively in control of their own destiny. On any given night, innumerable factors outside of the bats’ control can dictate their success at finding food. Everything from the weather, choosing a particular search area, locating an appropriate host, having sufficient time to feed before being detected, and escaping before turning into someone else’s meal are all variables at play. Investors have analogous uncertainties, but their tribulations come from unexpected press releases, CEO statements, earnings reports, foreign currency devaluations, and even destabilizing statements from the day’s polarizing political candidate can interfere with the goal of seizing a profit. No matter how fit and intelligent the bat, nor well-researched and strategic the investor, there remain factors outside of their control that impinge on their respective success.

Given the necessity of blood and the unpredictable conditions in which it is found, just how have vampire bats overcome this adversity? Animal behavior specialists refer to it as “reciprocal food-sharing.” Don’t be fooled by the sophisticated name, it’s simply a regurgitated gift from a bat who enjoyed success to one whose search came up empty (somehow the image is not as uplifting as a momma bird feeding her beloved hatchling, but the concept is the same). At first glance, this seeming self-sacrifice seems counterintuitive–why relinquish part of your valuable meal to someone who failed—until you consider that the fickle nature of finding food means that anyone can fail at any time. Faced with this unsettling prospect, individuals band together to provide mutual support when necessary.   Follow the vomit-united pair of bats over time and you will discover that the initial donor is bound to be the recipient on a different day. Therein lies the insurance…and the lesson for investors.

So what does blood-sharing among bats have to do with investing, you ask? Well, the most direct advice is for you to find a willing network of friends to throw you a few Benjamins when your high-risk flyers fail to pan out (but be sure to return the favor because even bats are quick to ostracize individuals who fail to reciprocate). If you don’t have any particularly altruistic associates willing to take the leap into socialism however, don’t worry, you can more realistically provide your own insurance against random adversity by fashioning a roost of diverse investments.

Begin by imagining each of your investments as an individual vampire bat. Each day you send out your bats in search of profits. Ideally they are all successful, but the reality is that on any given day some will inevitably be prosperous where others will come up empty. Fortunately, they all return their collected spoils to the same location—your portfolio, and once reunited the day’s winners can provide life support to those who happened to fall on hard times. Through this group effort your financial colony, like the bats, can be sustained.

The common and fateful mistake occurs if you decide to evict the day’s underperformers from the roost. At first blush it seems to make sense—eliminate the stragglers, clone the big winners, and develop a super colony that consistently returns gorged with profits.  But remember that the environment in which you are operating is governed by erratic variables, and today’s big winners may just as easily return tomorrow emaciated by an unsuccessful hunt.

In fickle environments, the optimal strategy devised by nature for the long-term survival of a vampire bat colony is to send out a host of diverse hunters each night and then share the spoils among the entire colony. Cull diversity from your roost in an attempt to reap greater rewards and you will likely go extinct when a sector, region, or capitalization-category experiences an unexpected downturn (after all, Blockbuster stock looked pretty good in 2004).

Thinking of your investment portfolio as a vampire bat colony and employing the same survival strategy of reciprocal profit-sharing among your individual investments will help you maintain a balanced-portfolio and avoid financial starvation when the next big market swing occurs. As for donating blood, well that’s pretty important, too.

Want to read more stories of science-inspired products and strategies? Follow @SaysNature on Twitter an account established and maintained by Kurt MacDonald. Also check back here for original content. Thank you.