19 Sep The Prince by Niccolo Machiavelli – 5 Takeaways for an Investor
Niccolo Machiavelli was born in 1469 to a family of noble standing in Florence. He lived during the Renaissance, in interesting times of cultural and socio-political upheaval. Wars were waged, city-states were lost, and families filtered in and out of power. Niccolo was a politician and diplomat, and towards the later part of his life, a writer. He wrote plays and novels, but his most classic work is a political treatise called ‘The Prince’.
Machiavelli wrote ‘The Prince’ as an advisory to a young prince of the Medici ruling family who has just been restored to power. (In present day context, the book would have been called Ruling for Dummies). Many scholars have labelled the work to be one of the first on modern political philosophy, but undeniably the biggest reason why it has survived the centuries and maintained its relevancy is because of its brutal and unreserved take on human nature and power. Machiavellism is now synonymous with being manipulative, and it has attracted so much interest from psychologists that it is now a personality construct in itself.
I first read The Prince as an undergrad many years ago. It struck me as being somewhat cruel and cold. I could not understand the appeal nor the necessity of the book. And none of the examples stuck because they were hardly applicable to me at that stage of my life as a student. Now that I am older, my roles in life are more defined. I reread the book and tried to apply the teachings to me as an investor and trader. Here are some of my takeaways.
1. Learn from others
‘A wise man ought always to follow the paths beaten by great men, and to imitate those who have been supreme, so that if his ability does not equal theirs, at least it will savor of it’.
As with many, I started off ‘punting’ rather than ‘investing’ in the market. I cringe when I think of some of my trades from many years ago, not so for the money made or lost, but more so for the frivolity and the naivete behind them. If only I had known then what I had known now. And even more so, if only the present me could have known what the future me knows. But we all know that is impossible, so the only way would be to learn from the people who have walked the path before me, and the best way to do so would be to Read.
‘To exercise the intellect the prince should read histories, and study there the actions of illustrious men, to see how they have borne themselves in war, to examine the cause of their victories and defeat, so as to avoid the latter and imitate the former.’
Firstly, Machiavelli said to read histories, and I highly doubt that his intentions were for us to be bogged down by news; to study the actions of illustrious men, and not be obsessed with the forecasts of analysts and gurus. While the former allows one to gain insight into minds of the great, the latter is mired and clouded by self-serving biases and often mercenary considerations. One needs to be discerning.
Secondly, we all know that history is written by the winners, but it is the losers that will teach us as much and even more. So while reading Warren Buffet is inspiring, finding out more about Long Term Capital Management (LTCM), Nick Lesson, the Great Depression etc, will be just as beneficial.
3. Be on the ground
If one is on the spot, disorders are seen as they spring up, and one can quickly remedy them; but if one is not at hand, they are heard of only when they are great, and then one can no longer remedy them.
Be on the ground. Know the ground. Only then will we be able to react to situations before they become critical. If you are actively investing, reading about a company after it has made the news and the stock price has made a huge run up or gapped down is a sure indication that you are behind the curve. A Prince cannot be at many different places at the same time, just like an investor cannot be vested in so many companies that he cannot keep track of (unless of course that form of diversification is deliberate and part of the overall strategy).
4. Be flexible
A man who is used to acting in one way never changes; he must come to ruin when the times, in changing, are no longer in harmony with his ways.
The financial markets are constantly changing. Falling in love with a stock, sticking to a trading method that is obsolete, refusing to innovate is but a recipe for disaster. I see this in many others and also in myself, how often do we insist on holding on to a losing position just because we refuse to admit that the market is no longer in harmony with us?
5. Prepare for the worst
‘A wise prince ought to observe some such rules, and never in peaceful times stand idle, but increase his resources with industry in such a way that they may be available to him in adversity, so that if fortune changes it may find him prepared to resist her blows.
Having lived in tumultuous times, Machiavelli has seen how fickle Fortune can be and how important it is to plan for a rainy day. I especially like this one because of the mention of ‘industry’. Too often when the going is good we take our feet off the paddle and start to relax. We assume that we have mastered a trading method, we are making good returns on our investments, and that everything is under control and that nothing can go wrong. We stop reading, stop learning and stop preparing for the worst.
Fact is, peaceful times are when we ought to be most industrious. When the market is quiet, it is time to read and plan and prepare for the next trade. When our positions are on the up and away, rather than bask in the glow of unrealized profits gains it is more prudent to re-examine and re-adjust our cut losses and profit levels.
The way markets move is the result of individuals acting for their own personal gain. It is a good approximation of human nature. The Prince is essential reading for anyone looking to gain a better understanding of that.