Investing in the Classics

Machiavelli’s Discourses on Livy: On Good Foundations

Please note that for the purposes of this analysis, I use the Harvey C. Mansfield and Nathan Tarcov translation of Machiavelli’s Discourses on Livy.


The Discourses on Livy (Italian: Discorsi sopra la prima deca di Tito Livio) is a work of political history and philosophy written in the early 16th century by the Italian writer and political theorist Niccolò Machiavelli, best known as the author of The Prince. Machiavelli’s Discourses are on the works of Roman historian Titus Livy, and this work is perhaps Machiavelli’s most honest expression of his personal political beliefs, in particular, his support for republican government. In this analysis, I will analyze Machiavelli’s writings on good and bad foundations in order to gleam lessons that might be useful for investors in today’s times. Investors’ need for good foundations is multifaceted, from the foundation of his own organization, to the basis of his investment principles, and all the way down to each individual investment.


In The Prince, Machiavelli discusses in length the differences that result from those who come to power by virtue or fortune, however, in the Discourses, Machiavelli takes the next step in outlining what he believes to be good and bad foundations for a republic or kingdom. Machiavelli first asserts that it is necessary that if one wishes to properly order a republic anew or to reform it, it must be done by one individual. He writes, “This should be taken as a general rule: that any republic or kingdom is ordered well from its beginning or reformed altogether anew outside its old ordered unless it is ordered by one individual” (Book I.9). This is a rather controversial point for many scholars as Machiavelli supports republics on one hand, yet believes they require they must be formed or reformed by a single individual, a seemingly contradictory notion. Machiavelli argues that the lessons of history (i.e. the effectual truth) dictate that it must be so. He continues, stating that “a prudent orderer of a republic, who has the intent to wish to help not himself but the common good, not for his own succession but for the common fatherland, should contrive to have authority alone” (Book I.9).


Machiavelli illustrates this point with example of Romulus, who was also listed as one of the virtuous princes and most excellent men in The Prince. Romulus was the mythical founder of Rome, who killed his brother Remus, in order to found Rome at what he deemed to be its propper location, as they disagreed where the city ought to be built. After founding Rome and ruling as a co-ruler with Titus Tatius, Romulus killed his partner (Titus) and established the Roman Senate. Machiavelli says that “many will perhaps judge it a bad example that a founder of a civil way of life, as was Romulus, should first have killed his brother… That opinion would be true if one did not consider what end had induced him to commit such a homicide” (Book I.9). Machiavelli argues that one ought to understand the ends of Romulus actions before judging the act itself. Machiavelli argues that Romulus “deserves excuse in deaths of his brother and of his partner, and that what he did was for the common good and not for his own ambition, is demonstrated by his having at once ordered a Senate with which he took counsel and by whose opinion he decided” (Book I.9). In Machiavelli’s opinion, the founding of the Senate, which could have only come about by Romulus seizing absolute authority, was the foundation of the Roman Republic and the source of its subsequent greatness. Thus, Machiavelli concludes that “when the deed accuses him, the effect excuses him; and when the effect is good, as was that of Romulus, it will always excuse the deed; for he who is violent to spoil, not he who is violent to mend, should be reproved” (Book I.9). In The Prince, as was stated by in an earlier point, violence is not the preferred means, even if the end is good, Machiavelli says that since men are not all good, a prince must learn how to be not good according to necessity.


This principle has lessons that investors today can still learn from. One might see parallels to the notion of cruelty well used from The Prince; in the foundation of one’s organization or for each investment, especially if one is an activist or distressed investor. For example, activist or distressed investor often faces difficult decisions where a management team or bloated company structure is destroying shareholder value, but the means to correct this problem, usually requiring streamlining and restructuring (i.e. lay-offs in one form or another), are usually unpopular in the short-term. Nonetheless, the investor must look to the long-term (as Machiavelli calls it, ‘the end’) and not worry what infamy tough choices may incur you in the short-term. As Machiavelli writes, in the long-term the ends will excuse the acts if they are good. Tough decisions rarely occur by consensus, therefore the responsibility often falls to a single individual to make.


Having established that reforms and foundation require individual action, Machiavelli then turns to what are good founders and what are bad ones. He writes:

“Among all men praised, the most praised are those who have been heads and orderers of religions. Next, then, are those who have founded either republics or kingdoms. After than are celebrated those who, placed over armies, have expanded either their kingdom or that of the fatherland…” (Book I.10).

Machiavelli’s delineation is a reasonable one; those who found the superstructure under which all other individuals operate are the most praised. In his context, he calls them founders or religion. For modern investors, we see this attributed to those who have founded investment philosophy and principles, first among them being Benjamin Graham, the founder of modern value investing. Next, those who found the tangible organizations, such as founders of funds or businesses, deserve praise; they did not invent the wheel, so to speak, but they organize society according to the principles of the superstructure. Modern investing examples of these individuals would include the likes of Seth Klarman and Howard Marks, among others. Logically following this would be those successful individuals within those organizations who excel in furthering their organization; in regards to investing, these praiseworthy individuals would include successful portfolio managers and analysts.


Machiavelli then argues that those things that are the opposite to what make men praised deserve rebuke. He states:

“On the contrary, men are infamous and detestable who are destroyers of religions, squanders of kingdoms and republics, and enemies of virtues, of letters, and of every other art that brings utility and honor to the human race, as are the impious, the violent, the ignorant, the worthless, the idle, the cowardly” (Book I.10).

These infamous individuals are those who are violent to spoil or for their own ambition. Only those like Romulus who use it to benefit the common good or their fatherland are excused for their acts. Machiavelli cites Julius Caesar as an example of a detestable individual, for he accuses Caesar of destroying the Roman Republic by seizing absolute authority. For investors who adhere to the Ben Graham tradition, one finds that those who generally destroy and those who are reckless or ignorant deserve reproach for the destruction they cause and the risks they take.


In speaking of foundations of city-states, Machiavelli outlines two kinds of origination: “cities are built either by men native to the place or by foreigners” (Book I.1). In the latter case, these almost always come in the form of colonies. Of this kind, Machiavelli writes: “Because these cities do not have a free origin, it rarely occurs that they make great strides… [for] Nor, in its beginnings, could it make any gains other than those conceded to it by courtesy of the prince” (Book I.1). Machiavelli notes that because colonies presuppose the goodwill and support of some existing state, they rarely achieve greatness because they are not able to establish modes and orders for their longevity, but are ordered to the obedience and interests of the prince or republic who owns them. The lesson for investors is that in order to found something with the potential to be great and long-lasting, one cannot act as if they were a colony of an established state, but must go out themselves as free. This lesson is perhaps most poignant for managing directors who seek to manage their own portfolios; instead of starting their own enterprises, they opt for the surety of their existing employer, thereby diluting their vision to merely an additional ‘product’ portfolio for clients.


On the other hand, when  the “builders of cities are free peoples” (Book I.1), the opportunity to establish genuine and unique foundations exists. Machiavelli states that in these cases  “one can recognize the virtue of the builder and the fortune of what is built, which is more of less marvelous as the one who was the beginning of it was more or less virtuous” (Book I.1). Machiavelli claims, and rightfully so, that in these cases the new enterprise can be adequately judged for as a success or failure, and whether that success or failure owes to virtue or fortune. This is because the success or failure can not be conflated with or hidden by the actions and intent of the parent state in the case of colonies. Most importantly for investors, Machiavelli asserts that the success and failure of such enterprises reflects on the virtue, or lack thereof, of the founder. As Machiavelli writes, “His virtue can be  recognized in two modes: the first is the choice of site, the other in the ordering of laws” (Book I.1). In these cases, founders, whether they be princes or investors, are able to lay foundations according to their vision and prudence and let this be fulfilled and recognized by the enterprises’ success or failure.


As Machiavelli elaborated on good foundations, one particular passage that stands out is the following:

“And truly, if a prince seeks the glory of the world, he ought to desire to possess a corrupt city – not spoil it entirely as did Caesar but to reorder it as did Romulus. And truly the heavens cannot give men a greater opportunity for glory, nor can men desire any greater” (Book I.10).

Machiavelli writes that in particular to the prince, where glory is the reward, reordering a corrupt city is the best possible opportunity. Similarly for investors, especially activist or distressed investors, turning around a troubled company is the most challenging and rewarding opportunity. To do so requires instituting ‘new modes and orders,’ a hallmark of Machiavelli’s most excellent men. As discussed in a previous post, greatness and new modes requires contrarian action, this is in accord with what it means to be a true activist or distressed investor. However, in investing maximal risk-adjusted returns is the opportunity and the goal, not glory.


Machiavelli concludes by detailing the implications and the importance of having good foundations. He asserts that following Romulus, Numa Pompilius had a tremendous role in ordering Rome. Numa, he writes, was responsible for giving Rome its religion, which eventually became one of the reasons for the great successes of the Roman Republic by the way it organized and influenced Roman society. Following this example, Machiavelli asserts:

“I conclude that the religion introduced by Numa was among the first causes of the happiness of that city. For it caused good orders; good orders make good fortune; and from good fortune arose the happy successes of enterprises. As the observance of the divine cult is the cause of the greatness of republics, so disdain for it is the cause of their ruin” (Book I.11).

Machiavelli packs a lot into this short passage. First, Machiavelli believes that proper education is the first foundation of all subsequent success. For investors, this proper education is a learning and adherence to value investing principles. Next, he argues that with a proper foundation in place, good orders will result in good fortune and success in enterprises. For investors this means that those who had a good foundation will achieve good risk-adjusted returns; first, by finding attractive investment opportunities, akin to successful enterprises, and secondly by avoiding mistakes and irrational exuberances by remaining prudent, which is akin to his use of good fortune in this passage. Machiavelli concludes that when these religions, or principles in the case of investors, are adhered to success follows, but when they are strayed from ruin follows. This lesson has stood the test of time and is a good reminder for investors even today.

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