Please note that for the purposes of this analysis, I use the Allan Bloom translation of Plato’s Republic. Please refer to a previous analysis on which I build upon here.
In the Republic, Plato argues that kings should become philosophers or that philosophers should become kings, or philosopher-kings, as only philosophers possess the knowledge required to rule justly and successfully. This assertion has been highly controversial since Plato first articulated it as it is one of the most exemplary examples of political idealism. Indeed, Plato meant it to be a harsh critique on the contemporary Athenian democracy of his time. Nevertheless, Plato created some of the most enduring political metaphors of western thought – including the Ship of State and the Allegory of the Cave, among others – in defending his assertion. Investors today can still learn much from Plato’s philosopher-king and his analogies for I argue that the true investor is no different in disposition from the philosopher; just as the philosopher-king is fit to rule in Plato’s eyes, I assert that only the investor-philosopher is able to achieve maximal, long-term, risk-adjusted returns.
In constructing their ideal, just city, Socrates argued that the city must be ruled by those who are ruled by the rational part of their soul, as opposed to the appetitive or spirited parts. Later on, Socrates asserts that the appetitive-led rulers become tyrants (Book IX, 575c-579e) while the spirited-led rulers become oligarchs (Book VIII, 547c-548c). Instead, rationally-led rulers are said to be the only solution:
“Unless the philosophers rule as kings or those now called kings and chiefs genuinely and adequately philosophize, and political power and philosophy coincide in the same place… there is no rest from ills for cities, my dear Glaucon, nor I think for human kind, nor will the regime we have now described in speech ever come forth from nature” (Book V, 473c-e).
Plato, through Socrates, asserts that only when philosopher-kings rule will good governance be possible; their ideally just city would be impossible without such rulers in place. For investors, I posit that the maximal, long-term, risk-adjusted returns are not possible if the investor lacks the philosophic disposition.
The philosopher-kings are made to be the ideal rulers by Plato because their philosophic disposition incentives them to be just and avoid corrupting influences. Socrates states, “Won’t be also assert that the philosopher is a desirer of wisdom, not of one part and not another, but all of it?” (Book V, 475b). The philosopher-king is at his core driven by his love of learning, neither by honors nor wealth (though these latter gains likely follow from the rationally-led individual – see a previous analysis for this argument). Moreover, the lover of learning leads one to desire all kinds of wisdom as Socrates says that “the man who is really a lover of learning must from youth on strive as intensely as possible for every kind of truth” (Book VI, 485d). Similarly, the great investor is one who isn’t just aware of the best opportunity within one particular industry or asset class, but is also cognizant of value as a whole – that is to say, the cheapest security in one particular basket may not hold the same value proposition relative to an entire other set of securities elsewhere. As Klarman states, “Industry analysts are not well positioned to evaluate the stocks they follow in the context of competing investment alternatives” (Margin of Safety, p.167). Thus, the great investor must be like Plato’s philosopher who is a lover of all learning and the truth value of it, which for the investor constitutes each things value and risks.
Plato posits that only the philosophically disposed individuals can achieve this level of understanding because they are not distracted by love of honor or wealth. Socrates proposes the following analogy to illustrate this point: “But, further, we surely know that when someone’s desires incline strongly to some one thing, they are therefore weaker with respect to the rest, like a stream that has been channeled off in that other direction” (Book VI, 485d). Similarly for investors, those who are essentially concerned with fame and wealth will no doubt find that their judgment will be clouded by their passions, rather than being led entirely by their reason. Instead of seeking the truth – what the true margin of safety is – they will think of things in increasingly speculative terms of ‘accolades’ and ‘upside’. As such, their investment success will deteriorate as they deviate from prudent principles and they would have achieved more reputation and returns had they focused only on learning the truth, as the investor-philosopher does.
The first of the famous metaphors that Plato proposes is that of the Ship of State, though he never calls it this explicitly. In this analogy, Plato argues that philosopher-kings are justified in ruling because they are the only ones that possess the necessary skill and best motives to rule. Thus, this analogy is also a striking criticism of democracy. For investors today, this analogy serves as a reminder for understanding why investors are justified in contrarian action. This rich passage bears quoting at length for it has many layers of meaning to it:
“The sailors are quarreling with one another about the piloting, each supposing he ought to pilot, although he has never learned the art and can’t produce his teacher or prove there was a time when he was learning it… And they are always crowded around the shipowner himself, begging and doing everything so that he’ll turn the rudder over to them. And sometimes, if they fail at persuasion and other men succeed at it, they either kill the others or throw them out of the ship… Besides this, they praise and call ‘skilled sailor,’ ‘pilot,’ and ‘knower of the ship’s business’ the man who is clever at figuring out how they will get to rule, either by persuading or by forcing the shipowner, while the man who is not of this sort they blame as useless. They don’t know that for the true pilot it is necessary to pay careful attention to year, seasons, heaven, stars, winds, and everything that’s proper to the art, if he is really going to be skilled at ruling a ship… don’t you believe that the true pilot will really be called a stargazer, a prater and useless to them by those who sail on ships run like this?” (Book VI, 488b-489a).
First, Plato says those who are not philosophers, the sailors in this metaphor, all want to rule of their lust for power or wealth, though the lack the qualifications and willingness to learn the skills required to do so. Similarly, speculators want achieve high returns though they lack prudent investing principles and are not willing to put the hard work required for prudent investing. Second, Plato attacks the sophists, those ‘clever’ sailors who try to gain power by persuasion or by force, as they were the politicians of the Athenian democracy who used rhetoric to win popular support, as opposed to having skill or wisdom like the philosophers. These sophists are akin to the talking heads and celebrity-activists who try to usurp the true investor-philosophers as models for emulation. These fame and power seeking individuals lack true understanding, but play on emotions to influence the speculative masses. Third, for Plato only the philosopher – the navigator – has the understanding and expertise required to rule, but is misunderstood by the sophist-sailors because their love of wisdom is alien to them and is thus seen as a threat to their hold on power. Similarly, the talking heads and celebrity-activists try to drown out the voices of reason, those true philosophic-investors like Klarman, Abrams, Marks and Singer who try to warn the masses when the markets are too exuberant.
On this latter point – how the sophist-sailors mistrust and attack the philosopher-navigators – Plato asserts that this represents reality. As Socrates posits, “Now, I don’t suppose you need to scrutinize the image to see that it resembles the cities in their disposition toward the true philosophers” (Book VI, 489a). This relationship is perverted from its natural order according to Plato. Instead, Socrates says:
“And, further, that you are telling the truth in saying that the most decent of those in philosophy are useless to the many. However, bid him blame their uselessness on those who don’t use them and not on the decent men. For it’s not natural that a pilot beg sailors to be ruled by him nor that the wise do to the doors of the rich. The man who invented that subtly lied. The truth naturally is that it is necessary for a man who is sick, whether rich or poor, to go to the doors of doctors, and everyman who needs to be ruled to the doors of the man who is able to rule, not for the ruler who is truly of any use to beg the ruled to be ruled” (Book VI, 489b-c).
Instead of the philosopher-king asserting his right to rule, Plato argues that the masses ought to recognize their own lack of understanding and seek out the wisdom of the true philosophers, just as the sick seek out doctors. Plato is not trying to instantiate a sense of arrogance and self-righteousness in the philosopher-king, but reveal that the best rulers and those who are unwilling to rule. From the very outset of the Republic, Socrates states that “the good aren’t willing to rule for the sake of money or honor… necessity and a penalty must be there… if they are going to willing to rule… and the greatest of penalties is being ruled by a worse man if one is not willing to rule oneself” (Book I, 347b-c). Thus, Plato asserts that philosophers do not wish to rule; indeed Socrates rhetorically asks “Have you any other life that despises political offices other than that of true philosophy?” (Book VII, 521b). Instead, “they must be compelled to rule” (Book VII, 539e) by those who need their wisdom, and this is why they are the best suited to rule; for they possess the wisdom necessary to rule and have the proper motivation because they do not enter office for honors nor wealth. I argue that the true philosophic-investors of our times are like these philosopher-kings who must be compelled to rule; for these figures do not speak out against irrational exuberance and other pressing issues for the sake of publicity like the celebrity-activists do, but do so because such issues represent a true danger to the whole. Thus, the best investors are those who are concerned with the love of learning and the truth, akin to Plato’s philosopher-kings.
However, Plato recognizes that the masses will not always, if ever, compel philosophers to rule. Underpinning Plato’s discussion of the philosophy disposed individual is his assertion that “for the man who is going to become a perfect philosopher – such natures are few and born only rarely among human beings” (Book VI, 491a-b). Moreover, Plato – through Socrates – proposes that “it’s impossible that a multitude be philosophic” (Book VI, 494a). Since the masses can never be philosophic, Plato asserts that when their greed creates delusion, the philosophers must focus on what they can control:
“they [the philosophers] have seen sufficiently the madness of the many, and that no one who minds the business of the cities does virtually anything sound, and that there is no ally with whom one could go to the aid of justice and be preserved. Rather – just like a human being who has fallen in with wild beasts and is neither willing to join them in doing injustice nor sufficient as one man to resist all the savage animals – one would perish before he has been of any use to city or friends and be of no profit to himself or others. Taking all this into calculation, he keeps quiet and minds his own business – as a man in a storm, when dust and rain are blown about by the wind, stands aside under a little wall. Seeing others filled full of lawlessness, he is content if somehow he himself can live his life here pure of injustice and unholy deeds, and take his leave from it graciously and cheerfully with fair hope” (Book VI, 496c-e).
In times of such mania, when the greed of the masses creates such storms of injustice and yet they are unwilling to listen to the philosophers, then the philosophers ought to mind their own business. Analogously, when markets are irrationally exuberant and the speculative masses will not heed to the voice of reason, then investor ought to mind his own business. Thus, the prudent investor recognizes the madness and is unwilling to participate. While he cannot prevent others from their folly, he rationally resides to holding cash cheerfully, refusing to engage in speculative endeavors, while waiting opportunistically for attractive opportunities to emerge from the folly of the masses.
The Allegory of the Cave is the most famous passage from Plato’s most famous work, the Republic. In it, Plato proposes an allegory that explains human nature, understanding, truth, and the philosopher’s relationship with the unphilosophical masses.
“Next, then make an image of our nature in its education and want of education, likening it to a condition of the following kind. See human beings as though they were in an underground cave-like dwelling with its entrance, a long one, open to the light across the whole width of the cave. They are in it from childhood with their legs and necks in bonds so that they are fixed, seeing only in front of them, unable because of the bond to turn their heads all the way around. Their light is from a fire burning far above, along which see a wall, built like the partitions puppet-handlers set in front of the human beings and over which they show puppets… Then also see along this wall human beings carrying all sorts of artifacts, which project above the wall” (Book VII, 514a-c).
For the masses – who are really prisoners – shadows are as close as they get to viewing reality. Much of this is due to poor education, which is the fault of society and its conventions. Similarly, the speculative masses today are not given a proper education in prudent investing, but are taught in the institutions about growth, buying and holding, and efficient markets. Thus, the speculative masses are ignorant for they only see appearances of things that are. Socrates posits that “such men would hold that the truth is nothing other than the shadows of artificial things” (Book VII, 515c). They have such narrow perspectives that they can’t turn their heads, according to Plato’s Cave. Moreover, unlike the philosophers they don’t even know themselves.
Socrates then explains how the early-stage of the philosopher is like a prisoner who is freed from the cave and comes to understand that the shadows on the wall do not make up reality at all. As Socrates continues the allegory:
“Now consider what their release and healing from bonds and folly would be like if something of this sort were by nature to happen to them. Take a man who is released and suddenly compelled to stand up, to turn his neck around, to walk and look up toward the light; and who, moreover, in doing all this is in pain, because he is dazzled, is unable to make out those things whose shadows he saw before” (Book VII, 515c-d).
Socrates supposes that the freed prisoner, being forced to turn and see the fire, would hurt his eyes seeing light for the first time. This is emblematic of why most speculators refuse to seek out the truth, for knowing the truth would destroy the illusions that they hold so dear, for them ignorance is bliss. Indeed, Socrates says that the prisoners would kill anyone who would try to free them (Book VII, 516e-517a). Only the one with a philosophic disposition will fight through the pain in order to look at the light, which represents the truth. Such an individual begins to perceive the true form of reality rather than the mere shadows seen by the prisoners.
The final stage in which the freed prisoner becomes an enlightened philosopher occurs once he climbs out the cave, towards higher manifestations of truth, culminating in the truth itself, the sun. As Socrates describes:
“Then finally I suppose he would be able to make out the sun… and see what’s it’s like… And after that he would already be in a position to conclude about it that this is the source of the seasons and the years, and is the steward of all things in the visible place, and is in a certain way the cause of all those things he and his companions had been seeing” (Book VII, 516b-c).
Upon reaching the highest form of light, the philosopher becomes enlightened and is finally able to truly understand the reasons behind everything. He is no more confused by illusions and shadows. Similarly, the investor is no longer confused by illusions, but is fixated on learning and the truth. Additionally, Plato intends to show that the goal of education is lead everyone as far out of the cave as possible and that education should not aim at putting knowledge into the soul, but at turning the soul toward right desires.
In Plato’s conclusion of the Allegory of the Cave, he illuminates how dark and ignorant the world is revealed to be to those who are enlightened. This forms the basis for his justification that as to why ideally philosophers should be kings, for only they know the truth. As Socrates concludes:
“in getting habituated to it [the darkness], you will see ten thousand times better than the men there, and you’ll know what each of the phantoms is, and of what it is a phantom, because you have seen the truth about fair, just, and good things. And thus, the city will be governed by us and by you in a state of waking, not in dream as many cities nowadays are governed who fight over shadows with one another and form factions for the sake of ruling, as though it were some great good. But the truth is surely this: that city in which those who are going to rule are least eager to rule is necessarily governed in the way that is best and freest from faction, while the one that gets the opposite kind of rulers is governed in the opposite way” (Book VII, 520c-d).
The philosopher sees ten thousand times more clearly in the dark than do the prisoners, just as the true philosophic-investor sees ten thousand times more clearly than the speculator. For the philosophically disposed individual is not confused by phantoms and shows because they have seen the sun. Thus, when the philosopher-king is in charge, they guide the city waking for they have seen the truth and know what they are doing. Moreover, their love of learning not only makes them qualified for rule, but also gives them the proper motivation to rule – that is, no desire to at all – thus they are least corrupted by rule. As much the same can be said for the investor-philosopher, who is the only one able to achieve maximal, long-term, risk-adjusted returns for these very reasons.