Investing in the Classics

Machiavelli’s The Prince: On Virtue vs. Fortune – Part I

Please note that for the purposes of this analysis, I use the Harvey C. Mansfield, Second Edition translation of Machiavelli’s The Prince.

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The Prince (Italian: Il Principe) is a 16th century political treatise by the Italian diplomat and political theorist Niccolò Machiavelli. The work is said to be one of the first works of modern philosophy, especially modern political philosophy. It is also one of the most controversial and often misinterpreted philosophical works. Personally, I find Machiavelli to be an incredibly intelligent writer and a master of satire. The Prince is about how a prince ought to be and act in order to maintain and enhance his principality. Similarly for the investor, one ought to be focused on maintaining and enhancing one’s success for the long run.

 

In Machiavelli’s analysis, he delineates those princes who have come to power by their virtue or by fortune. By virtue (Italian: virtu), Machiavelli refers the skill and temperament of the prince, rather than his (or her) moral qualities (which is not to say that these are not important, even for Machiavelli, but this is a complicated issue for another time). Fortune (Italian: fortuna) is more or less similar to our modern conception; it is essentially what we would think of as the role of luck, in particular that it acts as a double edged sword. Machiavelli writes:

“that in new principalities, where there is a new prince, one encounters more of less difficulty in maintaining them according to whether the one who acquires them is more or less virtuous. And because the result of becoming a prince from private individual presupposes either virtue or fortune, it appears that one or the others of these two things relieves in part many difficulties; nonetheless, ho who has relied less on fortune has maintained himself more” (Chapter VI).

The analogy to the investor is an apparent one: of those who have had success, investors who have had success as a result of their virtue, be it some combination of skill and temperament, will find that it is easier to maintain their success than those who were fortunate (i.e. lucky or that their success was a result of their connections and not their virtue). While this distinction is quite obvious as a matter of fact, in reality it is not as easy to distinguish those investors who were simply lucky or well connected, especially in bull markets. Moreover, it often appears to be the case that these lucky investors are only discovered to be so after it is too late and permanent capital loses have incurred. As it is said, it’s only until only the tide pulls back then you see those who are swimming naked. Since maintaining success for the long run is the name of the game, both for Machiavelli’s prince and for any investor, one ought to understand the role of luck.

 

Machiavelli writes of fortune: “I judge that fortune is arbiter of half of our actions, but also that she leaves the other half, or close to it, for us to govern” (Ch. XXV). For rather unclear reasons, Machiavelli asserts that fortune accounts for half of our actions. The accuracy of the specific portion that fortune has is a relatively insignificant value for the purposes of this analysis, but the important takeaway is that he acknowledges the role of luck in our actions, even for the virtuous price (or in our case, investor); for what makes a prince or investor so virtuous is how he approaches and handles fortune. The reason that the prince, or investor, who relies on fortune alone is often undone is because Machiavelli recons fortune to be:

“one of those violent rivers which, when they become enraged, flood the plains, ruin the trees and the buildings, lift earth from this part, drop in another; each person flees before them, everyone yields to their impetus without being able to hinder them in any regard” (Ch. XXV).

The metaphor is a rather apt one, for in this way Machiavelli highlights the unpredictable, destructive, inconsiderate and the indiscriminatory nature of fortune. That is to say, fortune acts according to its own ‘will,’ as destructive or constructive as it pleases, and without regard to any particular individual’s wishes or control. When fortune strikes for the worse, everyone panics and is rendered defenseless against it. Machiavelli believes this is true for the most part, but less true for the truly virtuous princes. He writes:

“although they [fortune] are like this, it is not as if men, when times are quiet, could not provide for themselves dikes and dams so that when they rise later, either they go by canal or their impetus is neither so wanton nor so damaging” (Ch. XXV).

Machiavelli’s reasoning here implies that the prudent investor must, when times are good, still be conservative in his analysis and in his actions so that when fortune does strike he finds himself to be either safe at best, or still significantly better defended than his peers at worst. In Chapter XXIV, titled “Why the Princes of Italy Have Lost Their States,” Machiavelli was remarkably perceptive to state, “For men are much more taken by present things than by past ones, and when they find good in the present, they enjoy it and do not seek elsewhere” (Ch. XXIV). Machiavelli points out that people forget the cyclical nature of things, especially so when times are good, that is when they give in to their irrational parts and let their guard down.

 

Moreover, Machiavelli’s description of fortune implies that it has a more active role in delineating the virtuous from those who are not, as he writes:

“It happens similarly with fortune, which demonstrates her power were virtue has not been put in order to resist her and therefore turns her impetus where she knows that dams and dikes have not been made to contain her” (Ch. XXV).

I do not pretend to know that this active manner is the case in reality, but the importance is that Machiavelli places the impetus on the prince rather than fortune. It is not enough for the prince to simply ignore fortune in order to maintain his power, fortune has a way in acting against the prince if he is not constantly creating defenses for himself. So too the investor must understand that even if his is actions are prudent, there are still risks outside of his actions and ability to comprehend that can undermine him if he is not prepared. Thus, the successful investor is one who is always on guard and actively seeking out what risks might be out there, and not so just some of the time. Certainly neither the prince nor the investor can defend, or even know about, all of the risks out there, but if one builds enough dikes and dams they will certainly be more defended than their peers. As a result they will be in a better position to capitalize on others’ mistakes (this latter point I address later in this analysis).

 

Machiavelli then states, “that the prince who leans entirely on his fortune comes to ruin as it varies” (Chapter XXV). Machiavelli elaborates on why certain princes fail and others succeed, “he is happy who adapts his mode of proceeding to the qualities of the times; and similarly, he is unhappy whose procedure is in disaccord with the times” (Ch. XXV). I believe there are multiple ways to interpret this. First, from the perspective of the modern day investors, I do not believe that this means that one ought to abandon their investment principles as due to the whims of the market. What I believe he means is that one set of static principles may work when the times are favorable to that set of principles, but that if one does not adapt as the market adapts one will come to ruin. Machiavelli confirms this stating:

“for if one governs himself with caution and patience, and the times and affairs turn in such a way that his government is good, he is happy; but if the times and affairs change, he is ruined because he does not change his mode of proceeding” (Ch. XXV).

Again, this does not mean that one abandon their core investing principles as the favor of the month changes, I believe what it implies is that the prudent investor must act and react to his times. If the markets are frothy, the investor ought to proceed with extra caution as to build dikes and dams. But then the market is depressed, the value-conscience investor ought to be assertive in purchasing those securities that he deems sufficiently undervalued, which is an act of contrarianism. Therefore being a permanent bear, while likely safer than being a permanent bull, is not as good as the investor who is thoughtful in all times. In this way the prudent investor adapts to the times for his benefit, such that he maintains and enhances his success no matter how fortune varies.

 

Machiavelli concludes with the notion that a prince ought not to just defend against fortune, but that he should seek to command fortune. I believe this is akin, although not perfectly, to using fortune to capitalize on the mistakes of others, and it is a point that I believe he would assert makes a prince great. Rather infamously, Machiavelli writes that:

“I conclude, thus, that when fortune varies and men remain obstinate in their modes, men are happy while they are in accord, and when they come into disaccord, unhappy. I judge this indeed, that it is better to be impetuous than cautious, because fortune is a woman; and it is necessary, if one wants to hold her down, to beat her and strike her down. And one sees that she lets herself be won more by the impetuous than by those who proceed coldly. And so always, like a woman, she is the friend of the young, because they are less cautious, more ferocious, and command her with audacity” (Ch. XXV).

Machiavelli presents his readers with a rather vivid and shocking metaphor in which he conveys that the truly great prince ought not to ignore fortune nor just defend against it; rather the great prince actively tries to command fortune to his benefit. The manner by which one achieves this, according to Machiavelli, doesn’t not seem to be in accord with the principles of a prudent investor (namely to act with impetuous, ferocity, and audacity over reason and caution). This is by and large correct. However, one must understand the differences between Machiavelli’s time and that of our own to understand why this is divergence occurs. According to Machiavelli himself, the state of affairs of his time was one of idleness and complacency (see Discourses on Livy, First Book Preface), thus to act with impetuous and audacity is, as I argue, Machiavelli’s call for contrarian action. Our times are different; more market participants, or speculators to be quite frank, act first then think later (if they think at all). Impetuousness is too commonplace nowadays and is therefore associated with herd mentality and foolhardiness, but in Machiavelli’s time, to be audacious was an act of defiance of the state of things.

 

Thus properly interpreted, Machiavelli asserts that great princes, in order to be great, must be contrarians for they institute ‘new modes and orders.’ If a great prince was anything but a contrarian, he would be just like any other prince, but this is not possible for greatness is restricted for only a few. Greatness is therefore constricted to the few that go above and beyond that of others, which necessarily means that one cannot go above and beyond others without doing something different. This principle can be seen to be in accord with modern investing principles. Contrarianism is a necessary but not sufficient condition for greatness of a prince, and such is the case for investment success. The astute investor, by his virtue, not only prepares dikes and dams to guard against fortune, but he also stands by ready to capitalize on the mistakes of others. When speculators get greedy they are defenseless against the flood when it happens, and as Machiavelli says, they flee. The prudent investor, having withstood the flood is there and ready to capitalize on the bargains and opportunities that the panic of others offers them. In this way, the prudent  and astute investor is akin to Machiavelli’s most virtuous of princes (which he cites to be Moses, Romulus, Theseus and Cyrus, among unnamed others), to which he writes:

“as one examines their actions and lives, one does not see that they had anything else from fortune other than the opportunity… without that opportunity their virtue of spirit would have been in vain, and without that virtue the opportunity would have come in vain” (Ch. VI).

Machiavelli acknowledges that the even the most virtuous princes cannot completely rid themselves of fortune, but they are of such a sort that fortune only acts in their favor. Fortune no longer acts as destructive, but represents opportunity for the virtuous prince and prudent investor. Machiavelli makes this very point explicit elsewhere:

“A wise prince should observe such modes, and never remain idle in peaceful times, but with his industry make capital of them in order to be able to profit form them in adversities, so that when fortune changes, it will find him ready to resist them” (Ch. XIV).

The virtuous and prudent investor does the same. He is fearful when others are greedy, and greedy when others are cautious. His prudence tells him to hold cash when there are no compelling investment opportunities, while his virtue makes him diligent in continuing his research so that he will be ready with the winds of fortune change.

 

The contra example of the virtuous prince is the prince’s of Machiavelli’s time. Appositely, they are discussed in the chapter titled “Why the Princes of Italy Have Lost Their States” (Ch. XXIV). To this question, Machiavelli asserts that the princes of Italy certainly lack prudence to understand how fortune varies, while lacking virtue as they place their fate in the goodwill of others. Machiavelli writes:

“Therefore, these princes of ours who have been in their principalities for many years may not accuse fortune when they have lost them afterwards, but their own indolence; for, never having thought that quiet times could change (which is a common defect of men, not to take account of the storm during the calm), when later the time become adverse, they thought of fleeing and not defending themselves. And they hoped that their peoples, disgusted with the insolence of the victors, would call them back. This course is good when others are lacking; but it is indeed bad to have put aside other remedies for this one. For one should never fall in the belief that you can find someone to pick you up. Whether it does not happen or happens, it is not security for you, because that defense was base and did not depend on you. And those defenses alone are good, are certain, and are lasting, that depend on you yourself and on your virtue” (Ch. XXIV).

Here, Machiavelli diagnoses the anatomy of the imprudent individual, which includes all of the speculative individuals. The prudent individual, whether they be a prince or an investor, realizes that fortune is fickle, and that the surest defense one has is oneself. Therefore, the virtuous prince maintains himself far easier than the prince who relies on the goodwill of fortune. Machiavelli affirms this saying:

“Such opportunities, therefore, made these men happy, and their excellent virtue enabled the opportunity to be recognized; hence their fatherlands were ennobled by it and became very happy. Those like these men, who become princes by the paths of virtue, acquire with difficulty but hold it with ease” (Ch. VI).  

 

Becoming a virtuous prince is not easy, nor is it easy to become a successful investor. Successful investing requires discipline, patience, and good judgment. Acts that make princes and investors virtuous require, as was stated before, one to act differently from that of the herd in order to go above and beyond that of the herd. Greatness and success requires, as Machiavelli calls it, ‘new modes and orders.’ But those capable of possessing and acting according to this set of principles will have a higher likelihood of long term success according to Machiavelli. In summary, it is better to be virtuous than fortunate, but if you come to success via fortune, you ought to start building ‘dikes and dams’ if you wish to maintain your success.

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