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.
Machiavelli’s Discourses on Livy is often juxtaposed with his Prince as more indicative of his republican political ideology. It is certainly more apparent in his Discourses, although not absent, but veiled in his Prince due to political reasons. Nevertheless, in his Discourses, Machiavelli frequently describes Romans, amongst other ancient peoples, as a superior model of republicanism, one worthy of contemporary emulation. Yet in doing so, he had to overcome the biases and pretensions of his aristocratic contemporaries, who favored more aristocratic models of republicanism more prevalent in their times. Thus, Machiavelli put himself to the task to convince them otherwise, using his method of critical history as well as a healthy dose of rhetoric. I argue that Machiavelli’s account and analysis can be applied to the modern malignity of our times, that of moat ‘investing.’ Like Machiavelli, I will present the case that such a mode is defunct and stems from multiple misunderstandings. Instead, I argue, one should return to the example virtuous ancients, that of the principles of prudence of Ben Graham.
Machiavelli asserts that it is the nature of men to be hostile towards new modes and orders, that is, not against incremental progress or innovation, but to the kinds of paradigm shifts in their modes of thinking that further and alter history, because men are envious, incredulous, and inexorable in their habits.
“the envious nature of men has always made it no less dangerous to find new modes and orders than to seek unknown waters and lands, because men are more ready to blame than praise the actions of others” (Book I:Preface).
On this account, Machiavelli chides his contemporaries for admiring ancient things, even imitating them in superfluous matters such as sculpting, but shunning imitating them in the most important matters, that of statecraft. The virtue of the ancients – their strength and spirit – made them most vulnerable, enabling the Greeks and the Romans to acquire the largest empires the world had ever seen up until those times. Yet, the ‘enlightened’ contemporaries of Renaissance Italy, believing themselves to be above and beyond the modes and orders of the ancients, are actually lacking in all virtue.
“Considering thus how much honor is awarded to antiquity, and how many times – letting pass infinite examples – a fragment of an ancient statue has been bought at a high price because someone wants to have it near oneself, to honor his house with it… and seeing, on the other hand, that the most virtuous works of histories show us, which have been done by the ancient kingdoms and republics, by kings, captains, citizens, legislators, and others who have labored for their fatherland, are rather admired than imitated – indeed they are so much shunned by everyone in every least thing that no sign of that ancient virtue remains with us” (Book I:Preface).
All too similarly, many ‘investors’ today admire Ben Graham and others, even paying thousands of dollars for original versions of his works, yet they scoff at the mention of imitating his prudent investment method. They deem it to be too antiquated, draconian, and unsophisticated. Instead, with their presumptuous ‘understanding’ of moats and models, they have completely missed Graham’s point, and thus they retain none of his virtue and prudence. His ‘net-nets’ were not an end, but a means. It was an acknowledgment of the uncertainty of future, that there is no certainty no matter how complex the mathematics, that it is the more prudent route to seek value over ‘quality.’ How much more virtue and prudence existed then that has all but disappeared since the great corruptor of Omaha.
In beginning his Discourses, Machiavelli sought to debunk the pretensions that inhibited his contemporaries from considering imitation of the ancients. In particular, Machiavelli was highly preferential to Roman republicanism, a mode of government that had all but disappeared from the world in his time. What had persisted, instead, were the highly oligarchic ‘republics’ of Venice and, to a slightly lesser extent, that of Machiavelli’s own Florence.
“For those who have prudently constituted a republic, among the most necessary things ordered by them has been to constitute a guard for freedom, and according as this is well places, that free way of life last more or less. Because in every republic there are great and popular men, it has been doubted in which hands it is better to place the said guard with. With the Lacedemonians, and in our times with the Venetians, it has been put in the hands of the nobles; but with the Romans it was put in the hands of the plebs” (Book I.5).
Machiavelli, a man of undistinguished birth, in writing to his haughty aristocratic counterparts, defended the Roman model of republicanism over the oligarchic ‘republics’ of Venice and Sparta that were favored by his aristocratic contemporaries. On one hand, his audience admired the free way of life enjoyed under the Roman republic. But on the other hand, his aristocratic contemporaries opposed imitation of Roman republicanism because they feared the idea of having to share government with the lower class – the people – as was the practice in that republic.
These elites (wrongfully) viewed the people as rapacious and ambitious, such that they would take freedom from the nobility. The tumults that are described in the records of Livy between the plebs and the nobles was particularly frightening to their interests. Machiavelli sought to counter this mode of thinking, instead showing that the tumults in Rome were necessary and indeed responsible for the free way of life in Rome. More importantly, the division between aristocracy and the people is a natural one found in all cities, Machiavelli asserts, and that conflict between these factions is a most natural and inevitable phenomena. Contrary to his contemporaries who seek stability and security, Machiavelli realized that conflict was necessary and sufficient to for longevity and prosperity for it is out of such conflict that resolutions arise. As Machiavelli writes:
“I say that to me it appears that those who damn the tumults between the nobles and the plebs blame those things that were the first cause of keeping Rome free, and that they consider the noises and the cries that would arise in such tumults more than the good effects that the engendered. They do not consider that in every republic are two diverse humors, that of the people and that of the great, and that all the laws that are made in favor of freedom arise from their disunion, as can easily be seen to have occurred in Rome” (Book I.4).
Contrary to the imagination of his contemporaries, Machiavelli points out that their fear of populist avarice against the nobles is misplaced as so few extraordinary events happened over the more than three hundred years that the republic existed from the Tarquins to the Gracchi. Instead, in the more oppressive oligarchies of Sparta, many such extraordinary events occurred where the suppressed resentment of the lower classes surged, resulting in the massacres of the nobility under Cleomenes and Nabis. Machiavelli continues:
“Neither can these tumults, therefore, be judged harmful nor a republic divided that in so much time sent no more than eight or ten citizens into exile because of its differences, and killed very few of them, and condemned not many more to fines of money. Nor can one in any mode, with reason, call a republic disordered where there are so many examples of virtue; for good examples arise for, good education, good education from good laws, and good laws from those tumults that many inconsiderately damn. For whoever examines their end well will find that they engendered not any exile or violence unfavorable to the common good but laws and orders in benefit of public freedom” (Book I.4).
Moreover, it could not be the case that Rome was poorly ordered because of its tumults as there were so many examples of Roman virtue, both in civic and military life, as virtue is the result of good education and laws, which in turn is the result of good orders of government. Contrast the laundry list of Roman exemplars to that of Sparta, who were lacking altogether in virtuous examples in civic life. Therefore, it is better to be a Rome than a Sparta, on Machiavelli’s account, for there is less hidden danger and greater virtue.
There are many modes of interpretation for investors two. One such interpretation, the most apparent one, is Machiavelli’s reminder not to be adverse to natural volatility; for it is out of such conditions that corrective forces are most efficient. Volatility is not risk, but the suppression of volatility creates risk because the natural and inevitable forces of conflict and correction build up then burst all at once. Instead, were smaller tumultuous periods allowed to take their corrective courses at de minimus harm, then the larger tidal forces can be temporized. Indeed, prudence consists in choosing the lesser of two evils.
In another interpretation, one ought to realize the importance not to disassociate cause from effect, and not to confuse the means for the end, as Machiavelli points out. Moat investors confuse such means for end; they misunderstand that moats are only a part of the formulation of an enterprise’s intrinsic value, it is not the margin of safety itself. Nor are moats the cause of the margin of safety, for that cause is the discrepancy between the intrinsic value and the price. Moat ‘investors’ are akin to Machiavelli’s aristocratic contemporaries, for they have a misplaced sense of fear arising from the deterioration of business quality, probably stemming from one to two severe and extraordinary examples. But if they examined the histories carefully, they would realize that Graham’s modes and orders leads to the fewest losses and the greater gains, just as the tumults of Roman republicanism led to few such deaths and exile. This is because when there is a large discrepancy between price and value, ergo the margin of safety, the risk is low and the reward is high. For many things can go wrong before permanent capital loss is incurred, and only a few things need to go your way for substantial capital gain.
The tumultuous part that makes our pathologically weak, contemporary moat ‘investors’ is that such Graham opportunities are not clean, orderly, spotless, nor regular, especially when compared to the seeming goodness, the supposed durability, the succinct certainty of ‘moaty’ businesses. But the prudence of Graham was in realizing that nothing is certain nor durable. Indeed, like the Roman tumults, goodness does not come from order but disorder, for entropy devolves order to disorder while necessity urges disorder to order. Therefore, like the Roman tumults, it is the disorder and conflict that ensured the protection and preservation of the free way of life, just as these modes produce the most superior risk-adjusted returns for prudent investors. Indeed, on this account one can see the soundness of the modes and orders of Ben Graham by the countless examples of investors who have been able to achieve superior risk-adjusted returns by imitating his prudence. On the other hand, one need not strain and toil to see how few examples there are of those who have achieved superior risk-adjusted returns by imitating the orders of ‘quality’ over value, which stands in testament to its misguided and defunct doctrine.
Concluding that the Roman mode of government is better for promoting and protecting a free way of life, Machiavelli adds the coda that the tumults should not be curbed, but formalized. With official channels to follow, the tumults rarely resorted to extraordinary modes, Moreover, such channels allow for many smaller tumults to occur, thereby sapping the potential of larger, more unshackled tumults of occurring. Contrary to the (aristocratic) historians, such as Livy and Tully, Machiavelli believed that the desires of the peoples was more decent than that of the nobles, as the former wished only not to be oppressed while the latter wished only to oppress. Thus, in placing the protection of liberty with the people, because of the decency of their ends, would be more prone for its preservation and less liable to turn to tyranny.
“I say that every city ought to have its modes with which the people can vent its ambition, and especially those cities that wish to avail themselves of the people in important things… The desires of free people are rarely pernicious to freedom because they arise either from being oppressed or from suspicion that they may be oppressed. If these opinions are false, there is for them the remedy of assemblies… though peoples, as Tully says, are ignorant, they are capable of truth and easily yield when the truth is told them by a man worthy of faith” (Book I.4).
“Without doubt, if one considers the end of the nobles and of the ignobles, one will see great desire to dominate in the former, and in the latter only desire not to be dominated; and in consequence, a greater will to live free… So when those who are popular are posted as the guard of freedom, it is reasonable that they have more care for it” (Book I.5).
Parallel to Machiavelli’s (satirical ascribed) great versus ignoble distinction, one sees that speculators, GARP and ‘moat’ investors (not that there is a fundamental distinction between these latter two) are akin to the nobles in being driven by their appetite for growth (i.e. speculative ‘upside’), while prudent investors in the Graham tradition are akin to the people in their desire not to lose money. Therefore, it is consequence that when entrusted with capital, the prudent investors are a better guard of capital as they are less reckless and have more care for it.
Machiavelli asserts that one cannot even imitate a Venice or a Sparta without certain precautions that, in order to make it resistant to the pent up resentment stemming from the oppression of the people, hinder and weaken the state. Appealing to history, Machiavelli cites that Sparta and Venice were only able to sustain their states as oligarchies because they prevented immigration, for any increase in the ratio of the people to the aristocrats threatened their ability to oppress the masses. As Machiavelli states:
“If someone wished, therefore, to order a republic anew, he would have to examine whether he wished it to expand like Rome in dominion and in power or truly to remain within narrow limits. In the first case it is necessary to order it like Rome and make a place for tumults and universal dissensions, as best one can; for without a great number of men, and well armed, a republic can never grow, or, if it grows, maintain itself. In the second case, you can order it like Sparta and Venice, but because expansion is poison for such republics, he who orders them should, in all the modes he can, prohibit them from acquiring, because such acquisitions, founded on a weak republic, are its ruin altogether. So it happened to Sparta and Venice” (Book I.6).
In consequence, because of their severely limited populations, these states could never expand beyond their polities, and if they did, they quickly were ruined, as happened historically to Sparta and Venice. On the other hand, the Romans made their people numerous and armed them so as to be able to make and maintain a great empire. Thus, Machiavelli concludes that not only does Roman republicanism best promote longevity and prosperity, it also enables you to acquire and maintain an empire.
All too similarly, the moat ‘investing’ style, as a weak doctrine, is of less utility to its practitioners due to its handicapping nature. Contrary to the conventional assertion that knowledge of and the ability to identify moats stems from some abstract conception of competitive strategy, it is actually the case that such knowledge and ability stems from expertise in industries. While the abstract knowledge of competitive strategy is of undoubted use, it cannot, by itself, identify moats; that is, it cannot move from generality to particularity (i.e., generality assists the intuition with regard to particulars, but it does not provide knowledge of particulars themselves). Therefore, in order to be a successful moat ‘investor’ one can only be like John Malone, that is, one is confined by their industry expertise – their circle of competence – as such knowledge and experience allows them to identify moats. Therefore, moat ‘investors’ are like Sparta and Venice, for they can sustain themselves within their narrow confines, but it they wish to expand into new areas, they find themselves quickly ruined. They may be able to generate above average returns within these narrow conditions, but because of their limited opportunity set and the cyclically of opportunities within industries, they are too handicapped to generate superior risk-adjusted returns.
On the other hand, the prudent investors of the Graham tradition are like that of the Romans, for they are unrestrained. The ability to apply the principles of prudence is unconstrained by industry or asset type. Indeed, the modes and orders of such a type produce so many more virtuous individuals that it enables them to acquire and expand with greater ease because these modes that are successful in one polity and easily imitated in acquiring and maintaining another. Thus, greatness in the form of superior risk-adjusted returns resides in the virtue and prudence of the Graham tradition.