Investors Can Profit from the New World Order by Adopting a Machiavellian Strategy
Invest like Machiavelli
Niccolò Machiavelli’s ‘The Prince’ has acquired the reputation as a work of ‘evil’. The problem is that many have not read it – or they haven’t read it properly. Yes, Machiavelli advocated a separation between morality and politics; yet, his principal advice was to advance a harsh analysis of politics and the world as they are. His reflections might appear ruthless, but they encourage even the most altruistic minded leaders to consider realistic scenarios rather than trust their idealistic instincts. The relentless focus on the ‘end justifies the means’ approach is why Machiavelli’s advice to a renaissance prince (Cesare Borgia) has stood the test of time. Critics might point out, correctly, that Machiavelli wrote for the benefit of a mostly renaissance Florentine public. But, the Florentine context of his day involved a world that was changing thanks to unprecedented scientific, artistic innovations and geographical discoveries across the Atlantic. In other words, Machiavelli’s instructions to his Prince were considered on the context of momentous socio-economic, scientific and political transformation. The reason why Machiavelli remains relevant, therefore, is not for the lessons in themselves and much less for the historical circumstances; rather, it’s for the approach to thinking about the world and how to exploit human nature.
And human nature has not changed significantly from the Florentine Renaissance. Yet the very fact that Florence during the Renaissance was also the birthplace of modern capitalism and banking makes Machiavelli’s ideas about strategy all the more relevant for 21stcentury investors to consider. For then, as now, banks flourished and failed and for all of the art and architecture, Florence was largely a city of finance: it was to the world what Wall Street is today. Popes, kings from all over Europe borrowed from Florentine – as well as Genoese, Milanese and Venetian bankers – who had established mechanisms (the very tools of finance we still use today such as cheques, bills of exchange, bonds, stocks, shares, multinational branches, double-entry bookkeeping and many others) that allowed lenders to offer credit while avoiding the Catholic ban on usury (i.e. charging interest, not unlike Islamic banking) while also allowing customers to profit from savings and protect their assets (insurance) against unforeseen events such as a shipwreck or highway robbery.
Just as in 1400’s Florence and 2008 New York, the failure of a bank, or financial firm, could throw thousands of families into bankruptcy and ruin. Moreover, it was a mathematician from Pisa, Leonardo Fibonacci who, through his Liber abaci, allowed Europeans in 1202 to adopt the modern numbering system, and the concept of ‘zero’ from the Muslims, which established a base for all of modern finance. It’s no surprise then that the world’s oldest banks are Monte dei Paschi di Siena (est. 1472) and Carige (Genoa, est. 1483). While history doesn’t repeat itself – and this is especially so in the context of financial markets – understanding that the healthy greed of business can easily turn into hubris and, inevitably, toxic debt through bad loans (the UK still owes billions of pounds from loans taken in the 15thcentury to the heirs of the Medici bankers).
In a word, Machiavelli advised the practice of ‘realism’. From a financial market perspective, then, while stressing that there are no certain outcomes, Machiavelli would discourage adopting any strategy that bears no relation to the context. Machiavelli recommends observing the world (or the markets) in all its complexity, urging flexibility. Evidently, having been written 500 years ago, ‘The Prince’ offers precious little direct advice for investors. Nevertheless, readers can extrapolate important lessons from timeless principles that apply to the world in general. And the most important of these, Machiavelli suggests – though in the framework of politics – is fortune, or chance (Chapter 25 is especially relevant). Modern western societies, which boast about their reliance on meritocracy, have tended to overlook the role of fortune, chance, or luck in markets and life itself. Machiavelli reminds us that we should also consider the fortune and that any endeavor as risky as investment is, above all, an art, a highly complex art, which poses many and perilous obstacles foremost among which is fortune. But, in Machiavelli’s world, fortune implies the combination of conditions that make the world at any given time. In short, Machiavelli would advise a modern ‘prince’ of Wall Street to always consider the present geopolitical and socioeconomic context.
Machiavelli also warns that human nature is variable.
Variability and fortune create opportunity. Thus, while chance can discourage or hold action back, human variability and change, for better or worse, when combined create opportunities. It is up to the virtuous leader to recognize the opportunity and take the appropriate action. Therein lies the idea of ‘the ends justify the means’: taking advantage of an opportunity sometimes means having to be ruthless in pursuit of the successful outcome. In politics such advice has brutal consequences. But, in the financial markets, this idea poses no harm. It does, however, suggest that investors maintain a flexible approach; that they be ready to change course, or take a new course, regardless of any preexisting beliefs, strategies or ideas. As to what kind of stocks, Machiavelli would advise buying, there are no rules because it depends on the opportunity. Invest wherever and whenever you see the ‘opportunity.’ Yet, traders should always question their assumptions, the more so, when ‘fortune’ has been kind; because, it is then that the dangerous feeling of infallibility arises.
Machiavelli would also have been aware, having lived in what was the capital of banking of his time, of banking issues and the tendency of humans to follow the crowd. He would be weary of the quantitative easing profligacy that have fueled equity markets on both sides of the Atlantic Ocean. Therefore, he would consider stocks based on companies with reasonable P/E ratios, good profit margins and prospects for strong performance in the wider context. Therefore, when a trade produces a successful outcome, the method – according to Machiavelli – has little bearing on it:
“It also derives, I think, from the fact that a prince is successful when he fits his … of two men who employ caution one will gain his objective while the other will not, … This also explains the inconstancy of prosperity. If one is cautious and patient in his method of proceeding and the times lend themselves to this kind of policy,…” (Niccolò Machiavelli, The Prince, Chpt. XXV)
Invest in Unrest
What is most noteworthy to the present context from this passage is “the inconstancy of prosperity”, or the . Therein lurks the Machiavellian opportunity.
The world is experiencing a crisis that derives from inconstancy or fickleness. In a financial context, market behavior can be fickle to a fault, creating and destroying micro-Machiavellian opportunities every day. After all, volatility is the engine of the markets. Nevertheless, a Machiavellian opportunity at a far deeper level has been taking shape, and it will require fresh thinking, because its roots are socio-economic. They are penetrating the global political structure, and will, unavoidably, affect the financial markets as well. The change stems from the social instability generated by unprecedented global income inequality. The latest statistics from Oxfam suggest that one percent of the world’s total population controls 82% of the wealth. More importantly, the pattern suggests that only the rich are getting richer. Most people are not seeing any improvement in their financial situation and it’s destabilizing the world.
It’s a situation that occurs rarely, perhaps once or twice a century. The last such period began thirty years ago with the fall of the Berlin Wall. That event ushered the collapse of the Soviet Union and saw a triumphal celebration of capitalist success, culminating in the process known as globalization. Meanwhile, the rising inequality marks the end of that very same globalization and its hubris of market optimism.
Institutional investors should correct their portfolios to absorb the reality that the income gap between the most affluent members of society and all the others will shake the foundations of finance, having already done so for society. This gap has the potential to slow economic growth; and unravel the ‘globalized’ system by encouraging isolationism and protectionism. This threatens the entire economic system, along with earnings and portfolios. Simply put, a new, and more cynical, world order is emerging. Whereas the globalization was the product of what appeared to be the triumph of the U.S. led world and capitalism over socialism, thereby supplying an unchallenged ideological and economic model, it’s all but obvious what form the new world order will take. What is evident is that the excessive wealth concentration into the pockets of the few will serve as the instrument of destruction. The Machiavellian opportunityresides in the chaos generated as the ‘tectonic plates’ of the old and new world collide.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
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