Chapter One
The Daoist Sage
Klippâs Paradox
âYouâve got to love to lose money, hate to make money, love to lose money, hate to make money. . . . But we are human beings, we love to make money, hate to lose money. So we must overcome that humanness about us.â
This is âKlippâs Paradoxâârepeated countless times by a sage old Chicago grain trader named Everett Klipp, and through which I first happened upon an archetypal investment approach, one that I would quickly make my own. This is the roundabout approach (what we will later call shi and Umweg, and ultimately Austrian Investing), indeed central to the very message of this book: Rather than pursue the direct route of immediate gain, we will seek the difficult and roundabout route of immediate loss, an intermediate step which begets an advantage for greater potential gain.
This is the age-old strategy of the military general and of the entrepreneurâof the destroyer and of the very creator of civilizations. It is, in fact, the logic of organic efficacious growth in our world. But when it is hastened or forced, it is ruined.
Because of its difficulty it will remain the circuitous road least traveled, so contrary to our wiring, to our perception of time (and virtually impossible on Wall Street). And this is why it is ultimately so effective. Yet, it is well within the capability of investors who are willing to change their thinking, to overcome that humanness about them, and follow The Dao of Capital.
How do we resolve this paradox? How is it that the detour could be somehow more effective than the direct route, that going right could be somehow the most effective way to go left? Is this merely meant to confuse; empty words meant to sound wise? Or does it conceal some universal truth?
The answers demand a deep reconsideration of time and how we perceive it. We must change dimensions, from the immediate to the intermediate, from the atemporal to the intertemporal. It requires a resolute, forward-looking orientation away from what is happening now, what can be seen, to what is to come, what cannot yet be seen. I will call this new perspective our depth of field (using the optics term in the temporal rather than the spatial), our ability to sharply perceive a long span of forward moments.
This is not about a shift in thinking from the short term to the long term, as some might suppose. Long term is something of a clichĂ©, and often even internally inconsistent: Acting for the long term generally entails an immediate commitment, based on an immediate view of the available opportunity set, and waiting an extended period of time for the resultâoften without due consideration to or differentiation between intertemporal opportunities that may emerge during that extended period of time. (Moreover, saying that one is acting long term is very often a rationalization used to justify something that is currently not working out as planned.) Long term is telescopic, short term is myopic; depth of field retains focus between the two. So letâs not think long term or short term. As Klippâs Paradox requires, letâs think of time entirely differently, as intertemporal, comprised of a series of coordinated ânowâ moments, each providing for the next, one after the other, like a great piece of music, or beads on a string.
We can further peel away Klippâs Paradox to reveal a deeper paradox, at the very core of much of humanityâs most seminal thought. Although Klipp did not know it, his paradox reached back in time more than two and a half millennia to a far distant age and culture, as the essential theme of the Laozi (known later as the Daodejing, but I will refer to it by its original title, after its purported author), an ancient political and military treatise, and the original text and summa of the Chinese philosophy of Daoism.
To the Laozi, the best path to anything lay through its opposite: One gains by losing and loses by gaining; victory comes not from waging the one decisive battle, but from the roundabout approach of waiting and preparing now in order to gain a greater advantage later. The Laozi professes a fundamental and universal process of succession and alternation between poles, between imbalance and balance; within every condition lies its opposite. âThis is what is called the subtle within what is evident. The soft and weak vanquish the hard and strong.â1
To both Klipp and the Laozi, time is not exogenous, but is an endogenous, primary factor of thingsâand patience the most precious treasure. Indeed, Klipp was the Daoist sage, with a simple archetypal message that encapsulated how he survived and thrived for more than five decades in the perilous futures markets of the Chicago Board of Trade.
THE OLD MASTER
Daoism emerged in ancient China during a time of heavy conflict and upheaval, nearly two centuries of warfare, from 403 to 221 BCE, known as the Warring States Period, when the central Chinese plains became killing fields awash in blood and tears. This was also a time of advancement in military techniques, strategy, and technology, such as efficient troop formations and the introduction of the cavalry and the standard-issue crossbow. With these new tools, armies breached walled cities and stormed over borders. War and death became a way of life; entire cities were often wiped out even after surrender,2 and mothers who gave birth to sons never expected them to reach adulthood.3
The Warring States Period was also a formative phase in ancient Chinese civilization, when philosophical diversity flourished, what the Daoist scholar Zhuangzi termed âthe doctrines of the hundred schoolsâ; from this fertile age sprung illustrious Daoist texts such as the Laozi and the Sunzi, the former the most recognized from ancient China and one of the best known throughout the world today. Its attributed author, translated as âMaster Laoâ or âThe Old Master,â may or may not have even existed, and may have been one person or even a succession of contributors over time.
According to tradition, Laozi was the keeper of archival records for the ruling dynasty in the sixth century BCE, although some scholars and sinologists maintain that the Old Master emanated from the fourth century BCE. We know from legend that he was considered to have been a senior contemporary of Kongzi (Confucius), who lived from 551 to 479 BCE, and who was said to have consulted Laozi and (despite being ridiculed by Laozi as arrogant) praised him as âa dragon riding on the winds and clouds.â4 Furthermore, written forms of the Laozi, which scribes put down on bamboo scrolls (mostly for military strategists who advised feuding warlords), are likely to have been derivatives of an earlier oral tradition (as most of it is rhymed). Whether truth or legend, flesh and bones or quintessential myth, one person or many over time, the Old Master relinquished an enduring, timeless, and universal wisdom.
To most people, it seems, the Laozi is an overwhelmingly religious and even mystical text, and this interpretive bias has perhaps done it a disservice; in fact, the term âLaoismâ has been used historically to distinguish the philosophical Laozi from the later religious Daoism. Recently, new and important translations have emerged, following the unearthing of archeological finds at Mawangdui in 1973 and Guodian in 1993 (which amounted to strips of silk and fragments of bamboo scrolls), providing evidence of its origins as a philosophical text5ânot mystical, but imminently practical. And this practicality relates particularly to strategies of conflict (specifically political and military, the themes of its day), a way of gaining advantage without coercion or the always decisive head-on clash of opposing forces. The Dao of Capital stays true to these roots.
The Laozi, composed of only 5,000 Chinese characters and 81 chapters as short as verses, outlines the Daoâthe way, path, method or âmode of doing a thing,â6 or process toward harmony with the nature of things, with awareness of every step along the way. Sinologists Roger Ames and David Hall describe the Dao as âway-making,â âprocessionalâ (what they call the âgerundiveâ), an intertemporal âfocal awareness and field awarenessââa depth of fieldâby which we exploit the potential that lies within configurations, circumstances, and systems.7
The central concept permeating the Laozi is referred therein as wuwei, which translates literally as ânot doing,â but means so much more; rather than passivity, a common misperception, wuwei means noncoercive actionâand here we see the overwhelming laissez-faire, libertarian, even anarchistic origins in the Laozi, thought by some to be the very first in world history8 (as in âOne should govern a country as one would fry a small fish; leave them alone and do not meddle with their affairsâ9âa cardinal Laozi political credo most notably invoked in a State of the Union address by President Ronald Reagan). The Laozi also has been deemed a distinctive form of teleology, one that emphasizes the individualâs self-development free from the intervention of any external force. This leads to the paradox of what has come to be known as wei wuwei (literally âdoing/not doing,â or better yet âdoing by not doing,â or âdo without adoâ10). âOne loses and again loses / To the point that one does everything noncoercively (wuwei). / One does things noncoercively / And yet nothing goes undone.â11
In wuwei is the importance of waiting on an objective process, of suffering through loss for intertemporal opportunities. From the Laozi, âWho can wait quietly while the mud settles? Who can remain still until the moment of action?â12 It appears as a lesson in humility and tolerance, but, as we wait, we willingly sacrifice the first step for a greater later step. In its highest form, the whole point of waiting is to gain an advantage. Therefore, the apparent humility implied in the process is really a false humility that cloaks the art of manipulation; as French sinologist François Jullien noted, âthe sage merges with the manipulator,â who, in Daoist terms, âhumbles himself to be in a better position to rise; if he withdraws, he does so to be all the more certainly pulled forward; if he ostensibly drains away his âself,â he does so to impose that âselfâ all the more imperiously in the future.â13 This is the efficacy of circumvention camouflaged as suppleness. And in this temporal configuration is, in the words of Ames and Hall, the Laoziâs âcorrelative relationship among antinomiesâ:14 With false humility we deliberately become soft and weak now in order to be hard and strong laterâthe very reason that, in the Laozi, âThose who are good at vanquishing their enemies do not join issue.â15
In this sense, the Laozi can simply be seen as a manual on gaining advantage through indirection, or turning the force of an opponent against him, through âexcess leading to its opposite.â16
THE SOFT AND WEAK VANQUISH THE HARD AND STRONG
Perhaps the most tangible representation of wuwei can be seen in the interplay of softness and hardness in the Chinese martial art taijiquanânot surprising as it is a direct derivative of the Laozi. According to legend, taijiquan was created by a thirteenth-century Daoist priest, Zhangsanfeng. Cloistered on Wudang Mountain, he observed a clash between a magpie and a serpent, and suddenly fully grasped the Daoist truth of softness overcoming hardness.17 The serpent moved withâindeed, complementedâthe magpie, and thus avoided its repeated decisive attacks, allowing the snake to wait for and finally exploit an opening, an imbalance, with a lethal bite to the bird. In this sequential patience, retreating in order to eventually strike, was the Laoziâs profound and unconventional military art:
Like Daoism itself, taijiquan has drifted into the more mystical and new age, but its roots remain in its martial application; this is clear today in the powerful blows of the original Chen style taijiquan form, as still practiced in Chen Village (located in Henan province in central China). According to Chen Xin (among the lineage of the eponymous Chen clan) in his seminal Canon of Chen Family Taiji...