The Dao of Capital

“If you want to profit, first learn to embrace loss. The market is a paradox best approached with patience and indirect strategies.”

1. Embrace Loss to Gain in the Market

Investment success often comes from taking the counterintuitive path of embracing initial setbacks. In Austrian investing, rooted in Daoist philosophy, this approach mirrors the concept of "wei wuwei" or “doing by not doing.” By holding back and allowing others to act impulsively, you create opportunities for long-term advantage.

Short-term losses may appear discouraging, but they are often necessary to build a strong foundation. Daoist principles highlight the value of yielding, likening it to the martial art tuishou ("push hands"), where one succeeds not by force, but by strategically withdrawing.

In financial contexts, this means avoiding impulsive investments triggered by immediate market trends. Instead, study the market's flow and make well-timed, carefully considered moves when others have overcommitted or acted rashly.

Examples

• Investors who resist panic-selling during market downturns often reap rewards when markets recover.
• Robinson Crusoe's focus on building fishing tools, despite short-term hunger, allowed him to thrive long-term.
• Henry Ford initially sacrificed profits to develop assembly lines, resulting in massive future gains.

2. The Roundabout Approach Builds Advantage

The most efficient paths often involve detours. Austrian investing thrives on this principle, prioritizing long-term productivity over immediate gains. Innovations like Ford’s assembly line exemplify how building the right systems, even at a cost, pays dividends.

Taking the indirect route challenges our instinct for immediate results. Pioneers like Crusoe risked temporary setbacks to achieve massive gains, such as creating tools that initially diverted time from food gathering but increased efficiency later.

This principle aligns with nature. Conifers grow slowly and develop deep roots, allowing them to dominate over angiosperms over time. Avoiding short-term competition enables them to secure lasting strength.

Examples

• Companies investing in research and development instead of chasing quick profits eventually dominate.
• Entrepreneurs focusing on creating infrastructure face early sacrifices but achieve sustainable growth later.
• Forest ecosystems thrive when slower-growing conifers eventually dominate based on their strength.

3. Nature Offers Investment Lessons

Studying nature reveals how to succeed in competitive environments. Forest ecosystems, particularly conifers, mirror the principles of patience and adaptability seen in Austrian investing. Slow growth and strategic withdrawals often outperform rapid, aggressive expansion.

Conifers thrive by initially avoiding direct competition and developing strong structures. While angiosperms flourish in the short term, conifers’ resilience allows them to achieve dominance over time, reflecting the Daoist virtue of building indirect advantages.

The concept of “seeding by not seeding” exemplifies wei wuwei. Conifers patiently wait out competition and seize opportunities, such as after wildfires, when they can thrive in cleared spaces.

Examples

• Wildfires clear aggressive overgrowth, mirroring how market crashes expose weak malinvestments.
• Businesses focusing on slow growth, like Berkshire Hathaway, outperform faster-growing rivals over decades.
• Natural systems maintain balance by avoiding direct fights over resources, much like strategic investors.

4. Military Strategies Teach Patience and Positioning

Both Sunzi’s ancient Chinese strategies and Clausewitz’s observations emphasize gaining advantage through non-direct means. The concept of "shi" in Sunzi, meaning positional advantage, aligns with indirect methods for lasting success.

Forceful action, like impulsive investments, wastes resources. Instead, holding back to exploit opportunities or waiting for the opponent’s mistakes ensures better positioning. The art of winning a war without fighting is akin to making investments with minimal direct intervention.

Clausewitz emphasized weakening strategic points rather than overwhelming force. This measured approach directly ties to Austrian investing: avoid reckless market activity and instead create slow, calculated moves.

Examples

• Military strategies in Sunzi focus on outlasting foes instead of striking prematurely.
• Clausewitz’s theories on focal points guide many successful defense and business leaders.
• Investors like Warren Buffet wait for undervalued assets, buying when the time is optimal.

5. Markets Are Processes, Not Predictable Events

Markets are dynamic and ever-changing, much like the Daoist concept of "the path." Human behavior drives these processes, making them unpredictable and impossible to fully understand empirically.

People’s subjectivity defines their decisions, from purchasing trends to speculative behavior. This prevents markets from following natural laws like physics, leading to constant flux and chaos.

The 2008 financial crisis demonstrated the unpredictability of markets. Historical data failed to anticipate systemic weaknesses, underscoring the importance of adapting to market processes rather than trusting past patterns.

Examples

• Unforeseen crises like the 2008 crash disrupt seemingly stable markets.
• Behavioral economics highlights how individual choices defy logical predictions.
• Markets driven by mass sentiment, such as cryptocurrency booms, emphasize chaos-driven dynamics.

6. Let Markets Self-Correct

Intervening in natural systems prevents them from regaining balance. Just as forests rely on small fires to rejuvenate, markets require occasional corrections to maintain health. External interference, like printing money, often worsens distortions.

Austrian economists argue against actions like artificially suppressing interest rates, which prevent normal market corrections. These interventions distort value, creating false investment opportunities and leading to larger crashes.

Allowing minor market adjustments prevents catastrophic collapses. Investors prepared to act after natural rebounds often take advantage of the resulting clearer conditions.

Examples

• Central banks printing excessive money during crises creates economic bubbles.
• Post-forest fire regrowth mirrors recovering markets after minor bear runs.
• Malinvestments exposed by corrections clear the path for innovative firms.

7. Delay Gratification for Greater Returns

Human instincts favor immediate satisfaction, which undermines disciplined investing. Austrian investing, by contrast, requires resisting short-term impulses to achieve long-term benefits.

The Marshmallow Test illustrated how delaying gratification is difficult but rewarding. Successful investors often face ridicule for avoiding booming industries, only to eventually outperform when trends collapse or new opportunities arise.

Our cultural emphasis on "living in the moment" further complicates discipline. However, by overcoming these tendencies, investors position themselves advantageously for major gains.

Examples

• Children passing the Marshmallow Test showed higher career success as adults.
• Tech firms skipping sudden IPOs often enjoy sustained profitability after measured growth.
• Environmental conservation efforts, while costly upfront, ensure sustainable resources.

8. Find the Right Time to Invest

Austrian investing involves biding your time for market conditions to stabilize before acting. Jumping into distorted markets leads to losses, while patient investors find success.

Distortion occurs when artificial adjustments, like low interest rates, inflate asset prices. Waiting for these distortions to pass ensures investments are based on stable conditions, reducing risks and maximizing returns.

Knowing when to act also involves targeting businesses reinvesting in their long-term productivity, ensuring sustainable growth rather than transient hype.

Examples

• Firms that reinvest earnings into innovation often create leading technologies.
• Investing in industries after recessions leads to highly undervalued asset opportunities.
• Avoiding overstretched markets prevents unnecessary exposure during financial turmoil.

9. Low-Valued Companies Hold High Potential

Companies overlooked due to slow growth often reward patient investors. These firms align with the principles of roundabout productivity, focusing on reinvestment and innovation over immediate visibility.

Investors ignore such firms in favor of fast-growing, flashy industries. However, history shows how undervalued businesses later dominate once their strategies yield results, much like conifers slowly outcompete rivals.

The key lies in identifying companies reinvesting earnings into research. This foresight helps spot gems poised for substantial returns after periods of lower activity.

Examples

• Microsoft heavily reinvested in R&D during slower periods, ultimately surpassing competitors.
• Netflix prioritized content and tech development despite major initial losses.
• Energy-efficient firms gain long-term advantages through steady improvement.

Takeaways

1. Wait patiently before investing in unstable markets, avoiding distorted or speculative conditions.
2. Seek investments in companies that emphasize reinvestment and gradual growth rather than immediate profits.
3. Focus on long-term market trends and be willing to accept short-term losses for future gains.