“The strong ones in life are those who understand the meaning of the word patience. Patience means restraining one’s inclinations. There are seven emotions: joy, anger, anxiety, adoration, grief, fear and hate, and if a man does not give way to these he can be called patient. I am not as strong as I might be, but I have long known and practiced patience. And if my descendants wish to be as I am, they must study patience.” – Tokugawa Ieyasu
Tokugawa Ieyasu would have likely had a love/hate relationship with Ben Graham’s Mr. Market.
On one hand, he had very little sympathy for those who acted rashly because of a lack of emotional control. At the same time, his lifelong success was bred from taking advantage of such individuals. If this sounds similar to a certain Warren Buffett (Trades, Portfolio), indeed it should. In these early weeks of 2016, the ability to restrain one’s inclinations (in the words of Ieyasu) is a tremendous attribute to the value investor.
Patience as optionality
Tokugawa Ieyasu saw patience as the ultimate in optionality. For most managers, optionality is defined simply as "the ability to have, locate or define options from existing conditions. These options can be defined by space, time or values such as resources or finances." A famous Japanese folk saying states, “To catch the biggest fish one must cast the longest line.” The ability to store up such a length of line, deploy it at the most opportune moment and endure the long lead time are rare human attributes. But they are some of the most common traits in successful value investor methodologies.
There is a story about the three unifiers of modern Japan. Oda Nobunaga was known for his violent streak, Toyotomi Hideyoshi was known for his skill in negotiating victories, and Tokugawa Ieyasu was known for his patience. In the story a mockingbird sits in a tree but won’t sing. Nobunaga says if it won’t sing he will kill it. Hideyoshi says he will find a way to make it sing. Ieyasu says he will wait for it to sing.
While likely apocryphal, the story sums up each respective leader’s world view. More importantly, it should be noted that Nobunaga was assassinated at the age of 47 never having united Japan. Hideyoshi finished Nobunaga’s work by creating a unified Japan by the end of the 16th century but lost everything by having no heir old enough to claim the shogunate upon his death.
In a recent article on his blog[1], Tren Griffin quoted Carl Icahn (Trades, Portfolio) as saying; “The cardinal rule is to have enough capital at the end of the day. In takeovers, the metaphor is war. The secret is reserves. You must have reserves stretched way out ahead. You have to know that you could buy the company and not be stretched.” As Harold Geneen said once, “The only unforgivable sin in business is to run out of cash.”
All of these quotes and stories have one thing in common – utilizing time and resources (in this case cash) in the game of life and investing. Ieyasu’s method of constraining one’s inclinations – or having patience – means having both a balanced emotional response and the wherewithal to put that patience to work as a focused optionality. Think of it as a three-dimensional put-and-call options strategy capable of being struck at the most advantageous time, place and price to you as an investor.
Emotions in achieving patience
Ieyasu understood that mastering emotions – not eliminating them – was the key to success. Generally, untamed emotions nearly always lead to bad decisions. In his eyes, the worst possible scenario was making the wrong choice at the wrong time based on the wrong emotion. For instance, many of us are faced in the beginning of 2016 with considerable losses in our holdings. By making decisions based on fear, we will likely be making a very human – but also a very poor – decision. Many of us have seen the classic emotive view of market investing. I’ve attached a version – a particularly vivid one from Blackstone – showing the emotions of the average investor laid over returns for the period 1999 to 2013.
In this chart, Ieyasu would point out investor emotional inclinations were far in excess (joy and admiration bundled into euphoria in 1999, 2006 and 2014) on the high side and far too low (fear and hatred bundled into panic in 2000 and 2008) during market swoons. For those who controlled their emotions through both the good and bad times – thereby maintaining their optionality – great deals of money could be had in both up and down markets.
I should say right up front that maintaining your emotional (and cash) balance in down times is much harder than in the days of euphoria. Study after study shows that humans feel loss far more intensely than gain[2]. This natural inclination can cause individual investors to entirely lose the one great asset they have over professional money managers – the ability to look downfield and exploit opportunities by keeping their options open.
The Samurai stock market
So what’s an investor to do in these down days of 2016? I’d suggest you get in touch with your inner Ieyasu and develop his core thesis on patience. Don’t ignore your emotions – simply get better control of them. Use your inherent advantages as an individual investor to create market optionalities and opportunities that simply don’t exist for money managers who feel they must be fully invested all the time. Most professional money managers' actions are far too similar to Nobunaga's (“If the shares don’t increase in price immediately I will sell them.”) or Hideyoshi's (“I’m smart enough to know which stock will rise in price.”) versus having the patience of Ieyasu and letting management compound value over time.
When many individuals think of bushido (Japanese for “the way of the warrior”), many misplace the thrill of war on the samurai class of Ieyasu Japan. In reality, the great samurai saw combat as an option to access or gain power. Those who stayed in power the longest recognized that by practicing patience they could avoid war altogether. This optionality was a powerful tool to have available but terribly costly in its employment. By mastering the seven emotions, leaders like Ieyasu and his descendants made best use of their limited capital.
Conclusions
How did Ieyasu’s patience work out? Pretty well actually. At the Battle of Sekigahara his forces routed the opposition and put him – and his family – in position to rule Japan for the next 250 years. To put that in perspective, imagine George Washington’s direct descendants continue to hold the presidency today in an unbroken link since 1789.
How did Ieyasu achieve such results? By maintaining roughly 25% of his troops in reserve and unleashing them at the height of the battle. These reserves – or force optionality, as they are called in today’s lexicon – made all the difference to Ieyasu.
As we are faced with some significant losses in the beginning of 2016, such reserves might just do the same for you.
As always, I look forward to your thoughts and comments.
[1] The full article can be found here.
[2] Loss aversion was first demonstrated in Kahneman/Tversky’s classic “Choices, Values and Frames,” American Psychologist, #39, 1984. Though over three decades old as I write, this article should have a front and center seat on every investor’s or money manager’s desk.
