Berkshire Hathaway
The Sage of Chaos

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By hartmanbirge
July 7, 2006

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Fair warning.... A bit long and deep (just how I like them)..

One of the things I am charged with in my career is to read all the great theorists on military strategy. Whether it be Clausewitz or Jomeni or Hart they are picked apart. Some time ago I fell in love with the philosophy of Sun Tzu and I think this philosophy is arguably the most powerful and compelling of them all. Often despised in the West and dismissed as "sneaky" or dishonorable I think that these arguments are at best superficial. I have asked myself why it is that for me Sun Tzu stands above the rest and I think that the answer is because as a military philosophy it is but a mere extension of a life philosophy. It is far from a linear, simplistic realm, but more a holistic, all-encompassing way. I will argue that Buffett's way of investing and lifestyle is the manifestation of the Sun Tzu philosophy � and the manifestation of Munger even Moreso.

Buffett or Munger would have been supreme military strategists in a different set of circumstances � their philosophy is all right there to be had in Sun Tzu. I think it inappropriate to use the word "doctrine" to describe it, for it is more a "way" or a path. When mastered and applied it transcends ALL areas of life � everything is interconnected, related, and balanced. There are many things I could write about related to this topic and we've all seen the Sun Tzu business books and I recall a time not long ago of a Sun Tzu craze of sorts where there was an attempt to "militarize" the business realm � I think for the most part that it all missed the point.

When I attended the BRK annual meeting and the Wesco meeting I couldn't help but notice all the people who were there who had failed to so much as READ any of the philosophical underpinnings. I think that many attend these two events to find out or hear WHAT to think or do.. Many people ask which book they might read to figure it out � looking in vain for the elusive silver bullet. My conclusion is that most of the attendees are looking for a tip or some news that will allow them to earn some money (call this a strong anecdotal hunch). They haven't taken the time to learn HOW Buffett or Munger think and apply the craft. Yet for the most part it's all there in the recommended reading material. And in that material some underlying themes begin to emerge that is repeated in the various and wildly divergent texts and authors. When I juxtapose these themes and currents of Munger's reading lists and the way that Buffett and Munger conduct their investment activity onto Sun Tzu I get a very VERY strong match � philosophically. To tie it all together I therefore recommend Sun Tzu as part of the expanded reading list.

There are many things within Sun Tzu that one could relate to the Munger/Buffett Philosophy. The Sun Tzu's central character is the wise Sage who has learned self-mastery and can apply the philosophy onto the natural forces as they present themselves and in so doing increase his influence and power exponentially. If circumstances devolve into War it essentially means he has failed for the true talent is in aligning forces and natural power in such a way so as to prevent the horrific consequences of outright battle � to win through non-action is far better than to take on your foe in a set-piece head on battle. Power is amassed through stealth and quiet accumulation of assets and forces to be leveraged into a future circumstance that will favor its application. Knowing exactly when and where to apply that force is the Art � it's not "seen" by most but alas our Sage identifies the opportunity and acts at just the right time. Sounding like the Munger/Buffett Philosophy yet?

As mentioned there are way too many areas of the Sun Tzu to delve into with a post or a thread but one that especially appeals to me and what I'd like to tackle with this post is what the Denma Translation (London 2002) refers to as "Working in Chaos." To quote, "But the ground of battle, and indeed all of life, is unpredictable, full of chaos and uncertainty. From an ordinary perspective, chaos is the disorder between the last discernible order and the future order that has not yet come. It is a dangerous and uncertain time, when things that seem solid and fixed fall apart. Chaos is indeed a great challenge for the general. If he himself is chaotic, his ability to command the situation is seriously undermined." I will now harken back to Buffett turning down a $10 vs. $20,000 bet that he would hit a hole-in-one on the golf course saying (to paraphrase) that "if you're not disciplined in the little things then you'll start to slip in the larger things." I take this as Buffett's not allowing himself to become "chaotic" on a personal level as it is ALL interrelated in very powerful ways. One has to be philosophically aligned and consistent.

Going back to the text, "The sage commander, however, always takes the bigger view. While in the midst of confusion, he sees how chaos forms its own particular order. Though the course of a hurricane along the coast is unpredictable, it is part of a weather pattern that is intelligible. [ed note � funny how they use a hurricane as an example!]."

And slightly transitioning from Sun Tzu to Taoist philosophy

"Chaos is born from order. Cowardice is born from bravery. Weakness is born from strength." So..... "chaos and order are two aspects of the same thing. Together they constitute the totality of our experience, the good and bad, the confusion and clarity � how it is all interconnected and constantly shifting. From the smaller perspective, we experience these as opposed. But in order to take whole, the sage commander must work with this totality. He resides in the fundamental orderliness of the chaos, and thus for him � the fight is chaotic yet one is not subject to chaos."

And the meaning of the above identification allows wise action:

"Chaos then becomes a powerful time for the sage commander to take effective action. He can use it as an ally, particularly against a highly solidified position. Chaos can undermine that situation, unraveling it rather than forcing a confrontation. Trying to over-power solidity by building up greater solidity merely triggers the cycle of escalation. Since the sage commander appreciates and accommodates chaos, he sees more clearly what is taking place within it. Thus he knows how shih will develop and can catch the moment when one small gesture will be more decisive than a tremendous effort applied at the wrong time or place."

Does the above apply to investing? Of course it does. And it goes to the guts of accumulating cash hoards during "good" or benign times while others are "trying to over-power solidity by building up greater solidity" (playing the same game) � the Sun Tzu would say to act when all others are losing their heads so that you get maximum payoff for minimal outlay of capital. And reverting to my theme that it's all related (investing, business, and personal) I love the quote from earlier article on what Berkshire is doing in the Katrina aftermath - ``Berkshire is one of the few insurance companies that has the balance sheet to hold this type of risk,' said Aon's Madden, a managing director who helps real estate developers find insurance through the second-largest insurance broker. ``They smell blood in the water...."

Blood in the water.... This describes a change in external conditions of course and those familiar with chaos and those who have thought it through far in advance can now act with abandon to seize the initiative and win the victory. Berkshire didn't play the same game and try to out-compete on an apples to apples basis. The secret to success is weak competition as Buffett reminds us... so Berkshire waited until all the competition is moving lock-step in the opposite direction. Berkshire correctly identifies the opportunity within the full spectrum � first to accumulate assets during the good times; and second to unleash that power (seen and unseen) of those accumulated assets upon a more favorable (chaotic) situation.

"Allowing a chaotic situation to develop demands courage, for it often means that in the short term things will get worse rather than better (reminds me of GRN). There is always the chance that something of value will be harmed. But in the interplay of chaos and order, things don't always resolve themselves in a linear manner, so they must be allowed to run their course. Achieving a fundamental long-term solution is more important than resolving immediate irritation and discomfort. So he (Sage) allows the situation to develop and with patience finds the right moment to make the critical impact."

I will submit that this plays perfectly to the "sit on your ass" investing style in that all of the energy is not applied directly to activity inside the portfolio but rather in equipping oneself with the requisite knowledge and temperament to identify reality so that opportunity when it presents itself can be seized rather than fought... All those books that Munger gives us and all that multi-disciplinarity are the tools used to apply upon reality so that those crucial moments on the continuum of time can be identified and taken advantage of.

As an aside, I have yet to see an investment book that can give the reader a template for identifying those pristine moments of time - for templates are impossible. Each circumstance will differ. Each circumstance will have different inputs and variables which are all playing upon each other in their interrelated and synergistic ways. No way you can template that. Munger reminds us that all the super-smart economists completely GAFFED what has transpired in Japan. One can't help but wonder why. And all the super-smart managers at LTCM completely GAFFED reality with their foolproof models. Strange things happen in a world that is interdependent on millions of levels. That means that change, when it inevitably occurs, will present itself in some strange ways. I submit that a significant part of our task is to identify the right moment to apply "force" (not just in investing but in life) and in order to identify correctly the interdisciplinary way as best described by Munger is the path to wisdom.


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