"It is much safer to be feared than loved if one of the two has to be lacking." No, those aren't my words. They're taken from 16th-century Italian philosopher Machiavelli's famous work, "The Prince." Machiavelli goes on to explain that to be feared but not hated can go very well together, and that great cruelty can be highly effective if it is done at a single stroke. He does note, however, that a Prince who persists in cruelty is always obliged to hold a knife in his hand.

What does this have to do with investing? As I suggested in last week's article about Socrates, great investors have all approached the market from a particular point of view that was bedrock to how they selected stocks. And while we can learn much from them, we can also take nuggets of insight from the greatest thinkers throughout history to guide us in our investing. While I feel the cruelty bit is a little over the top, let's examine how the insights of Machiavelli can be applied to investing in stocks.

Renaissance man
Niccolo Machiavelli was born in Italy during the late 15th century and was a contemporary of Columbus and Michelangelo. At that time, Italy was a collection of small city-states that were systematically invaded and occupied by France and Spain, its larger and more powerful neighbors. Machiavelli was obsessed with the idea of Italy regaining the former greatness of the Roman Empire and wrote extensively about political power -- how to get it, keep it, and ultimately exploit it.

During an age when most philosophers were imagining the ideal society, Machiavelli explored what the world is really like. His work has been called the bible of Realpolitik (hard-nosed politics). None of his principles is based on what people are supposed to do. Instead, he provides an insightful view into how people actually behave -- their motivations, fears, and loyalties.

Perception is reality
Machiavelli exhorted politicians to appear honest, merciful, and humane, even if they didn't actually possess any of these qualities. He stressed judging the actions of people by how they turn out, regardless of the methods employed, and proposed that a ruler be a fox (to recognize traps) and a lion (to frighten wolves).

Machiavelli's name is synonymous with deception and ruthlessness, but he was ultimately not successful in holding onto power himself. After 14 years of being the behind-the-scenes ruler of the state of Florence, he was ousted when the Medici family returned to power. Machiavelli was arrested, imprisoned, and eventually exiled to a small farm, where for the next 15 years he wrote his famous discourses.

What would Machiavelli be buying?
I think he would feel right at home in the 21st century, either managing a hedge fund or a private equity firm. His uncanny sense for the ebbs and flows of power would lead him to look for companies that are currently underperforming but have underlying strength that can be exploited for gain.

It's not easy for the average investor to play in the private equity market, as there aren't many publicly traded private equity firms. Fortress Investment Group (NYSE:FIG) has a private equity unit, and MVC Capital (NYSE:MVC) makes private equity investments in small companies. The CAPS community thinks highly of MVC but hasn't taken a shine to Fortress yet.

Machiavelli would be on the lookout for high-multiple stocks with slowing growth as opportunities for profitable short sales. Two retail companies that have fallen victim to this unhappy combination recently are Starbucks (NASDAQ:SBUX) and Whole Foods Market (NASDAQ:WFMI). While both companies are great brands with superior future prospects, they became seriously overvalued based on fundamentals. I'm compelled to add that these situations are easier to recognize in hindsight and not for the faint of heart (shorting Starbucks at $28 is not nearly as attractive as when it was $40).

I also think Machiavelli would approve of companies that acquire power (and profits) from easily recognized human weaknesses. Credit card companies, while performing an indispensable service, fall into this category. We are constantly bombarded through the media with the need to spend, spend, spend. Companies like Capital One (NYSE:COF), and MasterCard (NYSE:MA) have created an art form out of satisfying the urge to splurge, making money on both sides of the transaction -- discounts from the retailers, and interest from cardholders. I think old Niccolo would love the "What's in your wallet?" commercials.

Some Foolish advice
Machiavelli has perhaps gotten a bad rap. While his descriptions of the exploitation of power can be shocking, he also enlightens us to our own human tendencies. If your investment philosophy tends toward making money from the dark side, his writings might spark a wealth of ideas to consider.

On the other hand, chances are good that a 21st-century Machiavelli would have stuck with what he knew best -- politics. I have a feeling he would be right at home running a presidential campaign, leaving little time to research stocks. To manage his investment portfolio, he would probably seek out some investment advice, perhaps like our own Motley Fool Hidden Gems service. I can assure you that Tom Gardner and Bill Mann are relentless in uncovering opportunities that others overlook, and there's nothing deceptive about their stellar track record. You can even get a free trial.

Feel free to email me with investments you think would make Machiavelli's top 10 list. And be on the lookout next week for the father of rational thinking -- Aristotle.

For more on the companies described above, check out:

MVC Capital is a Hidden Gems pick. Starbucks and Whole Foods are Motley Fool Stock Advisor recommendations. MasterCard is an Inside Value selection. With so many market-beating newsletters to choose from, you can't go wrong with a 30-day free trial to any or all of them.

Fool contributor Timothy M. Otte surveys the retail scene from Dallas. He welcomes comments on his articles. Timothy owns shares of Starbucks but none of the other companies mentioned in this article. The Fool has a disclosure policy.