The order of enterprise

In plain words: those without capital rely on their labour; those with a little capital rely on their wits; those already rich compete for timing. This is the great principle of getting rich. … From this one sees that wealth has no fixed trade and goods have no permanent owner: the able draw wealth to themselves like spokes to a hub, and the incapable let it fall apart like broken tiles.

“Without capital, labour; with a little, wits; when rich, timing” ties the manner of enterprise to the amount of capital. In the language of Chapter 1 it can be read like this: with very little capital, income comes mainly from labour and is additive; only with more capital does return come mainly from the capital itself and become multiplicative, and only then does “timing” become important. Chapter 4’s absorbing barrier adds a further meaning to this order: the nearer one is to zero, the less one should take multiplicative risks that could hit the wall; “competing for timing” comes after one is rich. “Wealth has no fixed trade, goods no permanent owner” reminds us that wealth itself is not ergodic: today’s rich are not necessarily tomorrow’s.

Jiran: preparation and timing

After King Goujian of Yue was besieged at Kuaiji, he employed Fan Li and Jiran. The biography first records Jiran’s words, then how Fan Li, once the state was restored, gave up office and went into trade:

In plain words: Jiran said, “If you know there will be fighting, prepare in advance; if you know when goods will be needed, you understand goods. When these two are clear, the conditions of all goods can be seen. … In drought, invest in boats; in floods, invest in carts: that is the nature of things. … Study what is in surplus and what is short, and you will know what is dear and what is cheap. When the dear reaches its extreme it turns cheap; when the cheap reaches its extreme it turns dear. Sell the dear as if it were dung; buy the cheap as if it were pearls and jade. Let money circulate like flowing water.” After ten years of following this, the state was rich … When Fan Li had wiped out the shame of Kuaiji, he sighed and said, “Jiran’s policies were seven; Yue used five of them and achieved its aims. Having applied them to the state, I wish to apply them to my household.” … He then managed property and laid up goods, following the times without making demands of others. So those good at managing a livelihood can choose the right people and make use of the times. In nineteen years he three times amassed a thousand pieces of gold, and twice gave his wealth away to poor friends and distant kinsmen.

One point first: in the “Money-Makers”, “in drought, invest in boats; in floods, invest in carts” are Jiran’s words; Fan Li is the man who adopted and applied Jiran’s policies.

These passages can be compared with the earlier chapters in three ways:

• “If you know there will be fighting, prepare in advance” and the absorbing barrier. Preparing a response before the event corresponds to Chapter 4’s cash buffer: the value of a buffer lies precisely in building it before the winter comes.
• “In drought, boats; in floods, carts” and counter-cyclical preparation. Preparing in one state of the world for what another state will need resembles both Chapter 6’s crash insurance and Chapter 5’s rebalancing: each lays something by in advance for a different future world. The difference is that Jiran speaks of anticipating the alternation of drought and flood, while rebalancing needs no prediction at all.
• “When the dear reaches its extreme it turns cheap” and rebalancing. “Sell the dear as if it were dung; buy the cheap as if it were pearls” reads very much like Chapter 5’s “sell after rises, buy after falls”. But Jiran’s ground is that the supply and demand of commodities correct themselves (when the price is high, supply rises and demand falls); Chapter 5’s rebalancing does not need prices to revert, only that several assets have similar long-run growth rates and swing relative to one another. In a persistent trend, “selling the dear” would keep selling the winner, as in Chapter 5’s simulation.

“Three times amassed, twice gave away” is also worth a word: twice Fan Li dispersed his wealth and twice built it up again. This is first of all a record of benevolence, but from this book’s angle it also shows something: the ability to grow wealth differs from holding a particular fortune; the first can be repeated, the second can be lost.

Bai Gui: take what others discard

In plain words: Bai Gui was a man of Zhou. In the time of Marquis Wen of Wei, when Li Ke was devoted to getting the most out of the land, Bai Gui liked to watch the changes of the times: what others discarded he took up, and what others sought he let go. … He could eat plainly, restrain his desires and dress frugally, sharing hardship and joy with the servants who worked for him; when the moment came he moved like a beast or a bird of prey striking. … So if a man’s wisdom is not enough to adapt, his courage not enough to decide, his benevolence not enough to know when to take and when to give, and his strength not enough to hold firm, then even if he wishes to learn my methods I will never teach him.

Bai Gui’s “take what others discard, let go what others seek” is the classic statement of contrarian dealing. Read beside this book, the most notable line may not be “take what others discard” but the one before it: “he could eat plainly, restrain his desires and dress frugally”. He kept his rigid spending very low. Chapter 4’s simulation showed that cutting rigid costs both raises the ordinary surplus and softens the losses of a winter; a lasting small monthly cut does more than a small one-off addition to the buffer, and needs no large sum in advance. Only someone whose rigid spending is low has room to “take” when “others discard”, rather than being forced to sell at the worst moment. Bai Gui’s four conditions at the end (adapting, deciding, taking and giving, holding firm) can also be read as a demand for discipline: the best rule is useless if the person carrying it out cannot hold to it.

Wuyan’s loan

In plain words: when the Seven States of Wu and Chu rose in revolt, the marquises and enfeoffed lords in Chang’an had to join the army and needed loans to equip themselves. The moneylenders reasoned that the lords’ fiefs lay east of the passes, where the outcome of the war was undecided, and none would lend. Only the Wuyan family put up a thousand pieces of gold, at ten times the principal in interest. Three months later Wu and Chu were pacified; within the year the Wuyan family had received its tenfold interest, and with it became as rich as the great families within the passes.

This is a classic high-payoff bet: had the court lost, lords whose fiefs lay east of the passes might have been unable to repay, and the thousand pieces of gold might have been lost; if the court won, the return was tenfold. In the language of Chapter 3, the value of the deal depends on two things: how good the chances were (the lender’s judgement of the situation), and what share of the family’s whole wealth the thousand pieces of gold represented (the text does not say). The Kelly criterion would say: however good the chances, one should not stake one’s whole wealth on a single war.

The passage also recalls the survivorship bias of Chapter 1: the “Money-Makers” records only those who succeeded. We do not know how many people made equally bold bets in other upheavals and lost everything; they appear in no biography. Reading only the stories of the successful is like looking only at the richest 1 % of players in the coin game.

Limits of the comparison

Some limits should be stated:

• The “Money-Makers” discusses trading in commodities and lending in an agrarian society, not modern financial markets; Jiran’s “when the dear reaches its extreme it turns cheap” rests on the self-correction of commodity supply and demand and cannot be carried straight over to the prices of financial assets such as shares.
• The text has no concepts of probability or expectation; “timing”, “preparation” and “extreme” are judgements from experience. Comparing them with the Kelly criterion or first-passage times redescribes ancient experience in modern language; it does not mean the ancients discovered this mathematics.
• “Take what others discard” and “sell the dear, buy the cheap” both require judging where the “extreme” lies, which is exactly the hardest thing to estimate, as Chapter 3 explained; Chapter 5’s rebalancing is useful precisely because it does not need that judgement.

Summary

“Without capital, labour; with a little, wits; when rich, timing” ties the manner of enterprise to the amount of capital and can be read beside the distinction between additive and multiplicative growth and beside the absorbing barrier; Jiran’s “prepare in advance” and “in drought, boats” correspond to cash buffers and counter-cyclical preparation, and “sell the dear as dung, buy the cheap as pearls” resembles rebalancing, though on a different ground; Bai Gui’s low rigid spending and discipline are the precondition of contrarian risk-taking; and the Wuyan family’s tenfold interest is a successful high-payoff bet and an example of survivorship bias. The next chapter turns the book’s conclusions into a checklist and a pre-registered experiment.