Great Wall of China

Building Wealth: What we can learn from China

China is fascinating.  This is a country that has existed since at least 2000 BC.  I lose perspective with such large numbers, so let’s put it in different terms.  2000 BC was the golden age for the Egyptian Pharaohs.  In the following years, the world has seen Ancient Greece, Alexander the Great, the Roman Empire, the Dark Ages, the creation of Europe, the Renaissance, and the rise of America.  Throughout this turmoil, China remained one sovereign country.  When we’re building wealth that will last for generations, we can learn a thing or two from China.

The Old Man and the Mountain

In the last few weeks I read two books about Chinese history.  One by a Westerner, Henry Kissinger, and one by a high ranking communist China party member, Ji Chaozhu.  Both books are fascinating reads but, as you can imagine, they tell the story from starkly different points of view.

I found it telling that both authors chose to start their books by explaining the Chinese mindset using the same parable: “The Old Man and the Mountain”

A farmer had set up a home for himself and his family at the base of a towering mountain.  The trouble was the nearest town was on the other side of it.  For his family to get to the town they had to go miles out of the way.

So, one day the man decided to remove the mountain.  He took out his hoe and started digging.  Years passed and he became an old man, but still he scraped away at the mountain every day.   Once, a visitor from another town noticed what the old man was doing and mocked him by telling him he could never hope to succeed.

The man replied “You are correct, I can’t remove this mountain.  But when I die, my children will keep digging.  When they die their children will keep going.  It might take hundreds of generations, but we will triumph over this mountain.

My thoughts on the story:

  1. I am so glad we live in a world with hydraulics
  2. That old man is going to be pissed off if the tectonic plates shift and more earth juts upwards
  3. I don’t know a single person with this long term mentality

Often in my quest towards building wealth, I meet people who are impatient to get rich.  They read some guru’s book and get all excited and think money is going to start rolling through the front door.  True, if everything goes according to plan, they might gain riches.  In the same way that someone playing the lottery might.

However, being rich is not the same as building wealth.  Powerball winners, NBA players, and Wall Street whiz kids get rich.  The Walton, Rockefeller, and Mars families built wealth.  The former receive a large amount of money in a short time and typically spend it as fast; often ending up in worst situations than they began.  The latter created wealth by adopting the model of the old man and the mountain.  They set the monumental goal of building wealth and single mindedly chipped away at what needed to be done to achieve it.

The fleetingly rich watch their money ebb and flow based on circumstances outside of their control.  Those building wealth work hard to create an enterprise to last and insulate it from outside events.

In America we idolize rags to riches stories.  It’s why gurus are so successful peddling their promises of easy money and an easier lifestyle.  Although these fairy tales sometimes come true, it’s as likely as winning the lottery.

The stories we should be idolizing are the rags to years of hard work and sacrifice to building wealth for generations (doesn’t roll of the tongue quite so easily).  If you want something to last, be slow and methodical.  Don’t get in such a rush that you create a house of cards that will crumble when the first troubling wind blows.

The Art of War

Throughout China’s history they have exercised a diplomatic and strategic tactic lifted straight out of Sun Tzu’s “Art of War.”  Their longevity is thanks, in no small part, to this approach.

To start they conducted their governance in a conservative style which afforded them relative peace in times of crisis.  Then, when a neighbor threatened them, they first pulled their economic and military assets back close to the capital (ie, they went turtle).  Next they tempted a second neighbor into attacking China’s land.  Once there were two rivals vying for Chinese territory, China goaded them to fight more and more with one another.  In the end, the two enemies destroy each others’ forces and leave China intact.

If you have the time, read Kissinger’s book (link above) to see how China used this tactic against the USSR and the USA as recently as the 1980’s.   Ever wonder how one communist power, the Soviet Union, failed and one, China, is still intact and growing 10% a year?

We should use this tactic when building wealth.  First, create a conservative operation such that when things go South you have plenty of wiggle room.

Then, when rivals crop up, pit them against one another.  The rivals in our case are a poor market and your business competitors.  Wait for others to overstep their safety bounds and scramble to bail out when things go pear shaped.  Sit on the sidelines with extra funds and buy up “underperforming” assets at cut rate prices when the panicked investors abandon ship.

One of my former bosses expressed this in a more…graphic…way:

When the market pukes, you want to have a big bucket.

Seek Harmony

Building wealth through harmony

For millenium, the Chinese sought harmony above all else.  They avoided strategies which upset their internal peace in favor of a more calm and reasoned approach.  Unfortunately, they over applied this principle to the point they stopped looking at developments in other countries.  When Europeans entered China’s orbit in the 1300’s, they found a technologically inferior society. By the time China realized their predicament the Western powers had secured strong economic and geographic footholds in their territory.

In the 1920’s Chairman Mao Zedong was able to use this feeling of backwardness to gain support for his idea of “cultural revolution.”  This reactionary precept led to half a century of turmoil and the death of millions of Chinese.

In recent decades the Chinese have begun returning to their original purpose of seeking harmony, ableit with a different approach.  Now they are looking outside their own country and learning new technologies and ideas.  However, they’re not adopting Western ideology wholesale.  Rather, they’re picking and choosing the parts they think will benefit their society and promote internal harmony.  This approach has led to growth outstripping the Western powers and allowed them to remain relatively unscathed by the recent world recession.  If this trend continues, China will once again become the undisputed world power.

We should apply the same methodology to building wealth.  Seek harmony by minimizing your operation’s internal disruptions.  However, make certain you are always seeking new information.  When a new approach is clearly beneficial, incorporate it into your approach.  But do so in a gradual and methodical way so that you don’t destroy what is working in favor of a new trend which might work.

Wrap It Up: What the Chinese teach us about building wealth

If we measure today’s rise and fall of countries and companies on a Chinese time scale, most of our “significant” events would barely register as hiccoughs.  Although there have been short term diversions in China’s history, they’ve kept their empire intact for over 3000 years using the basic principles we’ve discussed.

If you’re building wealth to last, start with the Chinese model.  Follow the parable of the Old Man and the Mountain and set narrow goals and doggedly pursue them.  Recognize that to reach your goal it will take a significant time and sacrifice.  As you grow, be methodical.  Position yourself such that when unforseen circumstances arise you will be able to profit and not peril.  Seek internal harmony and only utilize new ideas and technologies which are clearly beneficial.  Don’t squander your resources and time on trends which might pan out.  Instead, find what works for you and keep doing it.

We like to think that at Pear Tree Property we apply these principles on a daily basis.  We conservatively invest capital (both ours and our investors’) in undervalued assets.  Today, we feel our best investment option is rural rental real estate, but that will evolve along with the landscape.

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During Kenny's decade in finance he bought many single family rentals in rural areas, as a hobby. Along the way, he talked some brave souls into joining him as investors and recently retired from finance to take his hobby to the next level. Keep up to date with everything he's doing on twitter!

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  1. Pingback: Cynical investing | Pear Tree Property

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