I recently read the book “The Simplest Thing in Investment” by Qiu Guolu. In the article, the author mentioned a passage from the legendary investor Joel Greenblatt:

  • First, value investing is effective;
  • Second, value investing is not effective every year;
  • The second point is the guarantee of the first point.

The point is clear: value investing works precisely because it doesn’t work every year. And it is this feature of “not valid every year” that in turn ensures its long-term effectiveness. If it works every year, it won’t continue to work in the future. This sounds like a paradox, but the reason does not seem complicated. Because in a capital market, as long as there is a method of making sure profits without losing money, it will definitely be eliminated by arbitrage. It is its instability and volatility that prevents arbitrageurs from taking action, but instead preserves its long-term vitality.

It seems to be useful, but it is actually useless. It seems useless and is not used, but it is actually useful.

This can’t help but remind people of “Zhuangzi: Human World”, in which “uselessness can be used to make great use” is its important point and proposition. Zhuangzi’s thought tells us that the direct and explicit function of a thing is “useful”, while its indirect and implicit value is “useless use”. Many times, it is precisely those seemingly “useless” qualities that actually achieve its more fundamental and longer-lasting effects.

“Useful” corresponds to the “short-term effectiveness” of value investing. If a method is effective every year, everyone will flock to use it, and its excess returns will quickly disappear due to arbitrage. The “uselessness” corresponds to the “long-term effectiveness” of value investing, it is precisely because value investing often fails in the short term and appears “useless”, such as occasionally underperforming the market or being laughed at, that most people cannot persist. This prevents the method from being overly arbitraged, thus ensuring its continued effectiveness in the long term. Therefore, the short-term “uselessness” (invalidity) of value investing is the fundamental guarantee of its long-term “usefulness” (effectiveness).

The story “The Carpenter and the Oak Tree” is an excellent illustration of this point of view

A master carpenter named Shi took his apprentice to Qi State and saw a huge oak tree (shrine tree) on the road. Its shade can accommodate thousands of cattle, and its trunks are hundreds of feet thick. There were as many people watching as if they were at a market, but the stone carpenter didn’t even look at it and walked straight past.

The apprentice caught up and asked: “Master, I have never seen such good wood since I learned the craft from you. Why don’t you look at it?” The carpenter said: “Forget it, that tree is useless. It is a loose wood. It will sink when making a boat, rot when making a coffin, break when making an utensil, gum will flow when making a door, and will be eaten by insects when making a pillar. It is precisely because this tree is ‘useless’ that it has lived so long and grown so big, and it has become a sacred tree.”

Because this oak tree is “useless” to the carpenter (cannot make tools), it is “of great use” to himself (it prevents it from being cut down and allows him to live longer). Isn’t that true of value investing? Because it is “useless” to those who pursue short-term profits (they cannot make money every year), but it is “of great use” to real long-term investors (the strategy can continue to be effective).

There is a similar story in “Zhuangzi Xiaoyaoyou”.

Huizi said to Zhuangzi: “I have a big tree called Ailanthus (a kind of Ailanthus). The trunk is bloated and does not fit the rope, and the branches are curled irregularly. It grows on the roadside and even the carpenters don’t look at it.” Zhuangzi replied: “You can plant it in the land of nothing.” The land of nothingness, the vast wilderness. You wander around the tree leisurely and lie comfortably under the tree. It is not attacked by an ax because it is “useless”, and its greatest use is that it is “useless”.

What Laozi and Zhuangzi saw are different but the same approach

Although the fable of “uselessness” mainly comes from Zhuangzi, its ideological roots can actually be traced back to Chapter 11 of Laozi’s “Tao Te Ching”:

“Thirty spokes make up a hub. If it doesn’t exist, it can be used as a cart. If it doesn’t exist, it can be used as a vehicle. If it doesn’t exist, it can be used as a utensil. If it doesn’t exist, it can be used as a room. Therefore, if it exists, it can be used as a benefit. If it doesn’t exist, it can be used as a room.”

Laozi used the examples of wheels, pottery, and houses to illustrate: “Existance” (entity/usefulness) provides convenience (“benefits”), but “None” (space/uselessness) really plays a role (“use”). This is the philosophical basis of “uselessness”.

The short-term “uselessness” (invalidity) of value investing prevents overcrowding and strategy arbitrage, and ensures the strategy’s continued effectiveness (longevity) on a long-term scale. This is the perfect embodiment of “uselessness” in the modern financial field.