Divide and Conquer - Sun Tzu on the art of Investing
If we think of investing as a combination of art and military science, then who better to consult than Sun Tzu and other giants of military science?
Written over twenty five hundred years ago, long before there were computers, the internet, and you tube, Sun Tzu, a high ranking general in the Chinese army compiled a thirteen chapter guide to warfare that “shaped the wars have been fought for thousands of years.”
Sun Tzu’s Art of War is arguably the most famous military book of all time. In his article, the Five Greatest Military Strategists of All Time, James Holmes the Professor of Strategy at the Naval War College points out that although not on his list of the top five Sun Tzu is among an elite group of military strategists that others refer to whenever they develop a strategy.
Hire Sun Tzu as Your War Time Consigliere
As the lead strategist for your personal investment portfolio, what insights might you glean from Sun Tzu and the other renowned military strategists on Professor Holmes’ list? In his thirteen-chapter treatise on war, Sun Tzu spelled out many ways to approach upcoming battles including:
“All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.”
Deception is at the very core of the stock market. Just when the world is pouring their dollars into the “biggest bull market in history,” the smart money is moving to other investment vehicles far ahead of the pending collapse.
Business leaders the world over quote Sun Tzu and incorporate his teachings into their business strategies and tactics. Just as business is war, investing is war. There are winners and losers and, far too often, the losers win big. A big loss in the stock market can alter one’s whole outlook on life.
Diversify of Die
I along with many of my fellow employees and I know thousands of other armchair investment strategists learned about the importance of diversifying our holdings the hard way.
At the time, many of us had hundreds of thousands of dollars in company stock. We also had good salaries and commission that allowed my family and me to buy almost everything we had every wanted. We would all celebrate every quarter when we received our employee stock report and compare notes on how much money we had and what we were going to do with it.
Not only did we receive shares of company stock, if we agreed to hold the shares for six months from issue date, the company kicked in another fifteen percent. I accumulated over five hundred thousand dollars in stock while working at the company for about ten years. We were all living the high life, and saw no end in sight.
October Black Monday of 1987, our stock value plummeted and most of us hung on to our losses far too long. Our net worth dropped like a rock and we never fully recovered. The same thing happened to shareholders of Enron when the company swindled all of their shareholders including the loyal employees who had no other holdings but company stock.
Keep Your Friends and Enemies Close
From Bernie Madoff to the great financial swindle of 2008, the landscape is littered with other examples of companies and advisors who misled their employees and investors while carving out great wealth for themselves. Investors gladly jumped on Madoff’s bandwagon only to learn they were victims of one of the biggest Ponzi schemes of all time.
The quote “to keep your friends close and your enemies closer” is misattributed to Sun Tzu when Mario Puzo and Francis Ford Coppola are the actual geniuses behind this wise advice from by Don Corleone, The Godfather, to his son Michael. The actual quote goes like this:
“My father taught me many things here — he taught me in this room. He taught me — keep your friends close but your enemies closer.”
Sun Tzu did say, “If you know your enemies and know yourself, you will not be imperiled in a hundred battles... if you do not know your enemies nor yourself, you will be imperiled in every single battle.”
This quote was shortened and adapted over time by business leaders who say, “To know your Enemy, you must become your Enemy.” One of the most important pieces of advice that strategy consultants offer their clients is to “think about what you would do to take away your business and your customers. Rest assured someone out there is doing just that and you need to be ahead of them.”
“Someone” is always trying to “eat your lunch” in the market and you best be thinking how they do and be one-step ahead of them at all times. Wars are won and lost one battle at a time. Wealth portfolios are built and crumble one move or battle at a time. They
Think Like Your Enemy - They are ALL Your Enemy
Learning to think like the person who is buying a stock your about to sell or sell one you are about to buy is sage advice, indeed. Why are “they” buying or why are “they” selling? Your mother always asked you if you would follow the crowd off a cliff. Well, maybe this is a good time to understand what the crowd is doing and take a contrarian approach to your portfolio.
You Are Waging War against the Brightest People in the World
When you decide to become your own financial advisor, be advised that you are going up against some of the world’s richest people. Granted many of them started with nothing, but now they have more resources than you can even imagine and you best “have your ducks in a row” when you decide to take on the role of managing your own portfolio.
Do your homework, do the research, take the time necessary to develop a solid strategy, back test for a while before you go live. Invest the time to understand how your enemies won and lost the battles of the past and what new investment tools are on the horizon.
Being an investment strategist is, in many ways, very similar to being a military strategist. There are wars to win and lose, battles to plan and fight and intelligence to gather. The strategists who have the best plan, execute it properly, and keep advancing against all odds are the ones who win in the end.
Learn from your friends and enemies. Understand the importance of strategy, diversification and most important, watch your back. Know when to advance, when to hold your ground and when to retreat. Check your ego at the door and button up for the ride of your life.