Art of War

[kennynah]

Next, you have the climate.
It can be sunny or overcast.
It can be hot ot cold.
It includes the timing of the seasons.

The Art of War 1:1.19-22

The biggest mistake is to assume the current climate will stay the same. Think back and u'll realize that no trend has ever stayed uninterrupted for extended periods of time. Seasons change. What is hot will turn cold eventually. We only know one thing about the future; that it will be different from today. What succeeds is in the long run is continuously adjusting to changing trends....

Thus, we must inbuild our flexibility to change our plans, a term called strategy.


Make victory in war pay for itself.
Avoid expensive, long campaigns.
The military commander's knowledge is the key.

The Art of War 2:5.1-3

The entire point in positioning(taking a Long or Short position in market), is to reap a reward.
It's possible to win a position and not be rewarded for it; we can read a trend but executed poorly and we lose more commissions to the trades or get whippedlashed, just as businesses can win markets that are not profitable.
So, the goal isnt simply to winning a position but winning a position that rewards us beyond the risks involved.

[kennynah]

Next, is the commander.
He must be smart, trustworthy, caring, brave and disciplined.

The Art of War 1:1.28-29

Traders must be intelligent(smart). We must appreciate the value of knowledge. Knowledge allows for clarity in execution and planning.

Investors must be honest. We must stay honest to our believes in what we are pursuing.

We must be caring, for those who support our endeavours. We must remember why we are investing/trading, for the bigger picture of life

We must be brave, for when the "earth"/"environment" or in other words, trade opportunities arise, we must be swift to undertake the risks involved in taking positions. If we lack this courage, all opportunities will be lost.

Finally, we must be disciplined and strict, more so with ourselves. We must be willing to do the unpleasant parts of investments. The research, the readings, staying in tuned with market sentiments, listen intently to people, etc. We must be reliable to ourselves, failing which can have our capital all wiped out.


Finally, you have military methods.
They shape your organisation.
They come from your management philosophy.
You must master their use.

The Art of War 1:1.30-33


We must first know where we are going in order to choose the right methods to get there. We will be confronted with many opportunities to "improve" our methods, but unless they are consistent with our philosophy, we must let them go.

When we preach "cutting losses", we must rigidly adhere to this philosophy. If we dont, this mere philosophy wont cut those losses for us. Thus, for many of us, who are consistently struggling with "cutting off losses", we must revert back to our "Honesty" within ourselves... we can lie to everyone, but ourselves and God.

[kennynah]

You must learn through planning.
You must question the situation.

The Art of War 1:2.1-2

Time and place affect our analysis of all the other factors in a competitive challenge. The situation is dynamic. We must continually question our situation from year to year, month to month and day to day.

So, stay flexible. What we know yesterday may not be applicable to today anymore. All the subprime that we know for the last few months, may no longer be applicable to how equities markets react to them. Stay "smart" and remember the "philosophy" behind our strives.


Plan an advantage by listening.
Adjust to the situation.
Get assistance from the outside.
Influence events.
The planning can find opportunities and give you control.

The Art of War 1:3.1-5

Listening is the heart of getting good information. Analysis is good becos it forces us to listen to others. Getting assistance from outside, in essence, is getting a different perspective. If we listen truly to other perspectives, we are more likely to identify missed opportunities that can make us more suucessful.

Very few people, especially aggressive people, are good listeners. Aggressive behaviour encourages self-promotion, persuasion, and confident action. It doesnt necessarily encourage listening.

Solid information is neither difficult to solicit nor filter out from the noise. Information on Commitment of Traders, T Bill Yield Curves, Mortgage Rates trend, Open Interests are real information that can be deciphered to any traders advantage. The mere one day, rally or tanking of index can be noise to the real trend.

[kennynah]

Using a large army makes war very expensive to win.
Long delays create a dull amy and sharp defeats.
Attacking the enemy cities drains your forces.
Long campaigns that exhaust the nation's resources are wrong.

The Art of War 2:1.12-15

If we hope to succeed, we must keep our costs to the minimum. Dont over trade, commission can form a substantial amount of costs of trades.

We can keep our investment small by planning small attacks. Large positions dont always reap comensurating rewards, if our positions dont move. We drain our limited resources and create opportunity costs. Risking a large investment, does not guarantee our success. In fact, it makes an overall investment portfolio more prone to risks. Since we cannot predict the future, a large investment(attack) can suffer immeasurable losses, when situation changes drastically.

Thus, the longer it takes for a competitive thrust to generate a reurn on our investment, the more uncertain and dangerous that position becomes. Hence, i do not always subscribe to buy, hold and forget method of investment. We incur lost opportunities whenever we plong all of our investible money into a few counters and we expose ourselves to unfavourable changes in the market environment.


You hear of people going to war too quickly.
Still, you wont see a skilled war that lasts a long time.

The Art of War 2:1.23-24

Sun Tze doesnt demand that we be hasty in identifying an opportunity, but he wants us to act quickly after we do find an opportunity. GS did that when their data shows how subprime and housing defaults can crash the stock market and they are among the very few who benefitted from this knowledge and opportunity.

When our positions are dragged on for too long without any good profits, our costs mounts...our opportunity costs of invested money. The eventual payback becomes farther out and uncertain even more. Good strategy demands that we get paid off, no matter how small, as quickly as possible. This turns our investments into a productive one.

Failure is always possible, but failure rate increases the longer we are positioned in the market. Imagine, another aircraft hits into pentagon a minute after this post, and we are Longed in the market. However, remote this possibility, we cannot eradicate it. We cannot forsee the future.

We must qucikly test our trading ideas, and in small bouts, not in large positions. If it works, we build upon this success and keep trying. However, we remain mindful that small incursions reaping small rewards are always better than large attacks in a prolonged fight. If we are successful, small rewards add up to our resources to test out even more ideas.

This is counter-intuitive to "let your winners run and cut your losses" it will appear. One has to decide.

A small saw cutting a big oak tree, is better than using a costly chainsaw to trim shrubs.

[kennynah]

Make no assumption about all the dangers in using military force.
Then you wont make assumptions about the benefits of using arms either.

The Art of War 2:2.1-2

Trading is underatking risks. We must appreciate exactly how risky this is. To measure exactness, we must have an intuitive, if not calculated, form of risk/reward ratio before entering any trades. Much like "margin of safety" to the value investing.
If we do not embrace risks, we will never know how successful we can be.

We must be aware of that failure is a possibility, but we cannot let this knowledge paralyze us. Instead, we must commit ourselves to small, quick, decisive actions, remembering that speed is the essence of any warfare.
We cannot eliminate chances of failure, thus we must evaluate our chances of success, but yet every move requires that we take risks.

We must prepare for unforseen levels of success as we prepare for failure. Both are possible. If we are ready for one, we must be ready for the other.

Our fear and greed must balance themselves out in the equation.

Our greed keeps us from becoming paralyzed by fear. And our fear keeps us from acting foolishly out of greed...

Both these forms of uncertainty are necessary to make strategy work over the long term..
and strategy is not planning, according to Sun Tze. It in fact, is a process of ever changing plan.


Know yourself and know your enemy.
You will be safe in every battle.
You may kow yourself but not the enemy.
You will then lose one battle for every one you win.
You may not know yourself or the enemy.
You will then lose every battle.

Art of War 3:1.6-7

the above is by far, the most quoted and known of Sun Tze's Art of War tactics.

Sun Tze reminds us that at the crux, knowledge or ourselves and that of the enemy(market) is vital in successful investments.
We must at least have knowledge of our chosen investment vehicle, whether stocks, bonds, property, etc. Not knowing and yet investing in them, is akin to entering a war destned for failure.

Not knowing ourselves, our temperament, our ability to handle fear and greed, can also lead us into investment disaster.
In a gist, it's about knowledge and information.

[kennynah]

Learn from the history of successful battles.
Your first actions should deny victory to the enemy.
You pay attention to your enemy to find the way to win.
You alone can deny victory to the enemy.
Only your enemy can allow you to win.

Art of War 4:1.1-5

We should first avoid failure in any investment campaign (you alone can deny victory to your enemy). Failure can mean a total wipe out of investment funds. By this, we can interpret to imply that our investment executions must include managing our losses to a degree that prevents the market from making us suffer irreparable damages. this can either be a form of cut loss, or instituting hedges to open positions, etc. But we alone can deny the market from hurting us. this is the 1st principal of investment...avoid failure vs wanting to win the market.

In other words, we must know how to successfully defend before we learn to attack and to defend whilst in the midst of attacking.

While protecting investments, we must watch our opponents (the rest of the market players). We must constantly see what moves they make. We can destroy our investments if we move at the wrong time (and hence, timing the market comes to mind).

We must be aware that it is our enemy (market) that allows us to win and it is us that prevent the market from hurting us.

So, we play a defensive role, while the market plays the role of creating winners for us.

You must fight well.
You can prevent the enemy's victory.
You cannot win unless the enemy enables your victory.

The Art of War 4:1.6-8

Again Sun Tze reemphasises the key note that our enemy (market) gives us profits. we cannot command the chosen stock to sway to our likings.

Here's an important concept "fight". In Sun Tze's opnion, "fight" is about preventing the opponent's(market's) victory. We are often guilty of spending to much time focusing on price moving in our desired direction than against us.

We must learn to fight not against the market, but fight against ourselves, to do what we inherently do not want to do, to take a loss when the opponent does not allow us to win.

[kennynah]

We say:
You see the opportunity for victory; you don't create it

Art of War 4:1.9-10

Vision is the central skill addressed here. Vision means seeing an opportunity, that is being able to percieve an opening to trade. We cannot control the market. But we can see certain trends; like we know now that commodities is riding high due to shortages; crude continues to climb, becos of attacks on oil pipes.

More importantly, some of us may be able to see changing of trends earlier than others. Thus, we are not creating those opportunities, except to watch out for them to present themselves.

We are in a dance, when we trade, we dance with the market. We move when they move. he market leads us, and not the other way around. We must keep pace with the music, the tune of the market at play. To do, we must have knowledge(as was mooted earlier).

We response to what the market dictates. We must watch carefully and forget about wanting to control the dance. We must perceive the tempo of change and visualise into our future and that of the market.


Some can struggle to a victory and the whole world may praise their winning.
This also demonstrates a limited ability.

Art of War 4:3.4-5

Taking a profitable trade, requires 2 skills: seeing the opportunity and acting to take advantage of it.
When we meet more resistance than we expect, we have a problem with seeing and picking the right opportunities. The fact that we often times get into trading problems and have to struggle shows that we have much to learn about vision (the earlier point).

Success against all odds seems heroic. Outsiders dont see the cost of such struggling success. If we have to struggle in battles(trades) to succeed, success may be costing us more than we planned (such as lost opportunities; we have limited resources, it's a fact that we choose what we invest in).

The longer we struggle, the more costly and less profitable victory can become. The goal of strategy is to make victory pay most handsomely.

Sun Tze does not teach heroism. He teaches success.

Peeple may think that someone who can overcome great odds is terrific. Sun Tze thinks otherwise. He thinks it is foolhardy to choose battles(trades) with high odds staked against it. A master is one who slants the odds to his favour. He thinks we cannot make a career out of choosing wrong battles(trades)

[kennynah]

This is the art of war
1. Discuss the distance
2. Discuss your numbers
3. Discuss your calculations
4. Discuss your decisions
5. Discuss victory
The ground determines the distance
The distance determines your numbers
Your numbers determine your calculations
Your calculations determines your decisions
Your decisions determine your victory.

Art of War 4:4.4-14

This is the most important passage (and sadly, least known) in The Art of War
I'm taking sometime to dwell on this passage. If i go away remembering only one Art, this would be it.
Feel free to interpret this passage.

[kennynah]

Sun Tze, advocated "Hearing, Envisioning and Testing" of new ideas, in his next 3 stanzas

There are only a few notes on a scale.
Yet, you can always rearrange them.
Yu can never hear every song of victory

Art of War 5:2.11-13

We must understand the metaphors he uses. In the first verse above, Sun Tze demonstrates his own creativity ability to use metaphircial musical scales for information and knowledge. What we hear (or in this case, read) is the starting point of creative trading ideas.

Knowledge comes from a set of facts. But ability comes from knowing what is useful and how to interrelate them. The music is a creative art, with known sets of limited notes, but with multitude of arrangements to deliver countless variations. It is the same with known facts, all of us know them, but most of us will use them differently. The success comes from learning how to improve on using and meshing these known facts into usable information in a variety of ways.

There are only a few basic colours.
Yet, you can always mix them.
You can never see all the shades of victory

Art of War 5:2.14-17

Vision ! A point reiterated many times in his writings.
This is the consequent next step after "hearing" or reading known facts. Our minds must envision the impact these facts have on global, regional, macro and micro economies and correspondingly the various asset classes, so that we can visualise how these assets will perform. We then execute plans to capitalise such Visions !


There are only a few flavours.
Yet, you can always blend them.
You can never taste all the flavours of victory.

Art of War 5:2.17-20

Here, "tasting" is the metaphor for "testing".
In the earlier 2 stanzas, Sun Tze suggested that we ask, if the ideas "sound" good and if they "look" to have chance of becoming successful... then comes the "testing" of the idea.
In this case, testing of our idea, can be done on "paper trades" or taking a small position to verify those ideas that sound and appear good.

[kennynah]

I wanted to highlight this passage because it appears to be very useful a concept...

It is the same in all battles.
You use a direct approach to engage the enemy.
You use surprise to win.

Art of War 5:2.1-3

Central to this passage is the word "surprise". It is not to be read as "unexpected". In fact, Sun Tze means that we must arm ourselves with "innovative" methods of trading. Perhaps, this is not applicable to the usual stock buying and selling. But in the world of option trading, there are many "options strategies" ranging from the simple Calls and Puts.

There are the verticals, ratios, butterflies, condors, etc... Knowing intimately how each can be deployed, to react to our enemy(market) moves in a specific manner. It is this "surprise", or innovative techniques, that gives us maximum leverage over the market. Remember that it is our enemy that gives us victory, and we can only prevent the enemy from harming us.


A hawk suddenly strikes a bird.
Its contact alone kills the prey.
This is timing.

Art of War 5:3.4-6

In relation to timing, Sun Tze speaks of 3 critical ideas concerning this topic of "timing".

#1. When all our facts(from reading, envisioning and back testing) point eventually to a taking a position, we must not hesitate. It is the speed of the hawk that kills its prey. We must be bold in assuming an attack, when the enemy's moves suggest clearly that we must counter move to take advantage.

#2. This issue is regarding striking power. To be successful, our striking power must be damaging to the opponent. This said, we must consider taking a significant position in order to reap the largest rewards of our trades we assume when we are sufficiently convinced of #1.

#3. Just as we take on a sizeable trade, we must still never allow our enemy to "surprise" us; that is, however confident we are that we will achieve success from #1 and #2, we must still protect our trades. Again, remember that we alone can prevent the enemy from winning.