Appear weak when you are strong
In the 1980’s, almost every C-suite executive had a copy of Sun Tzu’s ‘The Art of War’ on their office bookshelf. Adaptation of this treatise was considered applicable for the corporate world of the time, which tells you much about the culture of the era. A Montblanc fountain pen for signing contracts was the corporate katana. Yes, it’s a bit of mash up, thinking Japanese (they were the biggest, baddest companies and banks in the world back then … before their demographics changed and their economy and markets crashed) using a Chinese philosopher-general’s teachings while lusting after German manufacturing.
I read The Art of War once. It think I still have a copy somewhere in storage. I was going through a phase of reading many books that I thought I should read, to broaden my base: A Brief History of Time; War and Peace; The Art of War and more besides. I don’t remember much of these books other than I will never read War and Peace again.
I came across the following Sun Tzu quote the other day and I thought it fitting in relation to investing (and what I wrote in my last post about traders).
When I read Sun Tzu’s words, what sprung to mind was that the first pretty much describes the bog standard investment approach employed the world over on your and my behalf (i.e. the common garden variety 60/40 portfolio [60% stocks/40% bonds]); and the second describes the approach to “investing” employed by traders (i.e. active speculators and day-traders etc.).
The difference between strategy and tactics confuses many. In simple terms:
strategy is the plan for achieving an objective;
tactics are the actions taken to achieve the planned objective.
Using my approach to investing as an example, here’s my strategy:
Grow wealth using a robust and repeatable method with favorable risk asymmetry
And here’s the high-level tactics used in service of that strategy:
Apply research-based insights as identifiers for selecting:
- investment vehicles;
- the applicable allocation, and
- the timing of their use
By contrast, the professional investing world typically uses a one-size-fits-all approach with only the slightest of modification across an investment cycle. It has done well for many decades, but the future is less certain in my opinion, which is partly why I set off along my own path. This approach will still work over the long-term (as Sun Tzu says about strategy without tactics), but that long-term may be longer than prior long-terms.
Traders, on the other hand, have no definable strategy. They are waging a war that is essentially constant skirmishing and the objective is ‘stay alive so I can skirmish again tomorrow’. In reality, most traders use a preferred methodology like technical analysis, but each trade requires interpretation because technicals are never clear cut. Hopefully, they have clear risk management practices that they use.
Sun Tzu is also credited with saying, “Appear weak when you are strong, and strong when you are weak”. It is the traders who think themselves strong at present and use social media to lambaste those who warn that beneath it all, things are not what they appear. Not very Sun Tzu of them … unless they recognize their own weakness.
The Age of Hybrids
Because I wanted a repeatable process with risk asymmetry (i.e. elements that would help me avoid the skirmisher’s dilemma), I was forced down the macroeconomic path and away from the trader’s route. By nature, that means that I seek the big picture, which also means that results are slower in coming, but all the more meaningful for it.
I’ve said before that markets will ultimately reflect what the economy is doing. It used to be easy back in the day when only professionals had direct access to capital markets (and when interest rates gave both sides of the portfolio solid returns), but then the ‘90s came along bringing the internet, disintermediation and that wall of [market] noise sound. Nowadays, the markets fit the economy like ‘90s grunge attire … loosely … sloppy even.
You know the economy is still in there somewhere, but the market hides the shape of it for prolonged periods.
Patience is therefore required. As Warren Buffet has said, “The stock market is a device for transferring money from the impatient to the patient.”
Despite my longer-term approach, my hybrid methodology goes beyond being merely a slight adaptation on the 60/40 portfolio theme. I started from the risk perspective and sought to isolate that element and work backwards from there, building investments from that starting point. You can read about it in a piece I published in 2019.
What I accidentally discovered in my quest to isolate risk was, once I had isolated periods of risk, then I could invest in assets normally associated with greater risk (e.g. emerging markets and commodities) and so benefit from greater gains whilst also experiencing less risk than a traditional approach to investing (e.g. stocks).
It was counterintuitive, but made logical sense. It put me in mind of watching Valentino Rossi driving a Formula 1 car for the first time. He constantly spun out in the corners until he was told that an F1 car uses downforce for traction, unlike ordinary cars, as such, Rossi needed to go faster in the corners not slower.
My investing strategy lets me go faster but also requires patience. Doesn’t sound so appealing when I put it like that.
Anyhow, it’s dynamic and best of all, repeatable … and I have my tactics pre-prepared for the coming events.