History has shown us that the world is constantly moving in cycles: ⢠The great depression of 1929. ⢠Black Monday i
How This 2,000-Year-Old Military Strategy Can Make You Wealthy Today What if I told you that there was a book that’s been on the “best seller” list for the last 2,000 years? Better yet, what if this incredible book could make you a better, smarter, more profitable investor TODAY? I’m talking about ‘The Art of War’. It was written over 2,000 years ago by ancient Chinese military strategist Sun Tzu, and has been used for centuries to win battles across China, the world, the boardroom and even the stock market. The teachings and philosophy behind the book even helped Ho Chi Minh crush America in Vietnam, and has even become required reading for US officers, marines and even in the CIA. And deep within the pages of this secret ‘investment war weapon’ are 16 ways The Art of War can help you become a wealthy investor. And today, I want to show them to you…
The Art of War For Your Portfolio
As an investor you’re constantly at war. Make no bones about it. The market itself, company management, brokers, other investors, your own psychology, you name it. There are just so many aspects to investing that fight against each other it can sometimes be tricky to uncover the best investment opportunities. I like to think of this as the art of war for your portfolio. And until very recently I had no idea this ‘art of investing war’ had something in common with a man from 506 BC. An ancient Chinese military general, Sun Tzu, commanded a vast army in the Wu Kingdom, and has since become known the world over because of his military precision and tactical ability. Sun Tzu documented his strategy in his book The Art of War, and much like all Chinese philosophers, there’s a beautiful simplicity in his wisdom, all of which you can actually apply today. More recently, after re-reading The Art of War, I couldn’t help but notice that there were certain principles that apply to good, profitable investing. And despite being written for a completely different purpose, the stock market has quite a few eerily similar characteristics to a battlefield. So it’s quite fascinating to see just how much you can apply Sun Tzu’s principles to modern investing. Heck, there’s a reason even the crafty and infamous Gordon Gekko proclaimed the following:
So what exactly are these timeless principles and how can you use them?
16 Ways Sun Tzu Can Make You a Better Investor I’ve encountered a few truly world-class investors in my time, and more yet I noticed they tend to share similar traits. Traits that were staring right back at me from this 2000-year-old manuscript. I couldn’t believe it. Was I holding in my hands the secret to investing? Oh you better believe it. And that’s why I decided to share them with you. These were simply too powerful to keep to myself. Let me show them to you.
What does that mean for you as an investor? As an investor there are a number of market bias’s we can encounter. The talking heads on TV, your investor friends, indicator after indicator, the Skype groups thoughts on a specific stock or sector, how you feel about the market or your investments, and so on. You could put in all the effort in the world, and research an investment so thoroughly your position would be bound for profit.
But, if your emotions get in the way, the chances of that position ever reaching its profit potential are zero. Fear and greed are powerful profit killers. And that’s why I always say, you need to invest in what you see, and not what you think. Make decisions based on what the charts, fundamentals, earnings and so on are telling you. Not that “hot tip” you’re most likely getting from a dope. This leaves you with little or no chance of mistakes happening. But the second you start absorbing the hundreds of opinions, signals and bias’s out there your investments are doomed. Invest in what you see, not what you think
What does that mean for you as an investor? If you fight the market, there’ll only be one winner. That’s not what good investors do. Instead of fighting they learn, adapt and work around market conditions. There’s a popular quote from legendary Ed Seykota that I think fits quite well with this: “The markets are the same now as they were five to ten years ago because they keep changing – just like they did then.” The markets continually change, so fighting them will only leave you with a smaller portfolio. Some ways I’ve even seen investors ‘fight the market’ are by ignoring, or even going against trends. Trends are the cornerstone of technical analysis (using charts to determine trades and investments). If you want to increase your odds of making stock market money, don’t fight the trend. There’s a reason the cliché of “The trend is your friend” has been around all these years. More often than not you don’t want to buy a stock that’s on its way down, and you’d rather buy something that’s started going up (or is on the verge of a long term upwards trend). Buying a stock on its way down, or “catching a falling knife” as the act is commonly known as is simply gambling. Not investing. Don’t fight the market. The more you understand this, the more money you’ll make in the long term.
What does that mean for you as an investor? Before you ever open up an investment platform or even look at a stock chart there are a couple of things you need to do first. And pretty much all of them are dictated by your investment plan. You need to plan your journey into the stock market, how you’re going to tackle it, and more importantly how you’re going to make money and protect that money. Before you go into battle (the market), you need to strategize and plan (your investment plan / strategy) That’s where your investment plan comes in. It’s what binds every decision you make, and it’s the golden thread that runs through every action you take as an investor. It’s the reason you enter certain investments, it’s how you limit your losses, it’s how you protect your capital, it’s how you approach the market… Heck, it’s a lot of things! And that’s precisely why it’s so important. Without clear objectives, or a plan on how to achieve those objectives, you’re a sitting duck. And let me tell you, Mr Market has his gun out at all times. And every day is hunting season. Which is why Sun Tzu talks about preparation. You can’t go into battle blind, hoping for the best. You’d get slaughtered (in battle and in the stock market).
That’s why you need to put the time aside to create a plan long before you’ve even considered investing in a stock. You need to tackle things like risk management, diversification, position sizing, what type of investor you are and so on. And in doing so, you need to set goals & targets, and this then becomes a way to get to them. Anything else is just gambling. So, if you’d like to find out more about how you can build your own investment plan, then this is the perfect resource for you!
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What does that mean for you as an investor? Investing is a long term game. It’s about letting the power of compounding work its magic over a number of years. Any interruption of that compounding process means you’ll have wasted the years you’ve spent in the market. Investing is not about constant positions or even bagging that one big 10,000% opportunity. No. Investing is about good decision making, rational moves, and finding solid companies and sticking with them. And this isn’t something that happens every day. A brilliant, profitable portfolio is the sum of its parts. It’s not about one single amazing investment you’ve made. And you don’t need to put on 50 trades a month to be a good investor. Remember, it was Warren Buffett who once said that investors will be ok if they just have one good idea a year, and that they don’t need to act every day.
What does that mean for you as an investor? When you first start out in the market, did you go head first and start throwing money into it? I’m willing to bet most of that money, if not all of it disappeared right? Don’t worry, this happens to a lot of people. In no way shape or form should ANY investor tackle the live markets without spending some time in a demo environment. Why? It’s where you need to hone your craft, test different approaches, and basically build a system that works for you. If you do this in the live market, you’ll end up losing money. Fast. Not to mention the psychology of a live environment also changes the way you invest. Look to win first before you go to war. Build an approach, strategy, or plan of attack that you know you’ll have the utmost of confidence in. And do this BEFORE you spend real money - Anything else is portfolio suicide. This may take a few weeks, but it’ll more than likely take a few months. I know it sounds boring, but it’s important. Don’t commit portfolio harakiri when you don’t have to. Win first (build an investment approach you have complete confidence in) then go to war (invest in real, live markets).
What does that mean for you as an investor? Smart investors don’t fire up their platforms, run a few numbers, check a few emails and then buy stocks. That’s what beginners and portfolio killers do. Great investors do their homework. They put in the time, effort and hard work needed to uncover good investments. Great stocks don’t just fall into your lap. You have to find them. You need to crunch the numbers, look at your ratios, consider earnings, but ultimately it’s about doing your homework. Whether you’re an income investor, growth investor or even a value investor, certain things trigger your decisions. And you need to spend the time uncovering those specific signs. Anything else is just gambling. And let me tell you, if you’re going to gamble in the market, the house will always win.
What does that mean for you as an investor? Don't invest in something you don't understand! If you’re not sure how exactly you’re going to make money in a specific investment, and even worse, you don’t understand the risks – Don’t make the investment. All you’re going to do is lose your money. One of the quickest ways to throw your money into the stock market abyss is to invest in something you don’t really understand. You need to do your homework and make sure you understand as much as possible about the investments you make. If you’re not ready for an investment – Spend more time on it! And if you still don’t understand, cut your losses and move on. There are plenty of profitable fish in the investment ocean…
What does that mean for you as an investor? The stock market can be all encompassing. You’ll find yourself starting to listen to certain radio shows, visit specific websites, catch headlines from a specific newspaper and so on. You begin to love the art and science of investing. And those who don’t eventually hand over the reins of their portfolio to an advisor or professional. And whilst there’s absolutely nothing wrong with this, just remember it comes at a cost. A big cost. If you want to be a good investor, a profitable investor, you need to love the market. You need to love the art of investing. Time in the market, building your experience, taking your financial medicine when it comes around, realizing that there’s no ‘holy money grail’ means you have to experience it all yourself. And that’s the step you need to take if you’re going to find yourself loving the market and the art of investing. You won’t ever truly appreciate the market until you experience it.
What does that mean for you as an investor? The market is constantly changing, moving, even shifting in cycles. That means no investment or trade you make will be alike. As cheesy as it sounds, each of your investments are like snowflakes, they don’t get repeated. Which is why looking for the exact setup over and over with the precise details from your previous position isn’t going to give you what you want. All it’ll do is distract you from the profitable positions you could be putting on. That’s also the reason why you have an investment strategy. It’s the methods you use to uncover probable positions, rather than you having to sift through an infinite amount of detail, all based on your ‘feelings’ and opinions. Emotions have no place in investing. Don’t try replicate why you think a position played out profitably, but rather stick to your investments strategy and trust it to uncover more down the line.
What does that mean for you as an investor? The market will throw a LOT at you! The kitchen sink comes so often you’ll probably give it a name, and even miss the times it doesn’t show up. Seriously though, investing can be tough. But if you don’t love it, you won’t do well in it. It’s easy to love the good times, when you’re banking profits. But when the downtrends come into play, and there are major selloffs, bar markets, corrections and even crashes, it’s easy to want to pack it all in. But if you want to grow your portfolio properly, if you want to make the money you dream of, you need to stick it through. And more over, you need to love it. All of it. Every bull AND bear trend. Otherwise you might as well just hand it all off to an advisor and never think about it again outside of those quarterly or annual statements you’d get. The market has both good and bad in it, but if you can’t learn to love it, you’re better off handing the keys to someone else.
What does that mean for you as an investor? The market is so complex, so intricate and so detail driven that a lot of investors I know feel they need to arm themselves with too much information. And it’s so easy to do it these days! We live in the age of information overload. There’s just so much stuff out there it becomes tough to realize once we’ve taken on too much. Because in doing so, you take your eye off the prize. Worse yet, you actually move the prize further and further away from your grasp. Don’t be that guy. I can tell you I already encounter way too many of them. When it comes to investing it’s about quality, not quantity. In more ways than one. But one of the most important ways I’m talking about is your approach to the market. You don’t need a million systems, strategies, indicators or approaches to invest. It’s about mastering one strategy, possibly even two. Anything else just cutters your mind and plan of attack. Would you rather spend 10 years mastering one approach, or spend the same time mastering 10 approaches? The first method gives you a plan you have 10 years’ experience in, whilst the second approach gives you 10 strategies each with one year’s experience. Take a guess which one will make you money?
What does that mean for you as an investor? The market comes in all shapes and sizes. That means what you look at this month could be entirely different to what you see next month. How do you make sense of it all? With your investment strategy. And your strategy is built around your strengths and weaknesses. Knowing this not only gives you an edge in the market, it also ultimately dictates whether you make money or not. Knowing where you fall short as an investor allows you the opportunity to invest around those problems. And knowing what makes you a great investor helps you uncover great stocks and even better opportunities. You can’t invest willy-nilly, and you have to look for the right setups. Your strengths and weaknesses as an investor will both attest to this. If you’re bad at fundamental analysis, then value investing is obviously not for you. Any attempt at that approach will leave you with a lighter wallet (and a potentially empty portfolio). But if you can spot a stock poised to grow in price, irrespective of its underlying value, then a growth investing approach is probably better for you. But without being able to answer these questions, and decipher what your investment strengths or market weaknesses are, you’ll be flying blind.
What does that mean for you as an investor? So this is an interesting one. I find you can lump market participants into two main categories. Investing and trading. SARS even taxes you according to how long you hold a stock for, so it’s not just me. Investors are looking for long term growth whilst traders are after geared profits from shorter and smaller market movements. Investors favor equities whilst traders look to geared products like CFDs, Single Stock Futures and so on. Now when it comes to geared products, or derivatives, are extremely risky. So in terms of investors, these are what I’d call “an enemy more powerful than you”. Does that mean investors should stay away from derivatives entirely? Well that depends on your risk profile and risk appetite. My personal portfolio has a small percentage attributed to these speculative instruments. But I wouldn’t trade these instruments unless I was prepared to lose that money, and I do this because I see these as a “punt”, a gamble. If I ‘win’, well that’s great, and if I lose then it’s no biggie. And that’s my way of keeping things on my own terms. But as a general rule of thumb, investors should approach derivatives and geared products with extreme caution.
In fact, Warren Buffett was even quoted as saying “derivatives are financial weapons of mass destruction”. And I tend to agree with him. They’re a powerful enemy for investors.
What does that mean for you as an investor? Your goal as an investor is to invest well, not often. There’s no specific amount of stocks you should be investing in over a specific period of time but taking on positions “just because” is financially irresponsible. And begs the question, “Why?”. You should invest for a reason. Not on a whim. Unless there’s a real advantage to be had in the market, keep your itchy trigger finger away from it. Trust in your approach, and be confident in your strategy. Over time the market will be good. Don’t force your investments, and don’t invest unless you’re confident that the work you’ve put in means you’re onto a highly probable, and potentially profitable position. Don’t invest on a whim, invest for a reason.
What does that mean for you as an investor? Why do we invest in the first place? To build a portfolio which ultimately makes money and achieves our financial goals of course. Not to “be in the market for a long time”. Don’t confuse time and performance. Market effort and investment result are two very different things. Yes, whilst time in the market is extremely important, it’s also about timing the market. Or should I say timing the right move. You can hold a stock for 10 years but if it goes nowhere what’s the point? You want to uncover the right stocks, not just invest for the “right” amount of time. There’s a business concept that I love that I think applies to investing brilliantly. It’s call ‘opportunity cost’. If you have a choice between buying SAB and Mr Price, and you choose the SAB, the opportunity cost is that which you’ve given up to make your choice. So in this case the opportunity cost of choosing SAB, is Mr Price. And in investing terms, the opportunity cost of the performance you get from SAB is the performance of Mr Price over the same period. So to simplify things a little, you don’t want the opportunity cost of your investments to be a profitable, money making portfolio. Time is just one variable behind profitable stocks, don’t forget that.
What does that mean for you as an investor? Things in our local markets haven’t exactly looked very ‘peachy’ of late. But you have to remember that this is not the end of the world. Yes, our country is facing some political and economic rough patches, but this is not the first time (nor the last) it’ll happen. History has shown us that the world is constantly moving in cycles:
The great depression of 1929 Black Monday in 1987 The Dot Com bubble of the 1990’s The global financial crisis in 2007
These are all examples of significant shocks to global stock markets that wiped out billions of investors cash. Yet every single one of these events were followed by sustained and significant bull runs. Even after the calamity of 2007, the worst financial crisis you’ve witnessed in your time, today we see global stock markets at or near the highest levels they have been. So remember that regardless of the latest media hype or doom and gloom prophets, that ebb and flow much like the ocean, investments move in cycles. The biggest failures I saw in the crisis 9 years ago were made by investors who panicked and cashed in all their investments at or near the bottom of the cycle and stayed on the side-lines in fear. The problem is not moving all your investments into cash, but the error of not getting back into the market and missing out on the upside recoveries when the cycle turns. Make sure you keep a long term investment view and don’t let the short term news hypes effect your long term time horizon of your investments. Also remember that times of crisis bring about some of the best buying opportunities!
How A 2,000-Year-Old Military Strategy Can Make You a Wealthy Investor Today Sun Tzu was a strategist way ahead of his time. The simple fact that investors and traders have been approaching the market using principles he outlined thousands of years ago attests to that. Simply put, Sun Tzu’s 2000-year-old principles can make you a wealthier investor today! Stick to his principles, follow these rules without hesitation or fail, and your portfolio will grow in the long run.
Until then, here's to profitable trading.
John Stuart Content Director The Money Lab
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