I was re-reading Art of War recently, and I couldn’t help noticing how Sun Tzu’s military strategies applies to investing. As he said 2,500 years ago, “he who knows them will be victorious; he who knows them not will fail.” Below are 6 quotes well worth applying as a result of the present financial chaos we find ourselves in.
The above comments, and those below, have been edited for the sake of clarity and brevity to provide a fast and easy read and have been excerpted from an article* by Simon Black (sovereignman.com) originally entitled 2,500 year old wisdom from Sun Tzu on our present financial chaos - Sun Tzu on Value Investing and which can be read in its unabridged format HERE.
We’re living through some of the most insane financial conditions in modern history:
- the Western world is drowning in debt,
- entire nations are starting to go bankrupt despite interest rates being at record lows…
- national pension funds are running out of money,
- banking systems are dangerously illiquid and undercapitalized.
- Even central banks are borderline insolvent.
There’s clearly a tremendous amount of risk in the system and yet many western stock markets are crossing all-time highs with historically dangerous valuations, and retail investors are piling in like the good times will last forever.
Sun Tzu wrote that:
- “He who is destined to defeat first fights and afterwards looks for victory.” Chapter 4
- This is precisely what most retail investors are doing right now: they are throwing money at the market and hoping that their stocks go up.
- Expecting success from haphazard actions is as pitiful an investment strategy as it is a military strategy.
- “The skillful fighter puts himself into a position which makes defeat impossible, and does not miss the moment for defeating the enemy.”
- Victory comes from having a completely defensible position and having the guts to seize the advantage when one is presented.
- In investing, a defensible position is a strong, well-managed, highly profitable company with a pristine balance sheet and very little debt, and a stock price that trades at reasonable (or discount) valuations.
- Better still, an even more defensible position is staying out of the market entirely, holding cash as you wait patiently to strike at the right opportunity.
- “He will win who knows when to fight and when not to fight.” (Chapter 3)
- It’s critical not to miss those opportunities to attack when, from time to time, blood is running in the streets and the market presents no-brainer opportunities to buy high quality assets at a discount.
- A great general will have the courage to seize the advantage – and a great investor will have the courage to buy assets that are widely despised and incredibly unpopular.
- “You can be sure of succeeding in your attacks if you only attack places which are undefended.” (Chapter 6)
- We’re seeing this right now with many petroleum and mining stocks, many of which are trading for less than the value of their net assets, yet still paying a dividend. It’s basically free money– like an undefended enemy position. This is the nature of value investing.
- “Hence that general is skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose opponent does not know what to attack.”
- This is how most retail investors think– like the opponent who does not know what to attack or defend. People seem to think that a falling stock price means that it will fall forever, or that a rising stock price means that it will rise forever. We tend to buy what’s expensive and sell what’s cheap, instead of the other way around. It’s a totally non-sensical mentality.
- “It is only one who is thoroughly acquainted with the evils of war that can thoroughly understand the profitable way of carrying it on.”
- There are countless risks out there, and it takes a tremendous amount of experience to not only understand what’s happening, but to safely profit from it.
- This is what makes financial education and mentorship so paramount: investing, especially in times of epic crisis, can bring tremendous reward as long as you have the right knowledge and experience.
The great general opens his treatise by introducing five primary factors in war strategy; and as he has told all the would-be generals for the past 2,500 years,
- “he who knows them will be victorious; he who knows them not will fail.”