Stock Management The Sun Tzu Way: Part IV

Includes: CAT, CVX, PNC, WMT
by: Colin Lea

This article is the fourth in my Sun Tzu series, and I will be discussing the importance of the principles contained in Sun Tzu's Chapter 4 -Tactical Dispositions. The main focus stocks in this article will be Caterpillar (NYSE:CAT), PNC Financial Services Group (NYSE:PNC) and Wal-Mart Stores Inc (NYSE:WMT), and their relevance to this discussion on investing in dividend growth stocks.


For those who have been following, I am writing a series of articles that seek to apply the principles of the art of war, by the ancient Chinese warrior Sun Tzu, to investing. For those who haven't yet seen the original article, you can read it and the subsequent updates on the portfolio by accessing them via my page on Seeking Alpha. It's important to read the original article (and revisit it) to understand the rationale for including stocks in the portfolio, and to follow the strategy as we discuss Sun Tzu's principles in each subsequent article.

Tactical Dispositions

Sun Tzu's observations on tactical dispositions are focused on military strategy (at the tactical level), and as I regularly cite in this series of articles, there are many lessons which are as equally relevant for investors and military leaders alike. It is important to understand the difference between tactics and strategy, so I have included definitions for each below:

tactics plural of tac-tic (noun)

  1. An action or strategy carefully planned to achieve a specific end.
  2. The art of disposing armed forces in order of battle and of organizing operations, esp. during contact with an enemy.

strategy (noun)

  1. A plan of action or policy designed to achieve a major or overall aim.
  2. The art of planning and directing overall military operations and movements in a war or battle.

So strategy is centered on a major overall aim, goal or end state; i.e. to have a diversified portfolio of dividend growth stocks that will achieve an average return of 7% per annum (not the goal of this portfolio, but an example only).

But to achieve that goal or end state requires decisions and actions made at the tactical level to deliver specific outcomes, that contribute to the overall strategy (DGI portfolio returning 7%). i.e. A tactical action may be to include a number of core blue chip stocks that historically return between 5% - 8% per annum, and then include a couple of more speculative / volatile stocks with a potential higher (and lower) rate of return that will help to lift the overall performance of the portfolio. The risk is that the speculative stock (if not closely managed) may unwind the overall performance position of the portfolio. Another tactical action may be to include a hedge, with put or call options, to manage the downside of any speculative play.

Sun Tzu indicates some key elements that are applicable for successful tacticians:

  • (1) The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy.
  • (11) What the ancients called a clever fighter is one who not only wins, but excels in winning with ease.
  • (13) He wins his battles by making no mistakes.

These three elements encompass one of my favorite Sun Tzu observations, "Know yourself, and know your enemy, and in 100 battles you will be undefeated". For investors, it is also fair to say "Know yourself, and know your position (and its limitations), and in 100 trades you will be victorious".

These are simple translations of the military principles to finance and investment. Let's now look at this in terms of applying it to some of the stocks in the Sun Tzu Investment Portfolio, and its key goal of:

Finding undervalued blue chips stocks with good fundamentals and a historical record of paying dividend income streams, with a view to holding for long-term positions.


Caterpillar is what I call a core blue chip stock, and is often referred to as a bellwether stock, representative of underlying market sentiment. It pays a regular dividend and has potential for strong capital growth; that said it has been prone to the whipsaw market volatility of the last 12 months. Since inclusion in the portfolio it has traded as low as $79 and as high as $116; as at 24 August its share price of $87.47 represents capital growth of 7.06%, and it has paid dividends totaling $316.28 over the last 12 months. [NB: Capital growth wise the stock has been as high as 41.9%, at which point I re-evaluated and sold a percentage of the stock to rebalance the portfolio. Those funds were reinvested in Chevron Corp (NYSE:CVX) and have since seen capital growth of 9.24% and paid dividends totaling $391.50 over three quarters].

Caterpillar is what I consider an ideal core stock for younger investors looking to establish a DGI portfolio.

Caterpillar 12 month Performance Chart

PNC Financial Services Group

In building the portfolio I wanted to include a dependable financial services stock, and in doing so I went for what I knew and trusted, which is PNC Financial Services Group. I wrote on PNC this time last year, and it has not failed to disappoint in its performance over the short term, nor its potential in the longer term. Since inclusion in the portfolio it has traded as low as $47.98 and as high as $67.89; as at 24 August its share price of $62.05 represents capital growth of 19.4%, and it has paid dividends totaling $288 over the last 12 months.

PNC Financial is an ideal stock for younger investors looking to include a financial sector stock within a DGI portfolio, without exposure to the volatility and legal liability issues facing the big American banks.

PNC Financial 12 month Performance Chart

Wal-Mart Stores Inc

Wal-Mart Stores Inc is the type of unsexy, reliable and dependable stock that every young investor should seek to replicate in the structure of a DGI portfolio. I have written on WMT this time last year, and it has rewarded the portfolio with its dependable performance. More interestingly, the unsexy stock of WMT has outperformed my expectations, and is currently the highest returning stock in the portfolio in terms of capital growth. It has traded as low as $53.43 and as high as $75.24; as of 24 August, its share price of $72.11 represents capital growth of 30.63%, and it has paid dividends of $210.60 over the last three quarters.

Wal-Mart is a good example for younger investors looking to include a financial sector stock within a DGI portfolio, notable given the current tight economic conditions. It is a company that does well during periods of good economic times, but also is one of the first to benefit positively from economic downturns; as economic conditions turn bearish, belts get tightened and people look for additional savings in their weekly shopping, which leads them (and their dollars) to Wal-Mart.

Wal-Mart Stores 12 month Performance Chart


Sun Tzu indicates that tactical decisions affect overall strategy, and it is important that investors understand the correlation (and difference) between the two. It is wise to look to the performance of older, proven tacticians and strategists, and I would encourage those interested (especially younger investors) in building a solid DGI strategy to read widely, and look at those in the SA community like David Van Knapp, who are not only happy to share their insights on dividend growth investing strategy, but who are very approachable and transparent in the way that they do so. It also pays to look at what the big time investing warriors are doing, such as leading hedge fund managers, and insider monkey is a good resource through which to do so.

For myself, writing this series and applying these thoughts to my Sun Tzu portfolio has been fundamental in crystallizing my own strategy, and I have learned much along the way (yet there is so much more to learn). In doing so, I hope to put myself beyond a position of defeat, ready to take advantage of tactical actions that contribute to the overall success of the portfolio strategy.

Portfolio Summary as at 24 August, 2012

  • Total dividend returns to date = $1,781.02

  • Total capital growth to date = $3,701.8 / 4.15%

  • Total cash in reserve = $7,412.93

  • Total value = $102,151.69

Highest Performing Stock as at 24 August, 2012

  • Wal-Mart Stores = 30.63%

Lowest Performing Stock as at 24 August, 2012

  • Morgan Stanley = -(26.39)%

Overall Portfolio Position as at 24 August, 2012

Disclosure: I am long BHP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I have additional indirect exposure to a number of these stocks through managed funds in Australia.

Disclaimer: This advice is general advice only. You should seek independant financial advice prior to making any investments of your own.

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