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The Art of War

Jun. 01, 2009 12:46 AM ET2 Comments
Jasper M profile picture
Jasper M's Blog
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Sun Tzu tells us, "Know thy enemy, and know thyself, and in a hundred battles,you will never be endangered".

Love that proverb.

"The Art of War" is chock full of good ideas. I won't pretend they're all still applicable: For example, I imagine "knowing thyself" is probably not particularly useful when confronted by area denial munitions like persistent nerve gas, or smart mines. But the text, and most especially that proverb, remain useful guides. And not just in war.

For example, if you get to know your strengths and weaknesses, you can better tailor you investment strategies around them (as opposed to embracing someone else's "one size fits all" approach - these seldom work well, as one size Never fits all). If you figure out what kinds of discipline are easy for you, and what kinds are hard for you, you are more likely to come up with a strategy you can actually Stick With.

To give some personal examples:

One kind of discipline that comes easy for me is imposing limits on downside risk (painful memories). If that means reducing the percentage of my "at risk" portfolio,and therefor profits, so be it. If it means using options, which will lose 100% if I'm wrong, so be it. That decision comes easy for me. Knowing that, among other things, tells me that options are something I should consider as a trading vehicle.

Another thing that comes easy for me is patience. Actually, more like stubbornness. If I have faith in my model, and my designated external validators don't tell me I'm wrong, I am perfectly willing to wait 2 years to be right. (Especially if interest rates are low!) That was Really helpful in 2006. I reassess about every two weeks, and usually do nothing.

I am also pretty good about walking away from the table. I plan my positions so that if I am right, it is Enough. Let someone else have the last few percent. For example, I closed out almost all but 3 of the puts/short positions I had in equities in October-November of '08, mostly missing the rally into January, And the final drop into March. And that was fine, I made my bundle off the move, no need to be greedy.

On the other hand, one thing that I have learned comes hard for me is Choice. If I think I've ID'd a trend, I tend to stall on which security to ride that trend. Which bank to short? The ones everyone already knows are dead on their feet? Or the ones I think are probably only a little better, but less in the news? Or just a whole index? In a different sector, puts on Cisco, or Intel?

Knowing that choice is hard for me, I build into my strategy choosing less, by choosing more - I plan ahead of time to give myself the latitude to pick several. For example, I am currently short, or holding puts on, 11 financial companies. That's an extreme case, for an extreme situation. My point is that by giving myself permission not to concentrate on just one, I can drastically speed up my decision making.

It's not always necessary - I picked exactly two negative bets for when oil peaks this summer. But when it's handy, it's Very handy. For me.

Note that my approach would be absolutely pointless for, say, an avid reader of the details of financial reports, who had a tendency to panic. Or someone who likes to watch the screen Every Minute, while hanging on the phone to his broker, and wants a profit Every Day. THEY, 'knowing themselves', would find different strengths and weaknesses, and need to work with and round them in different ways than I work around/with my own.

So get out there, and 'know yourself'. I think you'll find it can by quite . . . gratifying. ; )

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