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Zanshin and the Art of Investment Management

Japan is a very peaceful country nowadays, but having experienced a one-thousand-year-long period of continuous warfare the Japanese know a thing or two on combat. What has often fascinated me, probably because of its near neglect in Western culture, was the focus in Japanese culture on the psychology of combat and its links to Zen, a Japanese branch of Buddhism that focuses on working on one’s mind through mediation.

 

This interest has led me to embrace the practice of Karate and eventually apply some of its principles in my experience as a paratrooper and even in my favorite hobby: motorcycling. However, I never would have expected these teachings to have any relevance to the world of investing. I was wrong.

 

One of the central concepts in Japanese combat psychology is Zanshin, which can roughly be translated as “remaining awareness”. Zanshin effectively refers to the state of total concentration and alertness that a warrior must maintain during a confrontation.  In a Zanshin state, there are no emotions, no thoughts about victory or defeat, only intense attention to the task at hand.  This condition allows for swift and effective action as soon as the situation requires it and is considered by many to be the key to victory against a stronger opponent.

 

Zanshin can be developed in martial arts through patient repetition of basic techniques (Kihon), forms (Kata) and sparring (Kumite). It can be further enhanced through the diligent practice of sitting meditation (Zazen).

 

Having experienced Zanshin as a martial artist, I couldn’t avoid noticing how well it applied to motorcycling, where an intensely focused and aware mind is far more effective in spotting any potential threat on the road and allows for smoother handling and control of the bike.

 

But it wasn’t until I came in contact with value investing that I started realizing that the concept of Zanshin has important applications in finance as well.

 

Intelligent investing is about good analysis: carefully screening the universe of available securities to screen out and select the most appealing ones. There are a variety of ways to do this, such as focusing on cash flows, asset value, growth rates etc. Nevertheless, however important analytical skills are, they are secondary if compared to the character of the investor. When Warren Buffett was asked what is the surest way to become wealthy, he did not reply “refine your analytical skills to the highest level”. He actually replied “be greedy when others are fearful and fearful when others are greedy”. I firmly believe this is by far the most important part of his teaching and also the most difficult to apply.

 

Why? Because by definition it requires going against our human nature. Our brains are in fact hardwired with a tendency to blindly follow the herd.  This is only one of the many cognitive biases to which we are subject due to past evolutionary pressures, that grant us great adaptability in a hunting/gathering society, but essentially doom us to mediocre returns as investors. Sadly this is generally the rule, for following the herd typically means buying securities in times of euphoria (i.e. overpriced) and selling them in crises (i.e. underpriced). It is a recipe for losing money, as approximately 75% of retail investors invariably do.

 

A few successful investors seem to be immune, or at least partially insensitive, to such cognitive biases. Warren Buffett is certainly one of them as he typically engages in buying sprees each time the market is depressed and pessimism abounds. Unfortunately, the rest of us seem to be hopelessly bound to follow these biases. Is there a way out? Well, one way would be to avoid playing the game. Buffett frequently states that the best strategy for the average investor is to keep buying an index fund at regular intervals over long periods of time. This is clearly sound advice, but, by definition, caps our returns to those of the market as a whole (at least you’d not be underperforming).

 

An alternative advice instead, is to develop and apply the concept of Zanshin. Just as in a combat situation, when investing in the stock market you can enhance your power of concentration and train to ignore all emotions, focusing only on the task at hand. The “task at hand” being fundamental analysis and the buy or sell calls that come as a direct result. Just as a warrior, following years of training and experience on the field, manages to keep its cool facing a powerful enemy, so can you maintain a balanced and clear mind even when confronted with extreme euphoria and pessimism by those around you.

 

How do you actually develop Zanshin on a practical level? Aside from starting to train in a Japanese martial art or initiating instruction in meditation (two great ways to be sure), there are a number of steps you can take without turning into the “Last Samurai”.

 

1.     Envision each stock investment as ownership of a business rather than as a gambling chip. If you acquire a stake in a sound business, it will keep generating cash flows for you even during market pessimism. These cash flows will, in time, translate into capital gain. The awareness of this simple concept makes it easier to hold done to your stocks rather than selling them in panic during bear markets.

2.     Be financially prudent in your investments as well as in your life. If you avoid leverage and maintain generous cash reserves, you will be less pressured to sell your stocks when their price goes (temporarily) down.

3.     Avoid investing for the short term. This will help you putting into perspective any short-term capital loss.

4.     Avoid checking compulsively the price of your holdings, especially during down days. Seeing all that red ink in your portfolio generates anxiety that may culminate in an untimely sale .

5.     Keep things into perspective. Do not depend emotionally on making money. If you do, you will be stressed out about it and lose your mental clarity. Value sincerely other (unquantifiable) aspects of life such as love, friendship, and helping others. This will allow you to detach emotionally from your portfolio and take wiser decisions. Again, it’s no coincidence that Warren Buffet never displayed much attachment to material things, curiously living in a relatively frugal way and devolving plenty of resources to philanthropy.

 

The final message is that, after all, we really all are warriors. Our life, however long or short, is finite and no amount of money can change that. The secret, both in life and in investment is to live in the present with full awareness and equanimity and savor it as it unfolds day-by-day, moment-by-moment, investment after investment…