The Art of War in Investing

The art of war in investing

The war has come, sooner than I expected. I was busy constructing the walls of Babylon (Insurance) and has yet to build a sufficiently strong army.

I like to see investing as a game. The objective is to build an empire as strong and lasting as the Romans and the Ottomans.

At the moment, mine is just a small hamlet with extremely limited resources. The job as a ruler is to make do with what you have, expand your territory and grow your influence.

Cao Cao and Liu Bei also started from nothing. One left Luoyang to build his own army while the other is just a mere sandal-maker. But they are quick-witted, resourceful and crafty, an essential skill in the art of war. Both eventually rose to prominence with their military genius and strategic thinking.

Doesn’t matter how big or small are you. The process is more important than the goal. Progress is better than perfection.

In Sun Tzu’s words: The control of a large force is the same principle as the control of a few men: it is merely a question of dividing up their numbers. Fighting with a large army under your command is nowise different from fighting with a small one: it is merely a question of instituting signs and signals.

Balancing Between Offence and Defence

In an empire, you have both offence and defence.

Offence deals with external affairs. This is about building a strong army, coming up with military plans, conquering other lands and securing strategic locations.

Defence deals with internal affairs. This is about the finances of your state. Does your treasury have sufficient budget to pull through bad times? Do you have walls strong enough to defend against unexpected invasions (medical bills)?

Every dollar represents a soldier under your command.

The bigger your army, the stronger your state.

Hence, how you allocate and utilise your army and resources is of paramount importance to the state.

The first task is to think about the allocation of your army between defence and offence. How many should be placed at the inner palace and outer gates as guards? This would be your emergency funds.

And how many should be placed at the frontline ready to conquer lands? This would be your warchest. Lands refer to assets like stocks and properties in this case.

Lands conquered would give you additional soldiers and resources (dividends). As your army size grows, you can conquer bigger lands with bigger resources and so on. (Effects of compounding interest)

Those who just leave their money in the banks and do nothing about it are 100% defence. You can be sure that they can weather through any unexpected crisis. But their state won’t be growing and expanding. It is the case of nothing ventured, nothing gained.

These are guards that would soon grow to become lazy and idle. Money loves activity and detests staleness. You have to put them into action to bring the very best out of them.

Even if you have allocated your soldiers on the front line. It does not necessarily mean it is a better decision. A person with 100% defence is better off than someone who lost military campaigns one after another.

A person who does nothing with his money is better than someone who lost it through investments.

Nevertheless, it is important to note that keeping one’s own state intact should be the primary importance. Crushing the enemy’s state is secondary.

Laying Plans

Those who have an army on the frontline, knowing when to attack and where to attack would also determine the success of the general.

You must plan before you strike.

Under Laying Plans in the art of war, there is a very popular quote.

Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.

The Art of War, Sun Tzu

Calculations refer to the research and valuation assumptions you do behind the scenes. The more work you have done, the more confident your decisions will be.

Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.

Weak Points & Strong

In the art of war, there is also the concept of weak points and strong points.

So in war, the way is to avoid what is strong and to strike at what is weak.

The Art of War, Sun Tzu

When stock prices and valuations are sky-high, don’t send your army to attack it. If you do, you have been baited by the enemy. It will cost you a lot more resources and that would be a mistake. Unnecessary lives of soldiers would be lost under your command.

A clever general, therefore, avoids an army when its spirit is keen, but attacks it when it is sluggish and inclined to return. This is the art of studying moods.

Similarly, markets have moods. Sometimes they are exuberant and sometimes they are fearful. Do not attack them when their spirit is keen.

You have to use them wisely and efficiently. Move not unless you see an advantage; use not your troops unless there is something to be gained; fight not unless the position is critical.

Variations of Attack

Whether to concentrate or divide your troops in an attack must depend on circumstances. A divide and conquer strategy would be splitting up your buys into tranches. An example would be deploying your warchest at:

20% when the market drops 5%
30% when the market drops 10%
50% when the market drops 20%.

But if you have an army that is as small as mine, dividing up would drastically weaken its strength and significance. In such a scenario, a better strategy would probably be deploying:

100% when the market drops 15%

My Investment Strategies

Having transitioned into the adulthood life after graduation, bills are starting to pile up on top of my hefty student loans repayment.

Most of my soldiers are being allocated towards defence. Recently, I increased my insurance coverage by upgrading to the private hospital, added in the rider, added in whole life and also an accident plan. Monthly premiums are about 5% of my salary after CPF deductions.

5% to give you peace of mind, why not?

The initial plan was to pare down my $21,000 student loan (now left $17,000) and build an army ASAP before the war comes (recession).

However, it came sooner than expected as the coronavirus fears ripple through the markets.

I have done my calculations and some stocks and REITs are getting very near my target prices. I can hear the chants from the soldiers and they are eager to strike at any moment.

Image result for small village

Currently, I only have $2,000 in savings and $2,000 in warchest. That’s why my state is a hamlet. My army probably only have 10 people on the frontline. Most of them are gone after I made the mistake to conquer unfamiliar terrains (cryptocurrencies).

We are not fit to lead an army on the march unless we are familiar with the face of the country—its mountains and forests, its pitfalls and precipices, its marshes and swamps.

Reallocation of Resources

To build up this army even bigger, I have decided to reallocate some of my resources. Soldiers that used to be paying my student loan would now come to join the frontlines.

At the moment, I am paying $1,500 every month for that. Now, the repayments would be reduced to $1,250 and that excess $250 would go into warchest.

The reason is that interest expense for my loans is about 4.85%. There are stocks that are trading at yields above 5% now. It would be a better use of resources to invest than to pay down debts. However, there are some tradeoffs.

The risk involved by reducing repayments is that I would pay an additional $920 in total interest expense. So you can look at it this way, I am paying $920 more in exchange for extra soldiers to join the army. (Extra bullets to fire)

If these bullets are not fired, I have lost the bet. The soldiers could have gone to attack the debt but they ended up doing nothing. But if the time comes, and these soldiers secured a valuable piece of land, then it is a wise choice.

Building a Stronger Army

Additionally, I am also considering to sell away some of my cryptos when the time is right. Bitcoin halving is in 2 months time. NEO 3.0 is expected to release around the end of the second quarter in 2020. Ontology’s Aristotle is also going to be released in 2020.

The first that I am going to let go of is NEO and ONT. The dividends from them are pathetic. The value of GAS and ONG is dependent on two things. The price fluctuations of the token itself and the USD/SGD exchange rate fluctuation.

Over the past year, total dividends earned from GAS is $8 and dividends from ONG is $22. The total capital invested in NEO and ONT is $2,187. That translates to a pathetic 1.4% dividend yield. It used to be 8% initially.

If I were to sell them now, I would realise a loss of $1,250. But I would gain $940 which would go into my warchest.

The trouble with such a platform business in the blockchain is very simple. NO useful Dapps are being built and used by the mass. It is all the gaming stuff primarily. Though NEO 3.0 is scaling up for enterprise use case.

We will see. My plan is to give them one final chance until the end of 2020. If these soldiers from the crypto division still don’t perform up to expectations. They are out of my hamlet.

Heaven (Tian 天)

There are five constant factors in the art of war, one of which is heaven. Heaven is the concept of dualism. The yin and yang, cold and hot, night and day, times and season, crisis and opportunities.

When markets are good, we are in Yang territory (the white space). When markets are bad, we are in Yin territory. We are probably at the point where Yang is the highest. But this is also the point where you see the Yin (black dot) emerging, signifying a transition into Yin.

It is foolish to think that the market will be forever white and bright in the Yang territory. But that is what the fed and Trump wants, and like to think that they can control the markets.

Yin (Offence) and Yang (Defence)

My defence is really weak now. I do not even have an emergency fund that could sustain me for 3-6 months. The strategic focus now is to conquer lands and build up a larger army base (dividends). Such opportunities do not come often. Go on the offence at Yin and stay on the defence at Yang.

Are we heading towards Yin? Probable. This is China’s manufacturing PMI released on 29 Feb. The actual figure is 35.7, way below the forecasted 45.1 and even the 08 crisis figures. And when China reports negative news, you know things are going really bad.

When China sneezes the world catches a cold.

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The number of CEOs leaving hit its highest peak as of Feb 2020.

Bob Igler, CEO of Disney has stepped down.
Keith Block, co-CEO of Salesforce has stepped down.
Ajay Banga, CEO of Mastercard has stepped down.
Ginni Rometty, CEO of IBM, stepping down in April 2020.
Jeff Weiner, CEO of LinkedIn stepping down in June
Chia Tai Tee, Chief Risk Officer of GIC, retiring.

A co-incidence at the highest yang? No one knows. Things are getting very interesting in the weeks and months ahead. I am on the offensive now.

However, just as water retains no shape, there are no constant conditions in the market. If fear abates and a V-shape recovery follows, then I am back to paying off my loans.

Do not pursue an enemy who simulates flight; do not attack soldiers whose temper is keen. When prices are soaring up beyond your target prices, do not chase as it might lead you to an ambush.

Lastly, and this is my favourite quote that sums up everything. Move swift as the Wind and closely-formed as the Wood. Attack like the Fire and be still as the Mountain.

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