SunTzu &The Art of War -- Laying Plans
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Laying Plans

From Griffith's translation:

"The title means 'reckoning', 'plans', or 'calculations'. In the Seven Military Classics edition the title is 'Preliminary Calculations'. The subject first discussed is the process we define as an Estimate (or Appreciation) of the Situation."

Rational Analysis

"The art of war is of vital importance to the state. It is a matter of life and death, a road either to safety or to ruin. Hence under no circumstances can it be neglected."

From Griffith's commentary on Sun Tzu On War:

"The opening verse of Sun Tzu's classic is the basic clue to his philosophy. War is a grave concern of the state; it must be thoroughly studied. Here is recognition--and for the first time--that armed strife is not a transitory aberration but a recurrent conscious act and therefore susceptible to rational analysis."

Portfolio Management and Risk Management Corollary:

Profitable portfolio management and risk management results are critical to maintaining and growing a portfolio. To be successful in this regard requires on-going, conscious risk taking. Financial markets lend themselves to rational phase, section, pattern, swing, and volatility analysis, and appropriate strategic and tactical plan development and implementation.

Strategic Planning

"The general who wins a battle makes many calculations in his temple before 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."

From Griffith's Preface:

"Sun Tzu was convinced that careful planning based on sound information of the enemy would contribute to a speedy military decision."

Portfolio Management and Risk Management Corollaries:

Always manage within the context of a written strategic plan that has been prepared from an objective analysis of market information. The plan should include very specific guidelines for money management, trade selection, risk control, and profit taking.

Be able to say yes to the general question -- Can every single market execution that has been implemented be based on a specific procedure that was intended as a part of a preconceived plan to react to particular market behavior in a specified manner. More specifically;

1. Did the day and price the position was entered make sound technical sense?
2. Did the day and price the position was liquidated make sound technical sense?
3. Did the degree of capital commitment to the trading situation make sound money management sense?

Counsel From Advisors

From Griffith's comments on Wu Ch'i's 'Art of War' in the Planning Operations Against Other States chapter:

"The Marquis of Wu was once deliberating on state affairs and none of his ministers' opinions was equal to his. He retired from the court looking pleased. Wu Ch'i advanced and said: 'Anciently, King Chuang of Ch'u was deliberating on state affairs. None of his ministers' opinions could equal his. He retired from the council looking worried. Lord Shen asked: "Why does the Sovereign look worried?" The King replied: "This humble one has heard that the world never lacks sages and that a country never lacks wise men. One able to get a sage for his teacher will be a King; one able to get a wise man for his friend, a Lord Protector. Now I have no talent, and still my ministers cannot equal me. Ch'u is in danger." This is what worried King Chuang of Ch'u, but pleases you. I, your servant, am secretly apprehensive.' Whereupon Marquis Wu looked ashamed."

Portfolio Management and Risk Management Corollary:

Always endeavor to associate with, ally with, and seek counsel from more experienced, more intelligent and better informed people than yourself.

Tactical Adaptation To Changing Circumstances

From Griffith's introductory commentary on Mao Tse-Tung's use of Sun Tzu:

"One of the most difficult problems which confronts any commander who has committed his forces in accordance with a well-developed plan is to alter this in the light of changing circumstances. Sun Tzu recognized the inherent difficulties, both intellectual and physical, and repeatedly emphasized that the nature of war is ceaseless change. For this reason operations require continuous review and readjustment."

Portfolio Management and Risk Management Corollary:

Incorporate sufficient flexibility to adapt strategies and tactics to make constructive use of unforeseen events, both favorable and unfavorable, as an inherent element of all plans, strategies, and tactics.

Constant Factors

"The art of war is governed by five constant factors, all of which need to be taken into account. They are: the Moral Law; Heaven; Earth; the Commander; Method and discipline."

Portfolio Management and Risk Management Corollary:

The art of portfolio management and risk management is governed by five constant factors as well. They are: Ethical conduct; Adaptation to events beyond human control; Knowledge and suitability of strategies and tactics to market conditions; Competent management; Disciplined organization and financial management.

Ethical Conduct

"The Moral Law causes the people to be in complete accord with their ruler..."

From Griffith's translation:

"Here Tao is translated 'moral influence'. It is usually rendered as 'The Way', or 'The Right Way'. Here it refers to the morality of government; specifically to that of a sovereign. If the sovereign governs justly, benevolently, and righteously, he follows the Right Path or the Right Way, and thus exerts a superior degree of moral influence."

Portfolio Management and Risk Management Corollary:

Regardless of philosophical or religious inclination, employ all resources in a moral and ethical manner at all times. Be generous in rewarding all who constructively participate in portfolio management and risk management efforts, and be generous in supporting worthy endeavors regardless of material return.

Perception Of, And Adaptation To, Events Beyond Human Control

"Heaven signifies night and day, cold and heat, times and seasons."

From Griffith's translation:

"It is clear that the character t'ien (Heaven) is used in this verse in the sense of 'weather', as it is today."

"By weather I mean the interaction of natural forces; the effects of winter's cold and summer's heat and the conduct of military operations in accordance with the seasons."

Portfolio Management and Risk Management Corollaries:

Just as we have no control over the weather, we have no control over where the market goes, yet we can endeavor to forecast both to create a guide for our portfolio management and risk management activities.

Even though we are unable to control market influencing forces, we still need to make our best forecast of those forces, and assess our exposure, so as to facilitate our strategic planning and tactical adjustments.

Realistically, our forecasts will, on occasion, be wrong. Therefore, the related strategies and tactics may, for a time, also be unsuitable to the situation.

The key point is not the rightness or wrongness of our forecast. Rather, it is the need for us to maintain the financial and emotional flexibility to adapt our strategies and tactics to accommodate the realities of the situation.

In summary, keep our energy focused on having a positive influence on the portfolio management and risk management results produced by the elements we can control, i.e., probabilistic forecasts, risk assessments, strategies, and tactics, as opposed to allowing our energy to be dissipated by concerns over events beyond our control, e.g., weather, fundamental developments, price, rate, and volatility movements.

Knowledge And Suitability Of Strategies And Tactics To Market Conditions

"Earth comprises distances, great and small; danger and security; open ground and narrow passes; the chance of life and death."

From Griffith's translation:

"Mei Yao-ch'en:...When employing troops it is essential to know beforehand the conditions of the terrain. Knowing the distances, one can make use of an indirect or a direct plan. If he knows the degree of ease or difficulty of traversing the ground he can estimate the advantages of using infantry or cavalry. If he knows where the ground is constricted and where open he can calculate the size of force appropriate. If he knows where he will give battle he knows when to concentrate or divide his forces."

Portfolio Management and Risk Management Corollary

Study and know the main fundamental supply/demand and price movement behavior characteristics (profile) exhibited by each market traded. This is essential to ensuring the suitability of strategy and tactics to the market's phase, section, pattern, swing level and volatility.

Competent Management

"The Commander stands for the virtues of wisdom, sincerity, benevolence, courage, and strictness."

From Griffith's translation:

"Tu Mu:... If wise, a commander is able to recognize changing circumstances and to act expediently. If sincere, his men will have no doubt of the certainty of rewards and punishments. If humane, he loves mankind, sympathizes with others, and appreciates their industry and toil. If courageous, he gains victory by seizing opportunity without hesitation. If strict, his troops are disciplined because they are in awe of him and are afraid of punishment."

Portfolio Management and Risk Management Corollary:

Strive to develop a balanced management skill set to enable prudent employment of all portfolio management and risk management resources.

Disciplined Organization And Financial Management

"By Method and discipline are to be understood the marshaling of the army in its proper subdivisions, the gradations of rank among the officers, the maintenance of roads by which supplies may reach the army, and the control of military expenditure."

Portfolio Management and Risk Management Corollary:

Discipline, efficient and effective organization, communication, and suitable utilization of all resources (people, plans, tools, capital) are all critical to portfolio management and risk management success.

Deception And "Shaping"

"All warfare is based on deception. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near. Hold out baits to entice the enemy. Feign disorder, and crush him. If he is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is of choleric temper, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected".

Portfolio Management and Risk Management Corollary:

Although, as individual portfolio managers and risk managers, we have limited ability to deceive and manipulate the markets, however, we can minimize the opportunity for other market participants to impair our success by keeping our strategies and tactics to ourselves. Allow strategies and tactics to become apparent only when results have been secured and if disclosure enables rational and gainful business development efforts, or when regulatory reporting requirements necessitate.

Active Portfolio Management and Risk Management Corollary:

When possible, and economically advantageous, establish multi-faceted positions through trusted intermediaries to minimize the opportunities for others to determine our strategies and tactics. This will also enable flexibility in adapting to evolving market conditions.

Avoidance Of Being Deceived And "Shaped"

Griffith's commentary on Sun Tzu On War:

"The same factors determine the 'shape' of the opposing armies. The prudent commander bases his plan on his antagonist's 'shape'. 'Shape him', Sun Tzu says. Continuously concerned with observing and probing his opponent, the wise general at the same time takes every possible measure designed to prevent the enemy from 'shaping' him."

"The wise general cannot be manipulated."

"His primary target is the mind of the opposing commander; the victorious situation, a product of his creative imagination. Sun Tzu realized that an indispensable preliminary to battle was to attack the mind of the enemy."

Portfolio Management and Risk Management Corollary:

Given our limited ability to deceive or "shape" the markets, and the markets seeming unlimited ability to deceive or "shape" us (through surprises, rumors, panics, false moves, etc.), be prepared with a management process that immediately enables us to recognize when we have been deceived.

Furthermore, when we have been deceived, this process should enable us to maintain the presence of mind and discipline to minimize the damage from adverse events, and, capitalize on unexpected opportunities.

To avoid being deceived, we need to be continually improving our individual and corporate strengths and weaknesses. The issues to be addressed in this regard include; our emotions -- ego, hope, fear, and, greed; our focused knowledge and experience; our understanding of human nature; our understanding of each market's phase, section, pattern, swing, and volatility characteristics, and idiosyncrasies (e.g. contract and government program specifications); our understanding of suitable strategies, tactics; and, our awareness of opposing participants' positions and strategies.

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