SunTzu &The Art of War -- The Sheathed Sword
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Portfolio Management

The Sheathed Sword
(Offensive Strategy)

Focus is on knowledge of self and opposition, and the accomplishment of objectives by informed pre-positioning so as to minimize the need to engage in costly conflict.

Importance Of Knowledge, Wisdom, And Understanding

"If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle."

Portfolio Management and Risk Management Corollary:

Have a sound portfolio management and risk management philosophy and money management discipline, and know them thoroughly. Know your own psychological ability to implement every strategy and tactic within the philosophy and discipline. Have an analytic framework that allows for timely evaluation and measurement of market activity, and the development, implementation of, and maintenance of suitable strategies and tactics.

Patience, Positioning, And Timing

"To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting."

"Thus the highest form of generalship is to balk the enemy's plans; the next best is to prevent the junction of the enemy's forces; the next in order is to attack the enemy's army in the field; and the worst policy of all is to besiege walled cities,..."

From Griffith's commentary on Sun Tzu On War:

"Never to be undertaken thoughtlessly or recklessly, war was to be preceded by measures designed to make it easy to win."

"Thus without battle his (the opposition) army was conquered, his cities taken and his state overthrown. Only when the enemy could not be overcome by these means was there recourse to armed force, which was to be applied so that victory was gained:

(a) in the shortest possible time;
(b) at the least possible cost in lives and effort;
(c) with infliction on the enemy of the fewest possible casualties."

Portfolio Management and Risk Management Corollaries:

It is difficult to imagine how an individual portfolio manager or risk manager could break the market's resistance. However, through patience, positioning, and timing an individual trader can capitalize on breaks and opportunities provided by the markets.

Although supreme excellence is in succeeding without resorting to battle (with a sheathed sword), most of THE ART OF WAR is devoted to preparation for and engagement in battle. Furthermore, it is difficult to achieve portfolio management and risk management objectives in the financial markets without taking a position (unless it is to avoid a loss).

Therefore, endeavor to manage without being drawn into protracted high risk/low return strategies, thereby minimizing the need to "unsheathe the sword".

Essentials For Success

"...we may know that there are five essentials for victory:

He will win who knows when to fight and when not to fight.
He will win who knows how to handle both superior and inferior forces.
He will win whose army is animated by the same spirit throughout all its ranks.
He will win who, prepared himself, waits to take the enemy unprepared.
He will win who has military capacity and is not interfered with by the sovereign."

Portfolio Management and Risk Management Corollary:

Have a well organized plan, stay focused on strategies and tactics suitable to market conditions, maintain patience in waiting for the markets to provide a qualifying high reward/low risk situation, and the discipline to execute again and again.

Always Have An "Edge"

"Though an obstinate fight may be made by a small force, in the end it must be captured by the larger force."

Portfolio Management and Risk Management Corollary:

As an individual portfolio manager or risk manager, we will always be a "small force" numerically and financially. However, in portfolio management and risk management, focused knowledge and experience are substantially more important in defining "large force". Therefore, the objective is to continually build our focused knowledge and experience force so as to ensure that we will always be the "large force" in all strategies we choose to implement.

Focused Application Of Knowledge And Experience

From Griffith's Preface:

"Sun Tzu was well aware that combat involves a great deal more than the collision of armed men. 'Numbers alone', he said, 'confer no advantage.' He considered the moral, intellectual, and circumstantial elements of war to be more important than the physical, and cautioned kings and commanders not to place reliance on sheer military power."

Portfolio Management and Risk Management Corollary:

Even if the amount of capital is large, discipline and ethical application of focused knowledge and experience is more consequential to the eventual success of the portfolio management and risk management process.

Opportunistic Flexibility

"Humanity and justice are the principles on which to govern a state, but not an army; opportunism and flexibility, on the other hand, are military rather than civic virtues."

Portfolio Management and Risk Management Corollary:

The way to capitalize on the endless opportunities created by ever-changing market conditions, is to become engaged as a part of a well thought out portfolio management and risk management plan and be flexible in adapting tactics to market conditions within the context of each pre-determined strategy.

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