Tuesday, 29 October 2013

Dividend Investor Wisdom - The Art of War by Sun Tzu


The Art of War , the ancient Chinese military book contributed by Sun Tzu, a famous military general and strategist, has been among the most influential of China's ancient wisdom classics. Its influence has gone beyond military thinking, but has impact on business tactics, legal strategy, sports games and even marriage counselling.

The book is surprisingly short. It is highly concise(maybe because ancient people needed to save words as their books must be "written" on bamboo sticks, so its one page says more than a hundred pages of contemporary books. It is a book that worthies reading for life. Every time when I try to relate the theories to anything in life that involves strategic thinking, I get new understanding about the book. For example, let us read the following verses in the context of dividend investment.

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《第四章 一》孙子曰:昔之善战者,先为不可胜,以待敌之可胜,不可胜在己,可胜在敌。故善战者,能为不可胜,不能使敌必可胜。故曰:胜可知,而不可为。

4.1  Sunzi said: The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy. To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself. Thus the good fighter is able to secure himself against defeat, but cannot make certain of defeating the enemy. Hence the saying: One may recognise the opportunity to conquer, but cannot create the opportunity.
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I love the last verse. Investors must know that we can not control the market as we control ourselves. The market is not for us to control, it has its own temperament. Sometimes it is rational, and sometimes it is frenzy. It can swing drastically within one week, and it can also remain static for one year. What we can do is always to monitor and seek for the opportunity when it comes. We must not try to outsmart the market, or try to predict how it will go. 
 
History is not the crystal ball to predict the future. Future is not predictable. Every technical analysis is only "true or statistically significant at certain confidence level" . Fundamental analysis is even worse in predicting the market. The market  is not efficient, and sometime it can be so inefficient that the price does not reflect the fundamental for years, and it also can suddenly adjust for hours. I always think that any one who believes EMH should leave investing for other adventures. 
 
Though not predictable, when the market is frenzy, you can be trained to tell it, and you know what to do. (only matter is if you are able to recognise that opportunity, or believe in yourself). When the market is static, everyone can tell, then you should just rest as the market  does and wait to recognise the opportunity when it arises. You can not create the opportunity. You can not make market behave as you want. But you can act when the market behaves as you want. Hence, One may recognise the opportunity to conquer, but cannot create the opportunity.
 
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《第四章 三》见胜,不过众人之所知,非善之善者也。战胜,而天下曰善,非善之善者也。故举秋毫,不为多力;见日月,不为明目;闻雷霆,不为聪耳。古之善战者,胜于易胜者;故善战者之胜也,无智名,无勇功。故其战胜不忒,不忒者,其措必胜,胜已败者也。故善战者,立于不败之地,而不失敌之败也。是故胜兵先胜,而後求战;败兵先战,而後求胜。

4.3  To see victory only when it is within the ken of the common herd is not the acme of excellence. Neither is it the acme of excellence if you fight and conquer and the whole Empire says, "Well done!" To lift an autumn hair is no sign of great strength; to see the sun and moon is no sign of sharp sight; to hear the noise of thunder is no sign of a quick ear. What the ancients called a clever fighter is one who not only wins, but excels in winning with ease. Hence his victories bring him neither reputation for wisdom nor credit for courage. He wins his battles by making no mistakes. Making no mistakes is what establishes the certainty of victory, for it means conquering an enemy that is already defeated. Hence the skillful fighter puts himself into a position which makes defeat impossible, and does not miss the moment for defeating the enemy. Thus it is that in war the victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat fights first and afterwards looks for victory.
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The last verse is true. Only act (buy or sell) when you know that you are already in a winning position(not to be confused with profitable position). Do not act like" let me buy a lot first and test the temperature and see how it goes" or "dear lord, if I don't sell now, the price will drop further". Do not engage unless you have fully calculated the odds of winning(not the same as profiting) and the associated risks. Do not engage blindly because you may recognise true opportunities later, but you have already engaged in a losing battle.

For dividend investors, I love this too. Hence his victories bring him neither reputation for wisdom nor credit for courage. He wins his battles by making no mistakes.

Yes. Dividend investing is not a game to seek for hidden gem. The ones who have done well in divided investing is not because they know more, hear more or see more. Nor are they more brave or wiser. They just recognise the opportunity and act as they should, more importantly rest as they should. In a word, they won by minimising mistakes.

In both quotations, it emphasised the concept that one should ensure that it will not be defeated first, and then seek for victory. I believe Warren Buffet said the similar ( First rule is not to lose. Second rule is to follow first rule. Something like that)  I am not sure if he had read The Art of War before. But indeed "Great Minds Think Alike."

In dividend investing, one must first think the questions like: " what if the price drop 20% in a year, and with annual yield of 6%, how long it takes to break even? What is the maximum loss I can take? How long it may take to recover the loss?" One should not be led to think as the way the analysts promote: " ABC is ... sound. Target price calculated by method... is ... we revalue this ... and target price now is 20% from current market price."  Rubbish!  Not only do they know the market will go up, but also they know how much it will go up! Should I call you God? I am not encouraging pessimism. But one must think of the worst case scenario first and have a back up plan. Sun Tze also expressed that "To ensure undefeatabilty lies with ourselves. To ensure victory lies with enemy". Indeed, you don't know whether or how much you can win, but you can do all the necessary to make sure you can avoid epic failure. 

2 comments:

  1. An investor actually wrote about the following this morning so, you can call him God :- "As per my advocation on penny stocks and blue chips, they are all now reacting according on my words and blogpost..... they call me the prophet, l call my words the reverberating factor"

    ReplyDelete
  2. sounds like prophet indeed. where did you come acorss that?

    ReplyDelete

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