Ready, AIM, fire – The lessons all investors can take from “The Art of War” (Part 2/2)

By Richard Mason

Feb 11, 2020

War

I read The Art of War several years ago. It’s a book that is said to be a common book for executives and sports athletes, and whilst I am neither of those I have always been fascinated by military history and tactics.

Whilst not specifically a book on trading, there are many points in the book that can be adapted to trading. It’s a book with timeless wisdom for all disciplines, and I would suggest to read it.

Following on from our first article last week, here are some more lessons that all traders can learn from the military strategy classic:

“Therefore, just as water retains no constant shape, so in warfare there are no constant conditions”

Markets change. What worked last year may not work today. And what worked yesterday may not work together. As traders, our job is to analyse the market conditions and deploy strategies in the most effective manner. That means doing more of what works, and constantly weeding out what doesn’t.

The markets will always be changing. Everyone thought that when the black boxes and algorithms came into play that we would see the end of the discretionary. And eventually – they were right.

Discretionary proprietary traders are now few and far between. All the advertised trader jobs are for quants and coders. But black boxes and algos can still be outsmarted. Just because they might be machines doesn’t mean they can’t be outsmarted.

Those black boxes need turning on by humans. What if the human sucks at trading? A black box might absorb a load of breakout buys, knowing that the breakout traders are weak hands. It then crushes the price and shakes the breakout buyers out, picking up the pennies.

But if there is a reason for the rise, it is the black box that will get steamrollered. Nothing is infallible in this business.

As markets change, a strategy that worked, then stopped working, may now come back into play. We have seen an unprecedented period of low interest rates. PE ratios are no longer comparable due to the cost of capital.

Just like water, you also need to change to suit the environment.

“The worst calamities that befall an army arise from hesitation”

Nothing much good ever arises from hesitation. Hesitation is for the man or woman who is unprepared; who lacks a battle plan or trading strategy.

Just like Napoleon and other decisive Generals, a trader must be swift and sure. Scenarios must already be prepared for, and so it trading should be a simple case of executing the plan.

“It is the unemotional, reserved, calm, detached warrior who wins, not the hothead seeking vengeance and not the ambitious seeker of fortune.”

In the world of small cap shares, many traders and investors can become married to their positions. They fall in love with stocks, and this means that they can’t think objectively any more – so besotted are they with their shares.

Unfortunately, because they are so crazy about the stock – they are unable to hear a bad word said about it. Any negativity is an attack on the owner’s identity, and that identity must be defended at all costs and with any vengeance necessary!

Many accounts have been blown due to love affairs with shares.

The ability to see things as they are, and now how we wish to see them, is a skill that can not only save one a lot of money, but earn plenty of it too. Understanding the real drivers of price and why shares move as they do can benefit one plenty in the long run.

The Art of War is an excellent read, and it’s worth picking up a copy in order to benefit from its wisdom.

Much of the book concerns itself with the strategy of being prepared and ready for all scenarios, having done plenty of due diligence.

That is not such a bad idea when it comes to trading the stock market.

Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.

Important Notice And Disclaimer

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.