The Hindu Business Line : Ancient `Art of war' in stock markets

STOCK markets have never ceased to baffle people, with bears entering the graphs all of a sudden and bulls doing their work in great hurry. There are peaks and troughs, highs and lows, and daredevils and play-safes. Some dig the depths to study the company fundamentals, while some others take the help of candles to illuminate the trends.

There are the many who go by the sentiment, while a good number follows the gut-feel. But Curtis J. Montgomery reads a 2000-year-old war guide to devise strategies for dynamic investments. His book Sun Tzu on Investing adapts the `art of war' to the modern battlefields of finance and investing. A sampler of the arsenal:

Many investors fear that they cannot compete with professionals in today's sophisticated market environments. Professionals use techniques such as program trading, portfolio insurance and complex derivative instruments. The amateur — the so-called dumb money — can take comfort from the fact that, despite an apparent technological edge, approximately nine out of every 10 professional money managers — the so-called smart money — have not even matched the overall market return over long periods of time.

Sun Tzu was no speculator. He was unwilling to take any unnecessary risks — patiently waiting and continuously preparing, gathering information and honing useful skills — until the day arrived when victory was absolutely assured. His timeless advice was, "fight only when it is easy to win." The most accomplished investors are noted for their uncanny ability to make decisive moves at just the right time.

Sun Tzu-style investors don't wait for media coverage to draw them to good investments. Many small businesses are making healthy profit margins and expanding market share, even during difficult periods for their overall industries or the regional or global economies. These well-run businesses tend to keep a low profile, unlike their larger blue-chip brothers who shout each accomplishment to the press, desperately trying to meet high expectations and justify high valuations. Small can be very beautiful, but the beauty is sometimes hidden beneath an average-looking surface.

An initial public offering (IPO) is like a beauty contest, you never really get a chance to appreciate the essence of the contestant and wind up voting with your eyes and hormones based on surface beauty exaggerated in a swimsuit or evening gown. IPOs are cleverly marketed to public investors and are dressed up to look beautiful. The Sun Tzu-style investor may watch for enjoyment along with the crowd, but is wise to wait six to twelve months for the ugly side of each beauty to surface. The simple fact is, nearly every IPO will be available at a better price within a year of offering.

Sun Tzu-style investors often buy when others are afraid, and sell when others are excited and overly optimistic. They don't prevail by overpowering anyone else, but by moving quietly and subtly against the prevailing emotional currents. As Master Sun said, they become "formless to the point of invisibility". In the long-term, investing success comes from remaining detached and avoiding emotional involvement in prevailing market trends.

"Armed struggle is considered profitable, and armed struggle is considered dangerous," says Sun, characteristically and contradictorily. "For the skilled it is profitable, for the unskilled it is dangerous."

(Book courtesy: Wiley www.wiley.com)

BookValue@thehindu.co.in

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