Sun Tzu Phrases - Portfolio Management and Risk Management

It would be helpful for you to have these two texts, especially Clavell's, to reference as you read
through these comments.
Once you get past the first section of these comments, Application of Selected Sun Tzu Phrases To
Portfolio Management and Risk Management, the following sections are organized to follow the
chapter titles in Clavell's book; with Griffith's chapter titles in parentheses, and quotes treated as
supplemental information.
Within each chapter section, before each Clavell quote or series of quotes, I have inserted a brief
heading label that characterizes the substance of the quote(s) and the companion portfolio
management and risk management corollaries.
Application of Selected Sun Tzu Phrases To
Selected
Portfolio Management and Risk Management
Chapter I Laying Plans (Estimates)
Chapter II On Waging War (Waging War)
Chapter III The Sheathed Sword (Offensive Strategy)
Chapter IV Tactics (Dispositions)
Chapter V Energy (Energy)
Chapter VI Weak Points & Strong (Weaknesses and Strengths)
Chapter VII Maneuvering (Maneuvre)
Chapter VIII Variation Of Tactics (The Nine Variables)
Chapter IX The Army On The March (Marches)
Chapter X Terrain (Terrain)
Chapter XI The Nine Situations (The Nine Varieties of Ground)
Chapter XII
Attack By Fire (Attack by Fire)
Chapter XIII The Use Of Spies (Employment of Secret Agents)
Summary The Art Of War as applied to Portfolio and Risk Management

Application of Selected Sun Tzu Phrases to Portfolio and Risk Management
Before getting into the quotes and corollaries, there are several selected phrases, employed by
translators of Sun Tzu's writings, that need to be defined within the context of contemporary portfolio
management and risk management situations:
Enemy
Other participants in the market(s), not the market environment itself.
Terrain
The virtual terrain created by participants interacting in the market place. Means of providing us with
information regarding what other market participants are doing.
Defeat
Catastrophic loss of business or trading capital.
Mistake
Given that to be human is to err, I view "mistake" to represent a series of errors, compounded in such a
way as to result in catastrophic loss of business or trading capital. "Mistakes" of a catastrophic nature
tend to result from failure to capture and isolate our intentions (plans, strategies, and tactics). I am not
viewing "mistake" as an error that simply results from being human and one from which we can recover
and learn.
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Chapter I : Laying Plans (Estimates)
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."
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."
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."
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..."
"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."
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."
"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."
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."
"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."
"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."
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."
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".
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."
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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Chapter II : On Waging War (Wagin War)
Focus on the object of war and proper engagement.
Stay Focused On Strategic Objectives
"In war, then, let your great object be victory, not lengthy campaigns."
Always keep attention and action focused on achieving strategic objectives as promptly as possible,
(within what the market will allow), as opposed to becoming distracted by the nuances and intricacies of
implementing complex strategies and tactics.
Reward/Risk
"When you engage in actual fighting, if victory is long in coming, the men's weapons will grow dull and
their ardor will be dampened. If you lay siege to a town, you will exhaust your strength, and if the
campaign is protracted, the resources of the state will not be equal to the strain. Never forget: When your
weapons are dulled, your ardor dampened, your strength exhausted, and your treasure spent, other
chieftains will spring up to take advantage of your extremity. Then no man, however wise, will be able to
avert the consequences that must ensue."
"In all history, there is no instance of a country having benefited from prolonged warfare."
When evaluating and implementing portfolio management and risk management strategies be sure to
balance time factors and resources required with expected rewards and risks.
If the rewards of the strategy are not forthcoming within the expected timeframe, withdraw in order to
regroup and refresh resources in preparation for future engagements.
Ensure Appropriate Financing
"The skillful general does not raise a second levy, neither are his supply wagons loaded more than
twice."
Assuming adherence to the principles in the Laying Plans section, ensure appropriate financing and
resources prior to strategy implementation. Avoid exhausting finances and other resources beyond what
was envisioned and risked in the original strategy.
Timing
"Once war is declared, he (the general) will not waste precious time in waiting for reinforcements, nor will
he turn his army back for fresh supplies, but crosses the enemy's frontier without delay. The value of
time--that is, being a little ahead of your opponent--has counted for more than either numerical superiority
or the nicest calculations with regard to commissariat."
"An attack may lack ingenuity, but it must be delivered with supernatural speed."
Timing, in almost every aspect of portfolio management and risk management, is critical, especially given
that we will always be in the financial and numerical minority. Therefore, when a decision has been
made, do not equivocate, implement it promptly.
Self-Sustaining Strategies
"Bring war material with you from home, but forage on the enemy. One cartload of the enemy's
provisions is equivalent to twenty of one's own, ..."
Allow for adequate financing from own reserves to initiate portfolio management and risk management
strategies.
Make use of every opportunity, within every strategy, to sell time value (a wasting asset) to secure option
premium income from the opposition so as to finance the maintenance of the strategy.
Reward, Replenish, And Invest In Support Structure
"...when you capture spoils from the enemy, they must be used as rewards, so that all your men may
have a keen desire to fight, each on his own account."
After a successful campaign, be sure to allocate appropriate parts of the rewards to all resources
employed in the portfolio management and risk management activity; replenish, and perhaps grow,
liquidity account; increase longer term diversified investment portfolio; reward associates; replenish
spiritual, emotional, mental, and physical reserves; and, invest in up-grading portfolio management and
risk management support structure.
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Chapter III: 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."
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,..."
"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."
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."
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."
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."
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."
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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Chapter IV: Tactics (Dispositions)
"The character hsing means 'shape', 'form', or 'appearance' or in a more restricted sense, 'disposition' or
'formation'. The Martial Classics edition apparently followed Ts'ao Ts'as and titled the chapter Chun
Hsing 'Shape [or 'Dispositions'] of the Army'. As will appear, the character connotes more than mere
physical dispositions."
Opportunistic Flexibility In Adapting Strategies And Tactics To Situation
"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."
"Security against defeat implies defensive tactics; ability to defeat the enemy means taking the
offensive."
"Hence the skillful fighter puts himself into a position that makes defeat impossible and does not miss the
moment for defeating the enemy."
Have a well organized plan. Select and test the alternative strategies that are suitable to the market
phase, section, swing level, and volatility. Have the patience to wait for the markets to provide qualifying
high reward/low risk situations for implementing the selected strategy. Have the discipline to execute
again and again.
Be prompt in making tactical adjustments in implementing strategies as market conditions change

(opportunity perceived, reaction time, and, results).
Adhere to sound money management practices to avoid catastrophic loss of capital, and especially,
Cut losses short and let profits run -- large losses are the most counterproductive outcome possible.
Intelligent Questioning Of All Situations
"To see victory only when it is within the ken of the common herd is not the acme of excellence."
Herd instinct.
Market discounting.
Contrary opinion.
Sustainable Success
"Nor is it the acme of excellence if you fight and conquer and the whole empire says, 'Well done!' True
excellence is to plan secretly, to move surreptitiously, to foil the enemy's intentions and balk his
schemes, so that at last the day may be won without shedding a drop of blood."
"What the ancients called a clever fighter is one who not only wins, but excels in winning with ease. But
his victories bring him neither reputation for wisdom nor credit for courage. For in as much as they are
gained over circumstances that have not come to light, the world at large knows nothing of them, and he
therefore wins no reputation for wisdom; and inasmuch as the hostile state submits before there has
been any bloodshed, he receives no credit for courage."
The objective of portfolio management is to secure hard dollar rewards that, in turn, are to be
utilized/leveraged for constructive purposes. The objective is in no way related to supporting the wasteful
trappings of satisfying the ego gratification need of the portfolio manager, risk manager, or anyone else.
Avoidance Of Catastrophic Loss
"He (the clever fighter) 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."
Seldom has a human being accomplished anything without making a mistake. Accordingly, I have
interpreted the use of the phrase "mistakes" to mean catastrophic mistakes leading to defeat, not the
mistakes that come from being human. Mistakes leading to catastrophic loss of capital tend to result from
our failure to capture and isolate our intentions (plans, strategies, and tactics). Therefore, this Corollary
becomes sevenfold;
1. Study past market conditions to know how each market tends to behave in given situations and
conditions.
2. Maintain discipline of strategy implementation guidelines and acceptable tactical adjustments.
3. Avoid repeating and compounding small mistakes to the point that catastrophic loss of capital results.
4. Deliberately study every strategy and tactic implemented and endeavor to learn from it.
5. Accept the inevitability of being wrong. Conserve capital during the bad times by limiting losses to a
predetermined percent of capital.
6. Do not necessarily equate losses to mistakes or defeat. Within the context of our philosophy, losses,
when controlled as a part of adapting to market conditions, are simply a part of the cost of doing
business.
7. To be a successful portfolio manager or risk manager, be willing and able to take losses with limited
emotional response.
Ethical Conduct
"The consummate leader cultivates the Moral Law and strictly adheres to method and discipline; thus it is
in his power to control success."
"Those skilled in war cultivate the Tao and preserve the laws and are therefore able to formulate
victorious policies.
Tu Mu: The Tao is the way of humanity and justice; 'laws' are regulations and institutions. Those who
excel in war first cultivate their own humanity and justice and maintain their laws and institutions. By
these means they make their governments invincible."
Again, 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.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter V: Energy (Energy)
"Shih, the title of this chapter, means 'force', 'influence', 'authority', 'energy'. The commentators take it to
mean 'energy' or 'potential' in some contexts and 'situation' in others."
Organizational Management
"The control of a large force is the same in principle as the control of a few men: it is merely a question of
dividing up their numbers. Fighting with a large army under your command is not different from fighting
with a small one: it is merely a question of instituting signs and signals."
Regardless of the size of the portfolio, have a well organized written strategic plan with very specific
guidelines for money management, trade selection, risk control, and profit taking.
Suitability Of Strategies And Tactics To Situation
"To ensure that your whole host may withstand the brunt of the enemy's attack and remain unshaken,
use maneuvers direct and indirect. In all fighting, the direct method may be used for joining battle, but
indirect methods will be needed in order to secure victory. Indirect tactics, efficiently applied, are as
inexhaustible as Heaven and Earth, unending as the flow of rivers and streams; like the sun and moon,
they end but to begin anew; like the four seasons, they pass away but to return once more."
"...these two in combination give rise to an endless series of maneuvers. The direct and indirect lead on
to each other in turn. It is like moving in a circle--you never come to an end. Who can exhaust the
possibilities of their combination?"
"Hiding order beneath the cloak of disorder is simply a question of subdivision; concealing courage under
a show of timidity presupposes a fund of latent energy; masking strength with weakness is to be effected
by tactical dispositions."
"The concept expressed by cheng, 'normal' (or 'direct') and ch'i, 'extraordinary' (or 'indirect') is of basic
importance. The normal (cheng) force fixes or distracts the enemy; the extraordinary (ch'i) forces act
when and where their blows are not anticipated. Should the enemy perceive and respond to a ch'i
maneuver in such a manner as to neutralize it, the maneuver would automatically become cheng."
Use option oriented strategies (indirect) to establish positions that can be converted to outright long or
short positions in the underlying (direct) as the market reveals itself.
Timely Implementation
"The quality of decision is like the well-timed swoop of a falcon that enables it to strike and destroy its
victim."
"Energy may be likened to the bending of a crossbow; decision, to the releasing of the trigger."

Quality analysis leads to the decision to act. Once the decision to act has been made, implement
promptly and without fanfare.
Leverage By Coordinating Complimentary Skill Sets
"The clever combatant looks to the effect of combined energy, and does not require too much from
individuals. He takes individual talent into account, and uses each man according to his capabilities. He
does not demand perfection from the untalented."
"When he utilizes combined energy, his fighting men become, as it were, like rolling logs or stones."
"Thus the energy developed by good fighting men is as the momentum of a round stone rolled down a
mountain thousands of feet in height."
Discipline, efficient, and effective organization and utilization of all resources (people, plans, tools,
capital) in the capacity, to which they are best suited, is critical to leveraging portfolio management and
risk management success.
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Chapter VI: Weak Points & Strong (Weakness and Strengths)
More tactical commentary.
"That the impact of your army may be like a grindstone dashed against an egg, use the science of weak
points and strong."
"You may advance and be absolutely irresistible if you make for the enemy's weak points; you may retire
and be safe from pursuit if your movements are more rapid than those of the enemy."
"An army may march great distances without distress if it marches through country where the enemy is
not. You can be sure of succeeding in your attacks if you only attack places that are undefended. You
can ensure the safety of your defense if you only hold positions that cannot be attacked. That general is
skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose
opponent does not know what to attack."
Thoroughly know the characteristics of each market being traded. Judiciously apply resources by
selecting and implementing those strategies that are suitable to the market's phase, section, pattern,
swing level, and volatility.
Likewise, avoid getting the bias of the position cross-wise with the market's price and volatility bias.
Be quick to minimize losses if strategy proves to be unsuitable to phase, pattern, or volatility.
Timing
"Whoever is first in the field and awaits the coming of the enemy will be fresh for the fight; whoever is
second in the field and has to hasten to battle will arrive exhausted."
Attempt to position, prior to a break, with option spreads and/or pre-established orders to enter based on
confirmation.
Avoid "chasing" a market to get in.
"Therefore the clever combatant imposes his will on the enemy, but does not allow the enemy's will to be
imposed on him."
Again, the individual portfolio manager and risk manager has severely limited, if any, ability to impose his
will on the opposing traders.
Mirror Portfolio Management and Risk Management Corollary:
The key is to actively take preventative measures to thwart the opposing participants' ability to entice and
deceive you into implementing inappropriate strategies, and in so doing, imposing their will on you.
Maintain An "Edge" Through Focused Knowledge And Experience
"By discovering the enemy's dispositions and remaining invisible ourselves, we can keep our forces
concentrated, while the enemy's must be divided."
"Hence there will be a whole pitted against separate parts of a whole, which means that we shall be
many to the enemy's few. And if we are able thus to attack an inferior force with a superior one, our
opponents will be in dire straits."
"Numerical weakness comes from having to prepare against possible attacks; numerical strength from
compelling our adversary to make these preparations against us."
"Though the enemy be stronger in numbers, we may prevent him from fighting. Scheme so as to discover
his plans and the likelihood of their success. Rouse him, and learn the principle of his activity or inactivity.
Force him to reveal himself, so as to find out his vulnerable spots. Carefully compare the opposing army
with your own, so that you may know where strength is superabundant and where it is deficient."
Thoroughly analyze market conditions and categorize (profile) its characteristics.
Preserve capital through adherence to prudent money management principles.
Through patience and our "superior force" of focused knowledge and experience, select and implement
strategies and tactics suitable to the opportunities provided by the market phase, section, pattern, swing
level, and volatility.
"What the multitude cannot comprehend is how victory may be produced for them out of the enemy's own
tactics."
"All men can see the individual tactics necessary to conquer, but almost no one can see the strategy out
of which total victory is evolved."
"Military tactics are like unto water; for water in its natural course runs away from high places and
hastens downward. So in war, the way is to avoid what is strong and to strike at what is weak. Water
shapes its course according to the nature of the ground over which it flows; the soldier works out his
victory in relation to the foe whom he is facing."
"Therefore, just as water retains no constant shape, so in warfare there are no constant conditions...He
who can modify his tactics in relation to his opponent, and thereby succeed inwinning, may be called a
heaven-born captain."
"Sun Tzu's theory of adaptability to existing situations is an important aspect of his thought. Just as water
adapts itself to the conformation of the ground, so in war one must be flexible; he must often adapt his
tactics to the enemy situation. This is not in any sense a passive concept, for if the enemy is given
enough rope he will frequently hang himself. Under certain conditions one yields a city, sacrifices a
portion of his force, or gives up ground in order to gain a more valuable objective. Such yielding therefore
masks a deeper purpose, and is but another aspect of the intellectual pliancy which distinguishes the
expert in war."
Maintain a strategic focus at all times, regardless of the circumstances.
become engaged as a part of a well thought out trading plan and be flexible in adapting to conditions
within the context of the plan. In so doing we will become a part of the markets' energy flow and, thereby,
continually improve our ability to successfully understand and utilize market conditions to our advantage.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter VII: Maneuvering (Maneuvre)
"Lit. 'struggle' or 'contest' of the armies' as each strives to gain an advantageous position."
Disciplined Organization
"Without harmony in the state, no military expedition can be undertaken; without harmony in the army, no
battle array can be formed."
"In war, the general receives his commands from the sovereign. Having collected an army and
concentrated his forces, he must blend and harmonize the different elements thereof before pitching his
camp"
Again, disciplined, efficient, and effective organization and utilization of all resources (people, plans,
tools, capital) is critical to leveraging portfolio management and risk management success.
"After that comes tactical maneuvering, and there is nothing more difficult. The difficulty consists in
turning the devious into the direct, and misfortune into gain."
Use option oriented strategies (indirect) to establish positions that can be converted to outright long or
short positions in the underlying (direct) as the market reveals itself.
flexible in adapting strategies and tactics to conditions within the context of the plan.
Inherent Advantages And Disadvantages
"Maneuvering with an army is advantageous; with an undisciplined multitude, most dangerous."
"...This too literal translation completely misses the point. Ts'ao Ts'ao's interpretation is surely more
satisfactory. The verse is a generalization which introduces what follows. A course of action which may
appear advantageous usually contains within itself the seeds of disadvantage. The converse is also true."
And again, disciplined, efficient, and effective organization and utilization of all resources (people, plans,
tools, capital) is critical to leveraging portfolio management and trading success.
Regardless of how promising a market situation appears, always establish protective loss measures.
Also, regardless of how bleak a position appears, always be prepared to act on an unexpected
advantage afforded by the market.
Timing
"If you set a fully equipped army to march in order to snatch an advantage, the chances are that you will
be too late."
Again, avoid "chasing" a market to get in.
Proper Support
"On the other hand, to detach a flying column for the purpose (to snatch an advantage) involves the
sacrifice of its baggage and stores."
"An army without its baggage train is lost; without provisions it is lost; without bases of supply it is lost."
Preserve capital through proper support, prudent strategy and tactic selection, and adherence to prudent
money management principles.
Relationship Management
"We cannot enter into alliances until we are acquainted with the designs of our neighbors."
Just as we need to know ourselves and the markets we trade in order to succeed, we need to know all
trading partners we align with.
Develop Knowledge Through Study
"We are not fit to lead an army on the march unless we are familiar with the face of the country--its
mountains and forests, its pitfalls and precipices, its marshes and swamps."
"We shall be unable to turn natural advantages to account unless we make use of local guides."
Be thoroughly informed, both technically and fundamentally, of all major information elements that
influence the decision making processes of the participants in each market being traded.
Systematically organize the information in a form that facilitates timely decision making and
implementation, as opposed to inhibiting it.
Trading on "inside" information is illegal. However, by adhering to the two foregoing points, we can create
"local guides" out of how we process and organize market related information.
Develop thought of overlaying significant points of fundamental information on swing charts.
"In war, practice dissimulation and you will succeed."
"Let your plans be dark and impenetrable as night"
"He will conquer who has learned the artifice of deviation."
Passive Portfolio Management and Risk Management Corollary:
Keep your strategies and tactics to yourself. Allow them to become apparent only when results have
been secured.
Active Portfolio Management and Risk Management Corollary:
When possible, establish multi-faceted option positions to enable flexibility in adapting to evolving market
conditions.
Mirror Portfolio Management and Risk Management Corollary:
Given our limited ability to deceive the markets and the markets seeming unlimited ability to deceive us,
be prepared against being deceived by the opposition by being as fully informed of their characteristics
and positions as is possible.
Strategic Planning
"Ponder and deliberate before you make a move."
Have a written strategic plan with very specific guidelines for money management, trade selection, risk
control, and profit taking.
Timely Implementation
"Move only if there is a real advantage to be gained."
"...when you move, fall like a thunderbolt."
Once an opportunity has been identified, a strategy has been selected, and tactics have been decided
on, implement promptly and without hesitation.
"Whether to concentrate or to divide your troops must be decided by circumstances."
Again, maintain a strategic focus at all times, regardless of the circumstances.
Again, 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 to conditions within the context of the plan. In so doing you will become a part of
the markets' energy flow and, thereby, continually improve your ability to successfully interact with market
forces.
Reward, Replenish, Invest
"When you plunder a countryside, let the spoil be divided among your men; when you capture new
territory, cut it up into allotments for the benefit of the soldiery."
Replenish, and perhaps grow, liquidity account.
Increase longer term diversified investment portfolio.

Reward associates.
Replenish spiritual, emotional, mental, and physical reserves.
Invest in up-grading portfolio management and risk management support structure.
Organizational Management
"On the field of battle, the spoken word does not carry far enough; hence the institution of gongs and
drums. Nor can ordinary objects be seen clearly enough; hence the institution of banners and flags.
Gongs and drums, banners and flags, are means whereby the ears and eyes of the host may be focused
on one particular point. The host thus forming a single united body, it is impossible either for the brave to
advance alone, or for the cowardly to retreat alone."
Have a written plan and very specific guidelines for money management, trade selection, and profit
taking.
Ensure that every member of the portfolio management and risk management unit clearly understands
what is to be done.
Discipline, efficient and effective organization, communication, and utilization of all resources (people,
plans, tools, capital) is critical to leveraging portfolio management and risk management success.
Planning, Patience, Timing
"Now a soldier's spirit is keenest in the morning; by noonday it has begun to flag; and in the evening, his
mind is bent only on returning to camp. A clever general, therefore, avoids an army when its spirit is
keen, but attacks it when it is sluggish and inclined to return. This is the art of studying moods."
"Disciplined and calm, he awaits the appearance of disorder and hubbub among the enemy. This is the
art of retaining self-possession."
"To be near the goal while the enemy is still far from it, to wait at ease while the enemy is toiling and
struggling, to be well fed while the enemy is famished--this is the art of husbanding one's strength."
"To refrain from intercepting an enemy whose banners are in perfect order, to refrain from attacking an
army drawn up in calm and confident array--this is the art of studying circumstances."
"It is a military axiom not to advance uphill against the enemy, nor to oppose him when he comes
downhill."
Have a well organized strategy, the patience to wait for the markets to provide a qualifying high
reward/low risk trade, and the discipline to execute again and again.
Through planning, patience, and our "superior force" of focused knowledge and experience, select and
implement strategies and tactics suitable to the opportunities provided by the market phase, pattern, and
volatility. In so doing, will avoid getting crosswise of the markets' strength.
Preserve capital through adherence to prudent money management principles, so that when a mistake is
made the financial consequence will be small.
"Do not pursue an enemy who simulates flight; do not attack soldiers whose tempers are keen. Do not
swallow a bait offered by the enemy."
Actively take preventative measures to thwart the opposing participants' ability to entice and deceive you
into implementing inappropriate strategies and tactics.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter VIII: Variation of Tactics (The Nine Variables)
Catastrophic Loss Avoidance
"There are roads that must not be followed, towns that must not be besieged."
"There are armies that must not be attacked, positions that must not be contested, commands of the
sovereign that must not be obeyed."
There are times when it is best to be neutral, i.e., have no market positions. This is especially true when
the only trades available are of the high risk/low reward variety.
"The general who thoroughly understands the advantages that accompany variation of tactics knows how
to handle his troops. The general who does not understand these may be well acquainted with the
configuration of the country, yet he will not be able to turn his knowledge to practical account."
Adjust the tactical implementation of each strategy to contemporary market conditions (phase, section,
pattern, swing level, and volatility).
In addition to being well educated and informed regarding markets, current conditions, and strategy, the
successful portfolio manager and risk manager also needs the psychological capacity and discipline to
adapt his implementation tactics.
"In the wise leader's plans, considerations of advantage and of disadvantage will be blended together. If
our expectation of advantage be tempered in this way, we may succeed in accomplishing the essential
part of our schemes. If, on the other hand, in the midst of difficulties we are always ready to seize an
advantage, we may extricate ourselves from misfortune."
In every advantageous situation, there is an inherent potential disadvantage. Identify the potential
disadvantage, establish precautions against it, all the while, continue to pursue the advantage.
In every disadvantageous situation, there is an inherent potential for an advantage to develop. Be

constantly alert to capitalizing on potential advantages, as and when they appear, to diminish and/or
eliminate losses.
Rely On Own Preparation
"The art of war teaches us to rely not on the likelihood of the enemy's not coming, but on our own
readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made
our position unassailable."
Never construct and implement a strategy based on hope or fear of what the market may do. Always
endeavor to base actions on knowledge, principles, planned strategies, and acceptable tactical
adjustments.
"There are five dangerous faults that may affect a general, of which the first two are: recklessness, which
leads to destruction; and cowardice, which leads to capture.
Next there is delicacy of honor, which is sensitive to shame; and a hasty temper, which can be provoked
by insults.
The last of such faults is oversolicitude for his men, which exposes him to worry and trouble, for in the
long run the troops will suffer more from the defeat, or at best, the prolongation of the war, which will be
the consequence."
Avoid recklessness by engaging the markets only within the context of a well thought out portfolio
management and risk management plan.
Once a strategy has been developed, tested and selected, be bold in implementation.
While always adhering to the Moral Law, also, always be flexible and opportunistic in capitalizing on
opportunities provided by changing market conditions.
In stressful situations, minimize the inclination to make emotional decisions.
Also, regardless of the planning that has gone into developing and testing a strategy, there will often
times be some adversity, usually financial losses, encountered in implementation. Be prepared to view
the adversity as simply another part of doing business, by adapting strategy and tactics to market
conditions, thereby keeping the financial losses small.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter IX: The Army on the March (Marches)
Respectful Preparation
"He who exercises no forethought but makes light of his opponents is sure to be captured by them."
Have a written strategic plan with very specific guidelines for money management, trade selection, risk
control, and profit taking.
Be confident based on preparation, but not cocky based on unfounded and/or untested perceptions.
"Do not climb heights in order to fight."
"If you are anxious to fight, do not go to meet the invader near a river he has to cross. Instead, moor your
craft higher up than the enemy, and facing the sun. Do not move upstream to meet the enemy. Our fleet
must not be anchored below that of the enemy, for then they would be able to take advantage of the
current and make short work of you."
"After crossing a river, get far away from it. When an invading force crosses a river in its onward march,
do not advance to meet it in midstream. It will be best to let half the army get across, and then deliver
your attack."
Avoid struggling to get into a trade. Take only those high reward/low risk trades provided by the market.
To do otherwise, will simply exhaust capital and other resources in fruitless trades, and leave you with
insufficient wherewithal to capitalize on meaningful trade opportunities when they do appear.
Preserve And Protect Resources
"All armies prefer high ground to low, and sunny places to dark. Low ground is not only damp and
unhealthy, but also disadvantageous for fighting. If you are careful of your men, and camp on hard
ground, your army will be free from disease of every kind, and this will spell victory."
"When, in consequence of heavy rains up-country, a river which you wish to ford is swollen and flecked
with foam, wait until it subsides. Country in which there are precipitous cliffs with torrents running
between, deep natural hollows, confined places, tangled thickets, quagmires, and crevasses, should not
be approached or else left with all possible speed."
"If in the neighborhood of your camp there should be any hilly country, ponds surrounded by aquatic
grass, hollow basins filled with reeds, or woods with thick undergrowth, they must be carefully routed out
and searched; for these are places where men in ambush or insidious spies are likely to be lurking."
At all times, and especially when strategies are in play, seek to keep all resources in profitable and
advantageous positions. Likewise, quickly liquidate unprofitable positions and minimize exposure to
situations with inordinate risk to uncertain market movements.
Study, Observe, Remember, Compare, And Apply
"Movement among the trees of a forest shows that the enemy is advancing."
"The sudden rising of birds in their flight is the sign of an ambush at the spot below."
"When there is dust rising in a high column, it is the sign of chariots advancing; when the dust is low, and
spread over a wide area, it betokens the approach of infantry. When it branches out in different
directions, it show that parties have been sent to collect firewood. A few clouds of dust moving to and fro
signify that the army is encamping."
"Humble words and increased preparations are signs that the enemy is about to advance. Violent
language and driving forward as if to the attack are signs that he will retreat."
Know the implications and importance of various market actions and rhetoric, and be prepared to react
accordingly. "Profile" characteristics of each market traded. Constantly compare current conditions with
market "profile".
"If the enemy sees an advantage to be gained and makes no effort to secure it, the soldiers are
exhausted."
If a market fails to continue to advance with bullish news, or fails to continue to decline with bearish
news, be prepared to adapt strategy tactics accordingly.
"...soldiers must be treated in the first instance with humanity, but kept under control by means of iron
discipline."
"If, in training soldiers, commands are habitually enforced, the army will be well disciplined; if not, its
discipline will be bad."
"If a general shows confidence in his men but always insists on his orders being obeyed, the gain will be
mutual."
Disciplined organization and utilization of all resources is critical to successful portfolio management and
risk management.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter X: Terrain (Terrain)
"Topography or conformation of the ground."
Market Analysis
"We may be able to distinguish six kinds of terrain: accessible ground, entangling ground, temporizing
ground, narrow passes, precipitous heights, positions at a great distance from the enemy."
One way of viewing our perception of the "terrain" or "ground" of the markets is to liken us to an
experienced river traveler exploring and mapping uncharted wilderness inhabited by hostile people. And
to liken market price movements to the river we are utilizing as our main conveyance through that
wilderness.
We can look back through our charts, records, and other "profiling" data and see where we have
traveled, and observe the obstructions that have caused the river to change its course and speed and,
likewise, have caused us to leave the river and portage around unsafe stretches. We would also be able
to review our skirmishes with the hostiles, both on the river and during the portages.
It is through these experiences that we gain a sense of the character and "profile" of the river (each
market's price movement) and its response pattern(s) to the country (conditions and events that influence
price movement) through which it is moving. These experiences also enhance our understanding of our
vulnerability to the river and the hostile intent of the inhabitants, as well as our ability to make
constructive use of the river in pursuing our objectives.
However, given the inevitable twists and turns all rivers take and the inclement weather conditions (fog,
etc.) we are obliged to travel through, we cannot always see where the river is going to carry us, or the
movement of the hostile forces.
Therefore, our perception of the impending terrain and hostile action, and the concomitant impact on the
shaping of our strategies and tactics will, to some degree, be influenced by what our experience and
ability to understand the current behavior of the river tells us.
The character of the movement of the river, in and of itself, will provide some insight into the terrain
through which we are traveling, whether we can see the terrain or not. Sometimes, that will be all we
have to rely on in preparing our travel plans and defenses against hostile attack.
"Ground that can be freely traversed by both sides is called accessible. With ground of this nature, beat
the enemy in occupying the raised and sunny spots, and carefully guard your line of supplies. Then you
will be able to fight with advantage."
"Ground that can be abandoned but is hard to reoccupy is called entangling. From a position of this sort,
if the enemy is unprepared, you may sally forth and defeat him. But if the enemy is prepared for your
coming, and you fail to defeat him, then, return being impossible, disaster will ensue."
"When the position is such that neither side will gain by making the first move, it is called temporizing
ground, and the situation remains at a deadlock. In a position of this sort, even though the enemy should
offer an attractive bait, it will be advisable not to stir forth, but rather to retreat, thus enticing the enemy in
his turn; then, when part of his army has come out, you may deliver your attack with advantage."
"With regard to narrow passes, if you can occupy them first, let them be strongly garrisoned and await
the advent of the enemy. Should the enemy forestall you in occupying a pass, do not go after him if the
pass is fully garrisoned, but only if it is weakly garrisoned."
"With regard to precipitous heights, if you precede your adversary, occupy the raised and sunny spots,
and there wait for him to come up. Remember, if the enemy has occupied precipitous heights before you,
do not follow him, but retreat and try to entice him away."
"With regard to positions at a great distance from the enemy, if the strength of the two armies is equal, it
is not easy to provoke a battle, and fighting will be to your disadvantage."
Manage resources to be consistent with the phase, pattern, and volatility of the market.
Pre-position with options.
Control catastrophic loss risk through money management.
Avoid struggling to get into a trade.
Trade only when there is a leveragable advantage, i.e., for every dollar of risk, make sure there is the
realistic potential for a predetermined multiple reward.
"Sometimes an army is exposed to calamities, not arising from natural causes, but from faults for which
the general is responsible. These are: flight; insubordination; collapse; ruin; disorganization; rout."
Establish, maintain, and continually strengthen the philosophical fiber that holds the elements and
substance of our portfolio management and risk management approach together regardless of the nature
of our immediate circumstances, whether they be prosperous or poor, favorable or unfavorable, difficult
or easy.
Develop And Maintain An "Edge"
"Other conditions being equal, if one force is hurled against another ten times its size, the result will be
the flight of the former."
Always endeavor to be the superior force, at minimum, through focused knowledge and experience.
Balanced Diversification
"When the common soldiers are too strong and their officers too weak, the result is insubordination."
"When the officers are too strong and the common soldiers too weak, the result is collapse."
Maintain balance in resource management and diversification in risk positions.
"When the higher officers are angry and insubordinate, and on meeting the enemy give battle on their
own account from a feeling of resentment, before the commander in chief can tell whether or not he is in
a position to fight, the result is ruin."
Be disciplined in the use of all portfolio management and risk management resources at all times.
Remain unemotional in all situations.
Clear Communication
"When the general is weak and without authority; when his orders are not clear and distinct; when there
are no fixed duties assigned to officers and men, and the ranks are formed in a slovenly, haphazard
manner, the result is utter disorganization."
Ensure clear communication in all aspects of the development, testing, and implementation of strategy
and tactics.
"When a general, unable to estimate the enemy's strength, allows an inferior force to engage a larger
one, or hurls a weak detachment against a powerful one, and neglects to place picked soldiers in the
front rank, the result must be a rout."
Always endeavor to be the superior force, at minimum, through focused knowledge and experience.
Otherwise remain neutral.
Manage resources to be consistent with the phase, pattern, and volatility of the market.
"These are the six ways of courting defeat -- neglect to estimate the enemy's strength; want of authority;
defective training; unjustifiable anger; nonobservance of discipline; failure to use picked men -- all of
which must be carefully noted by the general who has attained a responsible post."
"The natural formation of the country is the soldier's best ally; but a power of estimating the adversary, of
controlling the forces of victory, and of shrewdly calculating difficulties, dangers, and distances,
constitutes the test of a great general. He who knows these things, and in fighting puts his knowledge
into practice, will win his battles. He who knows them not, nor practices them, will surely be defeated."
"Profile" all you can learn about each market being traded.
and tactics.
Continuously improve focused knowledge and experience.
Remain unemotional in all situations.
Suit strategies and tactics to phase, section, pattern, swing level, and volatility of market.
Stay Focused On Achieving Strategic Objectives
"The general who advances without coveting fame and retreats without fearing disgrace, whose only
thought is to protect his country and do good service for his sovereign, is the jewel of the kingdom."
Keep attention and actions focused on achieving strategic objectives within reasonable time frames, and
with minimal loss or expenditure of resources.
Focused Knowledge And Experience
"If we know that our own men are in a condition to attack, but are unaware that the enemy is not open to
attack, we have gone only halfway toward victory. If we know that the enemy is open to attack, but are
unaware that our own men are not in a condition to attack, we have gone only halfway toward victory. If
we know that the enemy is open to attack, and also know that our men are in a condition to attack, but
are unaware that the nature of the ground makes fighting impracticable, we have still gone only halfway
toward victory. The experienced soldier, once in motion, is never bewildered; once he has broken camp,
he is never at a loss. Hence the saying: If you know the enemy and know yourself, your victory will not
stand in doubt; if you know Heaven and know Earth, you may make your victory complete."
Have a sound portfolio management and risk management philosophy and money management
discipline, and know them thoroughly. Know your own psychological ability to implement the philosophy
and money management guidelines.
Have an analytic framework that allows for timely evaluation and measurement of market activity
(represents collective action of other traders).
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter XI: The Nine Situations (The Nine Varietis of Ground)
"The art of War recognizes nine varieties of ground: dispersive ground; facile ground; contentious
ground; open ground; ground of intersecting highways; serious ground; difficult ground; hemmed-in
ground; desperate ground."
Maintain Disciplined Market Analysis, Even When Neutral
"When a chieftain is fighting in his own territory, it is dispersive ground, so called because the soldiers,
being near to their homes and anxious to see their wives and children, are likely to seize the opportunity
afforded by a battle and scatter in every direction."
"On dispersive ground, therefore, fight not."
"On dispersive ground, inspire your men with unity of purpose."
Maintain disciplined evaluation of on-going market conditions, in each instrument traded, even when
position is neutral.
Stop Losses Quickly
"When he has penetrated into hostile territory, but to no great distance, it is facile ground."
"On facile ground, halt not."
"On facile ground, see that there is close connection between all parts of the army."
Profitable trades tend to be profitable from the onset. Loss trades tend to be losers from the onset.
Therefore, maintain diligent position management discipline, even in the early stages of a trade.
Always Tighten Stops, Never Loosen
"Ground that is of great advantage to either side is contentious ground."
"On contentious ground, attack not."
"On contentious ground, hurry up your rear guard."
After extended moves, avoid adding to positions and tighten up risk management provisions.
Always Maintain Protective Provisions
"Ground on which each side has liberty of movement is open ground."
"On open ground, do not try to block the enemy's way."
"On open ground, keep a vigilant eye on your defenses, fearing a surprise attack."
Maintain protective risk management provisions on all open positions.

Opportunistic Adaptation Of Strategies And Tactics To Situation
"Ground that forms the key to three contiguous states, so that he who occupies it first has most of the
empire at his command, is ground of intersecting highways."
"On ground of intersecting highways, join hands with your allies."
"On ground of intersecting highways, consolidate your alliances."
"We cannot enter into alliance with neighboring princes until we are acquainted with their designs.
Pre-position with option strategies that allow multiple courses of action as the market reveals itself.
Perform proper due diligence and ensure compatibility before inviting anyone to become a part of the
portfolio management and risk management group.
"When an army has penetrated into the heart of a hostile country, leaving a number of fortified cities in its
rear, it is serious ground."
"On serious ground, gather in plunder."
"On serious ground, ensure a continuous stream of supplies."
"The farther you penetrate into a country, the greater will be the solidarity of your troops, and thus the
defenders will not prevail against you. Make forays in fertile country in order to supply your army with
food."
Always be alert to selling time value (a wasting asset).
When in the midst of a successful portfolio management and risk management campaign, be diligent in
realizing gains, as the market provides the opportunity, and utilizing those gains to maintain portfolio
management and risk management resources.
Focused Knowledge And Experience
"Mountain forests, rugged steeps, marshes and fens--all country that is hard to traverse: this is difficult
ground."
"In difficult ground, keep steadily on the march."
"On difficult ground, keep pushing on along the road."
"Carefully study the well-being of your men, and do not overtax them. Concentrate your energy and
hoard your strength. Keep your army continually on the move, and devise unfathomable plans."
"We are not fit to lead an army on the march unless we are familiar with the face of the country--its
mountains and forests, its pitfalls and precipices, its marshes and swamps. We shall be unable to turn
natural advantages to account unless we make use of local guides."
Be scrupulous in avoiding trying to force a trade in this type of environment. Instead, concentrate on
conserving resources for application to the high reward/low risk situations that will eventually develop.
Catastrophic Loss Protection
"Ground that is reached through gorges, and from which we can only retire by tortuous paths, so that a
small number of the enemy would suffice to crush a large body of our men: this is hemmed-in ground."
"On hemmed-in ground, resort to stratagem."
"On hemmed-in ground, block any way of retreat to make it seem that you mean to defend the position,
whereas your real intention is to burst suddenly through the enemy's lines."
Avoid being forced to trade in this type of situation, unless have pre-positioned through option strategies.
If it looks like we are crosswise of the market's bias, liquidate. Otherwise, will soon be in desperate
ground, where catastrophic loss of capital usually results.
Disciplined Risk Management
"Ground on which we can only be saved from destruction by fighting without delay: this is desperate
ground."
"On desperate ground, fight."
"On desperate ground, proclaim to your soldiers the hopelessness of saving their lives. The only chance
of life lies in giving up all hope of it.
For it is the soldier's disposition to offer an obstinate resistance when surrounded, to fight hard when he
cannot help himself, and to obey promptly when he has fallen into danger."
The limitation of applying this War principle to our portfolio management and risk management effort is
that in war an individual soldier, through desperate action, may have an impact on the enemies
movement. But, in portfolio management and risk management our actions as individuals, desperate or
not, have limited to no impact on the outcome of price movement. However, like in war, our actions do
have a very direct impact on the outcome of any given strategy we choose to implement. Therefore, in
trading, our objective is not to seek to enter desperate ground prepared to "trade till capital is exhausted",
rather, it is to impact the outcome of the strategy by having a well organized strategy, the patience to wait
for the markets to provide a qualifying high reward/low risk situation, and the discipline to execute again
and again.
Paradoxically, we can only make money by exposing ourselves to risk. However, when we find ourselves
in desperate situations, we will also find that we have failed to manage our risk through protective
measures. Therefore, we must, at all costs, be disciplined in managing the risk of every strategy we
implement.
Focus On Achieving Strategic Objectives
"The skillful tactician may be likened to the shuai-jan. Now the shuai-jan is a snake that is found in the
Ch'ang mountains. Strike at its head, and you will be attacked by its tail; strike at its tail, and you will be
attacked by its head; strike at its middle, and you will be attacked by head and tail both."
"Asked if an army can be made to imitate the shuai-jan, answer yes."
"You will not succeed unless your men have tenacity and unity of purpose, and above all, a spirit of
sympathetic cooperation. This is the lesson which can be learned from the shuai-jan."
"The principle on which to manage an army is to set up one standard of courage that all must reach."
"The skillful general conducts his army just as though he were leading a single man by the hand."
"Bestow rewards without regard to rule, issue orders without regard to previous arrangements, and you
will be able to handle a whole army as though you had to do with but a single man."
and tactics.
Regardless of the size of the portfolio, have a written strategic plan with very specific guidelines for
money management, trade selection, risk control, and profit taking.
Discipline, efficient, and effective organization, along with opportunistic and flexible utilization of all
resources (people, plans, tools, capital) is critical to leveraging portfolio management and risk
management success.
Study, Observe, Remember, Compare, And Apply
"How to make the best of both strong and weak is a question involving the proper use of ground."
Physiologically, most humans are very similar, yet each human is distinctly different and unique (DNA,
fingerprints, scent, psyche, etc.). Therefore, each person needs to be dealt with differently, yet,
consistently within a sound framework of principled guidelines. Markets can be viewed in a similar
manner. All markets experience price movement, yet each one moves in its own unique way. Therefore,
need to learn to recognize and trade utilizing the unique phase, section, pattern, swing, and volatility
"profiles" of each market and instrument traded.
Management Competence
"It is the business of a general to be quiet and thus ensure secrecy; upright and just, and thus maintain
order."
Establish, maintain, and continually strengthen the philosophical fiber that holds the elements and
substance of our trading approach together regardless of the nature of our immediate circumstances,
whether they be prosperous or poor, favorable or unfavorable, difficult or easy.
Staying focused on discipline, efficient, and effective organization, and opportunistic and flexible
utilization of all resources (people, plans, tools, capital) is critical to maintaining a successful portfolio
management and risk management program.
"To master his host and bring it into danger -- this may be termed the business of the general. The
different measures suited to the nine varieties of ground; the expediency of aggressive or defensive
tactics; and the fundamental laws of human nature: these are things that must most certainly be studied."
"For it is precisely when a force has fallen into harm's way that it is capable of striking a blow for victory."
"Success in warfare is gained by carefully accommodating ourselves to the enemy's purpose."
"By persistently hanging on the enemy's flank, we shall succeed in the long run in killing the commander
in chief--a vital act in war."
"Walk in the path defined by rule, and accommodate yourself to the enemy until you can fight a decisive
battle."
"At first, then, exhibit the coyness of a maiden, until the enemy gives you an opening; afterward emulate
the rapidity of a running hare, and it will be too late for the enemy to oppose you."
The only way to make money trading markets is to incur risk. The challenge is to manage the risk.
flexible in adapting to market conditions within the context of the plan.
Avoid struggling to get into a trade. Take only those high reward/low risk trades the market provides
Suit strategies and tactics to phase, section, pattern, swing level, and volatility of market.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter XII: Attack by Fire (Attack by Fire)
Manias, panics, and unreasoned greed and fear.
Disciplined Emotions
"There are five ways of attacking with fire. The first is to burn soldiers in their camp; the second is to burn
stores; the third is to burn baggage trains; the fourth is to burn arsenals and magazines; the fifth is to hurl
dropping fire among the enemy."
Regardless of how a fire starts, the usual result is panic. Markets periodically experience manias and
panics that are accompanied by extreme price movements. Our challenge is to remain calm and
prepared to capitalize on the opportunities created by the extreme price movements as opposed to being
trampled by the movement.
"In order to carry out an attack with fire, we must have means available; the material for raising fire
should be kept in readiness."
As individual portfolio managers and risk managers, we are not in a position to precipitate a mania or
panic. However, we can be in position to observe and profit from the unreasoned, herd-like price
movements that often times accompany mania and panic market conditions.
"There is a proper season for making attacks with fire, and special days for starting a conflagration."
"In attacking with fire, one should be prepared to meet five possible developments. When fire breaks out
inside the enemy's camp, respond at once with an attack from without. If there is an outbreak of fire, but
the enemy's soldiers remain quiet, bide your time and do not attack. When the force of the flames has
reached its height, follow it up with an attack, if it is practicable; if not, stay where you are. If it is possible
to make an assault with fire from without, do not wait for it to break out within, but deliver your attack at a
favorable moment."
"In every army, the five developments connected with fire must be known, the movements of the stars
calculated, and a watch kept for the proper days."
"The enlightened ruler lays his plans well ahead..."
Study past manias and panics. Become familiar with the conditions accompanying them. Be alert for
similar conditions to appear and be prepared to capitalize on them.
"When you start a fire, be to the windward side of it. Do not attack from the leeward. If the wind is in the
east, begin burning to the east of the enemy, and follow up the attack yourself from that side. If you start
the fire on the east side, and then attack from the west, you will suffer in the same way as your enemy."

Trade with the direction of the price movement resulting from the mania or panic, never against it.
Stay Focused On Achieving Strategic Objectives
"Move not unless you see an advantage; use not your troops unless there is something to be gained;
fight not unless the position is critical. No ruler should put troops into the field merely to gratify his own
spleen; no general should fight a battle simply out of pique. Anger may in time change to gladness;
vexation may be succeeded by content. But a kingdom that has once been destroyed can never come
again into being; nor can the dead ever be brought back to life.
Hence the enlightened ruler is heedful, and the good general full of caution. This is the way to keep a
country at peace and an army intact."
The objective of portfolio management and risk management is to secure hard dollar profits that, in turn,
are to be utilized/ leveraged for constructive purposes. The objective is in no way related to supporting
the wasteful trappings of satisfying the ego gratification needs of the portfolio manager, risk manager, or
anyone else.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Chapter XIII: The Use of Spies (Employment of Secret Agents)
"The character used in the title means 'the space between' two objects (such as a crack between two
doors) and thus 'cleavage', 'division', or 'to divide'. It also means 'spies', 'spying', or 'espionage'."
Importance Of Information Process And Related Communications Capability
"Raising a host of a hundred thousand men and marching them great distances entails heavy loss on the
people and a drain on the resources of the state."
"...to remain in ignorance of the enemy's condition, simply because one grudges the outlay of a hundred
ounces of silver in honors and emoluments, is the height of inhumanity."
Successful portfolio management and risk management requires the commitment of substantial financial,
information processing, mental,and emotional resources.
Notwithstanding the fact that paying for inside information is illegal, timely acquisition of accurate
information is critical. Setting bribery and inside information aside, it is foolish and shortsighted to
begrudge the cost of acquiring the appropriate information and related processing capability required to
trade successfully.
Means Of Developing Foreknowledge
"What enables the wise sovereign and the good general to strike and conquer, and achieve things
beyond the reach of ordinary men, is foreknowledge. Now this foreknowledge cannot be elicited from
spirits; it cannot be obtained from experience, nor by any deductive calculation.
Knowledge of the enemy's dispositions can only be obtained from other men. Knowledge of the spirit
world is to be obtained by divination; information in natural sciences may be sought by inductive
reasoning; the laws of the universe can be verified by mathematical calculation; but the dispositions of
the enemy are ascertainable through spies and spies alone."
This is a difficult issue given the vast differences in the war culture mores of Sun Tzu's time and the
regulatory mores imposed on today's financial market environment. To the extent foreknowledge can be
obtained it is invaluable. The issue becomes twofold;
1. Can the information be obtained legally (i.e., within the mores of our culture)?
2. To the extent it can, what is the information, where can it be obtained, and how should it be processed
to ensure high probability decisions, actions, and results?
Notwithstanding the cultural differences, I think the critical issue is the development of foreknowledge. It
is not, literally, the employment of spies. Spies simply represent an exotic method of gathering
information that could eventually turn out to be useful foreknowledge. In this regard, a figurative use of
the phrase "spies" would be more appropriate than a literal one.
An advantage of today's environment over Sun Tzu's time is the vast pool of information, on virtually
every market (collective enemy's disposition) around the world. For the most part, it is available to
anyone who chooses to acquire it. Yet, even with this information, just as in any other era and any human
endeavor, there are still winners and losers. The difference is in how the winners process and act on the
information.
There are three main types of information available;
1. Supply/demand statistics -- used primarily for fundamental analysis.

2. Price, volume, and open interest -- used primarily for technical analysis.
3. Industry information exchanged amongst industry professionals.
This information can be obtained without the use of literal spies.
The manner in which the information is gathered and processed can be figuratively described as "spies"
(sources) providing information and probabilistic assessments (foreknowledge) of future events being
developed by the recipient of the information.
Note: Need to develop the difference between inductive and deductive comments, type of foreknowledge
being developed, and information processing as communicated by fundamental and technical analysis.
Knowledge, Wisdom, And Understanding Required In Interpreting Information
"Spies cannot be usefully employed without a certain intuitive sagacity. Before using spies we must
assure ourselves as to their integrity of character and the extent of their experience and skill."
"Without subtle ingenuity of mind, one cannot make certain of the truth of their reports."
Just as raw information from spies has to be accurate and properly processed in order in order for
probabilities of future events (foreknowledge) to be determined, the quality of today's information also
needs to be verified and processed so that probabilities of future events (foreknowledge) can be
determined. Information, regardless of how it was obtained, is useless in developing foreknowledge
unless it is accurate and interpreted correctly.
Security (Preservation And Protection) For Information And Related Processing Capabilities
"Hence the use of spies, of whom there are five classes: local spies; internal spies; converted spies;
doomed spies; surviving spies.
When these five kinds are all at work, none can discover the secret system. This is called 'divine
manipulation of the threads.' It is the sovereign's most precious faculty."
"The end and aim of spying in all its five varieties is knowledge of the enemy..."
"Spies are a most important element in war, because upon them depends an army's ability to move."
Our success in portfolio management and risk management is directly related to our ability to gain
knowledge by gathering and processing information about the markets in such a way as to facilitate
timely decision making and action.
Given that our method(s) of gathering and processing of information can be figuratively described as
spies providing foreknowledge, we need to be protective of their security.
Just because we may abide by the mores imposed by our culture and regulation, does not mean
everyone else will. Therefore, avoid employing people, in sensitive areas, with characteristics that might
make them vulnerable to enticement by opposing portfolio management and risk management units.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪
Summary of the Art of War
In summary, there are several important themes developed by Sun Tzu as they can be applied to
portfolio management and risk management challenges.
Strategic Planning And Rational Analysis
Planning based on rational analysis of the best quality information available.
Importance Of Information And Related Processing Capability
Secure the best information available. Protect the sources and processing capabilities from compromise.
Importance Of Knowledge, Wisdom, And Understanding
A theme that is imbedded in virtually every other theme, especially in regard to knowing self and
opposition.
Study The Past, Market Analysis, Develop And Maintain An "Edge"
Leads to knowledge, which, if properly focused, can lead to success.
Strive to become the superior force in more than mere numbers. This is achieved through focused
knowledge and experience, which, in turn, is gained by studying and observing situations, conditions,
people, and events; remembering what was observed; comparing the observations to one another as
well as to contemporary circumstances; and by disciplined application of the results of the observations in
the pursuit of strategic objectives.
Know yourself, your opposition, and the environment within which interaction will occur.
Staying Focused On Strategic Objectives
Keep attention of all resources and related action focused on achieving strategic objectives as promptly
as possible. Avoid becoming distracted by the nuances and intricacies of implementing complex
strategies and tactics.
Match the suitability of strategies and tactics to the market's phase, section, pattern, and volatility.
Understand, and guard against, the inherent disadvantage in every advantageous situation. Likewise, be
alert to capitalizing on advantages that occur in distressed situations.
become engaged as a part of a well thought out trading plan and be flexible in adapting tactics to those
ever-changing market conditions within the context of each pre-determined strategy.
Ethical Conduct
Be moral and ethical in all things.
Rely On Your Own Preparation
Rely on your own preparations. Do not hope for success based on the opposition not preparing.
Develop a balanced management skill set to enable prudent resource utilization.
Disciplined Emotions
Minimize emotional influences (hope, fear, greed).
Disciplined Organization And Financial Management
Discipline, efficient, and effective organization, and utilization of all resources (people, plans, tools,
capital), in the capacity to which they are best suited, in all situations, is critical to success.
Ensure appropriate financing and provisioning of all activities (prior to and during).
Clear Communication
Ensure clear communication in all aspects of the development, testing, and implementation of strategies
and tactics.
Practice deception in plans, strategy, and tactics, and its corollary;
Take precautionary steps to avoid being deceived by the opposition.
Reward, Replenish, And Invest In Support Structure
After a successful strategy, be sure to allocate appropriate parts of the profits to all resources employed
in the portfolio management and risk management activity.
Patience, Positioning, And Timing
Develop patience and discipline in positioning and timing the use of all resources in adapting to ever-
changing circumstances.
Avoidance Of Catastrophic Loss
Avoid catastrophic mistakes, by promptly adapting strategies and tactics to current circumstances,
thereby, keeping the consequences of mistakes small and manageable.
Preservation And Protection Of Resources
At all times, and especially when strategies are in play, seek to keep all resources in profitable and
advantageous positions. Likewise, quickly liquidate unprofitable positions and minimize exposure to
situations with inordinate risk to uncertain market movements.
▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

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It would be helpful for you to have these two texts, especially Clavell's, to reference as you read

through these comments.

Chapter I Laying Plans (Estimates)

Chapter II On Waging War (Waging War)

Chapter III The Sheathed Sword (Offensive Strategy)

Chapter IV Tactics (Dispositions)

Chapter V Energy (Energy)

Chapter VI Weak Points & Strong (Weaknesses and Strengths)

Chapter VII Maneuvering (Maneuvre)

Chapter VIII Variation Of Tactics (The Nine Variables)

Chapter IX The Army On The March (Marches)

Chapter X Terrain (Terrain)

Chapter XI The Nine Situations (The Nine Varieties of Ground)

Chapter XIII The Use Of Spies (Employment of Secret Agents)

Summary The Art Of War as applied to Portfolio and Risk Management

Other participants in the market(s), not the market environment itself.

Catastrophic loss of business or trading capital.

From Griffith's translation:

From Griffith's commentary on Sun Tzu On War:

Portfolio Management and Risk Management Corollary:

From Griffith's Preface:

Portfolio Management and Risk Management Corollaries:

Counsel From Advisors

Portfolio Management and Risk Management Corollary:

Tactical Adaptation To Changing Circumstances

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

Portfolio Management and Risk Management Corollary:

Portfolio Management and Risk Management Corollary:

From Griffith's translation:

Portfolio Management and Risk Management Corollary:

From Griffith's translation:

Portfolio Management and Risk Management Corollaries:

Knowledge And Suitability Of Strategies And Tactics To Market Conditions

From Griffith's translation:

Portfolio Management and Risk Management Corollary

From Griffith's translation:

Portfolio Management and Risk Management Corollary:

Disciplined Organization And Financial Management

Portfolio Management and Risk Management Corollary:

Deception And "Shaping"

Portfolio Management and Risk Management Corollary:

Active Portfolio Management and Risk Management Corollary:

Avoidance Of Being Deceived And "Shaped"

Griffith's commentary on Sun Tzu On War:

"The wise general cannot be manipulated."

Focus on the object of war and proper engagement.

Stay Focused On Strategic Objectives

Portfolio Management and Risk Management Corollary:

Portfolio Management and Risk Management Corollary:

Ensure Appropriate Financing

Portfolio Management and Risk Management Corollary:

From Griffith's translation:

Portfolio Management and Risk Management Corollaries:

Reward, Replenish, And Invest In Support Structure

Portfolio Management and Risk Management Corollary:

Importance Of Knowledge, Wisdom, And Understanding

Portfolio Management and Risk Management Corollary:

Patience, Positioning, And Timing

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

(a) in the shortest possible time;

Portfolio Management and Risk Management Corollaries:

Portfolio Management and Risk Management Corollary: