Great investors are like great historical tacticians. With the understanding of all the factors and variables, we have seen great militarists of the likes like Zhu Ge Liang (諸葛亮), Julius Caesar, Napoleon. But none has ever graced the world with his concise principles when it comes to strategy and planning.
His name is Sun Tzu.
His masterpiece, The Art of War, dates back from the 771 BC, is a detailed and thorough write up on how a successful militarist prepares and strategize for warfare. Throughout the years, The Art of War has been translated to multiple languages and the core principles have been adopted to be applied in business, management and also sports.
Since principles dating back to the 771 BC has helped ancient kings win wars and also recently, sports team to win championship, is it possible to apply the principles towards being a better investor?
The Art of War consists of 13 chapters, each chapter detailing each steps in clarity on what to achieve, based on the tenets and principles behind. Although some chapters are purely applicable to ware fare, there are plenty where we can pick out valuable advice for investing.
Chapter 1: Planning (始計)
Behind every success, comes great execution. But with each execution comes with a great plan. The simplest quote that really sums of planning “Fail to Plan = Plan to Fail”
Before investing in a company, what are the key information needed? What does the company does? How does it earn money?
If I were to apply Sun Tzu’s wisdom, failure to adhere to The Art of War is a matter of life and death, which means no thorough study on a company’s business and information will be the BIGGEST and GRAVEST mistake one commits.
You will end up losing your capital.
The 5 factors that are highlighted in the Art of War can be translated to (i) Nature of Business (ii) Fundamentals (iii) Financials (iv) Management (v) Valuations (in this precise order!)
1. Nature of Business
If a company does not have a good business model, it would be difficult for it to increase sales and revenue. If that is the case, would we be willing to put in our money to be an owner of such a company?
Would you rather buy a fantastic company with growth year in year out, has a recession proof business model (example companies running a food business) or a cyclical business (example oil and gas or construction companies)?
Next, if the fundamentals of the company does not bode well, the company is likely to be facing a HUGE challenge. Examples would be like conventional newspaper company like Star Media Group Berhad (KLCI listed) and Singapore Press Holdings (SGX listed)
These companies are facing huge disruption and challenges where the internet is slowly eating into their bread and butter business. More and more people are reading news and engaged by advertisements online rather than flipping through a hard copy newspaper.
A disrupted business will record lower revenues, and eventually lower profits. So always keep track of a company’s business fundamentals to see whether it will be rendered obsolete by the change of time and technology.
Thirdly, what are the financials the company is reporting? Listed companies are required to publish their financial performances to the public. And for investors we are always interested in picking the best of the best companies to invest in. These financial reports will be the report cards we use to gauge a company’s performances.
An annual report will highlight all the strengths, weaknesses, opportunities and threats of a company. The annual report facts and figures will be your ultimate weapon into getting to know the company inside out prior to making a decision to invest or not.
Forth, the management. The generals. The leaders. Who you hire to run your business so that you can sleep soundly, knowing that the company you invested in will reap profits and returns. If you are a king of a country, would having a general like Alexander the Great fighting an enemy bring you less worry?
Examples of good management are key leaders of a company these days, like Mark Zuckerberg of Facebook Inc. (NASDAQ), Mr Lim Wee Chai of Top Glove Corp Berhad (KLCI Listed), Li Ka-Shing, previous chairman of Hutchison Whampoa Limited (HKEX Listed)
Last but not least, is valuation. Knowing WHAT the company is doing, HOW the company earns money, WHERE the company major business is heading to, HOW is the company performing, WHO is leading the company, the final and most important question to ask – WHEN to invest in the company. How much are you willing to pay to be an owner of a business?
These 5 criteria should be the key cornerstones when approaching any companies for a thorough analysis.
Sun Tzu may have been born in an era where wars were waged and ravaged lands. But his insights and wisdom have been well put to use into winning wars. But it is also so relevant that even after thousands of years, the logic and planning required before making a decision, is a crucial step. Remember, investing is where you put in your own hard earned money to compound your returns. Make the required preparations beforehand.
Do you agree with Sun Tzu’s philosophy in planning and strategize before investing?
Let us know in the comments below!
Let us know too if you are eager for Chapter 2 of The Art of War Series!
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