Sun Tzu for Investment; Calculation of Victory

The Art of War; Chapter 4, Verse 17:-

“In respect of military method, we have, firstly, Measurement; secondly, Estimation of quantity; thirdly, Calculation; fourthly, Balancing of chances; fifthly, Victory.”

How do we convert this wisdom for use in Investment Decisions?

Measurement

This pertains to obtaining all the known factual information on a certain investment; measure the cost, measure the returns per year, measure the cost of financing etc.

Estimation

This relates to estimating the variable factors with regards to an investment; estimate the growth, evaluate the industry outlook, etc.

Calculation

Now, put in all the known factors and all the estimations into your formula.

EG: Return on property investment:-

=[ (Rental per year / Cost of Property) + Estimated Capital Growth per year] – Financing Cost

=[(80,000 / 1,000,000) + 5%] – 6%

=8% + 5% - 6%

=7%

Balancing of chances

Compare the various alternatives available. Evaluate the risk and returns of each. Choose the one that has the best balance of risk and returns.

Victory

 The Art of War; Chapter 4, Verse 15:-

“Thus it is that in war the victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory.”

By the time you actually make the investment after all the above preparations are made, victory should already be all but assured. There shouldn’t be any need for sleepless nights and worry. Sit back and wait for victory.

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The Art Of War

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物以稀为贵 (That which is scarce is valuable)

That which is scarce is valuable.

That which is freely available is cheap.

In business;

Efficiency, good service, cost control and reliability are scarce.

Talk of big plans, marketing hype, aggressive selling and uncontrolled spending are common.

It is therefore the scarce characteristics that are valuable to the businessman; the common is cheap.

In investment;

Proper research, studying a company’s accounts, reading heavy material and a conservative approach are scarce.

Gambling, speculation, buying on tips and wanting fast returns are common.

It is therefore the scarce characteristics that are valuable to the investor; the common is cheap.

In life;

Patience, foresight, humility and perseverance are scarce.

Envy, pride, impatience, and giving up are common.

It is therefore the scarce characteristics that are valuable to a person; the common is cheap.

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One Hundred Unorthodox Strategies: Battle And Tactics Of Chinese Warfare

The Essence Of War: Leadership And Strategy From The Chinese Military Classics

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During my college days, StarCraft was THE game. Countless nights were spent playing this game on LAN with friends. Now StarCraft 2 is out. Wonder if it will provide the same level of entertainment. Am expecting nothing less...

Watch the trailer:-

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Starcraft II: Wings of Liberty

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Guaranteed Way to Become a Millionaire (Seriously)

In order to become a millionaire, you'd need the following:-

1. $2,000 per month.

2. 20 years of time

3. An investment vehicle that would net a return of at least 7% per annum.

By adding $2,000 per month to an investment returning 7% p.a.; after 20 years (240 months), you would have a nest egg of $1,047,931.

Provided you can find the above investment, the above method will guarantee that you eventually become a millionaire. Of course, not everyone can afford to sock away $2,000 a month. But 2,000 a month is still a whole lot more manageable than the dizzying figure of $1,000,000.

And I believe that with some frugality, effort and perseverance, many of us would be able to sock away that 2k. After all, the installment payment for an average car would already likely cost you more than 1k a month. Giving up a little here and there will definitely help you achieve your goal.

I prepared a spreadsheet showing the monthly investment balances, which can be downloaded HERE.

And finally, what investment would be able to generate 7% a year while being able to preserve (or even grow) the capital element? Dividend stocks and REITS would be a likely candidate. Read more about REITS HERE.

Sometimes, the simplest things work best.

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Dividends Still Don't Lie: The Truth About Investing in Blue Chip Stocks and Winning in the Stock Market

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Value Investing; Something Good Will Eventually Happen

In an earlier blog post, we linked to one of Warren’s Buffett’s classic articles on value investing. In it, there is the following quote:- “if a business is worth a dollar and I can buy it for 40 cents, something good may happen to me”.

A stock on Bursa Malaysia recently proved this concept. The stock is Titan Chemicals Corp (TITAN). Titan manufactures chemicals to be sold to manufacturers of flexible and rigid packaging, fibers, automobile parts and other products.

In early May 2010 (just 2 months ago), I flirted with this stock, but unfortunately did not finally consummate the purchase. At that time, it was trading at around RM1.25. Based on this price, it had the following results on a value perspective:-

Dividend yield: Approx 4%

PE Ratio: Approx 6

Net Assets per Share: Approx RM2.50

Based on the above, this definitely qualifies as a value stock. Solid dividend yields prove steady recurring earnings; low PE Ratio (lower than the benchmark of 10) means it is under-valued earnings-wise; and finally, you can get RM2.50 of assets for RM1.25. That’s like getting it all at a 50% discount. Exactly the kind of deal Buffett looks for.

And true enough, someone (Honam of South Korea) came along and offered to buy the company at RM2.35. At this price, Net Asset Value is better reflected and the PE Ratio rises to approximately 10. It is not a steep price at all, simply that the value has been recognized.

And if you had bought the share at RM1.25; it was last traded on the open market on 15 July 2010 at RM1.85; a profit of 48% even before the actual offer made by Honam.

Of course, this doesn’t mean that every value investment you make will make quick profits. Most of them will stay undervalued for quite some time. But if you hold enough value stocks in your portfolio, ‘good things’ will probably happen to you one after another. And always remember that value stocks are inherently lower risk than others, simply because they are so undervalued that there is not much room left to go down even further.

We will finish this article with more of Buffett’s wisdom.

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The Warren Buffett Way, Second Edition

Value Investing: From Graham to Buffett and Beyond (Wiley Finance)

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Spain Wins World Cup 2010

Octopus gets it right. 8 times out of 8.

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