Hedge Fund CIO: When Investing Is Like Waging War

Submitted by Eric Peters, CIO of One River Asset Management

Warfare

“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.”

              – Sun Tzu, The Art of War, 650 BC

“Out of every one-hundred men you send us, ten shouldn’t even be here, eighty are just targets, nine are the real fighters, and we are lucky to have them, for they the battle make. Ah, but the one, one is a warrior, and he will bring the others back.”

             – Heraclitus, 500 BC

“The only easy day was yesterday – Get comfortable being uncomfortable – Don’t run to your death – Have a shared sense of purpose – Move, shoot, communicate – No plan survives first contact with the enemy – All in, all the time.”

             – US Naval Special Ops

“Capital markets and combat are not turn-based games like chess,” said the Deputy CIO, top decile performer, Marine Force Recon veteran.

“This means that there’s no such thing as waiting to make a decision, because waiting is a decision,” he continued. “Waiting can frequently be correct near-term, but you need to be intentional about how to use that time – to gather information, prioritizing the data that will have the most significant impact on your probability of a favorable outcome.”

There’s a vast difference between incomplete and insufficient information. “Defining the threshold for information sufficiency is an art, honed through experience, often indistinguishable from intuition.” Acting with insufficient information imposes an unnecessary risk that will get you killed in combat or cause avoidable losses as an investor.

“But waiting for complete/perfect information is foolish because it’s an illusion – it’s not possible, because events move in real time.” You cannot fall victim to the zero-defect mentality – the search for perfect information cripples your ability to execute.

“There are two contrasting philosophies in military science about the best use of reserves; plugging holes or reinforcing success.” The US Marine Corps has decisively adopted the latter. “We don’t apply resources evenly across a front.” Our forces search for gaps.

“As a battle develops we don’t deploy reserves to areas where we experience the most resistance. We deploy them to the areas where we’re experiencing the most success.” The Germans pioneered this doctrine between WWI and WWII, devastating their neighbors through the lightning of Blitzkrieg.

Portfolio rebalancing is an expression of this philosophy. It’s a rules-based process that forces you to do what everyone says they’re trying to do, but few do.” Which is to redeploy resources through selling high and buying low, applying pressure to gaps in the market.

“The Special Operations community selects and trains with the expectation that we will always be outnumbered but must never be outmanned,” he said. “We only play away games. And we’re expected to win every one.”

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