-Sun Tzu

Image generated from Gemini

THE ART OF WAR

Written in China roughly 2,500 years ago and attributed to military strategist Sun Tzu, The Art of War is one of the most influential treatises on strategy, tactics, and conflict ever produced. It is composed of 13 chapters, each dedicated to a different aspect of warfare - from laying plans and manoeuvering armies to using spies and understanding terrain.

What makes the text so enduring is that it is not really about the mechanics of hacking with swords or shooting arrows. It is a profound study of human psychology, resource management, and strategic positioning. Sun Tzu’s core philosophy revolves around efficiency: winning with the least amount of destruction, avoiding prolonged conflicts, and securing victory through superior planning and positioning before the battle even begins.

A STAPLE OF 1980s FINANCE

The Art of War was a cliched desk adornment of bankers in the 80’s and 90’s and has remained a tongue in cheek element of the industry, I have a copy sitting proudly on my book shelf. In this new series, I will take a piece of advice from the book each Tuesday (Sun Tzu-esday) and apply it to prevailing markets, hopefully it is fun and thought provoking.

EVEN THE FINEST SWORD

This week’s inaugural Sun Tzu quote - Even the finest sword plunged into salt water will eventually rust. - reminds use that even the finest swords [companies, investments, people] can rust if they’ve spent too much time in salt water.

What is salt water to investing, business and people though?

Salt water refers to an unsuitable environment, conditions that over time will damage and decay that which is not suited to it. Crucially too, it is a relatively slow process that can only be truly seen when looked for by those who know what it looks like.

This could be any range of items in an investment thesis:

• A structurally declining industry - cable tv, landlines, coal mining, tobacco, physical retail are all examples of industries in structural decline and having an extremely fine company sitting in the middle of one of these needs to be understood deeply.

• Toxic corporate culture - these are more prevalent in industries moving really fast (e.g. AI, tech, social media) or in industries moving really slow, where, without opportunity or the chance of recognition, politics and behaviours fester. Something to watch out for if investing in booming AI companies.

• Loss of focus on the products/services in favour of marketing - Steve Jobs was hyperaware of this and in a world of shortened attention spans and overwhelming focus on social media marketing, it is more likely than ever:

• Arrogant leadership - one of the fallouts of the digital age of the internet was that everyone has to be on a mission, but visionary founder missions can be dangerous to investors - Mikhail Zverev mentions as much in our recent EiC with him - as they can burn through investor capital (more often than not they end up very wealthy though….) on a fruitless plan, e.g. WeWork.

• Chronic capital misallocation - when a company hits on a cash cow product and are suddenly dealing with more capital than they’re use to, they can often go down paths of empire building, M&A, acquisitions or similarly wasteful uses of capital.

• Poor strategy - incoming leaders tend to want to be seen to make change to justify their existence. If it ain’t broke though and they fix it, it can often derail the successful process and momentum that was in place.

• Product missteps - staying ahead of competition in what you do and/or getting too far from what you do well can be fatal, Blackberry did two missteps in a relatively tiny amount of time, first they didn’t move to touchscreen when Apple did and this lost them huge share but those that remained, did so for the keyboard. When they launched their next model it had a touchscreen (too late) and no keyboard (forgot or ignored their core offering) and ultimately saw them disappear having been near dominant in corporate mobiles.

• Debt - we all know about this one.

For investors there are a few too, it can be paying too high a price, having too many eggs in one basket, not doing your research, not managing exposures, being too slow - or - quick to react or debt (leverage) too.

Good corporate and investment management requires that you regularly ask yourself, what is the salt water?

What do you think?