Tuesday, September 7, 2021

Battlefield Lessons On Investing

As an individual, I believe in reading up and gaining additional knowledge for the betterment of oneself, for learning is a lifetime activity. A big advantage of having lots of general knowledge is the contextualization of one knowledge domain onto another, from which we could derive useful real-life applications. We can apply this onto investing as well. 

As a war history buff, I shall share an interesting bite on World War 2: 


In the second half of 1944 on the western European front, the Allied commanders were debating on whether to approach Germany on a broad front (i.e., keeping and moving the front line as even as possible), or to adopt a narrow front (i.e., one part of the front move further in than other part(s)). Eventually the broad front strategy, favoured by the Supreme Allied Commander, General Dwight D. Eisenhower (who went on to become the President of the United States in the 1950s), prevailed.


The rationale behind both sides of the argument were not without merit. The proponents of the narrow front would want to end the war quickly with a single decisive stroke at a particular location that would cause the Germans to capitulate, while supporters of the broad front pointed out the precarious logistical supply situation they were in. Though the German forces were routed earlier in France (thus giving the assumption of a potential quick victory had the Allies went for a narrow front), they were still a formidable foe, as demonstrated later in end 1944/early 1945 during the Ardennes Counterattack (known as the Battle of the Bulge). Furthermore, a narrow push runs the risk of the attack being cut off at the rear by the defenders.


So, what can we apply the above to the field of investing?


#1: Never Underestimate The Markets


Just as the Allies began to underestimate the Germans who eventually dealt them a surprising blow during the Battle of the Bulge, as an investor we should not be underestimating the markets. Though the markets are not our enemies, but our approach towards them should not be that of overconfidence and we cannot bank on them behaving as we thought they should be. Like situations on a battlefield, markets are erratic and unpredictable, and may spring a surprise that may benefit or frustrate you.


#2: Concentration May Bring High Returns, But High Risks, Too


If we plowed our entire investable resources into one asset class / region / country / sector / company, and that thing generated huge returns, we could say that we had hit the jackpot. However, if the thing went downhill, so would our resources and we could end up worse off. An example would be a play into technology back in 2020, after which the sector flourished and massive returns were enjoyed. However, if we did not know the coming of COVID-19 and went all-in the tourism sector, that would be catastrophic. 


#3: If You Are Not Sure, Go For A Broad Approach

If you are unsure of how to go about investing (or knowing the future of) a certain asset class / region / country / sector, the safest and easiest way would be to go for a broad approach using exchange traded funds (ETFs). In this way, your risks would be distributed and thus reduced. Always start from the asset class level, then go down to the region / country / sector levels after you are familiar with them. For example, for equities you could begin with global equities ETFs before going into region or country specific ones, and then into sectoral ones, and so on. The returns of the broad approach may not be as high as a concentrated one, but at least your capital is better preserved when things go downhill.


  1. very good analysis on past war

  2. Well, the Allies did try a concentrated approach with the disastrous Operation Market Garden in late summer/early autumn 1944 (77th anniversary end of this month). The plan was pushed hard by the British, perhaps with memories of the 1940 German blitzkrieg thru the Ardennes forest & also the Japanese own 1941/42 blitzkrieg down Malaysia into S'pore, i.e. choosing & focusing on a non-obvious route of attack & relying on the enemy focusing away on other more obvious routes of attack.

    I suppose it's similar to contrarian investing or deep-value investing. Big outperformance if you're correct, but wipe out if you're wrong.

    Position sizing will be important here.

    While the Allies effectively lost an elite division (1st British Airborne Division) in this unsuccessful attack, they had tons of other manpower & resources to continue the war.

    The Germans won the battle, but they lost thousands of experienced troops & tanks/planes that they could ill afford.

    1. Good points raised and agreed. Also, the Germans followed up with their last Ardennes push (or gamble) in the winter of 1944, which it failed and left the western border of Germany relatively open.