The Art of War, By Sun Tzu: The Use of Spies; a Study of the Corporate & Financial Markets

Throughout history, war becomes the extreme solution where diplomatic attempts have failed. Where the state’s negotiations end, military seizure of assets, resources and terrain begins. The game must be played regardless of the consequences, with loss of life and devastation left in its wake, and the innocent as the ultimate victims. The game is started and finished, with heroes on the winning side and criminals on the other. It is a true statement that history is written by the winners, moreover justice often evades the victors, while convicting the losers. Therefore the means to the end must be considered.

Searching through history at the occurrences of conflict, events that guided the course and ultimately affected the outcome, intelligence rises to the top of the list of key elements. Not just knowledge and preparedness, but inside information, misinformation and use of that information is consistently proven to be critical in the execution of military operations. This brief study will show how the use of information, described in the Art of War in the chapter “The Use of Spies”, whether military or civilian in nature, has a profound affect on the outcome of any engagement,. As always, the Market Intelligence think tank focuses on financial markets, so that is our final destination. Let’s begin with a brief look at types of spies.

The five types:

1. Local (Citizens)

2. Inward (Enemy Officials)

3. Converted (Enemy Spies)

4. Doomed (Counter Intelligence)

5. Surviving (Double Spies)

  1. Local citizenry is the machine that keeps society moving forward. They are the farmers, merchants & consumers in every civilization. Their individual roles, though small and somewhat insignificant, have a function in the overall picture. The sheer numbers, when combined for a specific purpose, can provide significant intelligence, actionable in a variety of ways. Whether they are aware of the larger task, locals have inside information as to the who, what, when and where, often in real time. It is the challenge of the collectors and analysts to assemble that information in a timely manner. The true purpose is often a heavily guarded secret, known only at the highest levels.

In the financial markets, this is called conventional wisdom. While actual wisdom may not exist from the perspective of the average citizen, it is the movement of the herd that creates the reality. In this way, perceived direction (and therefore movement) must be considered as real, as it is the force causing the herd to move. Mainstream media has little real or current information to offer the average investor. However, since millions watch television news and react to the content, it possesses the power to cause and affect change in the markets. One gazelle running in fear can influence the entire herd. A frightened gazelle does not hide quietly to secure its own safety, but screams and hops wildly to alert the others of impending danger.

Even though the markets move based on institutional actions and not the tiny incremental actions and reactions of the retail investor, there is nevertheless a significant number of participants and amount of capital to be considered. It is individuals that consume a significant portion of products and energy and create trends that move stocks and effect inflation. The primary source of this information is the spending habits and confidence of local citizenry. If you check the financial news, it is the floor traders, fund managers and wall street analysts who are describing the events as they unfold, adjusting predictions and reacting to them.

  1. Inward or local officials are the legislators, enforcers and legal community in a given industry. It is a well known fact that most corporate actions are carried out not based on the public good, but based on consequences and repercussions of those actions as carried out by officials. The outright violation of laws and lack of ethical behavior often have a greater good for the corporation due to lenient laws, acceptable fines, or lack of real legal consequences. In the crash of 2008, “moral hazard” was the euphemism of the day, where banks took extreme risks despite the dangers to the economy. The analysis suggests that the clear goal is financial gain rather than the good of the people. Therefore, anticipation of events must be considered based on the goals of the organization rather the good of the society.

In financial endeavors, it is a critical element in investing to know why choices are being made, and most importantly how the instrument might be affected by those choices. Many companies throughout history have taken great risks to the environment, health and security in pursuit of greater earnings. In most cases, this is due to a clear understanding of the legal and public consequences, which are deemed acceptable. It is the government regulators and legislators that we rely on to create, monitor and execute moral and ethical mandates for the greater good rather than the greatest profit, and it is this form of intelligence that provides critical tools for the investor to be “in the know” at all times. For example, it is required by law that every publicly traded company publish earnings and other corporate actions in the public domain in a timely manner. Reporting of transactions via the SEC by company executives is called insider trading and it completely legal. This information provides great insight into the vision, intent and actions of the executives of an organization.

1. Converted spies are essential in the waging and winning of any war. In the war of business and investing, this aspect becomes a tricky subject. As detailed previously, public information is readily available to the savvy investor. However, this is where the illegal version of inside information comes into play. Information about internal operations and future reports, etc. is critical when considering competition, but heavily regulated in the financial markets. It is the analysis of public information that creates the real actionable intelligence to give the investor a competitive edge. If you possess the information, even if it is speculative in nature, you can be in the right place at the right time. Discrimination and extraction from the raw data reveals actionable information, thus increasing probabilities.

2. Counter Intelligence may be the most critical element and a vital tool in waging war. In battle strategy, it is the art of deception. If the enemy knows where you are headed, he can attack you. If he knows your strengths, he can avoid them and take advantage of your weaknesses. Therefore, deception is the key to sending your opponent in the wrong direction or creating a false sense of security or danger. In investing, information must be analyzed and filtered to discern its true nature. Is the information a deception or accurate? This is the art of counter intelligence.

One example is the contrarian view, where the conventional wisdom (mainstream media) reports “facts” and experts make their expert projections, yet the market moves on other real information in the opposite direction. It is this information and misinformation that separates the 90% from the 10% (losers and winners). The question is, where do you find accurate analysis of information? Do these experts have an agenda or ulterior motive? There are many sources from Wall Street analysts to fundamental researchers to technical indicators. As in war, the key is to extract the real, identify the false, understand motives and control the flow of information. In this case, (you) the investor are doomed without it.

  1. The best application of the surviving or double spy is the knowledge that not all information can be 100% accurate at all times. Markets move on a varying combination of momentum, volume and volatility. Often accurate information begins as such, then suddenly converts or reveals itself as misinformation. These changes occur frequently in the financial markets. Geo-political events, government actions and natural disasters are but a few catalysts that can move markets. Whether the event is sinister in nature or truly random in nature is another subject and irrelevant, What matters is here foreknowledge of the possibility, probability and the ability to act on the occurrence.

It is imperative that the investor maintain a diligent watch or at least maintain access to analysis of world events, however remote and seemingly insignificant. Trading and investing requires a nimble hand, alert mind and the ability to act with confidence when conditions change. One common element in both war and investing is the initial plan of action. While important, it is just the plan. Battlefield adjustments based on current events as they unfold will win or lose the day. Without proper training and the ability to act and adjust under stress, there is no chance of success.

On a final note, consider the analogy of travel. Travel to an unknown area without a map, a local guide, understanding of local laws, language and customs and the dangers that may exist would be foolish. Navigation into the unknown without the knowledge of others is problematic and the results unpredictable. As in the financial markets, once these key elements are secured, timing is the final factor to be carefully considered. The amount and accurate use of information, the greater the chance of well timed action.

“In action, watch the timing”

-Tao Te Ching

The use of spies or better phrased, the use of information as described in the Art of War is an excellent example of how to win with conservation of energy, foreknowledge and effort-less execution through the use of market intelligence. The combination of all types of information is called divine manipulation of the threads and should be considered the highest priority.

“What enables the achievement of things beyond the reach of ordinary men

is foreknowledge. It cannot be elicited from spirits, obtained from experience nor by inductive calculation. It can only be obtained from information”

-Sun Tzu

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