One of the words in this topic is superfluous, and I think it is ‘sport’. The ‘spirit of the Olympics’ defined sport as ‘war by peaceful means’, simply a peaceful simulation of all the principles of war. If war be defined as ‘all kinds of competition’, and Business be defined as ‘one kind of competition (for the custom of customers)’ in a particular format and for a particular prize, then we can now understand Business as ‘one kind of war’. Since business is supposed to be (mostly) carried out without shedding any genuine blood, sport becomes a simulation to practice Business Strategy.
The stated objective of business is often ‘to survive’. If ‘survival of the fittest’ is the basis of evolutionary choice, then Business Strategy has much to learn from The Principles of War, and Evolutionary Biology. This is not to be confused with the Marketing definition, which sees a Business existing to meet the needs of customers; markets only provide the context in which Business must survive, while the basis of survival is provided by Strategy. Rather like the playing field in sport, which provides context, while Strategy and Gamesmanship decides the winners.
So this is the hierarchy. The ultimate power struggle is synonymous with war, where you fight for freedom with your life at stake. Sport is merely a peaceful simulation, with smaller stakes, but the central objective remains power and dominance. Politics is just a dirtier, more nakedly obvious struggle for power, while Business is a little more subtle, but uses the same principles of ‘warfare’.
All Business (and even markets) simulates a sackfight, i.e. entry into the circle is free and easy, but exit is only pain of ‘death’. In war, too, the traditional battlefields would be ‘valleys of death’, allowing easy entry but impossible exit (especially through retreat). Once inside the circle, the tactics of war and sport are similar; so also in both Business and markets. Size gives strength in frontal combat, but is a liability if the adversary is fragmented; traders and businessmen will see the merit in this principle of war (and sackfights); so also, the benefits of temporarily establishing co-operative relationships with long-term enemies (“My enemy’s enemy is my friend”).
However, what is not so obvious is that markets are also history in motion, with the central theme being a struggle for (market) power. People like Warren Buffet often do a disservice to this understanding of markets, by oversimplifying the rules of success, dumbing them down to reach a wider audience. He pretends that investing is more akin to agriculture (i.e. nurture) than hunting (i.e. nature). This is only for the lazy investor, or maybe stupid investor; while that includes most of you, it remains a half-truth. For those of you who are able to absorb this self-criticism, it helps to know that Warren Buffet’s philosophy may be accommodating to your ignorance and laziness, but it is not the complete picture.
To understand the rest of the picture, you need to understand Business (and consequently, markets) in terms of the principles of war/ sport/ politics. It is a struggle for (market) power, and here too, only the fittest survive. More so in today’s markets, which have turned these war games into video games, sometimes with disastrous consequences for those who believe too blindly in Warren Buffet. The Guru himself plays the war games with finesse (in his Reinsurance, Banking and mortgage derivatives businesses), but doesn’t talk too much about it. His stakes in Wells Fargo, Goldman Sachs, GEICO, etc, bear testimony to that.
Businesses don’t change trajectory over short periods of time, but markets do. The price discovery process of stock prices is complex, and simulates the field of war (between bullishness and bearishness). There is an ongoing (power) struggle for supremacy, which is difficult to understand, especially for lesser mortals, who are doomed to remain ‘day traders’. But the likes of Ray Daglio and George Soros have made as much, if not more, money than the maestro; they have just done different things with it, which made them less visible. It is not the money they make that makes them great, but the philosophy they have evolved is genuine wisdom. It is just unfortunate that the subject is arcane and hence lost to wider audiences.
The world suffers a lot of damage because of its attitude to volatility, and the received wisdom of Warren Buffet, which it uses to justify its own laziness and stupidity. Aphorisms like “we do not speculate”, or “this is day trading”, or “markets cannot be beaten” or “we focus on business” are embedded across the world of business, leaving them as sitting ducks to the consequences of market volatility. It is even considered virtuous to look away from the consequences of ignoring volatility, (mis)using the Guru’s gospel to justify one’s own inadequacy. The consequences are visible in the many dead bodies across Indian industry, who lost their lives to risk from the currency and commodity markets, especially over the last few years.
The reason for this is simple and obvious. Most competition (i.e. war) is about evolving a superior you, who must outcompete another mortal. In market terms, it would mean locating and rooting out your own irrationality, before you can take advantage of your rivals, i.e., Mr Market. By definition, this is a pursuit palatable to only a few, as we all (instinctively) seek ordinariness and mediocrity in all that we do. The teachings of Warren Buffet help us to rationalise our laziness to ourselves, allowing us to revel in our mediocrity.
The principles of competition are many, and have been explored by seminal authors like Sun Tzu (“The Art of War”). A different kind of (political) competition is explored by Machiavelli, which looks at the internal dynamics of (business) organisation and establishes rules for leadership.
* Know thy enemy…..and thyself: This is one of central principles of War, and resonates with all good businessmen. There is no mention of the customer here, just as there is no mention of the actual battleground….these are assumed as context. Matching your enemies weaknesses with your strengths (even building new strengths, if need be) creates the Maximin strategies found in Game Theory, so widely used in Business Strategy. Yet the actual theory was developed from the Chinese checkers- game of “Go”, which teaches players to use minimum resources for maximum effect. Maximum leverage over competition is achieved when you develop a strength to match your enemy’s weakness, even as you avoid pitting your weakness against the enemy’s strength. If you can locate Mr. Market’s weaknesses (and volatility is a good indicator), then an appetite for tolerating volatility will do you good; however, this is diametrically opposite Mr. Buffet’s prescription to long-term “buy and hold” investors. I know for a fact that trading DLF well, will give you vastly greater profits than holding HUL, but not if laziness/ passivity is the investment objective.
* If his forces are united, separate them: Used in Human Resources, where talent is fought over, using Machiavelli’s insights on politics. That is, if (market) risk is concentrated, diversify sensibly. This activity has to be nuanced; over-diversification creates the same set of problems as the concentration of risk.
* If the enemy is choleric, pretend to be weak: Used in M & A strategy, e.g. “Winners’ Curse”. This is obvious to any trader.
* Attack when the enemy is unprepared, appear where you are not expected: Used in Supply Chain strategy, when inputs are accumulated/ monopolised, to get (unfair) advantage. Understanding Mr. Market’s deception, and building some schemes of your own, is a difficult but fruitful task.
For us Indians, I have a special message. Our historic performance in all wars with outsiders (Alexander, Mahmud of Ghazni, Babar, the British) is recorded in history. The only war we have ever won, is against our own kind, the Pakistanis. This world standing is replicated in the world of sport, where we claim our rightful place at the bottom of every (competition) table in every sport that is played by anyone with an arm and a leg. Indian politics, if it were to be similarly ranked in some hypothetical world ranking, would confirm my case. Tell me, if you agree with the first three points, why would Indian Business and Indian markets be any better?