“To overcome the intelligent by folly is contrary to the natural order of things;
to overcome the foolish by intelligence is in accord with the natural order.
To overcome the intelligent by intelligence, however, is a matter of opportunity.
There are three avenues of opportunity: events, trends, and conditions.
When opportunities occur through events but you are unable to respond, you are not smart.
When opportunities become active through a trend and yet you cannot make plans, you are not wise.
When opportunities emerge through conditions but you cannot act on them, you are not bold .
Those skilled in generalship always achieve their victories by taking advantage of opportunities.”
- Zhuge Liang, “Way of the General,” circa 200 AD
What a beautiful illustration of enduring value. When a military strategist writing some two millennia ago can describe the nature of trading exactly, it becomes wonderfully apparent how little the game changes. Fads come and go… technology marches on… but human nature, and the basic principles of sound trading, forever remain.
Let’s break down the observations here. The first point, that foolish does not beat smart, is obvious but subtly important. How many traders hope to be paid for foolish activity in markets? If you fail to think things through, you get what you deserve.
The second point, that smart beats foolish, applies to outlier situations where investors have lost their heads. At the height of a mania, when greed leads to a frenzy of nonsensical buying, smart beats foolish by waiting things out — or going short at the right time. At the depths of a panic or a grinding malaise, smart beats foolish by deploying cash reserves to scoop up depressed assets. Occasionally Mr. Market acts very foolish, and thus provides windows of opportunity for smart players to profit.
The third point — the most important — is that smart only beats smart on an opportunistic basis. Most of the time, the opponent does not give an obvious opening. This is why it is silly to think that opportunities are uniformly distributed, or that opportunity perpetually exists in every market, every time frame, or every day of the year. “A matter of opportunity” means careful situational assessment — looking for a window, and exploiting the opportunity before the window closes. When competing against smart players, or rather non-foolish players, you beat them by being more selective… more willing to alternate tremendous patience and overwhelming aggression.
Zhuge Liang then notes the requirement to respond, make plans, and act — so key! So many traders fall by the wayside here. They fail to respond because they are not paying attention — or worse, they are too distracted by noise, paying too much attention to the wrong things (which is actually worse). More critically, they fail to make a long-range or even an intermediate-term plan… because they don’t know how to plan, or fail to see the value in it. And as such, they lack the ability to act with boldness, and to reap the fruits of timely boldness intelligently applied.