Manias, panics, and unreasoned greed and fear.
Disciplined Emotions
"There are five ways of attacking with fire. The first is to burn soldiers in their camp; the second is to burn stores; the third is to burn baggage trains; the fourth is to burn arsenals and magazines; the fifth is to hurl dropping fire among the enemy."
Portfolio Management and Risk Management Corollary:
Regardless of how a fire starts, the usual result is panic. Markets periodically experience manias and panics that are accompanied by extreme price movements. Our challenge is to remain calm and prepared to capitalize on the opportunities created by the extreme price movements as opposed to being trampled by the movement.
Suitability Of Strategies And Tactics To Situation
"In order to carry out an attack with fire, we must have means available; the material for raising fire should be kept in readiness."
Portfolio Management and Risk Management Corollary:
As individual portfolio managers and risk managers, we are not in a position to precipitate a mania or panic. However, we can be in position to observe and profit from the unreasoned, herd-like price movements that often times accompany mania and panic market conditions.
Opportunistic Flexibility In Adapting Strategies And Tactics To Situation
"There is a proper season for making attacks with fire, and special days for starting a conflagration."
"In attacking with fire, one should be prepared to meet five possible developments. When fire breaks out inside the enemy's camp, respond at once with an attack from without. If there is an outbreak of fire, but the enemy's soldiers remain quiet, bide your time and do not attack. When the force of the flames has reached its height, follow it up with an attack, if it is practicable; if not, stay where you are. If it is possible to make an assault with fire from without, do not wait for it to break out within, but deliver your attack at a favorable moment."
"In every army, the five developments connected with fire must be known, the movements of the stars calculated, and a watch kept for the proper days."
"The enlightened ruler lays his plans well ahead..."
Portfolio Management and Risk Management Corollary:
Study past manias and panics. Become familiar with the conditions accompanying them. Be alert for similar conditions to appear and be prepared to capitalize on them.
Catastrophic Loss Avoidance
"When you start a fire, be to the windward side of it. Do not attack from the leeward. If the wind is in the east, begin burning to the east of the enemy, and follow up the attack yourself from that side. If you start the fire on the east side, and then attack from the west, you will suffer in the same way as your enemy."
Portfolio Management and Risk Management Corollary:
Trade with the direction of the price movement resulting from the mania or panic, never against it.
Stay Focused On Achieving Strategic Objectives
"Move not unless you see an advantage; use not your troops unless there is something to be gained; fight not unless the position is critical. No ruler should put troops into the field merely to gratify his own spleen; no general should fight a battle simply out of pique. Anger may in time change to gladness; vexation may be succeeded by content. But a kingdom that has once been destroyed can never come again into being; nor can the dead ever be brought back to life.
Hence the enlightened ruler is heedful, and the good general full of caution. This is the way to keep a country at peace and an army intact."
Portfolio Management and Risk Management Corollary:
The objective of portfolio management and risk management is to secure hard dollar profits that, in turn, are to be utilized/leveraged for constructive purposes. The objective is in no way related to supporting the wasteful trappings of satisfying the ego gratification needs of the portfolio manager, risk manager, or anyone else.
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