SunTzu &The Art of War -- The Use of Spies
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The Use of Spies
(Employment of Secret Agents)

From Griffith's translation:

"The character used in the title means 'the space between' two objects (such as a crack between two doors) and thus 'cleavage', 'division', or 'to divide'. It also means 'spies', 'spying', or 'espionage'."

Importance Of Information Process And Related Communications Capability

"Raising a host of a hundred thousand men and marching them great distances entails heavy loss on the people and a drain on the resources of the state."

" remain in ignorance of the enemy's condition, simply because one grudges the outlay of a hundred ounces of silver in honors and emoluments, is the height of inhumanity."

Portfolio Management and Risk Management Corollaries:

Successful portfolio management and risk management requires the commitment of substantial financial, information processing, mental,and emotional resources.

Notwithstanding the fact that paying for inside information is illegal, timely acquisition of accurate information is critical. Setting bribery and inside information aside, it is foolish and shortsighted to begrudge the cost of acquiring the appropriate information and related processing capability required to trade successfully.

Means Of Developing Foreknowledge

"What enables the wise sovereign and the good general to strike and conquer, and achieve things beyond the reach of ordinary men, is foreknowledge. Now this foreknowledge cannot be elicited from spirits; it cannot be obtained from experience, nor by any deductive calculation.

Knowledge of the enemy's dispositions can only be obtained from other men. Knowledge of the spirit world is to be obtained by divination; information in natural sciences may be sought by inductive reasoning; the laws of the universe can be verified by mathematical calculation; but the dispositions of the enemy are ascertainable through spies and spies alone."

Portfolio Management and Risk Management Corollaries:

This is a difficult issue given the vast differences in the war culture mores of Sun Tzu's time and the regulatory mores imposed on today's financial market environment. To the extent foreknowledge can be obtained it is invaluable. The issue becomes twofold;

1. Can the information be obtained legally (i.e., within the mores of our culture)?
2. To the extent it can, what is the information, where can it be obtained, and how should it be processed to ensure high probability decisions, actions, and results?

Notwithstanding the cultural differences, I think the critical issue is the development of foreknowledge. It is not, literally, the employment of spies. Spies simply represent an exotic method of gathering information that could eventually turn out to be useful foreknowledge. In this regard, a figurative use of the phrase "spies" would be more appropriate than a literal one.

An advantage of today's environment over Sun Tzu's time is the vast pool of information, on virtually every market (collective enemy's disposition) around the world. For the most part, it is available to anyone who chooses to acquire it. Yet, even with this information, just as in any other era and any human endeavor, there are still winners and losers. The difference is in how the winners process and act on the information.

There are three main types of information available;

1. Supply/demand statistics -- used primarily for fundamental analysis.
2. Price, volume, and open interest -- used primarily for technical analysis.
3. Industry information exchanged amongst industry professionals.

This information can be obtained without the use of literal spies.

The manner in which the information is gathered and processed can be figuratively described as "spies" (sources) providing information and probabilistic assessments (foreknowledge) of future events being developed by the recipient of the information.

Note: Need to develop the difference between inductive and deductive comments, type of foreknowledge being developed, and information processing as communicated by fundamental and technical analysis.

Knowledge, Wisdom, And Understanding Required In Interpreting Information

"Spies cannot be usefully employed without a certain intuitive sagacity. Before using spies we must assure ourselves as to their integrity of character and the extent of their experience and skill."

"Without subtle ingenuity of mind, one cannot make certain of the truth of their reports."

Portfolio Management and Risk Management Corollary:

Just as raw information from spies has to be accurate and properly processed in order in order for probabilities of future events (foreknowledge) to be determined, the quality of today's information also needs to be verified and processed so that probabilities of future events (foreknowledge) can be determined. Information, regardless of how it was obtained, is useless in developing foreknowledge unless it is accurate and interpreted correctly.

Security (Preservation And Protection) For Information And Related Processing Capabilities

"Hence the use of spies, of whom there are five classes: local spies; internal spies; converted spies; doomed spies; surviving spies.

When these five kinds are all at work, none can discover the secret system. This is called 'divine manipulation of the threads.' It is the sovereign's most precious faculty."

"The end and aim of spying in all its five varieties is knowledge of the enemy..."

"Spies are a most important element in war, because upon them depends an army's ability to move."

Portfolio Management and Risk Management Corollaries:

Our success in portfolio management and risk management is directly related to our ability to gain knowledge by gathering and processing information about the markets in such a way as to facilitate timely decision making and action.

Given that our method(s) of gathering and processing of information can be figuratively described as spies providing foreknowledge, we need to be protective of their security.

Just because we may abide by the mores imposed by our culture and regulation, does not mean everyone else will. Therefore, avoid employing people, in sensitive areas, with characteristics that might make them vulnerable to enticement by opposing portfolio management and risk management units.

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