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The art of investing

A pun on the art of war

What can investors learn from Sun Tzu-the brilliant military strategist?

The art of war is an ancient military strategy book Sun Tzu wrote.

Many of his teachings are relevant to business and investing.

Here are 2 of his lessons for your enjoyment.


(1) The general who Fights first and then tries to win will fail

Remember the old wisdom of choosing your battles wisely?


So why should you buy shares that you know little about? Whether the management is competent and honest people? The company’s debt levels and profile of controlling shareholders among others?


For investing purposes:

You should not buy shares without obtaining a good understanding of the company.


Promises of a pot of gold at the end of the rainbow...

How many times have we heard this before?

“This company’s product is a game changer”,
“This company has a great brand and is certain to succeed!”

A knee jerk reaction would be to throw money at the share.


Investing is not easy.

You spend days researching a company, going through annual reports and finally conclude that the company is not worth investing in.
You have nothing to show for all that effort.

People expect good returns on the stock market but don’t want to put in the hard work.


Buying a share and hoping that the price grows is not investing,

This is purely speculating

More often, this ends up in disappointment.



(2) The good general Wins 1st and then fights.

Winning a war prior to fighting involves tactics, analysis of the enemy's strong and weak and only proceeding to fight battles you are guaranteed victory.

This could mean attacking unguarded or exhausted regiments of the enemy.


Similarly, in today’s stock market, you will find opportunities that the rest of the market has ignored and the companies are massively undervalued.

These opportunities are few and require careful analysis and great courage.

Courage because the rest of the market is somewhere else and you are on your own.

There is apparent safety in numbers or so they say.


Take for example Ellies*:

Ellies has a market capitalisation of R62 million**

The company had R45 million cash on 30 April 2019.

Operations for the year ended 30 April 2019 produced cash of R32 million.


In theory

An investor buying the whole company for R62 million could stick around for 2 years,

Make back the R62 million invested and still have cash from reserves and the rest of the assets and operations of the business to sell and profit.


Undervalued stocks are great in that you pay less for every rand of value received.

If I value Ellies at 4x its cash earnings, its value should be around R240million.

Buying the company at R62million would mean that I have paid 25 cents to obtain R1 value.


*the information provided here is purely illustrative and the analyst should give it much more analysis if interested.

** Correct as at 18 Nov. 19

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