Choosing the Path, Finding the Way

I have been exploring the similarities between the practice of the martial arts and the practice of investing in the market. Both begin with a desire to better understand and control a sometimes hostile world. Observing that others have skills that produce the kind of results we would like to see in our own lives, we begin to ask questions. Then, perhaps, we read something in a magazine or a book that sends our life on a new direction.

There are only a finite number of skill sets that can be used in the martial arts. People are typically equipped with two arms and two legs. We can strike with our hands, elbows, knees, and feet. We can grapple with our opponents using our arms, legs, and hands. Therefore martial arts tend to concentrate in striking techniques in arts like western boxing and karate or on grasping techniques in arts like wrestling and judo.

Although the variations are endless, really there are only three proven techniques for investing in the stock market. Buying the Index as taught by Modern Portfolio Theory as taught and practiced by Jack Bogle, the founder of the Vanguard Group; value investing as taught by Benjamin Graham and practiced by his greatest disciple, Warren Buffet; or Technical Analysis as practiced by men like James Simons or by machines, shrouded in secrecy, developed by the great investment banks and hedge funds.

Some body types and personalities seem better suited for some martial arts than for other martial arts. A heavyweight Olympic boxer looks rather different than a heavyweight judo fighter on a national team. So it is with investment styles. A patient disciplined investor who is more concerned with minimizing risk while maximizing a safe return will select a different fighting style than a man with the soul of a poker star.

“I fear not the man who has practiced 10,000 kicks once, but I fear the man who had practiced one kick 10,000 times.”
Bruce Lee

Select a style that seems to suit you. Then begin to practice. In the dojo, literally the place of the way, the student learns basic stances and practices forms before learning to spar. After a couple of years, students will learn the basics of actual fighting skills in a controlled environment with its own etiquette and rules. Finally the student will fight for real in a tournament or in the street.

Achieve at least a working level in one art before attempting to integrate what you have learned in other arts. Bruce Lee began his martial arts career with the study of Wing Chun under the legendary master, Yip Man. As fate would have it, the other students would not practice with Lee because he was part Caucasian. Therefore, Lee was one of only a handful of students personally taught by that master. It was the best of all possible worlds, a great teacher with superbly talented student. Warren Buffet wanted to attend Harvard Business School. He didn’t make the cut, ending up at Columbia as a disciple of the greatest teacher of value investment, Benjamin Graham.

Fighting and investing provide the practitioner with both immediate and long term feedback. There is no debating the results. Either you were knocked out or you knocked out your opponent. Either your investments went up or your investments lost money. Investing and the martial arts both attract a lot of humbugs and con-artists. However charlatans don’t last. They either get their butts kicked in a real fight or they are wiped out in a couple of market cycles. That a martial art has been around for a couple of hundred years is pretty good proof that it works.

“To be bound by traditional martial art style or styles is the way of the mindless, enslaved martial artist. But to be inspired by the traditional martial art and to achieve further heights is the way of genius.”
Bruce Lee

Don’t ever stop learning. No martial art will work in every possible situation. No market strategy will be optimal in every possible market. They all contain strengths and weaknesses. Tae Kwan Do is justly famous for powerful long range kicks. However, short range styles like Wing Chun are specifically designed to allow a smaller opponent to overcome a larger opponent’s natural long range advantage. On the ground in a choke hold applied by a skilled wrestler, Wing Chun won’t help you very much.

Strengths contain weakness. Index funds are based on market cap. Therefore, the fund will hold the largest amount of a stock when it overvalued and the smallest amount when it is undervalued, guaranteeing that your returns will never be optimized. The path of the value investor is littered with what are termed “value traps.” I have stepped in three or four of those along the way. Most people who try to practice technical analysis don’t have the necessary disciplined self control required by that art. They are the day traders that end up in bankruptcy court or committing suicide after losing all their money.

Once you have established an understanding of your base art, improve yourself. Learn something new. Bruce Lee studied the Philippine martial arts (Silat and Eskrima), the Korean art, Tae Kwan Do, and wrestling and jujitsu under the legendary Gene Lebell, the man who choked out Steven Segal (an interesting story). Ultimately, Bruce Lee integrated all he learned into his own art, Jeet Kune Do.

Whether you are studying the martial arts or the marketplace, you are on your own journey. Begin by studying the classics whether in the dojo or the library. Set up a practice portfolio before risking real money. You can go ahead a start a 401 (k) before you know what you are doing if you stick to a simple age appropriate mix of index funds. As you learn and grow you will develop a style that is uniquely your own.

“Adapt what is useful, reject what is useless, and add what is specifically your own.”
Bruce Lee

One more thought: In fighting and investing mistakes are inevitable.

“Mistakes are always forgivable, if one has the courage to admit them.”
Bruce Lee