It would be helpful for you to have these two texts, especially Clavell's, to reference as you read through these comments. Once you get past the first section of these comments, Application of Selected Sun Tzu Phrases To Portfolio Management and Risk Management, the following sections are organized to follow the chapter titles in Clavell's book; with Griffith's chapter titles in parentheses, and quotes treated as supplemental information. Within each chapter section, before each Clavell quote or series of quotes, I have inserted a brief heading label that characterizes the substance of the quote(s) and the companion portfolio management and risk management corollaries.

� Selected Application of Selected Sun Tzu Phrases To Portfolio Management and Risk Management

� Chapter I Laying Plans (Estimates)

� Chapter II On Waging War (Waging War)

� Chapter III The Sheathed Sword (Offensive Strategy)

� Chapter IV Tactics (Dispositions)

� Chapter V Energy (Energy)

� Chapter VI Weak Points & Strong (Weaknesses and Strengths)

� Chapter VII Maneuvering (Maneuvre)

� Chapter VIII Variation Of Tactics (The Nine Variables)

� Chapter IX The Army On The March (Marches)

� Chapter X Terrain (Terrain)

� Chapter XI The Nine Situations (The Nine Varieties of Ground)

� Chapter XII Attack By Fire (Attack by Fire)

� Chapter XIII The Use Of Spies (Employment of Secret Agents)

� Summary The Art Of War as applied to Portfolio and Risk Management

Application of Selected Sun Tzu Phrases to Portfolio and Risk Management

Before getting into the quotes and corollaries, there are several selected phrases, employed by translators of Sun Tzu's writings, that need to be defined within the context of contemporary portfolio management and risk management situations: Enemy Other participants in the market(s), not the market environment itself. Terrain The virtual terrain created by participants interacting in the market place. Means of providing us with information regarding what other market participants are doing. Defeat Catastrophic loss of business or trading capital. Mistake Given that to be human is to err, I view "mistake" to represent a series of errors, compounded in such a way as to result in catastrophic loss of business or trading capital. "Mistakes" of a catastrophic nature tend to result from failure to capture and isolate our intentions (plans, strategies, and tactics). I am not viewing "mistake" as an error that simply results from being human and one from which we can recover and learn. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter I : Laying Plans (Estimates)

From Griffith's translation: "The title means 'reckoning', 'plans', or 'calculations'. In the Seven Military Classics edition the title is 'Preliminary Calculations'. The subject first discussed is the process we define as an Estimate (or Appreciation) of the Situation." Rational Analysis "The art of war is of vital importance to the state. It is a matter of life and death, a road either to safety or to ruin. Hence under no circumstances can it be neglected." From Griffith's commentary on Sun Tzu On War: "The opening verse of Sun Tzu's classic is the basic clue to his philosophy. War is a grave concern of the state; it must be thoroughly studied. Here is recognition--and for the first time--that armed strife is not a transitory aberration but a recurrent conscious act and therefore susceptible to rational analysis." Portfolio Management and Risk Management Corollary: Profitable portfolio management and risk management results are critical to maintaining and growing a portfolio. To be successful in this regard requires on-going, conscious risk taking. Financial markets lend themselves to rational phase, section, pattern, swing, and volatility analysis, and appropriate strategic and tactical plan development and implementation. Strategic Planning "The general who wins a battle makes many calculations in his temple before the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat; how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose." From Griffith's Preface: "Sun Tzu was convinced that careful planning based on sound information of the enemy would contribute to a speedy military decision." Portfolio Management and Risk Management Corollaries: Always manage within the context of a written strategic plan that has been prepared from an objective analysis of market information. The plan should include very specific guidelines for money management, trade selection, risk control, and profit taking. Be able to say yes to the general question -- Can every single market execution that has been implemented be based on a specific procedure that was intended as a part of a preconceived plan to react to particular market behavior in a specified manner. More specifically; 1. Did the day and price the position was entered make sound technical sense? 2. Did the day and price the position was liquidated make sound technical sense? 3. Did the degree of capital commitment to the trading situation make sound money management sense? Counsel From Advisors From Griffith's comments on Wu Ch'i's 'Art of War' in the Planning Operations Against Other States chapter:

"The Marquis of Wu was once deliberating on state affairs and none of his ministers' opinions was equal to his. He retired from the court looking pleased. Wu Ch'i advanced and said: 'Anciently, King Chuang of Ch'u was deliberating on state affairs. None of his ministers' opinions could equal his. He retired from the council looking worried. Lord Shen asked: "Why does the Sovereign look worried?" The King replied: "This humble one has heard that the world never lacks sages and that a country never lacks wise men. One able to get a sage for his teacher will be a King; one able to get a wise man for his friend, a Lord Protector. Now I have no talent, and still my ministers cannot equal me. Ch'u is in danger." This is what worried King Chuang of Ch'u, but pleases you. I, your servant, am secretly apprehensive.' Whereupon Marquis Wu looked ashamed." Portfolio Management and Risk Management Corollary: Always endeavor to associate with, ally with, and seek counsel from more experienced, more intelligent and better informed people than yourself. Tactical Adaptation To Changing Circumstances From Griffith's introductory commentary on Mao Tse-Tung's use of Sun Tzu: "One of the most difficult problems which confronts any commander who has committed his forces in accordance with a well-developed plan is to alter this in the light of changing circumstances. Sun Tzu recognized the inherent difficulties, both intellectual and physical, and repeatedly emphasized that the nature of war is ceaseless change. For this reason operations require continuous review and readjustment." Portfolio Management and Risk Management Corollary: Incorporate sufficient flexibility to adapt strategies and tactics to make constructive use of unforeseen events, both favorable and unfavorable, as an inherent element of all plans, strategies, and tactics. Constant Factors "The art of war is governed by five constant factors, all of which need to be taken into account. They are: the Moral Law; Heaven; Earth; the Commander; Method and discipline." Portfolio Management and Risk Management Corollary: The art of portfolio management and risk management is governed by five constant factors as well. They are: Ethical conduct; Adaptation to events beyond human control; Knowledge and suitability of strategies and tactics to market conditions; Competent management; Disciplined organization and financial management. Ethical Conduct "The Moral Law causes the people to be in complete accord with their ruler..." From Griffith's translation: "Here Tao is translated 'moral influence'. It is usually rendered as 'The Way', or 'The Right Way'. Here it refers to the morality of government; specifically to that of a sovereign. If the sovereign governs justly, benevolently, and righteously, he follows the Right Path or the Right Way, and thus exerts a superior degree of moral influence." Portfolio Management and Risk Management Corollary: Regardless of philosophical or religious inclination, employ all resources in a moral and ethical manner at all times. Be generous in rewarding all who constructively participate in portfolio management and risk management efforts, and be generous in supporting worthy endeavors regardless of material return.

Perception Of, And Adaptation To, Events Beyond Human Control "Heaven signifies night and day, cold and heat, times and seasons." From Griffith's translation: "It is clear that the character t'ien (Heaven) is used in this verse in the sense of 'weather', as it is today." "By weather I mean the interaction of natural forces; the effects of winter's cold and summer's heat and the conduct of military operations in accordance with the seasons." Portfolio Management and Risk Management Corollaries: Just as we have no control over the weather, we have no control over where the market goes, yet we can endeavor to forecast both to create a guide for our portfolio management and risk management activities. Even though we are unable to control market influencing forces, we still need to make our best forecast of those forces, and assess our exposure, so as to facilitate our strategic planning and tactical adjustments. Realistically, our forecasts will, on occasion, be wrong. Therefore, the related strategies and tactics may, for a time, also be unsuitable to the situation. The key point is not the rightness or wrongness of our forecast. Rather, it is the need for us to maintain the financial and emotional flexibility to adapt our strategies and tactics to accommodate the realities of the situation. In summary, keep our energy focused on having a positive influence on the portfolio management and risk management results produced by the elements we can control, i.e., probabilistic forecasts, risk assessments, strategies, and tactics, as opposed to allowing our energy to be dissipated by concerns over events beyond our control, e.g., weather, fundamental developments, price, rate, and volatility movements. Knowledge And Suitability Of Strategies And Tactics To Market Conditions "Earth comprises distances, great and small; danger and security; open ground and narrow passes; the chance of life and death." From Griffith's translation: "Mei Yao-ch'en:...When employing troops it is essential to know beforehand the conditions of the terrain. Knowing the distances, one can make use of an indirect or a direct plan. If he knows the degree of ease or difficulty of traversing the ground he can estimate the advantages of using infantry or cavalry. If he knows where the ground is constricted and where open he can calculate the size of force appropriate. If he knows where he will give battle he knows when to concentrate or divide his forces." Portfolio Management and Risk Management Corollary Study and know the main fundamental supply/demand and price movement behavior characteristics (profile) exhibited by each market traded. This is essential to ensuring the suitability of strategy and tactics to the market's phase, section, pattern, swing level and volatility. Competent Management "The Commander stands for the virtues of wisdom, sincerity, benevolence, courage, and strictness." From Griffith's translation: "Tu Mu:... If wise, a commander is able to recognize changing circumstances and to act expediently. If sincere, his men will have no doubt of the certainty of rewards and punishments. If humane, he loves

mankind, sympathizes with others, and appreciates their industry and toil. If courageous, he gains victory by seizing opportunity without hesitation. If strict, his troops are disciplined because they are in awe of him and are afraid of punishment." Portfolio Management and Risk Management Corollary: Strive to develop a balanced management skill set to enable prudent employment of all portfolio management and risk management resources. Disciplined Organization And Financial Management "By Method and discipline are to be understood the marshaling of the army in its proper subdivisions, the gradations of rank among the officers, the maintenance of roads by which supplies may reach the army, and the control of military expenditure." Portfolio Management and Risk Management Corollary: Discipline, efficient and effective organization, communication, and suitable utilization of all resources (people, plans, tools, capital) are all critical to portfolio management and risk management success. Deception And "Shaping" "All warfare is based on deception. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near. Hold out baits to entice the enemy. Feign disorder, and crush him. If he is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is of choleric temper, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected". Portfolio Management and Risk Management Corollary: Although, as individual portfolio managers and risk managers, we have limited ability to deceive and manipulate the markets, however, we can minimize the opportunity for other market participants to impair our success by keeping our strategies and tactics to ourselves. Allow strategies and tactics to become apparent only when results have been secured and if disclosure enables rational and gainful business development efforts, or when regulatory reporting requirements necessitate. Active Portfolio Management and Risk Management Corollary: When possible, and economically advantageous, establish multi-faceted positions through trusted intermediaries to minimize the opportunities for others to determine our strategies and tactics. This will also enable flexibility in adapting to evolving market conditions. Avoidance Of Being Deceived And "Shaped" Griffith's commentary on Sun Tzu On War: "The same factors determine the 'shape' of the opposing armies. The prudent commander bases his plan on his antagonist's 'shape'. 'Shape him', Sun Tzu says. Continuously concerned with observing and probing his opponent, the wise general at the same time takes every possible measure designed to prevent the enemy from 'shaping' him." "The wise general cannot be manipulated." "His primary target is the mind of the opposing commander; the victorious situation, a product of his creative imagination. Sun Tzu realized that an indispensable preliminary to battle was to attack the mind of the enemy."

Portfolio Management and Risk Management Corollary: Given our limited ability to deceive or "shape" the markets, and the markets seeming unlimited ability to deceive or "shape" us (through surprises, rumors, panics, false moves, etc.), be prepared with a management process that immediately enables us to recognize when we have been deceived. Furthermore, when we have been deceived, this process should enable us to maintain the presence of mind and discipline to minimize the damage from adverse events, and, capitalize on unexpected opportunities. To avoid being deceived, we need to be continually improving our individual and corporate strengths and weaknesses. The issues to be addressed in this regard include; our emotions -- ego, hope, fear, and, greed; our focused knowledge and experience; our understanding of human nature; our understanding of each market's phase, section, pattern, swing, and volatility characteristics, and idiosyncrasies (e.g. contract and government program specifications); our understanding of suitable strategies, tactics; and, our awareness of opposing participants' positions and strategies. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter II : On Waging War (Wagin War)

Focus on the object of war and proper engagement. Stay Focused On Strategic Objectives "In war, then, let your great object be victory, not lengthy campaigns." Portfolio Management and Risk Management Corollary: Always keep attention and action focused on achieving strategic objectives as promptly as possible, (within what the market will allow), as opposed to becoming distracted by the nuances and intricacies of implementing complex strategies and tactics. Reward/Risk "When you engage in actual fighting, if victory is long in coming, the men's weapons will grow dull and their ardor will be dampened. If you lay siege to a town, you will exhaust your strength, and if the campaign is protracted, the resources of the state will not be equal to the strain. Never forget: When your weapons are dulled, your ardor dampened, your strength exhausted, and your treasure spent, other chieftains will spring up to take advantage of your extremity. Then no man, however wise, will be able to avert the consequences that must ensue." "In all history, there is no instance of a country having benefited from prolonged warfare." Portfolio Management and Risk Management Corollary: When evaluating and implementing portfolio management and risk management strategies be sure to balance time factors and resources required with expected rewards and risks. If the rewards of the strategy are not forthcoming within the expected timeframe, withdraw in order to regroup and refresh resources in preparation for future engagements. Ensure Appropriate Financing "The skillful general does not raise a second levy, neither are his supply wagons loaded more than twice." Portfolio Management and Risk Management Corollary: Assuming adherence to the principles in the Laying Plans section, ensure appropriate financing and resources prior to strategy implementation. Avoid exhausting finances and other resources beyond what was envisioned and risked in the original strategy. Timing "Once war is declared, he (the general) will not waste precious time in waiting for reinforcements, nor will he turn his army back for fresh supplies, but crosses the enemy's frontier without delay. The value of time--that is, being a little ahead of your opponent--has counted for more than either numerical superiority or the nicest calculations with regard to commissariat." From Griffith's translation: "An attack may lack ingenuity, but it must be delivered with supernatural speed."

Portfolio Management and Risk Management Corollary: Timing, in almost every aspect of portfolio management and risk management, is critical, especially given that we will always be in the financial and numerical minority. Therefore, when a decision has been made, do not equivocate, implement it promptly. Self-Sustaining Strategies "Bring war material with you from home, but forage on the enemy. One cartload of the enemy's provisions is equivalent to twenty of one's own, ..." Portfolio Management and Risk Management Corollaries: Allow for adequate financing from own reserves to initiate portfolio management and risk management strategies. Make use of every opportunity, within every strategy, to sell time value (a wasting asset) to secure option premium income from the opposition so as to finance the maintenance of the strategy. Reward, Replenish, And Invest In Support Structure "...when you capture spoils from the enemy, they must be used as rewards, so that all your men may have a keen desire to fight, each on his own account." Portfolio Management and Risk Management Corollary: After a successful campaign, be sure to allocate appropriate parts of the rewards to all resources employed in the portfolio management and risk management activity; replenish, and perhaps grow, liquidity account; increase longer term diversified investment portfolio; reward associates; replenish spiritual, emotional, mental, and physical reserves; and, invest in up-grading portfolio management and risk management support structure. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter III: The Sheathed Sword (Offensive Strategy)

Focus is on knowledge of self and opposition, and the accomplishment of objectives by informed pre-positioning so as to minimize the need to engage in costly conflict. Importance Of Knowledge, Wisdom, And Understanding "If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle." Portfolio Management and Risk Management Corollary: Have a sound portfolio management and risk management philosophy and money management discipline, and know them thoroughly. Know your own psychological ability to implement every strategy and tactic within the philosophy and discipline. Have an analytic framework that allows for timely evaluation and measurement of market activity, and the development, implementation of, and maintenance of suitable strategies and tactics. Patience, Positioning, And Timing "To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting." "Thus the highest form of generalship is to balk the enemy's plans; the next best is to prevent the junction of the enemy's forces; the next in order is to attack the enemy's army in the field; and the worst policy of all is to besiege walled cities,..." From Griffith's commentary on Sun Tzu On War: "Never to be undertaken thoughtlessly or recklessly, war was to be preceded by measures designed to make it easy to win." "Thus without battle his (the opposition) army was conquered, his cities taken and his state overthrown. Only when the enemy could not be overcome by these means was there recourse to armed force, which was to be applied so that victory was gained: (a) in the shortest possible time; (b) at the least possible cost in lives and effort; (c) with infliction on the enemy of the fewest possible casualties." Portfolio Management and Risk Management Corollaries: It is difficult to imagine how an individual portfolio manager or risk manager could break the market's resistance. However, through patience, positioning, and timing an individual trader can capitalize on breaks and opportunities provided by the markets. Although supreme excellence is in succeeding without resorting to battle (with a sheathed sword), most of THE ART OF WAR is devoted to preparation for and engagement in battle. Furthermore, it is difficult to achieve portfolio management and risk management objectives in the financial markets without taking a position (unless it is to avoid a loss). Therefore, endeavor to manage without being drawn into protracted high risk/low return strategies, thereby minimizing the need to "unsheathe the sword".

Essentials For Success "...we may know that there are five essentials for victory: He will win who knows when to fight and when not to fight. He will win who knows how to handle both superior and inferior forces. He will win whose army is animated by the same spirit throughout all its ranks. He will win who, prepared himself, waits to take the enemy unprepared. He will win who has military capacity and is not interfered with by the sovereign." Portfolio Management and Risk Management Corollary: Have a well organized plan, stay focused on strategies and tactics suitable to market conditions, maintain patience in waiting for the markets to provide a qualifying high reward/low risk situation, and the discipline to execute again and again. Always Have An "Edge" "Though an obstinate fight may be made by a small force, in the end it must be captured by the larger force." Portfolio Management and Risk Management Corollary: As an individual portfolio manager or risk manager, we will always be a "small force" numerically and financially. However, in portfolio management and risk management, focused knowledge and experience are substantially more important in defining "large force". Therefore, the objective is to continually build our focused knowledge and experience force so as to ensure that we will always be the "large force" in all strategies we choose to implement. Focused Application Of Knowledge And Experience From Griffith's Preface: "Sun Tzu was well aware that combat involves a great deal more than the collision of armed men. 'Numbers alone', he said, 'confer no advantage.' He considered the moral, intellectual, and circumstantial elements of war to be more important than the physical, and cautioned kings and commanders not to place reliance on sheer military power." Portfolio Management and Risk Management Corollary: Even if the amount of capital is large, discipline and ethical application of focused knowledge and experience is more consequential to the eventual success of the portfolio management and risk management process. Opportunistic Flexibility "Humanity and justice are the principles on which to govern a state, but not an army; opportunism and flexibility, on the other hand, are military rather than civic virtues." Portfolio Management and Risk Management Corollary: The way to capitalize on the endless opportunities created by ever-changing market conditions, is to become engaged as a part of a well thought out portfolio management and risk management plan and be flexible in adapting tactics to market conditions within the context of each pre-determined strategy. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter IV: Tactics (Dispositions)

From Griffith's translation: "The character hsing means 'shape', 'form', or 'appearance' or in a more restricted sense, 'disposition' or 'formation'. The Martial Classics edition apparently followed Ts'ao Ts'as and titled the chapter Chun Hsing 'Shape [or 'Dispositions'] of the Army'. As will appear, the character connotes more than mere physical dispositions." Opportunistic Flexibility In Adapting Strategies And Tactics To Situation "The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy." "To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself." "Security against defeat implies defensive tactics; ability to defeat the enemy means taking the offensive." "Hence the skillful fighter puts himself into a position that makes defeat impossible and does not miss the moment for defeating the enemy." Portfolio Management and Risk Management Corollaries: Have a well organized plan. Select and test the alternative strategies that are suitable to the market phase, section, swing level, and volatility. Have the patience to wait for the markets to provide qualifying high reward/low risk situations for implementing the selected strategy. Have the discipline to execute again and again. Be prompt in making tactical adjustments in implementing strategies as market conditions change (opportunity perceived, reaction time, and, results). Adhere to sound money management practices to avoid catastrophic loss of capital, and especially, Cut losses short and let profits run -- large losses are the most counterproductive outcome possible. Intelligent Questioning Of All Situations "To see victory only when it is within the ken of the common herd is not the acme of excellence." Portfolio Management and Risk Management Corollaries: Herd instinct. Market discounting. Contrary opinion. Sustainable Success "Nor is it the acme of excellence if you fight and conquer and the whole empire says, 'Well done!' True excellence is to plan secretly, to move surreptitiously, to foil the enemy's intentions and balk his schemes, so that at last the day may be won without shedding a drop of blood." "What the ancients called a clever fighter is one who not only wins, but excels in winning with ease. But

his victories bring him neither reputation for wisdom nor credit for courage. For in as much as they are gained over circumstances that have not come to light, the world at large knows nothing of them, and he therefore wins no reputation for wisdom; and inasmuch as the hostile state submits before there has been any bloodshed, he receives no credit for courage." Portfolio Management and Risk Management Corollary: The objective of portfolio management is to secure hard dollar rewards 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 need of the portfolio manager, risk manager, or anyone else. Avoidance Of Catastrophic Loss "He (the clever fighter) wins his battles by making no mistakes. Making no mistakes is what establishes the certainty of victory, for it means conquering an enemy that is already defeated." Portfolio Management and Risk Management Corollary: Seldom has a human being accomplished anything without making a mistake. Accordingly, I have interpreted the use of the phrase "mistakes" to mean catastrophic mistakes leading to defeat, not the mistakes that come from being human. Mistakes leading to catastrophic loss of capital tend to result from our failure to capture and isolate our intentions (plans, strategies, and tactics). Therefore, this Corollary becomes sevenfold; 1. Study past market conditions to know how each market tends to behave in given situations and conditions. 2. Maintain discipline of strategy implementation guidelines and acceptable tactical adjustments. 3. Avoid repeating and compounding small mistakes to the point that catastrophic loss of capital results. 4. Deliberately study every strategy and tactic implemented and endeavor to learn from it. 5. Accept the inevitability of being wrong. Conserve capital during the bad times by limiting losses to a predetermined percent of capital. 6. Do not necessarily equate losses to mistakes or defeat. Within the context of our philosophy, losses, when controlled as a part of adapting to market conditions, are simply a part of the cost of doing business. 7. To be a successful portfolio manager or risk manager, be willing and able to take losses with limited emotional response. Ethical Conduct "The consummate leader cultivates the Moral Law and strictly adheres to method and discipline; thus it is in his power to control success." From Griffith's translation: "Those skilled in war cultivate the Tao and preserve the laws and are therefore able to formulate victorious policies. Tu Mu: The Tao is the way of humanity and justice; 'laws' are regulations and institutions. Those who excel in war first cultivate their own humanity and justice and maintain their laws and institutions. By these means they make their governments invincible." Portfolio Management and Risk Management Corollary: Again, regardless of philosophical or religious inclination, employ all resources in a moral and ethical manner at all times. Be generous in rewarding all who constructively participate in portfolio management and risk management efforts, and be generous in supporting worthy endeavors regardless of material return. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter V: Energy (Energy)

From Griffith's translation: "Shih, the title of this chapter, means 'force', 'influence', 'authority', 'energy'. The commentators take it to mean 'energy' or 'potential' in some contexts and 'situation' in others." Organizational Management "The control of a large force is the same in principle as the control of a few men: it is merely a question of dividing up their numbers. Fighting with a large army under your command is not different from fighting with a small one: it is merely a question of instituting signs and signals." Portfolio Management and Risk Management Corollary: Regardless of the size of the portfolio, have a well organized written strategic plan with very specific guidelines for money management, trade selection, risk control, and profit taking. Suitability Of Strategies And Tactics To Situation "To ensure that your whole host may withstand the brunt of the enemy's attack and remain unshaken, use maneuvers direct and indirect. In all fighting, the direct method may be used for joining battle, but indirect methods will be needed in order to secure victory. Indirect tactics, efficiently applied, are as inexhaustible as Heaven and Earth, unending as the flow of rivers and streams; like the sun and moon, they end but to begin anew; like the four seasons, they pass away but to return once more." "...these two in combination give rise to an endless series of maneuvers. The direct and indirect lead on to each other in turn. It is like moving in a circle--you never come to an end. Who can exhaust the possibilities of their combination?" "Hiding order beneath the cloak of disorder is simply a question of subdivision; concealing courage under a show of timidity presupposes a fund of latent energy; masking strength with weakness is to be effected by tactical dispositions." From Griffith's translation: "The concept expressed by cheng, 'normal' (or 'direct') and ch'i, 'extraordinary' (or 'indirect') is of basic importance. The normal (cheng) force fixes or distracts the enemy; the extraordinary (ch'i) forces act when and where their blows are not anticipated. Should the enemy perceive and respond to a ch'i maneuver in such a manner as to neutralize it, the maneuver would automatically become cheng." Portfolio Management and Risk Management Corollary: Use option oriented strategies (indirect) to establish positions that can be converted to outright long or short positions in the underlying (direct) as the market reveals itself. Timely Implementation "The quality of decision is like the well-timed swoop of a falcon that enables it to strike and destroy its victim." "Energy may be likened to the bending of a crossbow; decision, to the releasing of the trigger." Portfolio Management and Risk Management Corollary:

Quality analysis leads to the decision to act. Once the decision to act has been made, implement promptly and without fanfare. Leverage By Coordinating Complimentary Skill Sets "The clever combatant looks to the effect of combined energy, and does not require too much from individuals. He takes individual talent into account, and uses each man according to his capabilities. He does not demand perfection from the untalented." "When he utilizes combined energy, his fighting men become, as it were, like rolling logs or stones." "Thus the energy developed by good fighting men is as the momentum of a round stone rolled down a mountain thousands of feet in height." Portfolio Management and Risk Management Corollary: Discipline, efficient, and effective organization and utilization of all resources (people, plans, tools, capital) in the capacity, to which they are best suited, is critical to leveraging portfolio management and risk management success. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter VI: Weak Points & Strong (Weakness and Strengths)

More tactical commentary. Suitability Of Strategies And Tactics To Situation "That the impact of your army may be like a grindstone dashed against an egg, use the science of weak points and strong." "You may advance and be absolutely irresistible if you make for the enemy's weak points; you may retire and be safe from pursuit if your movements are more rapid than those of the enemy." "An army may march great distances without distress if it marches through country where the enemy is not. You can be sure of succeeding in your attacks if you only attack places that are undefended. You can ensure the safety of your defense if you only hold positions that cannot be attacked. That general is skillful in attack whose opponent does not know what to defend; and he is skillful in defense whose opponent does not know what to attack." Portfolio Management and Risk Management Corollaries: Thoroughly know the characteristics of each market being traded. Judiciously apply resources by selecting and implementing those strategies that are suitable to the market's phase, section, pattern, swing level, and volatility. Likewise, avoid getting the bias of the position cross-wise with the market's price and volatility bias. Be quick to minimize losses if strategy proves to be unsuitable to phase, pattern, or volatility. Timing "Whoever is first in the field and awaits the coming of the enemy will be fresh for the fight; whoever is second in the field and has to hasten to battle will arrive exhausted." Portfolio Management and Risk Management Corollaries: Attempt to position, prior to a break, with option spreads and/or pre-established orders to enter based on confirmation. Avoid "chasing" a market to get in. Avoidance Of Being Deceived And "Shaped" "Therefore the clever combatant imposes his will on the enemy, but does not allow the enemy's will to be imposed on him." Portfolio Management and Risk Management Corollary: Again, the individual portfolio manager and risk manager has severely limited, if any, ability to impose his will on the opposing traders. Mirror Portfolio Management and Risk Management Corollary: The key is to actively take preventative measures to thwart the opposing participants' ability to entice and deceive you into implementing inappropriate strategies, and in so doing, imposing their will on you.

Maintain An "Edge" Through Focused Knowledge And Experience "By discovering the enemy's dispositions and remaining invisible ourselves, we can keep our forces concentrated, while the enemy's must be divided." "Hence there will be a whole pitted against separate parts of a whole, which means that we shall be many to the enemy's few. And if we are able thus to attack an inferior force with a superior one, our opponents will be in dire straits." "Numerical weakness comes from having to prepare against possible attacks; numerical strength from compelling our adversary to make these preparations against us." "Though the enemy be stronger in numbers, we may prevent him from fighting. Scheme so as to discover his plans and the likelihood of their success. Rouse him, and learn the principle of his activity or inactivity. Force him to reveal himself, so as to find out his vulnerable spots. Carefully compare the opposing army with your own, so that you may know where strength is superabundant and where it is deficient." Portfolio Management and Risk Management Corollaries: Thoroughly analyze market conditions and categorize (profile) its characteristics. Preserve capital through adherence to prudent money management principles. Through patience and our "superior force" of focused knowledge and experience, select and implement strategies and tactics suitable to the opportunities provided by the market phase, section, pattern, swing level, and volatility. Opportunistic Flexibility In Adapting Strategies And Tactics To Situation "What the multitude cannot comprehend is how victory may be produced for them out of the enemy's own tactics." "All men can see the individual tactics necessary to conquer, but almost no one can see the strategy out of which total victory is evolved." "Military tactics are like unto water; for water in its natural course runs away from high places and hastens downward. So in war, the way is to avoid what is strong and to strike at what is weak. Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing." "Therefore, just as water retains no constant shape, so in warfare there are no constant conditions...He who can modify his tactics in relation to his opponent, and thereby succeed inwinning, may be called a heaven-born captain." From Griffith's commentary on Sun Tzu On War: "Sun Tzu's theory of adaptability to existing situations is an important aspect of his thought. Just as water adapts itself to the conformation of the ground, so in war one must be flexible; he must often adapt his tactics to the enemy situation. This is not in any sense a passive concept, for if the enemy is given enough rope he will frequently hang himself. Under certain conditions one yields a city, sacrifices a portion of his force, or gives up ground in order to gain a more valuable objective. Such yielding therefore masks a deeper purpose, and is but another aspect of the intellectual pliancy which distinguishes the expert in war."

Portfolio Management and Risk Management Corollaries: Maintain a strategic focus at all times, regardless of the circumstances. The way to capitalize on the endless opportunities created by ever-changing market conditions, is to become engaged as a part of a well thought out trading plan and be flexible in adapting to conditions within the context of the plan. In so doing we will become a part of the markets' energy flow and, thereby, continually improve our ability to successfully understand and utilize market conditions to our advantage. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter VII: Maneuvering (Maneuvre)

From Griffith's translation: "Lit. 'struggle' or 'contest' of the armies' as each strives to gain an advantageous position." Disciplined Organization "Without harmony in the state, no military expedition can be undertaken; without harmony in the army, no battle array can be formed." "In war, the general receives his commands from the sovereign. Having collected an army and concentrated his forces, he must blend and harmonize the different elements thereof before pitching his camp" Portfolio Management and Risk Management Corollary: Again, disciplined, efficient, and effective organization and utilization of all resources (people, plans, tools, capital) is critical to leveraging portfolio management and risk management success. Opportunistic Flexibility In Adapting Strategies And Tactics To Situation "After that comes tactical maneuvering, and there is nothing more difficult. The difficulty consists in turning the devious into the direct, and misfortune into gain." Portfolio Management and Risk Management Corollaries: Use option oriented strategies (indirect) to establish positions that can be converted to outright long or short positions in the underlying (direct) as the market reveals itself. The way to capitalize on the endless opportunities created by ever-changing market conditions, is to become engaged as a part of a well thought out portfolio management and risk management plan and be flexible in adapting strategies and tactics to conditions within the context of the plan. Inherent Advantages And Disadvantages "Maneuvering with an army is advantageous; with an undisciplined multitude, most dangerous." From Griffith's translation: "...This too literal translation completely misses the point. Ts'ao Ts'ao's interpretation is surely more satisfactory. The verse is a generalization which introduces what follows. A course of action which may appear advantageous usually contains within itself the seeds of disadvantage. The converse is also true." Portfolio Management and Risk Management Corollaries: And again, disciplined, efficient, and effective organization and utilization of all resources (people, plans, tools, capital) is critical to leveraging portfolio management and trading success. Regardless of how promising a market situation appears, always establish protective loss measures. Also, regardless of how bleak a position appears, always be prepared to act on an unexpected advantage afforded by the market. Timing "If you set a fully equipped army to march in order to snatch an advantage, the chances are that you will be too late."

Portfolio Management and Risk Management Corollary: Again, avoid "chasing" a market to get in. Proper Support "On the other hand, to detach a flying column for the purpose (to snatch an advantage) involves the sacrifice of its baggage and stores." "An army without its baggage train is lost; without provisions it is lost; without bases of supply it is lost." Portfolio Management and Risk Management Corollary: Preserve capital through proper support, prudent strategy and tactic selection, and adherence to prudent money management principles. Relationship Management "We cannot enter into alliances until we are acquainted with the designs of our neighbors." Portfolio Management and Risk Management Corollary: Just as we need to know ourselves and the markets we trade in order to succeed, we need to know all trading partners we align with. Develop Knowledge Through Study "We are not fit to lead an army on the march unless we are familiar with the face of the country--its mountains and forests, its pitfalls and precipices, its marshes and swamps." "We shall be unable to turn natural advantages to account unless we make use of local guides." Portfolio Management and Risk Management Corollaries: Be thoroughly informed, both technically and fundamentally, of all major information elements that influence the decision making processes of the participants in each market being traded. Systematically organize the information in a form that facilitates timely decision making and implementation, as opposed to inhibiting it. Trading on "inside" information is illegal. However, by adhering to the two foregoing points, we can create "local guides" out of how we process and organize market related information. Develop thought of overlaying significant points of fundamental information on swing charts. Deception And "Shaping" "In war, practice dissimulation and you will succeed." "Let your plans be dark and impenetrable as night" "He will conquer who has learned the artifice of deviation." Passive Portfolio Management and Risk Management Corollary: Keep your strategies and tactics to yourself. Allow them to become apparent only when results have

been secured. Active Portfolio Management and Risk Management Corollary: When possible, establish multi-faceted option positions to enable flexibility in adapting to evolving market conditions. Mirror Portfolio Management and Risk Management Corollary: Given our limited ability to deceive the markets and the markets seeming unlimited ability to deceive us, be prepared against being deceived by the opposition by being as fully informed of their characteristics and positions as is possible. Strategic Planning "Ponder and deliberate before you make a move." Portfolio Management and Risk Management Corollary: Have a written strategic plan with very specific guidelines for money management, trade selection, risk control, and profit taking. Timely Implementation "Move only if there is a real advantage to be gained." "...when you move, fall like a thunderbolt." Portfolio Management and Risk Management Corollary: Once an opportunity has been identified, a strategy has been selected, and tactics have been decided on, implement promptly and without hesitation. Opportunistic Flexibility In Adapting Strategies And Tactics To Situation "Whether to concentrate or to divide your troops must be decided by circumstances." Portfolio Management and Risk Management Corollaries: Again, maintain a strategic focus at all times, regardless of the circumstances. Again, the way to capitalize on the endless opportunities created by ever-changing market conditions, is to become engaged as a part of a well thought out portfolio management and risk management plan and be flexible in adapting to conditions within the context of the plan. In so doing you will become a part of the markets' energy flow and, thereby, continually improve your ability to successfully interact with market forces. Reward, Replenish, Invest "When you plunder a countryside, let the spoil be divided among your men; when you capture new territory, cut it up into allotments for the benefit of the soldiery." Portfolio Management and Risk Management Corollaries: Replenish, and perhaps grow, liquidity account. Increase longer term diversified investment portfolio.

Reward associates. Replenish spiritual, emotional, mental, and physical reserves. Invest in up-grading portfolio management and risk management support structure. Organizational Management "On the field of battle, the spoken word does not carry far enough; hence the institution of gongs and drums. Nor can ordinary objects be seen clearly enough; hence the institution of banners and flags. Gongs and drums, banners and flags, are means whereby the ears and eyes of the host may be focused on one particular point. The host thus forming a single united body, it is impossible either for the brave to advance alone, or for the cowardly to retreat alone." Portfolio Management and Risk Management Corollaries: Have a written plan and very specific guidelines for money management, trade selection, and profit taking. Ensure that every member of the portfolio management and risk management unit clearly understands what is to be done. Discipline, efficient and effective organization, communication, and utilization of all resources (people, plans, tools, capital) is critical to leveraging portfolio management and risk management success. Planning, Patience, Timing "Now a soldier's spirit is keenest in the morning; by noonday it has begun to flag; and in the evening, his mind is bent only on returning to camp. A clever general, therefore, avoids an army when its spirit is keen, but attacks it when it is sluggish and inclined to return. This is the art of studying moods." "Disciplined and calm, he awaits the appearance of disorder and hubbub among the enemy. This is the art of retaining self-possession." "To be near the goal while the enemy is still far from it, to wait at ease while the enemy is toiling and struggling, to be well fed while the enemy is famished--this is the art of husbanding one's strength." "To refrain from intercepting an enemy whose banners are in perfect order, to refrain from attacking an army drawn up in calm and confident array--this is the art of studying circumstances." "It is a military axiom not to advance uphill against the enemy, nor to oppose him when he comes downhill." Portfolio Management and Risk Management Corollaries: Have a well organized strategy, the patience to wait for the markets to provide a qualifying high reward/low risk trade, and the discipline to execute again and again. Through planning, patience, and our "superior force" of focused knowledge and experience, select and implement strategies and tactics suitable to the opportunities provided by the market phase, pattern, and volatility. In so doing, will avoid getting crosswise of the markets' strength. Preserve capital through adherence to prudent money management principles, so that when a mistake is made the financial consequence will be small. Avoidance Of Being Deceived And "Shaped" "Do not pursue an enemy who simulates flight; do not attack soldiers whose tempers are keen. Do not swallow a bait offered by the enemy."

Portfolio Management and Risk Management Corollary: Actively take preventative measures to thwart the opposing participants' ability to entice and deceive you into implementing inappropriate strategies and tactics. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter VIII: Variation of Tactics (The Nine Variables)

More tactical commentary. Catastrophic Loss Avoidance "There are roads that must not be followed, towns that must not be besieged." "There are armies that must not be attacked, positions that must not be contested, commands of the sovereign that must not be obeyed." Portfolio Management and Risk Management Corollary: There are times when it is best to be neutral, i.e., have no market positions. This is especially true when the only trades available are of the high risk/low reward variety. Opportunistic Flexibility In Adapting Strategies And Tactics To Situation "The general who thoroughly understands the advantages that accompany variation of tactics knows how to handle his troops. The general who does not understand these may be well acquainted with the configuration of the country, yet he will not be able to turn his knowledge to practical account." Portfolio Management and Risk Management Corollaries: Adjust the tactical implementation of each strategy to contemporary market conditions (phase, section, pattern, swing level, and volatility). In addition to being well educated and informed regarding markets, current conditions, and strategy, the successful portfolio manager and risk manager also needs the psychological capacity and discipline to adapt his implementation tactics. Inherent Advantages And Disadvantages "In the wise leader's plans, considerations of advantage and of disadvantage will be blended together. If our expectation of advantage be tempered in this way, we may succeed in accomplishing the essential part of our schemes. If, on the other hand, in the midst of difficulties we are always ready to seize an advantage, we may extricate ourselves from misfortune." Portfolio Management and Risk Management Corollaries: In every advantageous situation, there is an inherent potential disadvantage. Identify the potential disadvantage, establish precautions against it, all the while, continue to pursue the advantage. In every disadvantageous situation, there is an inherent potential for an advantage to develop. Be constantly alert to capitalizing on potential advantages, as and when they appear, to diminish and/or eliminate losses. Rely On Own Preparation "The art of war teaches us to rely not on the likelihood of the enemy's not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable." Portfolio Management and Risk Management Corollary: Never construct and implement a strategy based on hope or fear of what the market may do. Always endeavor to base actions on knowledge, principles, planned strategies, and acceptable tactical

adjustments. Competent Management "There are five dangerous faults that may affect a general, of which the first two are: recklessness, which leads to destruction; and cowardice, which leads to capture. Next there is delicacy of honor, which is sensitive to shame; and a hasty temper, which can be provoked by insults. The last of such faults is oversolicitude for his men, which exposes him to worry and trouble, for in the long run the troops will suffer more from the defeat, or at best, the prolongation of the war, which will be the consequence." Portfolio Management and Risk Management Corollaries: Avoid recklessness by engaging the markets only within the context of a well thought out portfolio management and risk management plan. Once a strategy has been developed, tested and selected, be bold in implementation. While always adhering to the Moral Law, also, always be flexible and opportunistic in capitalizing on opportunities provided by changing market conditions. In stressful situations, minimize the inclination to make emotional decisions. Also, regardless of the planning that has gone into developing and testing a strategy, there will often times be some adversity, usually financial losses, encountered in implementation. Be prepared to view the adversity as simply another part of doing business, by adapting strategy and tactics to market conditions, thereby keeping the financial losses small. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter IX: The Army on the March (Marches)

More tactical commentary. Respectful Preparation "He who exercises no forethought but makes light of his opponents is sure to be captured by them." Portfolio Management and Risk Management Corollaries: Have a written strategic plan with very specific guidelines for money management, trade selection, risk control, and profit taking. Be confident based on preparation, but not cocky based on unfounded and/or untested perceptions. Suitability Of Strategies And Tactics To Situation "Do not climb heights in order to fight." "If you are anxious to fight, do not go to meet the invader near a river he has to cross. Instead, moor your craft higher up than the enemy, and facing the sun. Do not move upstream to meet the enemy. Our fleet must not be anchored below that of the enemy, for then they would be able to take advantage of the current and make short work of you." "After crossing a river, get far away from it. When an invading force crosses a river in its onward march, do not advance to meet it in midstream. It will be best to let half the army get across, and then deliver your attack." Portfolio Management and Risk Management Corollary: Avoid struggling to get into a trade. Take only those high reward/low risk trades provided by the market. To do otherwise, will simply exhaust capital and other resources in fruitless trades, and leave you with insufficient wherewithal to capitalize on meaningful trade opportunities when they do appear. Preserve And Protect Resources "All armies prefer high ground to low, and sunny places to dark. Low ground is not only damp and unhealthy, but also disadvantageous for fighting. If you are careful of your men, and camp on hard ground, your army will be free from disease of every kind, and this will spell victory." "When, in consequence of heavy rains up-country, a river which you wish to ford is swollen and flecked with foam, wait until it subsides. Country in which there are precipitous cliffs with torrents running between, deep natural hollows, confined places, tangled thickets, quagmires, and crevasses, should not be approached or else left with all possible speed." "If in the neighborhood of your camp there should be any hilly country, ponds surrounded by aquatic grass, hollow basins filled with reeds, or woods with thick undergrowth, they must be carefully routed out and searched; for these are places where men in ambush or insidious spies are likely to be lurking." Portfolio Management and Risk Management Corollary: At all times, and especially when strategies are in play, seek to keep all resources in profitable and advantageous positions. Likewise, quickly liquidate unprofitable positions and minimize exposure to situations with inordinate risk to uncertain market movements.

Study, Observe, Remember, Compare, And Apply "Movement among the trees of a forest shows that the enemy is advancing." "The sudden rising of birds in their flight is the sign of an ambush at the spot below." "When there is dust rising in a high column, it is the sign of chariots advancing; when the dust is low, and spread over a wide area, it betokens the approach of infantry. When it branches out in different directions, it show that parties have been sent to collect firewood. A few clouds of dust moving to and fro signify that the army is encamping." "Humble words and increased preparations are signs that the enemy is about to advance. Violent language and driving forward as if to the attack are signs that he will retreat." Portfolio Management and Risk Management Corollary: Know the implications and importance of various market actions and rhetoric, and be prepared to react accordingly. "Profile" characteristics of each market traded. Constantly compare current conditions with market "profile". Opportunistic Flexibility In Adapting Strategies And Tactics To Situation "If the enemy sees an advantage to be gained and makes no effort to secure it, the soldiers are exhausted." Portfolio Management and Risk Management Corollary: If a market fails to continue to advance with bullish news, or fails to continue to decline with bearish news, be prepared to adapt strategy tactics accordingly. Disciplined Organization "...soldiers must be treated in the first instance with humanity, but kept under control by means of iron discipline." "If, in training soldiers, commands are habitually enforced, the army will be well disciplined; if not, its discipline will be bad." "If a general shows confidence in his men but always insists on his orders being obeyed, the gain will be mutual." Portfolio Management and Risk Management Corollary: Disciplined organization and utilization of all resources is critical to successful portfolio management and risk management. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter X: Terrain (Terrain)

From Griffith's translation: "Topography or conformation of the ground." Market Analysis "We may be able to distinguish six kinds of terrain: accessible ground, entangling ground, temporizing ground, narrow passes, precipitous heights, positions at a great distance from the enemy." Portfolio Management and Risk Management Corollary: One way of viewing our perception of the "terrain" or "ground" of the markets is to liken us to an experienced river traveler exploring and mapping uncharted wilderness inhabited by hostile people. And to liken market price movements to the river we are utilizing as our main conveyance through that wilderness. We can look back through our charts, records, and other "profiling" data and see where we have traveled, and observe the obstructions that have caused the river to change its course and speed and, likewise, have caused us to leave the river and portage around unsafe stretches. We would also be able to review our skirmishes with the hostiles, both on the river and during the portages. It is through these experiences that we gain a sense of the character and "profile" of the river (each market's price movement) and its response pattern(s) to the country (conditions and events that influence price movement) through which it is moving. These experiences also enhance our understanding of our vulnerability to the river and the hostile intent of the inhabitants, as well as our ability to make constructive use of the river in pursuing our objectives. However, given the inevitable twists and turns all rivers take and the inclement weather conditions (fog, etc.) we are obliged to travel through, we cannot always see where the river is going to carry us, or the movement of the hostile forces. Therefore, our perception of the impending terrain and hostile action, and the concomitant impact on the shaping of our strategies and tactics will, to some degree, be influenced by what our experience and ability to understand the current behavior of the river tells us. The character of the movement of the river, in and of itself, will provide some insight into the terrain through which we are traveling, whether we can see the terrain or not. Sometimes, that will be all we have to rely on in preparing our travel plans and defenses against hostile attack. Suitability Of Strategies And Tactics To Situation "Ground that can be freely traversed by both sides is called accessible. With ground of this nature, beat the enemy in occupying the raised and sunny spots, and carefully guard your line of supplies. Then you will be able to fight with advantage." "Ground that can be abandoned but is hard to reoccupy is called entangling. From a position of this sort, if the enemy is unprepared, you may sally forth and defeat him. But if the enemy is prepared for your coming, and you fail to defeat him, then, return being impossible, disaster will ensue." "When the position is such that neither side will gain by making the first move, it is called temporizing ground, and the situation remains at a deadlock. In a position of this sort, even though the enemy should offer an attractive bait, it will be advisable not to stir forth, but rather to retreat, thus enticing the enemy in his turn; then, when part of his army has come out, you may deliver your attack with advantage." "With regard to narrow passes, if you can occupy them first, let them be strongly garrisoned and await

the advent of the enemy. Should the enemy forestall you in occupying a pass, do not go after him if the pass is fully garrisoned, but only if it is weakly garrisoned." "With regard to precipitous heights, if you precede your adversary, occupy the raised and sunny spots, and there wait for him to come up. Remember, if the enemy has occupied precipitous heights before you, do not follow him, but retreat and try to entice him away." "With regard to positions at a great distance from the enemy, if the strength of the two armies is equal, it is not easy to provoke a battle, and fighting will be to your disadvantage." Portfolio Management and Risk Management Corollary: Manage resources to be consistent with the phase, pattern, and volatility of the market. Pre-position with options. Control catastrophic loss risk through money management. Avoid struggling to get into a trade. Trade only when there is a leveragable advantage, i.e., for every dollar of risk, make sure there is the realistic potential for a predetermined multiple reward. Competent Management "Sometimes an army is exposed to calamities, not arising from natural causes, but from faults for which the general is responsible. These are: flight; insubordination; collapse; ruin; disorganization; rout." Portfolio Management and Risk Management Corollary: Establish, maintain, and continually strengthen the philosophical fiber that holds the elements and substance of our portfolio management and risk management approach together regardless of the nature of our immediate circumstances, whether they be prosperous or poor, favorable or unfavorable, difficult or easy. Develop And Maintain An "Edge" "Other conditions being equal, if one force is hurled against another ten times its size, the result will be the flight of the former." Portfolio Management and Risk Management Corollary: Always endeavor to be the superior force, at minimum, through focused knowledge and experience. Balanced Diversification "When the common soldiers are too strong and their officers too weak, the result is insubordination." "When the officers are too strong and the common soldiers too weak, the result is collapse." Portfolio Management and Risk Management Corollary: Maintain balance in resource management and diversification in risk positions. Disciplined Organization "When the higher officers are angry and insubordinate, and on meeting the enemy give battle on their own account from a feeling of resentment, before the commander in chief can tell whether or not he is in a position to fight, the result is ruin."

Portfolio Management and Risk Management Corollary: Be disciplined in the use of all portfolio management and risk management resources at all times. Remain unemotional in all situations. Clear Communication "When the general is weak and without authority; when his orders are not clear and distinct; when there are no fixed duties assigned to officers and men, and the ranks are formed in a slovenly, haphazard manner, the result is utter disorganization." Portfolio Management and Risk Management Corollary: Ensure clear communication in all aspects of the development, testing, and implementation of strategy and tactics. Be disciplined in the use of all portfolio management and risk management resources at all times. Preserve And Protect Resources "When a general, unable to estimate the enemy's strength, allows an inferior force to engage a larger one, or hurls a weak detachment against a powerful one, and neglects to place picked soldiers in the front rank, the result must be a rout." Portfolio Management and Risk Management Corollary: Always endeavor to be the superior force, at minimum, through focused knowledge and experience. Otherwise remain neutral. Manage resources to be consistent with the phase, pattern, and volatility of the market. Catastrophic Loss Avoidance "These are the six ways of courting defeat -- neglect to estimate the enemy's strength; want of authority; defective training; unjustifiable anger; nonobservance of discipline; failure to use picked men -- all of which must be carefully noted by the general who has attained a responsible post." "The natural formation of the country is the soldier's best ally; but a power of estimating the adversary, of controlling the forces of victory, and of shrewdly calculating difficulties, dangers, and distances, constitutes the test of a great general. He who knows these things, and in fighting puts his knowledge into practice, will win his battles. He who knows them not, nor practices them, will surely be defeated." Portfolio Management and Risk Management Corollary: "Profile" all you can learn about each market being traded. Ensure clear communication in all aspects of the development, testing, and implementation of strategy and tactics. Continuously improve focused knowledge and experience. Remain unemotional in all situations. Be disciplined in the use of all portfolio management and risk management resources at all times. Suit strategies and tactics to phase, section, pattern, swing level, and volatility of market.

Stay Focused On Achieving Strategic Objectives "The general who advances without coveting fame and retreats without fearing disgrace, whose only thought is to protect his country and do good service for his sovereign, is the jewel of the kingdom." Portfolio Management and Risk Management Corollary: Keep attention and actions focused on achieving strategic objectives within reasonable time frames, and with minimal loss or expenditure of resources. Focused Knowledge And Experience "If we know that our own men are in a condition to attack, but are unaware that the enemy is not open to attack, we have gone only halfway toward victory. If we know that the enemy is open to attack, but are unaware that our own men are not in a condition to attack, we have gone only halfway toward victory. If we know that the enemy is open to attack, and also know that our men are in a condition to attack, but are unaware that the nature of the ground makes fighting impracticable, we have still gone only halfway toward victory. The experienced soldier, once in motion, is never bewildered; once he has broken camp, he is never at a loss. Hence the saying: If you know the enemy and know yourself, your victory will not stand in doubt; if you know Heaven and know Earth, you may make your victory complete." Portfolio Management and Risk Management Corollaries: Have a sound portfolio management and risk management philosophy and money management discipline, and know them thoroughly. Know your own psychological ability to implement the philosophy and money management guidelines. Have an analytic framework that allows for timely evaluation and measurement of market activity (represents collective action of other traders). Once an opportunity has been identified, a strategy has been selected, and tactics have been decided on, implement promptly and without hesitation. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter XI: The Nine Situations (The Nine Varietis of Ground)

"The art of War recognizes nine varieties of ground: dispersive ground; facile ground; contentious ground; open ground; ground of intersecting highways; serious ground; difficult ground; hemmed-in ground; desperate ground." Maintain Disciplined Market Analysis, Even When Neutral "When a chieftain is fighting in his own territory, it is dispersive ground, so called because the soldiers, being near to their homes and anxious to see their wives and children, are likely to seize the opportunity afforded by a battle and scatter in every direction." "On dispersive ground, therefore, fight not." "On dispersive ground, inspire your men with unity of purpose." Portfolio Management and Risk Management Corollary: Maintain disciplined evaluation of on-going market conditions, in each instrument traded, even when position is neutral. Stop Losses Quickly "When he has penetrated into hostile territory, but to no great distance, it is facile ground." "On facile ground, halt not." "On facile ground, see that there is close connection between all parts of the army." Portfolio Management and Risk Management Corollary: Profitable trades tend to be profitable from the onset. Loss trades tend to be losers from the onset. Therefore, maintain diligent position management discipline, even in the early stages of a trade. Always Tighten Stops, Never Loosen "Ground that is of great advantage to either side is contentious ground." "On contentious ground, attack not." "On contentious ground, hurry up your rear guard." Portfolio Management and Risk Management Corollary: After extended moves, avoid adding to positions and tighten up risk management provisions. Always Maintain Protective Provisions "Ground on which each side has liberty of movement is open ground." "On open ground, do not try to block the enemy's way." "On open ground, keep a vigilant eye on your defenses, fearing a surprise attack." Portfolio Management and Risk Management Corollary: Maintain protective risk management provisions on all open positions.

Opportunistic Adaptation Of Strategies And Tactics To Situation "Ground that forms the key to three contiguous states, so that he who occupies it first has most of the empire at his command, is ground of intersecting highways." "On ground of intersecting highways, join hands with your allies." "On ground of intersecting highways, consolidate your alliances." "We cannot enter into alliance with neighboring princes until we are acquainted with their designs. Portfolio Management and Risk Management Corollaries: Pre-position with option strategies that allow multiple courses of action as the market reveals itself. Perform proper due diligence and ensure compatibility before inviting anyone to become a part of the portfolio management and risk management group. Preserve And Protect Resources "When an army has penetrated into the heart of a hostile country, leaving a number of fortified cities in its rear, it is serious ground." "On serious ground, gather in plunder." "On serious ground, ensure a continuous stream of supplies." "The farther you penetrate into a country, the greater will be the solidarity of your troops, and thus the defenders will not prevail against you. Make forays in fertile country in order to supply your army with food." Portfolio Management and Risk Management Corollaries: Always be alert to selling time value (a wasting asset). When in the midst of a successful portfolio management and risk management campaign, be diligent in realizing gains, as the market provides the opportunity, and utilizing those gains to maintain portfolio management and risk management resources. Focused Knowledge And Experience "Mountain forests, rugged steeps, marshes and fens--all country that is hard to traverse: this is difficult ground." "In difficult ground, keep steadily on the march." "On difficult ground, keep pushing on along the road." "Carefully study the well-being of your men, and do not overtax them. Concentrate your energy and hoard your strength. Keep your army continually on the move, and devise unfathomable plans." "We are not fit to lead an army on the march unless we are familiar with the face of the country--its mountains and forests, its pitfalls and precipices, its marshes and swamps. We shall be unable to turn natural advantages to account unless we make use of local guides." Portfolio Management and Risk Management Corollary: Be scrupulous in avoiding trying to force a trade in this type of environment. Instead, concentrate on conserving resources for application to the high reward/low risk situations that will eventually develop.

Catastrophic Loss Protection "Ground that is reached through gorges, and from which we can only retire by tortuous paths, so that a small number of the enemy would suffice to crush a large body of our men: this is hemmed-in ground." "On hemmed-in ground, resort to stratagem." "On hemmed-in ground, block any way of retreat to make it seem that you mean to defend the position, whereas your real intention is to burst suddenly through the enemy's lines." Portfolio Management and Risk Management Corollary: Avoid being forced to trade in this type of situation, unless have pre-positioned through option strategies. If it looks like we are crosswise of the market's bias, liquidate. Otherwise, will soon be in desperate ground, where catastrophic loss of capital usually results. Disciplined Risk Management "Ground on which we can only be saved from destruction by fighting without delay: this is desperate ground." "On desperate ground, fight." "On desperate ground, proclaim to your soldiers the hopelessness of saving their lives. The only chance of life lies in giving up all hope of it. For it is the soldier's disposition to offer an obstinate resistance when surrounded, to fight hard when he cannot help himself, and to obey promptly when he has fallen into danger." Portfolio Management and Risk Management Corollaries: The limitation of applying this War principle to our portfolio management and risk management effort is that in war an individual soldier, through desperate action, may have an impact on the enemies movement. But, in portfolio management and risk management our actions as individuals, desperate or not, have limited to no impact on the outcome of price movement. However, like in war, our actions do have a very direct impact on the outcome of any given strategy we choose to implement. Therefore, in trading, our objective is not to seek to enter desperate ground prepared to "trade till capital is exhausted", rather, it is to impact the outcome of the strategy by having a well organized strategy, the patience to wait for the markets to provide a qualifying high reward/low risk situation, and the discipline to execute again and again. Paradoxically, we can only make money by exposing ourselves to risk. However, when we find ourselves in desperate situations, we will also find that we have failed to manage our risk through protective measures. Therefore, we must, at all costs, be disciplined in managing the risk of every strategy we implement. Focus On Achieving Strategic Objectives "The skillful tactician may be likened to the shuai-jan. Now the shuai-jan is a snake that is found in the Ch'ang mountains. Strike at its head, and you will be attacked by its tail; strike at its tail, and you will be attacked by its head; strike at its middle, and you will be attacked by head and tail both." "Asked if an army can be made to imitate the shuai-jan, answer yes." "You will not succeed unless your men have tenacity and unity of purpose, and above all, a spirit of sympathetic cooperation. This is the lesson which can be learned from the shuai-jan." "The principle on which to manage an army is to set up one standard of courage that all must reach." "The skillful general conducts his army just as though he were leading a single man by the hand."

"Bestow rewards without regard to rule, issue orders without regard to previous arrangements, and you will be able to handle a whole army as though you had to do with but a single man." Portfolio Management and Risk Management Corollaries: Ensure clear communication in all aspects of the development, testing, and implementation of strategy and tactics. Regardless of the size of the portfolio, have a written strategic plan with very specific guidelines for money management, trade selection, risk control, and profit taking. Discipline, efficient, and effective organization, along with opportunistic and flexible utilization of all resources (people, plans, tools, capital) is critical to leveraging portfolio management and risk management success. Study, Observe, Remember, Compare, And Apply "How to make the best of both strong and weak is a question involving the proper use of ground." Portfolio Management and Risk Management Corollary: Physiologically, most humans are very similar, yet each human is distinctly different and unique (DNA, fingerprints, scent, psyche, etc.). Therefore, each person needs to be dealt with differently, yet, consistently within a sound framework of principled guidelines. Markets can be viewed in a similar manner. All markets experience price movement, yet each one moves in its own unique way. Therefore, need to learn to recognize and trade utilizing the unique phase, section, pattern, swing, and volatility "profiles" of each market and instrument traded. Management Competence "It is the business of a general to be quiet and thus ensure secrecy; upright and just, and thus maintain order." Portfolio Management and Risk Management Corollaries: Establish, maintain, and continually strengthen the philosophical fiber that holds the elements and substance of our trading approach together regardless of the nature of our immediate circumstances, whether they be prosperous or poor, favorable or unfavorable, difficult or easy. Staying focused on discipline, efficient, and effective organization, and opportunistic and flexible utilization of all resources (people, plans, tools, capital) is critical to maintaining a successful portfolio management and risk management program. Opportunistic Flexibility In Adapting Strategies And Tactics To Situation "To master his host and bring it into danger -- this may be termed the business of the general. The different measures suited to the nine varieties of ground; the expediency of aggressive or defensive tactics; and the fundamental laws of human nature: these are things that must most certainly be studied." "For it is precisely when a force has fallen into harm's way that it is capable of striking a blow for victory." "Success in warfare is gained by carefully accommodating ourselves to the enemy's purpose." "By persistently hanging on the enemy's flank, we shall succeed in the long run in killing the commander in chief--a vital act in war." "Walk in the path defined by rule, and accommodate yourself to the enemy until you can fight a decisive battle."

"At first, then, exhibit the coyness of a maiden, until the enemy gives you an opening; afterward emulate the rapidity of a running hare, and it will be too late for the enemy to oppose you." Portfolio Management and Risk Management Corollaries: The only way to make money trading markets is to incur risk. The challenge is to manage the risk. The way to capitalize on the endless opportunities created by ever-changing market conditions, is to become engaged as a part of a well thought out portfolio management and risk management plan and be flexible in adapting to market conditions within the context of the plan. Avoid struggling to get into a trade. Take only those high reward/low risk trades the market provides Suit strategies and tactics to phase, section, pattern, swing level, and volatility of market. Once an opportunity has been identified, a strategy has been selected, and tactics have been decided on, implement promptly and without hesitation. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter XII: Attack by Fire (Attack by Fire)

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. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Chapter XIII: 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." "...to 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. ▪---------------------------------------------▪---------------------------------▪----------------------------------------------------▪

Summary of the Art of War

In summary, there are several important themes developed by Sun Tzu as they can be applied to portfolio management and risk management challenges. Strategic Planning And Rational Analysis Planning based on rational analysis of the best quality information available. Importance Of Information And Related Processing Capability Secure the best information available. Protect the sources and processing capabilities from compromise. Importance Of Knowledge, Wisdom, And Understanding A theme that is imbedded in virtually every other theme, especially in regard to knowing self and opposition. Study The Past, Market Analysis, Develop And Maintain An "Edge" Leads to knowledge, which, if properly focused, can lead to success. Strive to become the superior force in more than mere numbers. This is achieved through focused knowledge and experience, which, in turn, is gained by studying and observing situations, conditions, people, and events; remembering what was observed; comparing the observations to one another as well as to contemporary circumstances; and by disciplined application of the results of the observations in the pursuit of strategic objectives. Know yourself, your opposition, and the environment within which interaction will occur. Staying Focused On Strategic Objectives Keep attention of all resources and related action focused on achieving strategic objectives as promptly as possible. Avoid becoming distracted by the nuances and intricacies of implementing complex strategies and tactics. Suitability Of Strategies And Tactics To Situation Match the suitability of strategies and tactics to the market's phase, section, pattern, and volatility. Inherent Advantages And Disadvantages Understand, and guard against, the inherent disadvantage in every advantageous situation. Likewise, be alert to capitalizing on advantages that occur in distressed situations. Opportunistic Flexibility In Adapting Strategies And Tactics To Situation The way to capitalize on the endless opportunities created by ever-changing market conditions, is to become engaged as a part of a well thought out trading plan and be flexible in adapting tactics to those ever-changing market conditions within the context of each pre-determined strategy. Ethical Conduct Be moral and ethical in all things. Rely On Your Own Preparation Rely on your own preparations. Do not hope for success based on the opposition not preparing.

Competent Management Develop a balanced management skill set to enable prudent resource utilization. Disciplined Emotions Minimize emotional influences (hope, fear, greed). Disciplined Organization And Financial Management Discipline, efficient, and effective organization, and utilization of all resources (people, plans, tools, capital), in the capacity to which they are best suited, in all situations, is critical to success. Ensure appropriate financing and provisioning of all activities (prior to and during). Clear Communication Ensure clear communication in all aspects of the development, testing, and implementation of strategies and tactics. Deception And "Shaping" Practice deception in plans, strategy, and tactics, and its corollary; Avoidance Of Being Deceived And "Shaped" Take precautionary steps to avoid being deceived by the opposition. Reward, Replenish, And Invest In Support Structure After a successful strategy, be sure to allocate appropriate parts of the profits to all resources employed in the portfolio management and risk management activity. Patience, Positioning, And Timing Develop patience and discipline in positioning and timing the use of all resources in adapting to ever-changing circumstances. Avoidance Of Catastrophic Loss Avoid catastrophic mistakes, by promptly adapting strategies and tactics to current circumstances, thereby, keeping the consequences of mistakes small and manageable. Preservation And Protection Of Resources At all times, and especially when strategies are in play, seek to keep all resources in profitable and advantageous positions. Likewise, quickly liquidate unprofitable positions and minimize exposure to situations with inordinate risk to uncertain market movements.

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