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Nov-24-2009 13:47printcomments

Investment Strategy: Investing with Certainty

“the victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory” – Sun Tzu

(EUGENE, Ore.) - It is often said that risk and reward go hand in hand. In investment this is not true. The only real long term investment strategy is to invest with certainty. An investor following this strategy will outperform all other investors over time in every case.

In this article I will explain the basic principle of investing with certainty, why it is superior to risk taking, and give some examples of how it is used by institutional investors.

Investing with certainty means that you take no risk of loss. This does not mean that there is not a range of possible outcomes from an investment. It does not require that you have any particular foresight into the future.

Suppose you have $100 dollars, and you make an investment where the potential outcomes are either total loss, or 100% gain. An example would be betting $100 on a coin flip. This is an investment that can result in absolute loss. If you lose you are out. This is not investing with certainty.

Suppose now that you only invest $10 out of your $100. This would not result in a total loss if your investment failed. However, it is still not investing with certainty.

A coin flip is an “even-odds” game. All of the players are on a level playing field. You can never have certainty of returns when playing an even-odds game. You can only invest with certainty when you have a clear and demonstrable advantage over any competitors.

If you have a clear advantage over all competitors, which has the potential to yield a profit, this is an opportunity for certain investment. However, the future is always unpredictable. There is always some degree of uncertainty.

When investing with certainty, you must assess the range of all possible outcomes of your investment. Find the worst possible outcome. If you suppose that the worst possible outcome occurs, and you could still turn that outcome to your advantage, then you have found a wise investment.

Once you have established that the worst can be managed and gained from, then your investment has only upside potential.

Investing with certainty is superior to risk taking over the long term because the investor who invests with certainty cannot lose. If their competitors take risks, then eventually they will lose, and the person who acts with certainty wins.

“Hence the skillful fighter puts himself into a position which makes defeat impossible, and does not miss the moment for defeating the enemy.” – Sun Tzu

Stock market investments are almost always a bad idea, because the individual investor rarely has the opportunity to invest with certainty.

At best, stock markets are an even-odds game, where you are on a level playing field with everyone else. I actuality, stock markets are heavily rigged, which means that if you are not the one rigging them, you are probably going to lose your money.

Think of the stock market as being like a casino. The stock market is analogous to table games, not slots. You play against other people in technically even-odds games.

There is a rule in casinos that “you can spot the cheaters because they are the ones who always win.”

The stock market is no different. The consistent winners have to be cheating. It is a mathematical certainty. This cheating isn't necessarily illegal. It is simply adopting strategies that unbalance the odds relative to other investors, and applying the principle of investing with certainty.

The potential for unbalancing the odds is much greater in the stock market than at a card table. Good card players can gain a relative advantage by betting against weak card players. However, there is no card game where the player with the biggest stack of chips can rewrite the rules in the middle of the game. That is the kind of potential that exists in the stock market, which makes it completely different.

Institutional investors in stocks, bonds, and other securities apply the principle of investing with certainty. Institutional investors have a clearly superior position to individual investors, and so over time they are guaranteed to win. The institutional advantage takes many forms, such as superior access to information, superior analytical tools, superior technology, superior efficiency, superior legal and regulatory conditions, and in some cases outright illegal behavior.

Even winners in the stock market are still players. They still sit at the table. The house is a another story entirely.

A casino does not gamble. It only collects the “vig.” The casino taxes the players, who gamble with each other. The players take all the risks, while the casino is guaranteed a profit from every transaction.

If the stock market is the table in this analogy, then banks are the house. Banks profit by charging interest on loans. Banks create money, so the money has no cost for a bank. If a borrower pays off, the bank gets straight profit. If a borrower defaults, the bank creates more money.

Contrary to popular belief, this phenomenon has nothing to do with the currency base. You can run the exact same game with gold as you can with paper. A bank dealing in gold, loans gold at interest. The person they loan it to has to spend it on something, and so it ends up circulating through the economy and back to the bank. At the end of the day, the bank has its gold back, and the debtor owes them interest.

The only thing that matters in banking is having a monopoly on currency production. If you want to run a gold bank, you must have a monopoly on the gold supply, or at least significant control. The same goes for any other currency base, but other than that, all currencies can be used the same way.

What a bank does is not investing with certainty. A bank has guaranteed returns, but a bank performs no investment at all. Banks only extract profit from the investments of others. This is a strategy that you should be aware of, but not one that you should emulate.

Banks always collapse, because by extracting profit from legitimate investment they undermine the productivity and viability of their own clients. Eventually banks destroy their client base, and destroy themselves with it.

Finding investments with certain returns is a matter of identifying your investment objectives, and finding the means of achieving them. Determining objectives is an entirely personal matter, but once you have an objective in mind, apply the formula of investing with certainty to it.

If you cannot act with certainty, then you should not act at all. In the long run, gamblers always lose. If you cannot find a certain means of achieving an objective, then the objective may actually be impossible to achieve.

“the victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory.” – Sun Tzu

=================================== Business/Economy Reporter Ersun Warncke is a native Oregonian. He has a degree in Economics from Portland State University and studied Law at University of Oregon. At a young age, his career spans a wide variety of fields, from fast food, to union labor, to computer programming. He has published works concerning economics, business, government, and media on blogs for several years. He currently works as an independent software designer specializing in web based applications, open source software, and peer-to-peer (P2P) applications.

Ersun describes his writing as being "in the language of the boardroom from the perspective of the shop floor." He adds that "he has no education in journalism other than reading Hunter S. Thompson." But along with life comes the real experience that indeed creates quality writers. Right now, every detail that can help the general public get ahead in life financially, is of paramount importance.

You can write to Ersun at:

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Henry Clay Ruark December 1, 2009 9:31 am (Pacific time)

Ersun: Yours to O?rdr right on the money --no pun ! That's WHY reform of corporate charter process is demanded step for 21st Century fairness and protection from malign impacts of "corporate campaign contributions" now allowed via perversion of polital/speech "right" truly belong only to human being. Corporation is ONLY legal fiction for convenience, doth neither breath speak with own human voice,defecate, urinate or even cogitate as true human does. Myth of political-speech "right" was 30-yr. maneuver in railroad era, paid for and published only as court reporter statement re intent of court/involved...yet now allowed to stand as if true legal protection for process literally overwhelming every level of government via power of malignly-used dollar. See previous Op Eds re corporate contributions for full detail documented. Until, unless this sorry situation reformed we will never achieve honest, open opportunities we once had, via heavy impacts on governance via power-of-dollars, paid not only for politicians but for army of lobbyists surrounding and overwhelming system set up by Founders

Ersun Warncke November 30, 2009 11:00 pm (Pacific time)

Oregon Reader: I don't disagree with what you are saying. My point has to do with the probabilistic mathematics of an even-odds game. In an even-odds game, you can never be certain of winning. In stock market investing or poker, if you actually have a skill advantage, then it is no longer an even-odds game, so you can be sure of winning by taking advantage of other players. Berkshire Hathaway is a good example of an institutional investor with a superior position. If you manage billions of dollars, you can afford a huge staff of lawyers, researchers, economists, lobbyists, and other support staff at a small fraction of your investment pool. There is nothing dishonest about it. The simple fact is that an institutional investor vs. a small investor is like the worlds best poker player against someone who barely knows the game, and the world's best poker player has a stack about a thousand times the size of a small investor. Since you play poker you know what the outcome of that match-up will likely be. In stocks and other securities there is a big problem with borderline/illegal activity as well. Outright insider trading is one thing. Arbitrage schemes aren't illegal, but they still leech money out, which cuts gains for real investors. Some arbitrage schemes are also combined with illegal use of insider info, such as as timing trades based on the movements of large mutual funds. There is a variation on this, where if you know the computerized buy/sell limits for large mutual funds you can flood the market to push a stock up or down past the limit, using derivatives to offset your losses, and then capture the difference when the mutual fund either buys or sells a large block of stock, now with limited action, because you have taken all of the fake supply or demand out. Those are all schemes that I have read about from prosecutions and investigations. They are all easy from a technical stand point, but require massive amounts of capital. When I say that markets are rigged, it is too stuff like this that I refer.

Oregon Reader November 30, 2009 7:52 pm (Pacific time)

A thoughtful article, but again, one that I do not agree with. I am a valuation expert, and know that people with a knack for valuation (of any asset) can outperform those who simply invest into the market. Warren Buffet is a prime example of success in the arena. I doubt you would find any legitimate source that would say that he is dishonest... I, too, am well skilled in the art of poker playing. I can win more often than not. And I can almost always win over those who are ill prepared.

stephen November 24, 2009 7:06 pm (Pacific time)

Ersun...I thought your article was very good. I always look forward to them. I myself do not mind other opinions in the blogs. For me though Ersun? I learn who is running the economy, I learn who they are and their motives. I invested in gold and silver many years ago. Check out the charts. Why? because I knew their motives. By the way, the stock market has not gone up, Gold has not gone up,its the de-evaluation of the dollar etc. Engle: your post is somewhat is in line with mine huh? Learn your environment.

Ersun Warncke November 24, 2009 7:04 pm (Pacific time)

Henry, your comment caused my personal uncertainty to skyrocket :) It took several read overs, and an hour of tearing by bathtub apart (for totally unrelated reasons) to figure out what you were saying.

Henry Ruark November 24, 2009 3:42 pm (Pacific time)

Let's sork on a way to put the "vig" to work on these comments...surely there is great "uncertainty", and there must be some way to harness that vs the other-side, where we know what will be produced.
Yrs remain intriguing and also contribute greatly to "uncertainty" here --as in this one resulting momentarily and immmediately in a query seeking your license !!!
For me that's still another indication of arrogance at work to cover something.

Henry Ruark November 24, 2009 3:34 pm (Pacific time)

Engle: Your son have any weighty argument to back your claims re those gurus sure of every situation in Afghanistan ? "Surety" is missing quantity in anything tied to deep uncertainties of human behavior, including your gurus and anyone, anywheres, inany part of the financial world. Studied avoidance is no escape when "right to speak" on major points is challenged here; it only aggravates and empphasizes contempt shown when others involved have their background on record and easy of access. For yrs re Afghanistan to take on meaning, your further evidence is needed: Name degree and field. I.e, engineering hardly qualifies comments on social issues or on finance. What was your publication record, since you seek to act as guru on complex issues ? Surely there must be one of some kind --or not ?? Dissent welcome here but arrogance, contempt and studied avoidance brings only that much more evidence of any credibility...first rule of any analysis is always know the source and its motivations.

Ersun Warncke November 24, 2009 3:06 pm (Pacific time)

It should be obvious from this article that I am not licensed or certified in any branch of the financial industry.

Engle November 24, 2009 2:11 pm (Pacific time)

Are you licensed and certified somewhere in the financial industry? I'm just curious. One of my son's is a licensed stock broker and financial planner. He has been very successful, even during this down economy. His advice is premium, and for good reason, he has a proven track record. He also is a regular national poker tournament player, and has a high winning percentage. Sometimes gambling is not always an all or nothing pursuit for those who have the requisite skills. Knowing your environment is really what Sun Tzu was talking about. He was a must read for most infantry officers and senior NCO's. They were the ones who knew all about sacrifice, a general rule, not an exception.

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