Investment strategy – defensive or offensive?

Offensive or defensive investment strategy, which one will yield a greater ROI? That is the question. This is not a post based on statistical research, such  as asset allocation and diversification but more personal reflections and I am more looking for answers and asking questions.

What does it mean to be a defensive investor versus an offensive investor? What is your general investing plan of action? As a broker I knew a guy who almost had a million dollars in bank CDs. He said he always slept at night.  I knew another that only bought muni bonds.

Whereas I have known many people to lose a lot of money trading stocks and options.

However, that being said, I think the best way to invest is a stock strategy which is generally systematic and cautious, even defensive, but than makes bold strikes when the opportunity arises. It is similar to the idea of saving or investing to get wealthy.

defense is the best offense
Defensive is the best offensive strategy. Or is it? These are ancient defensive walls in my city.

Strategy in games

I have often played life with the strategy “the best offense is a good defense’. However, I have also noticed in life with this strategy, I am good at many things, but rarely at the very top-level. For example, I play chess almost to an expert level. I impress myself considering I have never really studied the game. I can dominate most players. And can certainly beat your average guy pretty easy.

I generally take a patient strategy and wait for my opponent to make a mistake and then attack. That is my strategy in many things in life and in chess, it is defensive. The result is I do well, but I am not world-class. To be a world-class anything you have to be on the offensive.

The great chess player Tigran Petrosian: World Champion 1963-1969 was the master of defense.  He was very frustrating to play. Although he was a world champion he was not as great as someone like Tal, Fischer or Kasparov who were masters of attack. Was it because Kasparov’s knights magically moved faster and with more agility on the board? Or his pawns had more staying power? No. It was Kasparov had a planned, practiced and perfected the idea of attack. Defense to him was only something to do while forming an attack.

I think chess is a good way to evaluate your own attitude to competition and investing, but only if you are a chess buff like I am.

I developed my basic defensive strategy in competition, as an extension of  my strategy games I played in my youth created by a company called SPI.

I realized that it usually took 3 to 1 odds in terms of firepower to dislodge and enemy position. If the position was fortified it took more. You could watch with vigilance while the enemy wasted resources on attacking, then strike back.

Think of playing the computer game Civilization and if you have an alpine unit fortified in the mountains, it is almost impossible to overrun.

My strategy to beat the computer at the highest level is fly beneath the radar until I had a technological advantage and then strike at the other civilizations. I could beat the computer at the highest level with ease.

Similarly, if you have played risk, it is easy to hang out in Australia and build armies most of the game.

Therefore, a defensive strategy is not ineffective for games or investing. It can work. You can muddle your way to victory and wealth via trench warfare.

You can avoid risk and do well in life. However, most likely never achieve greatness and this includes in investing.

Avoiding danger is in the long run no safer than outright exposure to it, life is either a daring adventure of nothing – Helen Keller

When I realized I needed to be more offensive in investing and chess

  • I was playing a female chess master and she was beating me constantly when she commented she liked to attack. And ask me what about me? That is when I realized maybe defense is not the best way in life. In fact, the adage is when you are down in material you have to go on the offensive. Offensive strategies tend to be what brings one to greatness. I realized she was not a better player than I, but she used her talent in a more strategically offensive way.

Strategy in history

I live in the city of Kraków, a  medieval fortified city. the pictures above I took of some of these walls. The city was under siege many times. How many times with little effort did Poles repel an aggressive enemy by wearing them down with a stiff defense, and then employing a decisive counter strike. Defense is only a time when you are probing the enemy and preparing for an offense.

The same goes for investing. You can have money in money markets and Muni bonds, but I think equity trading is where the money is. It is interesting to note that the fixed income market dwarfs the equity market for various reason, but also because people are fundamentally risk averse.

  • Poland rose to become the largest country in Europe because of its small élite Calvary units it used for offense. It was at a numeric disadvantage over its enemies it played an offensive tact, including capturing Moscow. The risk of playing defense was to great and was outweighed by the rewards of offensive thinking. The tiny unpopulated country of Sweden similarly did this under Adolphus Augustus. So again playing it defensive in life is safe, for a while but taking the offensive  is what changes your life.

Going on the offensive , even with great problems in life

Here are other examples of offensive thinking away from the military metaphors. My favorite thinker Hans Kung, wrote about how many mainstream thinkers are on the defensive against nihilism. This posture was ultimately as losing position as people would realizes there is not good defense except an offense.

He realized in his writing he needed to be more radical and not just build walls and apologies, but actually be bold and seek the true and be on the offensive against nihilism. His writing is brilliant, lucid and it make all the difference.

Psychology of investing in my own business

I think the way I invest might be a function of the psychogenesis of my personality. It is a reaction to the world and the way I live in general.  Take my own litte company I run out of Eastern Europe. Labor here is cheap however, I keep costs to a minimum and I am under leveraged in terms of employing people. I could employ a lot more and implement more ideas I have had on the back burner for years. However, I prefer to play it safe with a defensive strategy.

I wonder if my psychology of investing came from my upbringing in a home that was like many American stories rag to riches. My parents taught be taken the sure and steady route. I of course did not, as I live as an expat, traveled the world and am an entrepreneur. However, their fundamental attitude is still in my understanding of the world.

My investing strategy is defensive

I am a good investor. In fact, at this point as my  investing strategy has been perfected to a high level.  I am like I play chess, almost an expert. It is not just that I do not lose a lot but I can make steady consistent gains.

  • However, I am not a multimillionaire. In fact if I calculate the rate or ROI, it would take me many more years of long hard work. Therefore, I am coming to the realization that I need to go on the offensive more in terms of investing.

What this means I do not yet know. How do I translate this into my own personal investment strategy in terms of stock trading and my own ventures? How can I invest more aggressively without being reckless or simply applying leverage?

I do know offensive players do not take wild desperate risks. I have done this and always failed. High risk is like playing a long shot, it is a dream but rarely pans out.

Where does this leave me with investing tactics?

Therefore, for me to transform from a very good investor to a great one, I have to do more.  I have to do more self-reflection and strategic analysis of my habits and equity investors who have made money with an aggressive posture in investing. Further, to declare myself great, it has to be manifest by either high returns over the long terms and millions in the bank in my opinion. So I can say I realize the problem, that is like most people I tend to be too conservative or defensive but I am still working my way out to find what will make be an offensive investors.







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4 responses to “Investment strategy – defensive or offensive?”

  1. j

    “Taleb has suggested allocating 90% of a portfolio to Treasury bills from around the world, and the remaining 10% to speculative investments with home-run potential.

    The idea is that there is no risk in T-bills, so with the 90/10 mix, only 10% of the portfolio is at risk. Also, it would be difficult, for example, to buy 10 speculative stocks and have all of them go to zero at the same time, so, really, less that 10% of the portfolio is at risk of disappearing. If the speculative 10 doubled in a year, the entire portfolio would be up 10% plus the T-bill interest, totaling what a “normal equity portfolio” might earn in a typical year.”

    a 90/10 port can have the same return as a 100% port of many stocks, or RE or other assets. However, the 90/10 port would have only a fraction of the risk. if inflation is your fear just exchange tips for t-bills (and inflation should be your fear).

    1. Mark Biernat

      Asset allocation in usually fixed income, cash and equity. The you can allocate across different markets and globally, then different asset classes.
      However, most people who trade stocks allocate between a money market, one which comes close to a portfolio of T-bills and equity. This is easier to implement if you are are not an institutional trader.

      Given that, I do not think 90% in near liquid assets is an optimial allocation, even if 10% went into currency futures or options trading.

      I think it would be better to allocate more to equites and few to no derivatives.

      Taking risk is not gaming, it is developing a system that works over time in an aggressive way.

  2. Adam

    I only traded Currencies lately and did ok but I am now out and 100% back in USD and more on a commatic stage than being defensive.

    Despite the deficit madness Yield on T bills are down ??? This is not a sign of recovery. Is money looking for a shelter like in 2008? I hope not and do not think so but what does it tell us ?

    1. Mark Biernat

      Is money looking for a shelter? It is a good question. Some people say the Swiss Franc is one at least in the short-term and the technical trend seems to indicate that.
      No great shock here, the US economy has long-term problems, the deficit being both a symptom and a cause. The bottom line is if the private sector can not create jobs, then the political debate in Washington will only intensify and until 2012 and in some ways be a moot point.

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