Investment lessons from Shogun

 

The first TV Series based on James Clavell's Shogun was made in 1980, and I vividly remember watching it when I was about 7-8 years old. The plot was too complicated for a kid, but I recalled the shocking scene of seeing someone boiled alive in the show. Shogun was rebooted in 2024 and is available for Disney+ subscribers; this version is not to be missed. Fans are saying that it is Game of Thrones that is done right.

On the Telegram finance discussion groups, some folks drew financial inspiration from popular characters in the series, like Kashigi Yabushige. Still, the discussion was short-lived because Yabushige committed seppuku at the end of Season 1. 

I would have wanted to have a deeper conversation about whether assessing an investment strategy based on the outcome instead of the process is correct. Still, we might be better inspired to consider what the main character, Yoshii Toranaga, can teach us about investing.

I summarise this briefly into three parts :

a) Toranaga knew when to let go of his pawns to serve his greater ambitions

One gripping aspect of the series was how often people are willing to give their lives for their lord. Toranaga understood that to create the impression that he had conceded defeat, key household staff members had to commit seppuku.

For investors, it means having proper conditions to exit positions when it is no longer to hold onto them. In such a case, dividend investors are not particularly good at letting go of a counter; we often only throw in the towel when dividends are stopped completely. In this sense, technical analysts and quantitative investors are better placed to cycle their positions. 

I probably got out of AEM a little late when the troubles started this year, but my algorithmic positions are always dynamic, and I cycled out of Indian Small caps for the NASDAQ when the momentum shifted.

b) Toranaga does not control the wind. He only studies it.

When Toranaga is about to execute his disloyal vassal Yabushige, Yabishige asks him how it feels to control the winds. Toranaga answers that he merely studies the wind and does not control it. Even in a moment of triumph, Toranaga is humble and understands his limitations.

In investing, Warren Buffett can control the wind. Anyone who can buy enough shares to install his own directors in a company can unlock value in an undervalued company. However, most of us are not at Warren Buffett's level. We can only read financial statements and analyst reports, deploy our capital intelligently, and hope the stock will eventually reach its intrinsic value.

But there are many ways to read the winds. People spend years learning how to read financial statements, and I write code to unveil momentum indicators that work. Toranaga probably has a network of spies and is already aware of who his disloyal servants are pretty early in the series. Increasing how we read the wind would matter. Suppose the methods of reading the markets are conventional. In that case, getting unconventional results will get harder, so I resort to code to search for investment insights. 

c) Toranaga is actually very frugal with the deployment of his resources.

Throughout the series, the audience is led to believe that Operation Crimson Sky is Toranaga's planned frontal assault on Osaka Castle, with maybe a slight twist involving cannons being fired from the sea. But as it turns out, the entire operation to free hostages within the castle was executed with just one highborn woman, Toda Mariko. With one life, Toranaga could break the alliance of the Regents arrayed against him and even cause his rival lord to lose the favour of the young heir. 

Investors may have a different way of framing what Mariko means in their portfolio. For a value investor, Mariko can be a 100-bagger stock. She can also be a longshot bet on an altcoin going viral online. 

For most retail investors, stacking all their resources on a longshot gamble is a mistake. Most retail investors want Mariko to be a lottery ticket that will change their lives. 

That idea is wrong. Toranaga's military forces are primarily concentrated in Edo and can engage in massive battles independently. A small 1% percentage into a 100-bagger or an altcoin can improve your returns without raising too much risk for your portfolio. This insight can only be understood if we study the concept of the economic utility of our investment portfolios. 

There's no need to put all your eggs into a counter that has high returns and a high standard deviation. You can backtest how a 1% investment in a Bitcoin ETF can influence a 60/40 portfolio over the past 10 years. You don't need a flashy, one-sided bet to outperform your peers. 

Anyway, I hope I've not spoiled the series for readers. I'm eagerly awaiting the second season of the story that would have to depart from the original book, but plenty of inspiration can be gained from actual Japanese history.