The 2 Rules of Strategy: How to Win by Default
In the ancient Chinese military treatise “The Art of War”, the author Sun Tzu wrote:
“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.”
When you learn the basic principles of strategy and internalize them, you drastically increase your chances of success. The more you internalize those principles, the more success becomes inevitable.
The good news is that all of human strategy can be summarized in two simple sentences.
Strategy Summarized in 2 Rules
The two rules of good strategy are:
- Minimize your downside, then
- Maximize your upside
In that order.
If you do these two things, in the correct order, then you have made the best strategic decision in every situation. Period.
These two rules apply to politics, war, business, relationships, career planning, investing, gaming, sports – even philosophy itself.
Internalizing – truly understanding and applying – these two rules is the first step towards predictable success.
If anything, the two rules are so simple and obvious sounding that most will brush them off as mindless sayings and miss the critical principles that need to be consciously analyzed before every major life decision.
Minimize Your Downside
When defeat becomes impossible, then victory becomes inevitable.
When you know defeat is impossible, then you gain a new power – your strength can be used to shoot higher and to achieve an even higher upside than if you focused on the upside first.
Here are examples of this in action:
- Basic Asset Protection. If you follow basic asset protection, you gain power and will have the ability and confidence to shoot for larger goals.
- Cautious Wealth Building. If you systematically build a cautious wealth-building system, you’ll earn more over your life than the people who are shooting for the moon with every speculation. Buffett built his billions is stable, long-term, cautious investing.
- Reject Unproven Models. I promise you, the vast majority of people trying to get rich in cryptocurrencies, business fads, multi-level marketing, or the latest “next big thing” get wiped out drastically more than they even reach a comfortable middle-class retirement. The exceptions prove the rule.
- Building an Emergency Fund. If you build a cash reserve, you’ll avoid disaster. That means you’ll also be in a position to take advantage of opportunities when they do arise.
- Maximizing Insurance. The simplest way to protect against downside is to literally buy the protection. Insurance is a great example.
When losing money – including lost opportunity cost – is impossible, then you have the best possible investment and/or business.
When you’re operating from a position of strength, then you can do what you need to do to scale.
For example, I built a multi-million dollar stable portfolio that was extremely diversified. From this foundation, I was able to – and still do – launch new, more speculative projects looking for a “big break.” This has led to my net worth growing at an even faster rate than before – with less risk.
This strategy works. It’s crazy how few people talk about it. I suppose a wise, boring approach doesn’t sell as many books as a more flashy “get rich quick” scheme.
Maximize Your Upside
The principles seem obvious because they are obvious. Or, at least, they should be. Some of the most fundamental structures of human thought are so obvious sounding that their power is missed, ignored, and effectively lost.
I find myself quoting these two principles word-for-word in daily conversation with friends, family, business partners, and others. The solution to almost every major problem is about finding the best way to position according to these two principles.
That said, once you’ve built a safe foundation as described above, then you can afford to take more speculative positions – so long as you’re not blindly gambling.
For some examples:
- Starting a Wise Business. When you’re in a position to start a business without worrying about losing your shirt, your business is more likely to succeed. When that happens, then you can do the next step, which is scaling it…
- Scaling a Proven Model. When you follow the above, you’re then ready to follow this tactic – scaling what is working. This is how effectively every fortune has ever been made. Only a handful of fortunes have been built any other way. Don’t reinvent the wheel.
- Starting a Cheap Side Hustle. Perhaps less dramatic, but one of the simplest low-risk ways to maximize your upside is through a low-cost side hustle. If it works, you’ll have something to scale. If it doesn’t, that’s fine – it was cheap.
- Asking for a Raise. When you protect your career downside – by building a nice portfolio, earning a good education, building a strong network, finding out where it’s possible to find a job should your current job evaporate – you’ll be in a position to negotiate raises much better than before. Minimize downside, then maximize upside. In that order.
Once you internalize the two rules, all of finance becomes easier to navigate. You’ll eventually just know exactly what to do by instinct.
NOTE: Minimizing Downside is NOT the Same as Fear
Minimizing downside is a calculated approach to risk management. It’s not the same as being terrified of “worst-case scenarios.” Fearful people experience disaster far more than prudent people.
If anything, a wise man learns to do what is rational – even when it feels scary. Sometimes, it feels scary to be cash-heavy.
Sometimes, it feels scary to invest so that you might “miss out” on the latest get rich quick scheme – like cryptocurrencies or stock market bubbles.
But prudent, risk-averse wealth building works dramatically better than any other financial strategy.
Don’t Ignore Something Because It Sounds Obvious
The ideas behind the two rules – minimizing risk and then working to maximize good results – are so fundamental, they are constantly referenced indirectly throughout society.
On minimizing downside:
- “Don’t put all of your eggs in one basket.”
- “Don’t count your chickens before they hatch.”
- “A bird in the hand is worth two in the bush.”
- “A good offense is a good defense.”
On maximizing upside:
- “Aim for the stars.”
- “Swing for the fences.”
- “Go big or go home.”
We subconsciously “get” that we want to minimize bad results. That’s why they’re bad.
And we know that you want to maximize good results. That’s why they’re good.
If anything, the simplicity of the two rules sounds almost tautological – self-referencing.
The principles seem obvious because they are obvious. The simplicity of important ideas often blinds people. We often take situations that should be easy to navigate and destroy themselves by ignoring the obvious, basic rules.
Arrogance can push us to look for complicated views of the world that allows us to believe that we’re in possession of some special, unique angle where the basic rules don’t apply.
This mistake is behind shocking military defeats, investors losing everything during bubbles, sporting competition upsets – almost anywhere there is defeat, there is a decision-maker missing the obvious rules.
There is life-changing wisdom in proverbs. The two rules are a perfect example of this in action. Apply these in your life, and everything will eventually transform.
About Shaun Connell
I've been obsessed with financial strategy since I was in high school. I became a strategic generalist and used those principles to retire as a multi-millionaire - at the age of 26. This website is my passion project to help spread financial education.