On War: Managing the Fog and Friction of Markets

"Everything in war is very simple, but the simplest thing is difficult. The difficulties accumulate and produce a friction no one can imagine who has not seen war." — Carl von Clausewitz

Military Context

Clausewitz was a Prussian general and theorist whose On War remains foundational to modern strategy. He argued war is not a science governed by mathematical laws but an activity saturated with chaos, uncertainty, and psychological strain.

He introduced two seminal concepts:

• The fog of war: the inherent scarcity, ambiguity, and falsity of battlefield information
• Friction: the accumulation of unpredictable obstacles — weather, broken equipment, delayed messages — that make simple plans extremely hard to execute

"The simplest thing is difficult" deserves attention: Clausewitz is not saying war is intellectually complex but that even a plainly simple plan is deformed by the environment in which it must be carried out. That distinction matters enormously to traders.

The Wall Street Translation

1. Navigating the Fog

Fog means incomplete and conflicting information. You will never hold 100% certain facts before any trade.

• The certainty trap: many fail seeking a holy grail indicator that provides certainty. They wait for perfect confirmation, and by the time the fog lifts and news is fully digested, the market has priced it
• Probability over certainty: accept the fog, treat trading as probabilistic, and use reward-to-risk so that even a 50% hit rate leaves gains well above losses

2. Overcoming Market Friction

Returns shown on a backtest meet friction in live execution:

• Slippage and commissions: market makers take their share and large orders push price against you
• Spreads: widening sharply in volatility, raising the cost of entry and exit
• Emotional friction: panic blocks a timely stop; greed holds past the target
• System failure: connectivity loss, platform outages, sudden liquidity gaps

The key judgment: if your strategy needs high precision and flawless execution to profit, friction will eventually destroy it. A robust method must still work after every friction is subtracted.

Actionable Trading Rules

1. Build a margin of safety: never commit everything to a setup requiring perfect execution; assume worse slippage than expected and size accordingly.
2. Keep a response for the unexpected: since the future is foggy, always hold a plan for the disaster case.
3. Accept imperfect information: you will be wrong on some trades. That is not strategy failure but the fog itself — judge decision quality rather than single outcomes.

Relevance to a Retirement Portfolio

Friction has a precise and routinely underestimated counterpart for retirees: costs.

A retirement plan showing 7% annual returns in a spreadsheet must actually subtract fund fees, trading costs, taxes, and rebalancing slippage. Each is small alone and together they materially change the outcome across decades.

Clausewitz's insight applies fully: plans usually fail not because the conception was wrong but because the resistance of reality was never counted. Low cost is therefore not a minor optimisation — it is the one source of friction you can control with certainty.