Investing lessons learnt from a Grand Master!

This post was originally published on this site

It happened at the Intel/PCA Rapid Chess Grand Prix in 1994 in New York. It was Round One. Two young grand masters (aged 20 + something) played the first two games, which ended in a draw. As a result, they had to play an Armageddon Blitz tie- breaker – a short, fast-chess game where the White gets a total time of six minutes and the Black gets five minutes.

White clearly has a minute more, which is a huge advantage in such a short game. However, the Black is compensated by a benefit that in case of a draw, Black wins.

The game starts with quick moves. White starts with a strategy known as the ‘Petroff’ defense, but makes an unusual move at Move #4. The opponent suddenly stops. He goes numb. The clock is ticking. The Black wants to take his time to study and react to the move. Seconds are rushing by and soon the player has spent a minute and 43 seconds out of the 5 minutes given to him on one move.

He finally moves, more decisively and quickly now. The next 46 moves, he completes in 2 minutes and takes the game!

The player who played Black and won is none other than Viswanathan ‘Vishy’ Anand, the Indian chess Grand master and the former world chess champion. Also known as the ‘Lightening Kid’ during his early years (because of his fast game), Anand became the first grand master from India in 1988. He is a five-time world chess champion and the recipient of the Padma Vibhushan award, the second highest civilian honor in India. I read the story of his fascinating journey in Mind Master (his Autobiography) and would highly recommend this book to everyone. As I moved through the book, I found myself highlighting ideas from chess that can be used in investing.

What can investors learn from the Champion?

Although chess and investing are quite different, there are many lessons that investors can take from the game. I found areas where the chess champion’s thinking process had elements that investors can use in building a good investment process.

  • Before making your move

In the book, Anand describes in a lot of detail, the kind of preparation required before the game. One of the ideas he mentioned was going through experiences of former greats in chess. This works for the investors too. It is important to go through history of strategies that worked in the markets in the past, the investment philosophy of successful investors and what investment styles yielded good results under what conditions. Investing is about understanding history, businesses, finance and psychology.

Psychology is important, in chess too. Anand says: “The perception of chess as a left-brained activity executed with cold reason and calculation is not the one I entirely agree with…. Principally, winning in chess is centered on your emotions.” He writes about how it is important to understand oneself and as well as one’s opponent to win in this game.

In investing too, it is important to understand the behavioural cycle of the market (opponent) to take advantage of the mistakes the crowd makes. It is also equally important to understand one’s own decision-making process to avoid any behavioural pitfalls.

  • Error checking

“… after I have calculated a long, beautiful line for which I have travelled deep and uncovered interesting facts, I always return to the first move and run an error check. …Often in trying to look for beauty, I find I have missed something elementary.”

This is so common in investing. For most of the people, the most dangerous bias is confirmation bias. Once they are mesmerized by the story or the narrative of the stock, they actively seek out confirming opinions. Before making an investment, one should look for holes in the theory, be skeptical and try and play the devil’s advocate. Sometimes missing out or miscalculating a detail can be detrimental to long term returns from a particular investment.

  • Recording of decisions and review

From a very young age, Anand made it a habit of writing down his impressions immediately after every game. This helped him understand his mistakes and what he could have done differently during the game. The journal provided him with ideas that could be implemented in future and also at a macro level, to understand, if there was any pattern that needed to be eliminated.

Maintaining an investment journal works the same way for investment decision making. Whenever an investment is made, the investor should record the reasons behind the decision. During a review, reflecting on the outcome and the initial thesis will highlight if there was any error in judgement or any learning that can be carried to future investment decisions.

  • Don’t force yourself in a style/investment you can’t handle

It is extremely difficult to make superior returns in every market condition. A good investment philosophy, style or approach adopted by the investor and followed with discipline will result in good returns over a longer term. Shifting between different styles to take advantage of every short-term move can work negatively for the investor. In chess, the players try to get their opponents to step out of their comfort zones. That makes defeating them easy.

“The essence of chess is identifying which approach works best against an opponent because what people hate doing is what they will eventually do badly” – Anand.

Investors should be happy to lose less during conditions which are adverse to one’s investment style and make superior returns when those conditions are favorable. Anand defended his title successfully against Boris Gelfand in 2012 through a similar strategy. After studying Gelfand’s games, Anand decided to adopt a strategy where he will push for draws when playing Black and try for wins when playing White (In chess, White has an advantage of making the first move in the game).

  • Adopt technology

In 1999, Anand was invited to play a game of advanced chess where each player is allowed to use a computer to assist him in his moves. This was a first of a kind collaboration between man and machine to get the best out of both. Anand played against Karpov and won by a good margin. This event helped Anand accept the change that was coming, and in the following years, he leveraged technology rather than fight it.

For computers, the playground and the rules of markets are much more complex than chess. However, there are processes when machines can work better than men and a collaboration is warranted in investing too. Investors need to be open minded to adopt new technology rather than fight it.

  • A Grandmaster of Investments

Strategy games like chess highlight the importance of process and discipline. The ideas, processes and techniques employed by players over the years can be studied and used to improve decision making. The points discussed above can help design an effective investment process or enhance it. A good investor is a ‘consilient investor’ who derives knowledge from various fields to improve investment results.