Out of university I landed a summer job working the line at an office furniture factory. It was awful work—spraying industrial glue back and forth while standing all day next to an oven that kept the glue at a balmy 350 degrees. Fun stuff during the summer heat waves. It was also incredibly boring.
As a result, talking sports soon became the best way to relieve the boredom. One popular topic was “Name your best fantasy sports experience.” The answers ranged from the pretty cool (“Take some at-bats against Roger Clemens”) to the strange (“Take a punch from Mike Tyson”).
Up to this point if the veteran factory workers had any doubt that I was a nerd, my response removed that doubt: “Get a chess lesson from Garry Kasparov”. Suddenly, not fitting in at high school carried right through to the factory floor. I made the take-a-punch-from-Mike-Tyson guy seem normal.
However, my fascination with chess actually provided excellent training for when I ultimately ended up in the investment industry. Many of the skills that chess teaches translates well to portfolio management. In fact, it’s no coincidence that Kasparov has written a book about how chess informs successful decision making in other areas.
But Kasparov isn’t the only chess master to make this connection. Bruce Pandolfini, an author and chess teacher made famous by the movie Searching for Bobby Fischer where he was played by actor Ben Kinsley, has also highlighted how correct chess strategy can make for better business decisions.
In no particular order, here are a few of the Pandolfini lessons that I regularly apply to my own portfolio management:
- Don’t overextend. I wish I had the ability of Scion Capital’s Michael Burry, who famously made an all-in bet by shorting the US housing market during the financial crisis, but alas I do not. Nor do any of you. Therefore it’s important not to make concentrated wagers. For instance, if I like US equities, but don’t like European equities, should I abandon Europe entirely? Never. This year is a perfect example of how such a strategy could backfire as the French and Italian equity markets, for example, have both strongly outperformed the US. Similarly, if I like the outlook for China, I might increase my portfolio weighting by one or two percentage points but not by, say, 10 percentage points. Being caught wrong-footed happens frequently in chess as well as investing. Always minimize the downside risk.
- Seek small advantages. This is related to the above point. Winning chess is really a case of racking up more small victories than your opponent. The rule here is “slightly, slightly, slightly”. Small, winning moves accumulate and can result in the necessary overall advantage. Rack up enough small victories and you control the board or, in the context of portfolio management, enable your client to meet their retirement objectives earlier. Targeting small victories instead of massive wins also minimizes downside risk because the opposite becomes true—the number of big, costly errors are reduced. Capturing the queen is obviously desirable, but there’s absolutely nothing wrong with just winning a pawn.
- Don’t look too far ahead. Contrary to prevailing wisdom, chess masters typically only look ahead by three or four moves, not the 15 or 20 that many believe. Thinking too far ahead is a waste of time. Too many variables are likely to be introduced as the game goes on, which will thwart future planning. Clients frequently ask me how the economy will perform over the next year. I will make an educated guess, but I’m well aware of the limitations of forecasting. Forecasts are unreliable. The International Monetary Fund proved as much when looking at the remarkable inaccuracy of consensus economic forecasts prior to recessions. For example, the first plots in the chart below show the average forecasts for US GDP growth made in the year before the financial crisis followed by those made in the year of the actual downturn. Needless to say, overreliance on the year-ahead forecasts was a big mistake. From a portfolio management perspective, knowing the fallibility of forecasts should result in a sensible long-term strategy: to always maintain balance and diversification amongst asset classes. In chess, your opponent will often do something you didn’t expect. Same with the markets.
Forecasting is Problematic: Consensus Forecasts for US GDP (2009)
Source: IMF, early plot points indicate growth forecasts one year ahead of recession
Ultimately, however, chess teaches discipline. It teaches the importance of not only controlling risk but, equally important, controlling emotion. Director Stanley Kubrick, who was himself a competitive amateur chess player, put it this way: “Among a great many things that chess teaches you is to control the initial excitement you feel when you see something that looks good.”
In other words, chess forces thinking that’s methodical, restrained and emotion-free, which, of course, is also critical to investing. Emotion is the enemy of investors.
Bobby Fischer said the same thing a bit differently: “I don’t believe in psychology. I believe in good moves.”
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.