Two of my passions are “investment/valuation” and “chess”. I immensely enjoy spending time on both and keep reading/learning. So I was twice as delighted when I read about the title of this article “Investment Lessons from Chess”!
Usually such articles only have fancy title and when you start reading you get totally disappointed. But not in this case! I really liked the article and hence thought of reproducing it here with due credit and link.
So read and enjoy this article by Mehrab Irani (Twitter:@RealMehrabIrani) if you like investments and chess…
Most people don’t think; some people wrongly think that they are thinking; while very rare people actually think.
I was recently invited as the chief guest at a chess competition. As it is customary for the chief guest to deliver a talk, while preparing my talk for the event and speaking at the event, I found a lot of similarities between chess, life and investments. This article summarises some of those findings. Play to win; but be ready to lose. We cannot solve our problems with the same thinking in which we created them.
No One in Chess, Life or Investments Ever Won by Just Making the Forward Moves: We are disillusioned that we have to always make forward moves, to win in life or investments. But chess teaches us that, sometimes, to move forward in the game, to win in life, or to make the best investment decisions, we need to move a few steps backwards as well. To get a better job, we need to quit the current job; to derive a more profitable business deal, we need to give small incentives; to avoid big investment losses, you need to cut small losses; some situations demand us to spend money to get rich and so on.
Even a Pawn Can Convert Itself to the Mighty Queen: Once a tiny pawn is able to navigate and negotiate all the enemies and dangers to reach the other end of the board, it can convert itself into the mighty queen. Never underestimate the potential of anything in life or investments. All significant things began sometimes when they were insignificant. Most large companies began as small companies and many of the large-cap stocks started their journey on the bourses as small-caps. Small savings, over a period of time, create great wealth which capacitates a person to achieve financial emancipation.
Moves Which a Knight Can Make, Queen Can’t; Way a Pawn Can Kill, a Knight Can’t: Chess has six types of pieces— pawn, knight, bishop, rook, queen and king. While there are some similarities between the moves of various pieces, each piece has its own unique way to move. All pieces, except the knight, move in a straight line—horizontally, vertically or diagonally. A knight is unique as it moves to a square that is two squares away horizontally and one square vertically, or two squares vertically and one square horizontally. The complete move, therefore, looks like the letter L. Unlike all other standard chess pieces, the knight can ‘jump over’ all other pieces of either colour to its destination square. Although the queen, which has the most widely spread power to move up to any extent diagonally, horizontally or vertically, it still can’t jump over other pieces; nor can it move in L shape. The knight’s ability to ‘jump over’ other pieces means it tends to be at its most powerful in closed positions while a queen or bishop is more puissant in open long positions. Also, although a pawn moves straight and forward, it kills one step diagonally which can’t be imitated by the knight.
Whether it is life or investments, everyone has his or her own space; all of us have some gift with which the Almighty has given us for this earthly journey. We have to identify that divine talent, discover our genius, hone our skills, gain experience, improve our suaveness, consolidate our strengths while minimising our weaknesses and play the game in the best way we can.
Plan but Be Flexible with Your Plans: Chess trains you to think outside the box. There are many times in a game where your plans are foiled and you need a creative solution to stay in the game. Thinking outside the box helps you find solutions to problems in ways that others may not think of. Chess teaches us to plan but it also inculcates the essential habit of persisting and winning when the plan fails. This is also a skill you will need, over and over again, in life. Things don’t always go according to plan and people are unpredictable. The less rigid you are, the better you’re able to handle situations that come your way. For example, when your decision to buy a stock has been based on faulty analysis or information, it’s better to be flexible and get out of the wrong investment at minimum loss rather than sticking to it and nursing your ever-increasing losses. Remaining flexible is an invaluable lesson in life.
Sacrifice Is the Ultimate Wisdom for Victory: Sacrifice is a very important lesson thought by chess: you may sacrifice a pawn to make a better attack later on in the game; a pawn has to be sacrificed, to save the bishop and the rook needs to be sacrificed, to save the queen. The same principle applies, once you walk away from the chessboard. Sacrifice is a necessary part of life as well as investments. Insurance premium is a small monetary sacrifice made to protect ourselves, our loved ones and our assets from unforeseen situations which may randomly arise. Postponing spending on extravagances today to create your investment kitty will help you enjoy luxuries at a later stage without disturbing your financial independence. Sacrificing a safe job for a profitable future business venture, working to learn and grow rather than merely earn are sacrifices one makes in life to do things you really want, at a later stage. Without sacrifice, we will never get what we truly want or be completely happy.
Protect the King or Game Is Over: Things which are important should never be at the mercy of things which are not significant. The game of chess is on till the king survives. Hence, at all times, most resources should be directed towards protecting one’s king and destroying the opponents. While dealing with money and finance, you must know who is the king—what is the importance of asset allocation; how to protect your wealth from financial predators; how to budget for yourself before you pay others; when to cut spending and when to spend your way to riches; the best investment avenues and how to create positive leverage to multiply your wealth; how to insure your present and future wealth; and know the rules of money to avoid the common financial mistakes. Never let your king, whether in life or while dealing with your money, be at the mercy of anything else.
Investment Is a Board Game: Investments (and life), like chess, is a board game—you must know when to make the right move and when not to make the wrong move. You must know when to wait and when not to procrastinate. You must know when to think and when not to think too much. To a mind that is still in life, the universe surrenders. To a mind that is still in markets, during volatile times, the stock market surrenders.
When Someone Makes a Move Which You Don’t Understand; Don’t Try To Understand It: When someone makes a move which you don’t understand, don’t try to understand it as it might be an insensate move. When everyone in the market is greedy, don’t just follow the herd; when some market guru recommends a stock, don’t just buy because the so-called market guru has recommended; just because majority of people are pursuing a particular career or business venture, don’t enter it, if you don’t feel comfortable or understand its intricacies.
Win with Grace; Lose with Dignity: When you know you can’t lose, you are bound to win. But when you lose, you should know how to lose with dignity. The more you worry about being applauded by others and making money, the less you’ll focus on doing the great work that will generate applause and also make money. Two things define you— your patience when you have nothing and your attitude when you have everything. When you’re happy, you enjoy the music; but when you’re sad, you understand the lyrics. Chess teaches you to enjoy the music as well as understand the meaning and purpose behind the lyrics. Chess teaches that while dealing with your investments you should not be a victim of mental accounting or decision paralysis or bigness bias or buyer’s remorse or sunk fallacy theory. Nor should you suffer from the endowment effect.
Strategy without Patience Can Be Caustic; Patience without Strategy Can Be Anaemic: Strategy without patience can be caustic; patience without strategy can be anaemic; both, together, are the qualities of an astute winner. Make a proper strategy while dealing with your money; execute your plan but also keep periodically rebalancing, reviewing, changing and refreshing your portfolio allocation with time and your financial goals and circumstances.
At the End of the Game; the Mighty King and the Tiny Pawn Go Back in the Same Box: This is, perhaps, the most profound lesson of chess. At the end, we all go from where we came—dust. But our consciousness floats to the higher world and is directly positioned to the deeds which we have done. Although you may have worked hard throughout your life earning and preserving your wealth, that is not the thing which you will take with you when you, finally, move ahead from this world. Money is certainly not a permanent thing—that’s why it is called currency, i.e., it is just like electric current which moves from one point to another, from one house to another, from one person to another. Yes, it’s very important to achieve financial independence when you are alive but never forget the fact that money is not eternal and the thing which is not permanent can’t give you enduring happiness. So, earn money, reach the pinnacle of success, attain financial independence but always aim for a clean conscience.
To have the rewards that very few have, do the things that very few people are willing to do. Everyone wants to go to heaven but nobody wants to die. Everyone wants to achieve financial freedom but few really want to follow the principles and the path which leads to financial freedom. The most dangerous place is in your safety zone. The more you go to your limits, the more your limits will expand. All the very best in the New Year.
Source: Investment Lessons from Chess by Mehrab Irani, Moneylife Magazine
Date: 10th January 2018