Chess has existed for 600 years. However, I discovered it at about the age of 10. My maternal grandfather/ Nana bought me a chess set, and that's when I actually discovered what chess is. Since then, it has become a hobby that I practise every single day and has become synonymous with my daily routine. ( If you were to talk to my friends about me, high chances are chess would come up.)
I believe that playing chess has helped me in many aspects of life, the learnings go beyond the 8x8 board and can be applied in many aspects of life.One of the aspects is definitely stock markets. This blog is my attempt to highlight how chess can help someone become better at investing.
Asymmetrical outcomes
Not all moves in chess are critical, nor do they require a lot of thinking. The outcome of a game depends on a few critical moves. Out of the last 100 games I have played, I can pinpoint the decisive moves that changed the course of the game in all of them. It's all about thinking of a strategy and implementing it. When the implementation leaves you at a critical juncture, which will always happen, you think again and improvise. Investing is the same! A few decisions or stocks will make or break your alpha; until then, you just trust the process and keep following your set rules.
It's an art of action vs inaction. Learn when to step back, wait, and act when necessary. Understanding when to change the direction of the game vs when to strictly follow the predetermined plan is critical.
2. Opportunity in Chaos
The critical moves that we talked about often arise during Chaos. I consider a position chaotic when there are numerous variations to play, each resulting in severe changes in the game's dynamics ( most probably not favouring you) and where shallow calculations won't work. We could consider Chaos as corrections/falls and crashes in the stock market. These are the times when people emerge from the wealthiest or the poorest. Chess might not replicate the anxiety or stakes when a stock market falls, but the lessons from chess, if implemented, will be of big help.
3. Circle of competence
Imagine that I have a chess tournament in a few weeks. How do I maximise my chances of winning?
I will prepare a few weeks in advance, work hard every day AND STICK TO WHAT I KNOW! Why would I want to reduce my chances of winning by playing something completely alien?
The same goes for investing. The circle of competence is an idea that everyone has heard of, but it can't be emphasised enough. Our aim is to maximise returns, and the best way to do it is to focus on the sectors you are well versed in. If you think a XYZ sector will do well but you don't know much about it, learn and understand it first and then use it in the markets.
My preparation for a chess tournament follows the same logic of you studying a sector before buying it in the markets.
4. Pattern recognition
In the book, "What I Learned about Investing from Darwin", the author Pulak Prasad talks of how he invested in Info Edge by recognising that the business model was a template that has worked globally. For him, there are only a few ways businesses can have competitive advantages, and this is visible because their characteristics seem to converge at some point in time. When I read it, it made a lot of sense to me. Capitalism ensures the free flow of capital, which further ensures that opportunities with superior returns normalise the cost of capital over time. For businesses to break this theory and maintain superior returns, there can only be a countable amount of ways to do so.
With this comes pattern recognition. Studying business models globally that work and finding similar businesses at a smaller scale is a good strategy for filtering ideas. It is tedious, but with experience, it will get quicker and better.
Chess is probably the best way to improve pattern recognition. I love playing chess puzzles, and in the end, it is all about trying a few tested methods and fitting in the right one to solve the puzzle.
5. Focus
Everything comes down to this. There have been times when I spent 30 minutes calculating a line and did not realise where the time flew. Chess is a game of calculations and requires intense focus. This focus is extremely crucial in any field. A book named 'Deep Work' by Cal Newport is an excellent read on the increasing importance of concentrated work in the current world that focuses more on shallow work. I don't think I need to elaborate more on focus.
Chess has existed for hundreds of years. It is a battle of minds and temperament. The skills needed to become a good chess player fit the mould for becoming a good investor, and I hope all of us can improve these skills over time.
P.S If anyone wants to play chess with me, My chess.com username is Anshul682 :)
Key takeaways
The soft skills required in chess are very similar in investing.
Asymmetric returns are common in chess and investing. Some moves require a lot of thinking and change of plans.These times will be the deciding factor of the future outcomes.
Opportunity in chaos: Best results come out from chaos and turmoil. A cool calculative mind during a chaotic chess game and corrections will bring out the best results.
Circle of competence: To increase the odds of success, stick to the openings you know and stick to the sectors you know.
Pattern recognition: Solving chess puzzles and finding successful business models are all about identifying the right pattern and acting accordingly. This can only come with time.
Focus: Everything is built upon this. Any effort without strong focus will not bear fruits in the long term. Learn and prepare in a way that you never forget the openings or the sector.
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