Advances in technology have made investing more accessible than ever, and now there are even commercial algorithms that claim to be able to anticipate stock market trends and deliver positive results. Yet the best advice for investing may very well come from a game thousands of years old — chess. Doug Goldstein, Director of Profile Investment Services, Ltd., teamed up with Hungarian chess Grandmaster Susan Polgar to co-author Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing. He talked with Blouin News about this unusual strategy.
Blouin News: Do you need have a good knowledge of chess in order to really get the investment advice?
Doug Goldstein: Not at all. In the book, we explain each chess analogy clearly so that anyone who doesn’t understand chess will still grasp the underlying point that we are trying to make. In fact, all of the chess examples appear in “shout-out” boxes, so that if readers want to skip over them, they can.
BN: If you had to boil down the connection between chess and investing to its simplest form, what would it be? Something like “think strategically?”
DG: I would say: Just as a chess player has a goal (checkmating his opponent and winning the game), the investor also needs to have a goal. And in the same way, an investor, like a chess player, needs to think strategically and build a strategy with specific tactics to achieve his goals. All of this drills down to one short sentence which Susan Polgar regularly said to me whenever we played (and she won) a game of chess: “Look at the whole board.” Both investors and chess players often lose because they fail to look at all the moving parts, most of which are right in front of them.
BN: Chess is played against one player, and the rules are fixed. In real life, investing involves the interactions of numerous players and external factors, and disruption and innovation is constant. How do you reconcile this fundamental discrepancy?
DG: In chess, as in life, there are many different kinds of openings, mid-games, and endgames. Not all of them are suited to each player or every game, so you need to find the one that suits you and the game that you think your opponent will play. And sometimes, you may start out with one kind of strategy and then need to change it in the middle as you see that the game is not going your way. In both chess and investing, you have to do your best to “look at the whole board” and adapt your strategy and tactics accordingly. Is it always foolproof? No – and sometimes you may lose. But you still should try to do your best, building your strategy and tactics accordingly, along with the twists and turns of life.
BN: When you say “Think about the endgame first,” what do you mean for investors? If an investor is determined to reach a predefined endpoint, does that preclude him/her from taking advantage of unforeseen opportunities along the way?
DG: For investors, “think about the endgame first” means drawing up a set of financial goals. All investors have their own set of circumstances that will define their end goal. Of course, life may throw various unforeseen opportunities at them, and of course they could take advantage of them if that would be good for them. Nothing is 100% set in stone either. If investors’ life circumstances change along the way, then they should change their goals as they review their financial plan, also altering their strategy and tactics accordingly. One Wall Street term people use is “ROI,” which typically refers to “Return On Investment.” Susan and I have coined the term ROI to mean something different: “Risk. Opportunity. Invest.” What we’ve discovered is that when grandmasters view a board, the first thing they do is examine what specific risks lie in their way. They MUST assess and deal with those risks first. Then they can look for short-term opportunities and try to exploit them. Finally, after exhausting any moves they have to make related to the risk and the opportunity, then they can begin advancing their strategy, making small investing moves to gain incremental advantages. Investors must do the same, though they often don’t. All too often, investors put money in opportunities before properly calculating the risks. That’s a huge mistake. Everyone who wants to succeed must follow the ROI model – or else be very lucky.
BN: You say “Every pawn is a potential queen.” What does that mean?
DG: Every pawn is a potential queen – meaning that anyone, with the right tactics and strategy, can achieve his goals and advance even further than he originally thought. In a portfolio, it means before writing off an investment, study its potential. Does it just need more time before it can make it to its ultimate destination?
BN: Just like in top-tier chess tournaments, there can be a lot of pressure and mental strain when an investment starts losing value. How do you recommend dealing with that?
DG: We talk about mutual funds, index funds, and money managers [in Rich as a King], and why putting your money into an account managed in this manner can help you be more relaxed and less stressed about your finances. In the first chapter, we examine how the Nobel Prize winning research of Daniel Kahneman (who we interviewed for this book, and who reviewed our work) can be used to control behavior both on the chess board and with money. It seems that many, if not most, failed investments are related to the way individuals handle their decisions with too much emotion.
— Interviewed by Michael Lerner, Blouin News Buisness Editor