Chess and Trade (2)

If both chess and trade are games, why we keep playing these games?

Obviously, playing in this level of chess tournament cannot be justified by the financial reward. Even the champion, an National Master, spend 2 days played 6 games to won the cash award of $1800. There was not much left if taking lodging and transportation cost into account. Retail investors spend a great deal of time conducting market research and monitoring their portfolio. Even they might make decent profit, but after deducting commissions to brokers and tax to Uncle Sam, the yield will shrink substantially.

It is believed that to achieve genius level ability takes about 10,000 hours of practice or 10 years. Grand masters take about ten years of training and practice, only Bobby Fischer did it faster in nine years. It is a disappointing fact that most of us won’t be able to become a master or a professional trader, no matter how hard we try. That seems to be a typical high cost, long term, but low probability investment, which should be avoided outright.

We mentioned in the previous post, Louis Dembitz Brandeis, an associate justice of the U.S. Supreme Court, predicted a gloomy prospect for retail investors. However, Warren Buffet said:

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework.”

Here Warren Buffet’s emphasis is on the importance of high EQ (Emotional Intelligence). On personality development, chess games and investments offer excellent opportunities to improve observation skills, analytic skills, execution skills and ability and summarization skills. A high level chess players with high EQ is also very easy to excel in other areas. The founder of Grandmaster Capital Management, Patrick Wolff, is a grand master who won two US championships. He obtained Bachelor of Arts from Harvard University in Philosophy degree.

Let compare EQ requirements for a trade and a chess game:

(1) observation skills:
a chess: eg: That is straight forward. Which file is open? Which pieces are on the same line, a file, a rank or a diagonal?
b Investment: Does an event will influence our investment decision making? Such as: In Valley Fair Mall, Apple Store and the Microsoft Store are just across the corridor, we can clearly observe difference in traffic.

(2) analytic skills:
a chess: such as: How is the situation? Am I ahead or behind? Is my king safe? Are my other pieces safe? What is the most advantageous order if I have multiple ways of attack?
b Investment: eg: Is that event just a coincidence or becomes a confirmed trend? What was the market reaction? If I can take advantage of this opportunity, which stock I should choose as the vehicle? Are both fundamental and technical indicators cooperative? How long is the time frame?

(3) Execution skills:
a chess: Choose the safest way when you are advantageous. Be patient when you are behind. Always consider sacrifice, sometime even major pieces, to smash opponent’s defense.
b Investment: Take disciplined actions decisively, cut lose when necessary, do not dream a miracle will happen.

(4) Summerization skills:
Each trade should be recorded in the trade journal, analyze and review regularily. Avoid “step on the same rake twice”. Remember Dalai’s wisdom “When you lose, do not lose the lesson”!

Not everyone is suitable for trading, trading is a life long training of your mindset. Just treat every trade as an opportunity to exercise, so that we won’t make the same mistakes when managing more money in the future.