Good article from MSN Investor.
It should be of interest to everyone who reads the thread.
Never could get all that interested in Chess when I was younger so was more than a little surprised how similar the approach I was taught to use in the market is to how this dude played chess.
But have always felt I learned from some of the best when I was a broker from 1976-82 and in 1986 from a very wealthy, brilliant, lone wolf, professional investor in the patch stocks.
Isopatch
"Invest like a market grandmaster
Advice from the chessboard works every bit as well in roiling markets: Defense first, gains later.
By Victor Niederhoffer and Laurel Kenner
Players who by nature are accurate and cautious can be advised to construct not a shelter, but a virtual palace with double pawn walls and a personal guard.
-- David Bronstein, "The Modern Chess Self-Tutor"
The great difficulty of investing in recent years has been that on occasions when the market appeared most likely to rise, public sentiment has been pessimistic. Conversely, when the market is likely to fall, sentiment has been good.
As we write on Wednesday morning, the Nasdaq 100 ($NDX.X) is up 20% from the 1,370 close on April 4. But a week ago, there was hardly an optimist in sight. Stocks were declining on profit warnings, disappointment over the Fed's ineffectiveness, tensions with China and reasonable fear that Lucent Technologies (LU, news, msgs) and California power companies would declare bankruptcy.
Suddenly, the gloom dispersed. The market began to rally on the most tenuous of reasons: word that Dell Computer (DELL, news, msgs) expected to meet its earnings projections, a report that Amazon.com (AMZN, news, msgs) lost a bit less than expected on sales that were a bit stronger than expected, the introduction of a new chip by Intel (INTC, news, msgs).
The gains of the past week leave us and everyone else in a quandary. We dislike buying after big rallies. We know that the short-term outlook for the market is much more bearish after big rallies like the one we've recently witnessed, and much more bullish after big declines.
Yet in the context of the past year's 3,100-point drop in the Nasdaq 100, 278 points seems insignificant.
Thus, on the one hand we are bearish. But on the other hand, we are bullish because we are confidently predicting Nasdaq 5,000 by year-end 2005. And we believe that the upward sweep of progress and research will conquer the old-hearted mien that has kept the market in its icy grip during the last year.
Learn from the masters
How to reconcile these conflicting inclinations? And how to overcome at the same time the tendency to become highly bullish after a big decline, when the short-term outlook looks great, only to be left hanging when the bears again come into ascendancy? How to deal with a situation like the present, where it is likely that we will be highly bullish in a few days but bearish at present, when the changing constellation of uncertain events in the future might swing us this way or that as a leaf in the wind?
We have a suggestion, a new paradigm for investing. Like all simplifications, it is not the holy grail. But it has one virtue: It is based on a deep philosophical idea from one of the greatest geniuses who ever lived. And it has evolved as a master strategy in an area where the greatest minds have been at work for more than 1,000 years, testing it on the firing lines with millions of combatants.
The idea is synthesized from a strategy suggested by David Bronstein, who as a Soviet citizen in 1951 tied for the world chess championship. Because of his Jewish faith and his dissident father, it has always been suspected that Bronstein's house would have been in grave jeopardy had he won.
To many chess aficionados, including Vic's and Laurel's teacher, Art Bisguier, who has been U.S. champion on many occasions, Bronstein is the greatest genius who ever played the game.
We think Bronstein's insights provide a framework for a new approach to investment. The following is from his book "The Modern Chess Self-Tutor":
At the start of the game, you should not be thinking either about mate, or about rapidly gaining a big material advantage. A systematic approach consists in proceeding to one's aim in stages, and since the system is confrontational, you must all the time reckon with your opponent's ideas and counter-actions, and should be concerned not only about giving mate, but also about ensuring the safety of your own king. First you must build a shelter for your king...a securely defended command post.
At the start of the game, you shouldn't be thinking about taking big risks with big bets on stocks.
In investing, the strategy translates to: At the start of the game, you shouldn't be thinking about taking big risks with big bets on stocks. Rather, build a shelter for your king. Reckon with the market's tendency to swing violently against you and make sure you're not in over your head. Protect yourself and your family. Take account of possible sickness. Set aside enough for college educations. Squirrel away enough to maintain the home.
The most common first move in chess is to advance the king's pawn two squares. Bronstein's recommended opening reflects both his inventiveness and the importance he places on defense:
On the first move, it is best to play the king's knight toward the center, occupying the square in front of the bishop's pawn. By then advancing one square the pawn in front of the knight's former square and then placing the bishop on the pawn's square, one can build the king's house. The opponent will not be able to prevent you from employing this technique, and in order to breach your defenses, he will need to display a great deal more sharpness, resourcefulness, will to win, imagination, etc., than after the popular but very risky king's pawn opening.
Once you have built the king's shelter, the offense can be mounted in three stages. First, attack to weaken the adversary's pawn screen. Then, attack with pawns to create a breach in the defenses. Finally, mount an invasion with long-range pieces.
What it means in the market: When your defenses are in place, go for small gains. Swing into purchases when the market is oversold and sell out when the market becomes overbought.
Finally, after making good profits and adding to your speculative capital with the swing method, take some long-range buy-and-hold positions to participate in the market's millions-of-percent-a-century returns.
Bronstein also offers general advice on the dangers of being too shortsighted and too aggressive:
You should not bring into play only your favorite piece, but should seek a plan of action by which the pieces make moves in turn, creating a united group in attack and defense…. You must ask each piece (stock) what it can usefully achieve on its own, what help it requires from the other pieces, and in what it itself is prepared to help them.
There it is, in all its brilliance and simplicity. Defend first. Don't give your enemy any targets. Make the opponent extend himself if he is going to attack your very formidable house.
Live to trade another day. A scholarly day-trader, Bipin Pathak, objected that this strategy seems to advise trading to avoid loss rather than trading to win.
Our answer: You can't win if you're dead. Most traders, when examining their records, find that their worst trades came when they swung for the fences, and their best trades were small enough that they couldn't hurt even when dead wrong.
The important thing, writes trader Henry Carstens, is to do your homework so you place only high-odds trades.
Some may well ask, "What good are rules?" In the past few years, most of them stopped working. The rule about taking out the canes to buy after big declines didn't work, as many of the biggest winners traveled the long chute to single digits. For several years, rules about buying small stocks and value stocks didn't work.
One of our readers, Glenn Escovedo, is a chess master himself. He suggested that the wisdom of Russian trainer Mark Dvoretsky in "Secrets of Chess Training" might put these general rules in perspective, since on the surface they might not tell you what everyone wants to know: what to buy and sell right now.
Any experienced player knows that when he is looking for the best move in the tournament hall, calculating variations and turning over the possibilities for attack and defense, he almost never recalls the abstract principles that are operative in the given position... So why study general principles and ideas? A deep acquaintance with general principles, methods, and devices deepens and extends our intuition. In the course of a game, it is our feeling for chess that suggests moves to us that correspond to the operative rules of the position, allows us to asses these or other possibilities, and helps us to divine where to look for a concrete solution.
There have been many approaches to success in investments. Bronstein's strategy, evolved from millions of trials in a game modeled after medieval warfare, seems to us to provide valuable food for thought for all players. We are assured by grandmaster Bisguier and others that Bronstein's strategy is quite prevalent and effective in modern tournament play. We have found that adapting it has improved our own game in chess, life and the market." |
