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Chess and the stock market

Learning chess can make your great in the stock market, maybe.

What chess can teach you about the stock market

I love the game but can it make you rich in the stock market?

Chess and me

I am not a chess professional, however, I play and coach chess at a high level.  I can beat most players but not all.  I live in Eastern Europe (now Florida) the land of chess masters. In order to beat the best, I would have to study books on chess and this time I now use to study economics as I am getting a Ph.D. However, chess has taught me a lot over the years, including some lessons about the stock market and investing.

  • The most important thing chess has taught me is to ‘think before I move’. Just because something looks good, consider all the other options and possibilities in the short and long run. It seems so simple but most people buy stocks on emotion or on a trading system they have studied. Both can be wrong.

The stock market and me

I have been a professional and personal investor most of my life buying my first stock at about 16 with the money I made working the night shift at Howard Johnson’s restaurant. I made and lost 100k in today’s dollars. I also worked with brand name Wall Street firms starting at age 21. Therefore, I had an early start trading stocks and I came from an investment family.

Later I changed to more boring investment accounting positions.   My lifelong performance was good but in recent years my performance has been excellent.  I was out of the market in the fall of 2007 for example.  How many investment experts can say this?  I have learned a lot and to some extent mastered investing like chess, to a degree. Even in a down market, it is a good source of income for me.

Chess and the stock market

Basically, I have seen a proportional increase in my chess rating and my stock performance. Is this a coincidence? At this juncture, I teach economics as a day job as I invest and write my own language learning programs, which is considered more play than work.  I think few people think they have this option to unplug from corporate America as I did, so read on. I think chess teaches you to think and think objectively.

If you ever want to increase your cognitive powers, play chess. After even a couple years of play, see how your thinking has changed and you can then take that brainpower to the bank. The irony is few chess players I know are active investors. Rather, they are more about the game.

How chess and investing are different

Chess is a zero-sum game. When someone wins someone loses while investing is a positive sum game. That is the main difference. Besides that, the same rules apply. Psychology strategy, defense, risk, analysis.

Chess, stock market and ego

The best chess players put their egos aside and are humble.  They do not compare their ranking or walk around with a sense of entitlement.  The best players do not dress for success nor care about titles or what school they went to or initials behind their name.  They simply are playing a game, and there will always be someone better than you and someone worse.  Investing, uh, I mean chess is not about comparing yourself to anyone or anything. It is about play.

Chess, stock market and objectivity

I have seen many chess players marry a particular idea or line of defense. Investors similarly become too emotional (again ego) to admit they have made a mistake and ride stocks all the way down or keep talking about ‘value investing’ when at that moment value investing is not where it is at (opportunity cost).

Chess, stock market and strategy

The best players do not make dashing moves, this was done in the gallant 19th century, but not today.  Players have learned that setting up the right system before they make any moves is best. Intuition and brave moves are only good once your base is solid.

Chess, stock market and noise

Players do not listen to the advice around them during play.  Also, do not listen to the news or experts while playing the market. Really.

  • Take away #1 let got of your ego and see it all logically from a cost benefit decision including opportunity cost.

Chess, stock market and position and value

Position is more important than value. Yes, a pieces only has a relative value not an absolute.  The value of a piece is based on position.  A pawn at the end of the board is better than a Rook that is cornered.  So do not believe companies and insurance companies that talk about their book value in relation to their stock price, for example, and say they are undervalued. Why?  Many stocks trade undervalued for a long time and there is a huge opportunity cost for holding this.   So remember the value of a stock or a chess piece is not absolute but depends on many factors. Keynes said ‘in the long run we are all dead’,  so if you while you are waiting for a company to return to book value why not invest in a winning position as the long run may be years.

Read book from the masters of old to be a good stock market investor or chess player

Do not tell people you read these books and do not talk general things like ‘I look for value in the market’, there are such ridiculous statements.  Read books from the masters of old and practice on your own before you play or invest (chess board or paper trades).  Be again be quite and silent about it or your ego will grow and hurt your chances of winning.

  • Take away #2 Strategy more important than tactics

The stock market is computers Vs. computers in an open game

What about AI and computers, is this not like chess, a force that can not be beaten?

AI is effective against human players in chess because it is a closed system and deep lines can be calculated faster than humans. These computers are not programmed but most significantly learn while playing. To start they were given only the rules and taught themselves.
When AIs play each other, it becomes a different game. The stock market is not a closed system and infinitely more complex than chess, and in essence, computer systems are playing each other and cannot predict variables that arise outside their system such geopolitical events or natural disasters.  We can not even predict the weather three days in advance.

Therefore, the best econometric models or computerized trading systems are imprecise.  These models try to correlate variables. Computer models and action that is taken based on these models become part of the equation, hence the accuracy becomes flawed. This is why the problem is systemic and the logic is circular.

Better than worry about AI and the market, remember, the stock market is not a closed system like chess. It is open with more variables including exogenous shocks. Better than worry about AI and the market, remember, the stock market is not a closed system like chess. It is open with more variables including exogenous shocks.

Humans rely on their models and data, but still at this time make individual decisions which can beat the market. Therefore, metaphorically we can learn from the game of chess as we observe AI behavior and strategies.

Chess is not just what white does but what black does. It is dynamic.

Investing in the market with chess concepts

My lesson from investing and playing chess is this. Although tactics in chess to checkmate someone fast gets notoriety at lower levels, real masters take their time and build positional strategies.

Metaphorically in the stock market, you need to consider strategies like dollar cost averaging and which sectors are trending, over individual tactical plays. Your time should be invested in more global thinking. Place your research on macro trends over individual stock picks. Then from there, you can choose individual stocks.

Surprised? No great insights? If you look closely there are. The best take away here is to be a good chess player or stock market investor you need to be very humble and say, ‘I do not know anything’. Only then can you can learn not only how not to lose money while investing even in bear markets but make money in a bear market. With some lessons from the game of chess you can be a great stock market investor.

By Mark Biernat

Mark Biernat - I write about frugality on the expense side and revenue generation ideas on the income side which can be applied to the country as a whole or your home economy. Please like this page on FB. Thank you.

5 replies on “Chess and the stock market”

Kevin Pennysays:

Great article. I never thought of this concept of using chess as an investment tool. Thanks for sharing!

As a chess player this article gives me the motivation to continue with stock trading. My goal is to do it for living like you but I am not there yet.
Thank you.

Mark Biernatsays:

It is the combination of both that can make someone better at stock trading. There is an old adage which says good at chess poor at life. This is not true but I have met some Chess bums who all they do is play chess at the exlusion of other things. Now they are smart and good people, but if they applied even 1% of that mental energy to making money then they would have a little bit better lifestyle in life.
However, if you stimulate your mind with chess or something creative, and play the stock market it is like having a double edge sword, it can give you a mental advantage. At least I would like to think so, becasue I love the game of chess.

What do you mean by “Masters of Old”?

I thought it is abit strange but i realized the same thing.

I am a professional full time trader and my chess rating and stock performance is somewhat related.

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