Investment Lessons from Chess
Most people don’t think; some people wrongly think that they are thinking; while very rare people actually think.  
 
I was recently invited as the chief guest at a chess competition. As it is customary for the chief guest to deliver a talk, while preparing my talk for the event and speaking at the event, I found a lot of similarities between chess, life and investments. This article summarises some of those findings. Play to win; but be ready to lose. We cannot solve our problems with the same thinking in which we created them. 
 
No One in Chess, Life or Investments  Ever Won by Just Making the Forward Moves: We are disillusioned that we have to always make forward moves, to win in life or investments. But chess teaches us that, sometimes, to move forward in the game, to win in life, or to make the best investment decisions, we need to move a few steps backwards as well. To get a better job, we need to quit the current job; to derive a more profitable business deal, we need to give small incentives; to avoid big investment losses, you need to cut small losses; some situations demand us to spend money to get rich and so on.   
 
Even a Pawn Can Convert Itself to the Mighty Queen: Once a tiny pawn is able to navigate and negotiate all the enemies and dangers to reach the other end of the board, it can convert itself into the mighty queen. Never underestimate the potential of anything in life or investments. All significant things began sometimes when they were insignificant. Most large companies began as small companies and many of the large-cap stocks started their journey on the bourses as small-caps. Small savings, over a period of time, create great wealth which capacitates a person to achieve financial emancipation. 
 
Moves Which a Knight Can Make, Queen Can’t; Way a Pawn Can Kill, a Knight Can’t: Chess has six types of pieces— pawn, knight, bishop, rook, queen and king. While there are some similarities between the moves of various pieces, each piece has its own unique way to move. All pieces, except the knight, move in a straight line—horizontally, vertically or diagonally. A knight is unique as it moves to a square that is two squares away horizontally and one square vertically, or two squares vertically and one square horizontally. The complete move, therefore, looks like the letter L. Unlike all other standard chess pieces, the knight can ‘jump over’ all other pieces of either colour to its destination square. Although the queen, which has the most widely spread power to move up to any extent diagonally, horizontally or vertically, it still can’t jump over other pieces; nor can it move in L shape. The knight’s ability to ‘jump over’ other pieces means it tends to be at its most powerful in closed positions while a queen or bishop is more puissant in open long positions. Also, although a pawn moves straight and forward, it kills one step diagonally which can’t be imitated by the knight. 
 
Whether it is life or investments, everyone has his or her own space; all of us have some gift with which the Almighty has given us for this earthly journey. We have to identify that divine talent, discover our genius, hone our skills, gain experience, improve our suaveness, consolidate our strengths while minimising our weaknesses and play the game in the best way we can.
 
Plan but Be Flexible with Your Plans: Chess trains you to think outside the box. There are many times in a game where your plans are foiled and you need a creative solution to stay in the game. Thinking outside the box helps you find solutions to problems in ways that others may not think of. Chess teaches us to plan but it also inculcates the essential habit of persisting and winning when the plan fails. This is also a skill you will need, over and over again, in life. Things don’t always go according to plan and people are unpredictable. The less rigid you are, the better you’re able to handle situations that come your way. For example, when your decision to buy a stock has been based on faulty analysis or information, it’s better to be flexible and get out of the wrong investment at minimum loss rather than sticking to it and nursing your ever-increasing losses. Remaining flexible is an invaluable lesson in life.
 
Sacrifice Is the Ultimate Wisdom for Victory:  Sacrifice is a very important lesson thought by chess: you may sacrifice a pawn to make a better attack later on in the game; a pawn has to be sacrificed, to save the bishop and the rook needs to be sacrificed, to save the queen. The same principle applies, once you walk away from the chessboard. Sacrifice is a necessary part of life as well as investments. Insurance premium is a small monetary sacrifice made to protect ourselves, our loved ones and our assets from unforeseen situations which may randomly arise. Postponing spending on extravagances today to create your investment kitty will help you enjoy luxuries at a later stage without disturbing your financial independence. Sacrificing a safe job for a profitable future business venture, working to learn and grow rather than merely earn are sacrifices one makes in life to do things you really want, at a later stage. Without sacrifice, we will never get what we truly want or be completely happy.
 
Protect the King or Game Is Over: Things which are important should never be at the mercy of things which are not significant. The game of chess is on till the king survives. Hence, at all times, most resources should be directed towards protecting one’s king and destroying the opponents. While dealing with money and finance, you must know who is the king—what is the importance of asset allocation; how to protect your wealth from financial predators; how to budget for yourself before you pay others; when to cut spending and when to spend your way to riches; the best investment avenues and how to create positive leverage to multiply your wealth; how to insure your present and future wealth; and know the rules of money to avoid the common financial mistakes. Never let your king, whether in life or while dealing with your money, be at the mercy of anything else. 
 
Investment Is a Board Game: Investments (and life), like chess, is a board game—you must know when to make the right move and when not to make the wrong move. You must know when to wait and when not to procrastinate. You must know when to think and when not to think too much. To a mind that is still in life, the universe surrenders. To a mind that is still in markets, during volatile times, the stock market surrenders. 
 
When Someone Makes a Move Which You Don’t Understand; Don’t Try To Understand It: When someone makes a move which you don’t understand, don’t try to understand it as it might be an insensate move. When everyone in the market is greedy, don’t just follow the herd; when some market guru recommends a stock, don’t just buy because the so-called market guru has recommended; just because majority of people are pursuing a particular career or business venture, don’t enter it, if you don’t feel comfortable or understand its intricacies.  
 
Win with Grace; Lose with Dignity: When you know you can’t lose, you are bound to win. But when you lose, you should know how to lose with dignity. The more you worry about being applauded by others and making money, the less you’ll focus on doing the great work that will generate applause and also make money. Two things define you— your patience when you have nothing and your attitude when you have everything. When you’re happy, you enjoy the music; but when you’re sad, you understand the lyrics. Chess teaches you to enjoy the music as well as understand the meaning and purpose behind the lyrics. Chess teaches that while dealing with your investments you should not be a victim of mental accounting or decision paralysis or bigness bias or buyer’s remorse or sunk fallacy theory. Nor should you suffer from the endowment effect.
 
Strategy without Patience Can Be Caustic; Patience without Strategy Can Be Anaemic: Strategy without patience can be caustic; patience without strategy can be anaemic; both, together, are the qualities of an astute winner. Make a proper strategy while dealing with your money; execute your plan but also keep periodically rebalancing, reviewing, changing and refreshing your portfolio allocation with time and your financial goals and circumstances.
 
At the End of the Game; the Mighty King and the Tiny Pawn Go Back in the Same Box: This is, perhaps, the most profound lesson of chess. At the end, we all go from where we came—dust. But our consciousness floats to the higher world and is directly positioned to the deeds which we have done. Although you may have worked hard throughout your life earning and preserving your wealth, that is not the thing which you will take with you when you, finally, move ahead from this world. Money is certainly not a permanent thing—that’s why it is called currency, i.e., it is just like electric current which moves from one point to another, from one house to another, from one person to another. Yes, it’s very important to achieve financial independence when you are alive but never forget the fact that money is not eternal and the thing which is not permanent can’t give you enduring happiness. So, earn money, reach the pinnacle of success, attain financial independence but always aim for a clean conscience. 
 
To have the rewards that very few have, do the things that very few people are willing to do. Everyone wants to go to heaven but nobody wants to die. Everyone wants to achieve financial freedom but few really want to follow the principles and the path which leads to financial freedom. The most dangerous place is in your safety zone. The more you go to your limits, the more your limits will expand. All the very best in the New Year. 
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    COMMENTS

    Raj Kumar Sharma

    1 year ago

    i want idea for make monney

    Raj Kumar Sharma

    1 year ago

    hi

    Rajeev Kumar

    2 years ago

    Very well brought out

    P.N.JOHN

    2 years ago

    Nice but very basic.I think actually playing chess helps you to invest better.That is why in 2009 at age 52 I took to FIDE tournament chess and learning theory with coach. Very surprisingly since I took up chess I have ended up with capital gains at end of each financial year.My wins ranged from Jubilant Foodworks to Tasty Bite Eatables this year.I attribute my success substantially to improved thinking due to chess.I will give one example.I scored a nice win against a higher rated player and checkmated him in the middle but my coach was unhappy that I had not provided luft-escape to King.This showed my inclination to take too much risk and his comment improved my thinking not just in chess but in investments as well.

    archana_rahatade

    2 years ago

    Nicely written in simple language.

    Krishna Rao

    2 years ago

    Really excellent comparison. Article is written in very simple language so that anyone can understand.

    MUKUND PHADKE

    2 years ago

    I liked the article , very nicely explained !! Hope ,many new chess players will enter into stock market, and will be able protect capital , to enter on new trading day !!

    Shankar Chavan

    2 years ago

    Thank you Sir, lot of learning from your article.

    SURESHWARAN PARAMESHWARAN

    2 years ago

    excellent message.. hats off to you sir...

    B .Ganesh Rao

    2 years ago

    Excellent analogy.

    Anand Vaidya

    2 years ago

    I read this article first on the dead-tree version of ML. Truly enjoyable read. I hope ML will pulish more articles from Shri Mehrab Irani.

    Shrikrishna Kachave

    2 years ago

    A good read! Especially the concluding lesson, although all have been fantastically written.

    anumaggy

    2 years ago

    Superb interpretation!

    Savers Are Losers
    If you assume that saving is equal to investing, you might be in for a nasty surprise. You are also living with a big delusion because you don’t understand the ‘rules of money’. The rules of money permanently changed in 1971 when the then US president Richard Nixon took the US off the gold standard and granted itself the licence to print money. Since then, the US dollar and other world ‘currencies’ have depreciated while prices of all commodities measured against it—be it precious metals like gold, silver or industrial metals like steel, copper, aluminium or agricultural commodities—have gone up and will continue to go up over the long term. That’s why we call money as currency.
     
    Although we all love money but, invariably, we are all fooled by it. The problem is that, while most of us love money, we don’t realise how to value it. If you think hard, you will realise that money is nothing but paper and has no value in itself except that it can be exchanged for goods and services. Thus, the value of money is not intrinsic; it is what it can be exchanged for in return. Which is why money, today, is nothing but a currency which can be exchanged for other goods and services. And the more the goods and services we derive for a given amount of money, the more the value of money and vice versa. This is what I meant by knowing the value of money.
     
    If you are still confused, let me give you a simple but a very common and practical example. As I mentioned earlier, most of us have illusions about money—the more the money we get, the better off we think we are and vice versa. But this may not always be the case. Let us consider a simple example of an employee 
     
    Mr X who got a 10% salary increment when inflation was 12% while, in another year, he got 5% increment when inflation was 3%. Which one would he prefer and which one should he prefer? In all likelihood, he will prefer the first case of 10% increment, although the second one is superior. The reason is very simple and logical. In the first case, the employee is getting negative real increment since inflation is higher than the salary increase; while, in the second case, he is getting positive real increment since inflation is lower than the salary raise. Thus, in the first case, the value of money in his hand is lower while, in the second case, the value of money in hand is higher. Again, I repeat that money is just a currency with no real intrinsic value. Its value is derived from how much of goods and services one can buy with it; the more the amount of goods and services which can be bought with a given amount of money, the more is its value and vice versa. This is called the money illusion and one of the main reasons why people prefer investment in fixed deposit at negative real interest rates after tax rather than long-term tax-free gains through stocks.
     
    One of the other facets of the money illusion is tax as it eats into your gross income. Although almost everybody hates to pay tax but people, often, don’t realise how they can legally reduce their tax liability. It’s very simple. The government has made very discriminative tax laws. The rich know it and take advantage of it, while the poor and middle-class become its victims. The government’s tax system is regressive, i.e., it puts maximum taxes on ‘earned income’—the income that you work hard for like, say, salary. At the same time, it totally exempts from income-tax certain other forms of income, such as dividends, long-term capital gains, etc, which constitute all passive and portfolio income—the income derived from your investment assets whether it be shares, real estate, etc. The tax is also regressive because it taxes the rich at a much lower rate. For example, the ‘net marginal tax rate’ after deductions is much lower on a business than it is on salary. A salaried employee hardly gets any deductions and most of his earned income is almost fully taxed, while a businessman gets all kinds of expenses—whether he actually spends or not—as deduction and the net taxed money is lower. I say whether he spends or not because there are certain expenses which the businessman actually spends money on, like staff salaries, telephone bills, electricity bills, etc, which are allowed as a deduction from income; but there are certain other items, such as deprecation, which is not a cash expense but is still a deductible business  expense. That is why the tax system is regressive and favours the rich, i.e., middle-class people buy assets in their individual names while the rich buy assets in their businesses; typically, the companies which they own buy the assets for them and enjoy all the legally allowed benefits on it. Thus, the rules of money are not fair and give the rich an unfair advantage. 
     
    Coming back to inflation, unlike income-tax which goes out from our pocket and pinches us; hence, we know it, inflation is a hidden monster with a double-edged sword. Although we may know it, we simply fail to recognise it and accept its presence. As the famous economist Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon.” That is why it is very important to understand the concept of ‘fiat money’ as currency. Those who are ‘savers of money’ and hold their savings as currency will be big losers over a period of time. The government can, and will, keep printing money which will result in larger and larger amounts of money chasing the same limited quantity of goods and services. And as we know from the basic premise of economics—demand and supply—when the supply of a particular item (money) increases without actual increase in output (goods and services), it invariably results in a fall in the value of money. The simple rule is that more the money chasing a fixed supply of goods and services, the more will the rise in price of those goods and services get expressed in terms of ever increasing money supply. Thus, by printing money, the government is, in effect, ‘stealing money from your pocket’ by diminishing its value.
     
    If you still don’t believe how income-taxes and inflation are eating into your wallet, then consider this simple example. Say, today, you have Rs100 and the price of your favourite slice of cake is Rs100. So, with your Rs100, you can buy and eat the cake. Now, if you ‘save’ that money in a bank fixed deposit at 8%pa (per annum) rate of interest and are subject to, say, between 20% to 30% rate of tax, your Rs100 adds up to around Rs106 after one year. Now, assuming the current inflation rate in the economy is 10%, your favourite cake now costs Rs110 and, hence, out of your reach. Therefore, while, today, you were able to enjoy your cake with the Rs100, you are not able to enjoy it after one year, in spite of having ‘saved’ your money, thanks to tax and inflation. You can neither have nor eat your cake!  
     
    Therefore, in today’s fast changing technological currency age, savers are losers. Instead, invest in assets like equities, real estate, commodities, etc, which actually benefit with inflation and also give you tax breaks. No doubt, nothing is linear and every asset goes through its own cycles, but the long-term compounding benefits will ensure that your purchasing power remains intact and you can have as well as eat your cake. 
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    What Influences Equity Analysts?
    Equity researchers, employed by stockbrokers, are an important component of financial markets. Research analysts are supposed to know a lot about the companies and sectors they track. Some of them turn very influential; when they recommend a buy, investors act on their recommendation. When they recommend sell, a stock can fall sharply. However, over the years, evidence is piling up about...
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