The constant iterative calculation of risk and reward required in every chess move translates well to the investing world. I thought it might be instructive to look at three chess world champions and see how their style matches up to various investment styles. Do you see your own style in any of these Grandmasters?
Tigran Petrosian, my favorite player, is widely regarded as the greatest defensive player in history.
Petrosian's style is characterized by risk-aversion and an incredible patience in waiting to exploit any errors by his opponent. He preferred to quietly develop behind closed positions and sought to cramp his rival's development at every opportunity. Board position was so important to him that he often made sacrifices in order to gain positional advantage.
Chess grandmaster Paul Keres once said, "Petrosian was a player who spent more time considering his opponent's possibilities than his own."
So the Petrosian investor thinks about risk, risk, risk. When he looks at a company, he is always focusing on trying to foresee and avoid the negatives while also strengthening the underlying strategic position. This type of investor will tend to miss out on stellar gains but should avoid disastrous blowups.
However, if you are willing to make sacrificial investments in order to suit the overall plan, hedging and diversifying should come naturally, as they help contain overall risk.
One criticism of Petrosian was that his approach tended to make him draw too many games through lack of initiative. Similarly, the Petrosian investor will spend a lot of time looking at situations and avoiding them because of risk-aversion. However, they will wait until the price is right and then move to take advantage.
This game is very instructive of Petrosian's style.
Karpov is a former world champion and great rival of Garry Kasparov. In a similar vein to Petrosian, he preferred closed positional play to the uncertainty of open tactical battle.
Karpov said of his style:
"The game may be continued in two ways: one of them is a beautiful tactical blow that gives rise to variations that don't yield to precise calculation; the other is clear positional pressure that leads to an endgame with microscopic chances of victory. ... I would choose the latter without thinking twice. If the opponent offers keen play I don't object; but in such cases I get less satisfaction, even if I win, than from a game conducted according to all the rules of strategy with its ruthless logic."
Karpov sought to eliminate uncertainty and gradually work out a strategic plan that involved total control of the game.
A Karpov investor will seek to make money across all market conditions and not look to take risk unnecessarily. But she would be more aggressive than Petrosian and take more initiative in seeking to impose overall strategy.
One downside of Karpov's approach could be that, should his opponent disrupt his overall plan, how he'd react is unclear. Nevetheless, if a Karpov investor gets his investment approach correct, he will find it a lot easier to keep replicating results.
That type of investor would likely prefer a mechanical approach that did away with too much discretionary decision making. If it goes wrong, they just look to adjust the system.
There's a good example of Karpov's play here.
Tal's style was to relentlessly attack; he relied on intuitive thrusts that created open tactical battles. He would deliberately open up novel and complex positions, in order to intimidate and crush his rivals.
Naturally, this would create imperfection in his play, but few could match his calculative speed or skill. Although this style is seen as risky, Tal has the best record in chess Olympiads and only lost twice in 101 games.
A Tal investor is an archetypal trader, relying on gut feel and instinct to make decisions. He is not worried about the odd loss because the imposition of his style means he will have more winners than losers. Tal investing is all about calculated risk and having the confidence and courage to take initiative while unsafe in the knowledge that you are in uncertain territory. Trading against Tal would not be fun!
Tal once said, "I began to succeed in decisive games. Perhaps because I realized a very simple truth: not only was I worried, but also my opponent." Tal's play can be seen here.
Three Grandmasters, three very different approaches. As an investor, which one are you?
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