Are Investors Playing Chess or Checkers?

Today is the final trading day of notional ‘summer’. Notional you ask? Summer technically began on Friday June 21st and ends on Monday September 23rd. For many, summer begins the day that grade school ends and ends on Labour Day Monday. Using this as our benchmark, I thought a market wrap-up would be appropriate.

From ICE Data Services, & Bank of Canada website. August 29, 2019 4 pm.

Note: When yields go down, bond prices rise in general

The most often asked question over the summer months, as it relates to financial markets, has been “so, what are your expectations of the markets going forward and how should an investor be positioned?” Based on the chart above, most investors questions would have been referring to equity markets and the daily upheaval they have endured during each tweet, tariff tirade from various governments, and economic update. Who would have thought that the TSX Composite Index would have been among the better performers during the summer of 2019?

I have been giving this much thought, and a recent need to clean up a toy closet in our home provided the insight for an answer. I came across a number of games, and found both checkers and chess pieces to collect. The game boards for both of these are identical and yet the strategy, structure, and timelines of the game are both very different.

A recent commercial from a certain ‘robo-advisor’ pokes fun at an advisor calling investing a ‘long-term game’ (see my post of July 29/2019). With that said, games often make great easily understood illustrations, and this is an illustrative example. Checkers is considered a child’s game, while chess is considered a thinking game and champions of the game of Chess are considered ‘Grand Masters’.

Three Observations:

  1. The game board of chess and checkers are identical, and yet the game is played very differently.
  2. In checkers, all of the pieces move the same way and have the same value, while in chess, certain pieces have greater value, move in different directions, and one must always protect the King piece.
  3. Checkers can be played very quickly and with a modest amount of strategy. When you think you are losing, you probably are. In Chess, a loss of strategic perspective may suggest that you are in a position to lose, and that is when a bold move can be most effective against a less diligent opponent.

Years ago, a skilled Chess player and client tried to teach me the game of chess. He spoke about Chess in much the same way that I think of investing and so our conversations were always peppered with illustrations. While I am still a poor chess player, I will not forget some of the key ‘rules’ that he instructed me of.

  1. Don’t give up. Often, when things look the bleakest, the greatest opportunities arise.
  2. Know your playing pieces. They each have a role, and each have strengths and weaknesses. Much like an investment portfolios – these pieces or ‘assets’ should complement each other and not replicate each other. Use these wisely and prudently.
  3. Don’t be over-confident. Over-confidence comes from thinking you have a clear advantage. When this happens, players stop reviewing their tactics, play without a plan, or play without paying attention to their opponent’s moves.
  4. Never play the first move that comes to mind and never play the last move that comes to mind. As some clients have heard us say, sometimes the best move in response to market crises is no move at all.
  5. Keep track of time. In chess – there is a time limit to moves. Forgetting about timelines spells disaster in both Chess (and in investing).
  6. Don’t forget about the outcomes that you desire. Forgetting about outcomes and focusing on the immediate ‘crises’, leads to ‘distracted’ moves or hastily made investment decisions. Start with the end in mind.

Summer still abounds, 24 more days to be precise. Enjoy.