In Strategy and Tactics at Work (Chapter 3 of Garry Kasparov's How Life Imitates Chess) the author describes the "art of useful waiting." In chess there are occasions where there is nothing to do. These times are used to make small incremental positional improvements rather than explosive moves. Minor pieces are moved to the center of the board. Rooks are placed on key files. In investing there are times when we are fully invested and there is seemingly nothing to do. While there may be no trades to make, monitoring and research continues.

In chess one continuously calculates but the nature of those calculations change during the game. While it is your move you think through scenarios with if-this-then-that steps. For example if queen pawn advances, then knight takes bishop, then pawn retakes knight, etc. But in contrast while it is your opponent's move, let your mind run through abstract scenarios with visualizations of fantasy positions - without necessarily thinking through the sequence of moves to get there. Imagine your rook on the eight rank, imagine queening a pawn, etc. With such abstractions, your mind will be energized to search for a sequence of moves to make such positions possible.

In investing there are times for calculating trading sequences such as sell Citigroup then buy Cisco. But there are often times when an investor is in a "nothing to do phase." This is an excellent opportunity to visualize market and economic scenarios. Fantasize about a transportation industry with only three airlines; an internet where the PC and TV have truly converged; banks with all loans performing; consumers confident; further interest rate cuts; a strong US dollar. Such thinking will energize your mind to find investing themes and good company stocks to buy.

Comments: View Comments |  Wednesday February 27, 2008

In Strategy (Chapter 2 of Garry Kasparov's How Life Imitates Chess) the author describes strategy as abstract and pertaining to grand goals. By contrast he describes tactics as conditional and opportunistic. Similar contrasting words can be used to distinguish investors from traders. Investors are seeking a lofty goal such as long-term growth and the traders are opportunist with regard to trading imbalances often with little thought to a companies underlying business. But this contrast somewhat misses the mark as what investor does not enter and exit their positions without some measure of opportunistic considerations? And what trader does not have genuine long-term goals with respect to their trading capital? Indeed Kasparov goes on to say "it take both good tactics and strategy to be successful."

My SLO 2 strategy is: Identify and invest in three thematic industry group ideas at any given time. And keep enough cash in reserve to nibble into a fourth theme while unwinding positions in one of the three should rotation be necessary. The thematic idea must have the characteristics of an articulable compelling story. Individual companies must arguably fall into one of the compelling themes, have attractive fundamentals, and be traded with careful attention to its technical characteristics.

Playing chess involves making calculated moves to affect the position of the board several moves hence. Investing involves making calculated trades to construct a portfolio with desired content. Trading is the method of carrying out a portfolio strategy. "If you seize the opportunities that your strategy creates, you'll play your game like a Grandmaster." In the next chapter Kasparov discusses strategy AND tactics working together.

Comments: View Comments |  Wednesday February 20, 2008

Though airlines have been losing money for years, present circumstances provide three catalysts enticing me to put one-third of my SLO 2 portfolio into this industry.

Many experts are forecasting lower oil prices for 2008. I agree and therefore anticipate this lowering of airlines' primary variable cost will result in higher profit margins. This is one catalyst that will propel airline stock prices upward.

Another catalyst is increased demand for air travel and its attendant pricing power. The flying public is well aware full planes are the norm and the airlines reported load factors are rising. In the face of such demand, fares are continuously creeping upward. The airlines' confidence is also visible is new emerging add-on prices. United Airlines, for example, expects to net $100M annually by charging for checked baggage. With 117 million shares outstanding, this practice alone will be an earnings bump of 85 cents per share.

The third catalyst is airline mergers. I anticipate acquisitions to take place at a manic pace as companies jostle for advantageous positions in the new emerging industry landscape. Consolidation will likely lead to reduced routes further amplifying the aforementioned pricing power.

Continental (CAL) and Northwest (NWA) are particularly interesting due to their healthy international routes. I've bought three units each of CAL and NWA. I've bought two units each of United (UAUA) due to its accelerated earnings potential. I've also bought two units of Copa Holdings (CPA) due to its rapidly increasing passenger load.

Comments: View Comments |  Sunday February 17, 2008

In The Lesson (Chapter 1 of Garry Kasparov's How Life Imitates Chess) the author describes the spanking he received during the early rounds of his first match with then-champion Anatoly Karpov. He depicts the long grueling match and how his desire for better results led him to focus on how he made his decisions so he could fix whatever was wrong. While he learned lessons on how his opponent played and learned lessons on necessary changes to his own play, the primary lesson learned was the necessity of becoming intimately aware of the methods used to reach his decisions.

Though I have been successfully investing for 15 years, the markets gave me a spanking in 2007. In order to turn this around for SLO 2 I need to examine the weaknesses in decision making process that led to those undesirable results. My previous post discussed trading without a strategic theme and how my SLO 2 decisions will be based on three themes. This post discusses decision making with regard to position size.

Position size had little or no role in my SLO 1 decision making. I simply sought positions sized at just underneath 10% of the portfolio. This practice does not accommodate real world considerations of industry group diversification, leveraging positions in consideration of prevalent price trends, or systematically harvesting profits.

For SLO 2, I will set an objective position size for a given stock using measured expectations for its future gain. Further, this position will be obtained (or exited) via a patient three-unit-buy (or sell) campaign. Each buy (or sell) action will be timed with consideration of market direction, industry group direction, anticipated news releases, and the stock's own price action. Lastly, none of the three strategic themes will be allowed to occupy more than 50% of the portfolio.

As of this writing, this portfolio contains a first unit position in the following stocks. Each stock is within the bounds of my three themes and each position size has been thoughtfully determined. In a subsequent post, rationale on each will be presented.

Theme #1 Internet-related businesses are cheap. AIRN, PSEM, ALVR, BIDU, KNOT
Theme #2 Declining oil prices. LCC, NWA, UAUA, CPA
Theme #3 Consumer is not dead. KSS, PSS

Comments: View Comments |  Thursday February 7, 2008  |  Stocks: AIRN, ALVR, BIDU, CPA, KNOT, KSS, LCC, NWA, PSEM, PSS, UAUA,

Finding ways to apply a skill set from one discipline to another discipline is endlessly fascinating. As an investor it is often useful to examine a decision framework that leads to success in a non-financial field and study its attributes to apply them to an investing framework. In Garry Kasparov's How Life Imitates Chess, the chess champion describes how his decision making process evolved throughout his career and discusses how this applies to other areas of life. Though intended as a general-purpose tome, I found the material rich with tips worthy of application to investing. Therein is my approach to SLO2: I will make trades based on application of Kasparov's ideas to investing. Join me in the weeks to come as SLO2 is approached by importing chess ideas into investing. I hope you enjoy reading my blog entries How Investing Imitates Chess throughout this contest period.

In the book's prolog "Opening Gambit" Kasparov describes playing chess as a decision making process "requiring a constant stream of exact, informed decisions" and further posits the combination of "calculation, creativity, and a desire for results" plays a key part of success in any life endeavor. He concludes better decision making skills cannot be taught but can be self-taught. Self-awareness and challenge is the seed of self-teaching.

Looking back at SLO1, I overemphasized technical analysis and underemphasized thematic approaches in stock selection. That is (in chess parlance), I pursued tactics without strategy. So I am approaching the start of SLO2 with the following three strategic themes.

Theme #1 Internet-related businesses are cheap. Microsoft's offer to buy Yahoo this past week is a clanging gong telling us of not only this industry group's bottom, but of the potential dawn of a sizable restacking of the internet-enabled business landscape. Companies that provide internet content, services, or infrastructure comprise an excellent pool of potential stock picks.

Theme #2 Declining oil prices. The upward trend in crude oil prices has abated but rather than try to pick a bottom in oil company stocks, let's build a stock picking theme off of a beneficiary of lower fuel costs: airlines. Airlines have two things already going for them. First, airlines continue to have pricing power as evidenced by recent fare increases and continued full seats. Companies that exhibit pricing power are often excellent stock picks. Second is impending consolidation. This is speculative - and perhaps more so given the contest's limited duration - but riding appreciating prices on a speculation wave can be lucrative.

Theme #3 Consumer is not dead. I refuse to believe that the consumer is in as poor shape as the market has priced consumer stocks. The retail, restaurants, lodging, and gaming industry groups are all down presenting us with opportunities to buy excellent stocks at good prices.

Comments: View Comments |  Sunday February 3, 2008