Visually Compelling TA

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