Visually Compelling TA

How Investing Imitates Chess (5)

Rating: 2.67 not yet rated(3 votes)    Vote:

You are logged in as | Logout

Chess requires participants to traverse a decision tree comprised of an ever increasing number of branches. At each branch the value of position, material, and threats must be calculated. Chapter 4 of Garry Kasparov's How Life Imitates Chess addresses the role of Calculation in playing chess. The author asserts calculations must be precise and ordered to be effective, but otherwise writes little on how to perform such calculations. Instead the author stresses the limitations of calculation. "It doesn't matter how far ahead you see if you don't understand what you are looking at."

As investors we routinely perform calculations of price per earnings, sharpe ratio, price per earnings growth, and various other ratios. We may also scour footnotes of SEC filings to make normalized computations of otherwise accepted release numbers. We may even go as far as to compute the net present value of a future stream of earnings. There is no shortage of calculations available to assign value to each branch of an investing decision tree but there is also value in knowing their limitations. No matter how precise and how well ordered our calculations may be, they are not a substitute for insight and we must recognize when there is a diminishing return in their pursuit.

Though highly regarded investors such as Warren Buffet, Bill Gross, Abby Joseph Cohen, or (insert name of your favorite prominent investor) and their staffs are no doubt highly skilled at calculation, I would posit that their success is because they are talented at understanding what they are looking at. The next chapter is devoted to role of talent in success.