Visually Compelling TA

How Investing Imitates Chess (7)

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In chapter six of How Life Imitates Chess Garry Kasparov explores Preparation as an ingredient of success. Many fine anecdotes are provided ranging from sports to inventors spotlighting Michael Jordan, Thomas Edison, Thomas Jefferson and of course chess players such as Alexander Alekhine, Bobby Fischer, and Mikhail Botvinik. A common theme in these stories is that of disciplined hard work. The author advocates one seek out their own level of efficiency in terms of a ratio of work to results through practice and observation. The keys to great preparation are self-awareness and consistency. He points out a near mystical correlation between preparation and good results even when in retrospect the two cannot be directly tied.

Self awareness in investing is noted by Jack Schwager in Stock Market Wizards. After presenting interviews with fifteen stellar traders he summarizes a number of Wizard Lessons of which one is The Need for Self-Awareness: "Each trader must be aware of personal weaknesses that may impede trading success and make appropriate adjustments." Weaknesses cited include listening to other people's opinion, gambling urges, bargain hunting to the point of missing good trades, and the excitement from trading on options-expiration days. Schwager emphasizes that making proper adjustments is the necessary consequence of self awareness.

Regarding preparation, I recall an early seventies news clip which featured Fischer carrying two black notebooks with him everywhere he went. One titled "Spassky - White" and the other titled "Spassky - Black." Studious baseball pitcher Greg Maddux reportedly carries two black notebooks containing scouting observations from the league's opposing players' every at-bat. If I were to carry two notebooks pertaining to investing, what would they contain? The answer might reveal a valuable nugget of self awareness that needs to be addressed. My reflex is to carry charts. Perhaps one titled "Stock Charts - trending market" and the other "Stock Charts - sideways market"; or a pair of books labeled "Charts exhibiting channels" and "Charts exhibiting reversals." Whatever my final selection may be, I did not immediately think of fundamental themed notebooks. Say "Value Stocks" and "Growth Stocks;" or "Cash Flow Generators" and "Strategic Capacity Builders". I did not immediately think of story themed notebooks either. Say "Rule Breakers" or "Talented Management" or "Demographically Positioned." One can easily continue the possibilities, but the indication is clear: an oversized reliance on charts and technical analysis. A habit breaking approach might be to avoid charts for several months until a pattern of investing decisions on fundamentals or story emerges. The longer term correction might be to incorporate fundamentals into the technical analysis or prescreen stock ideas prior to examining charts. The interesting thing is that I am cognizant of the need to balance these three approaches but I am absent any habitual discipline integrating the three. I've been on autopilot with a single approach for too long.

Kasparov points out that targeting an area of life for efficiency need not mean becoming a fanatic. Fifteen minutes a day looking at chess openings would make you a better player. An hour a day learning Mandarin can change your career. Speaking of black notebooks, on my shelf are two Value Line binders. The contents are dated 1996. Wow. These books contain solid data on 1700 companies. So if I had read only one a day, I could have read the material twice between now and then. Granted the opinions become dated (though an active subscription provides weekly updates rotating the entire content every quarter) and the business landscape changes. But slow absorption of this single resource could enrich reception of all investing sound bytes for the remainder of one's investing lifetime. Not advocating Value Line per se here, but advocating consistency.

The preceding chapters have pertained to ingredients of success. The following chapters will pertain to evaluation and analysis. With each chapter I'll strive to discuss each with respect to specific SLO portfolio decisions.