Visually Compelling TA

The terms opening, middle game, and endgame are used to describe the phases of a chess game. These terms are often used outside of chess to describe the phases of an endeavor, but rarely are they applied to investing. In chapter nine of How Life Imitates Chess Garry Kasparov points out there are no distinct definitions for the three phases of the game. But even so each phase has distinct characteristics and each poses problems that benefit from different modes of thinking. With different modes of thinking being applicable, chess players find they have strengths in one phase and weaknesses in another.

The body of knowledge of chess openings is compartmented into various sets of opening moves and these are assigned names ranging from the descriptive ones (e.g. King's Gambit), to those named for individuals (e.g. Marshall Attack), to those named poetically (e.g. Sicilian Dragon). Aspiring chess students often approach learning this phase by memorization of opening sequences. Grandmasters universally agree this is a mistake (never mind that they have already memorized them!) as the players are not thinking for themselves. When your opponent departs from the book line you may not grasp the rationale as to why their pieces are placed where they are. Mistakes ensue. While I see their point, I cannot fully agree: memorizing a few opening moves can get you into a respectable position for the remainder of the game.

An aspiring investor may embrace an opening approach with a chosen set of moves. These approaches may be named descriptively (e.g. CANSLIM), named for an individual (Benjamin Graham approach), or poetically named (e.g. Motley Fool Rule Breaker). These modes of thinking are good and fine as they get the investor into the game with a respectable portfolio. But when the approach fails on a few trades, one may not realize the markets have departed from the book line and the approach no longer works. Mistakes ensue.

The middle game is approached with tactical finesse and strategic positioning into the endgame. The middle game requires alertness in general and alertness to patterns in particular. There are no book lines to rely upon. Tactics can of course be taught but the learning key is the more you do, the better you become. Tactical prowess is essential in this phase.

The middle game of investing is when the size of one's trades exceeds its periodic accumulations. Calculation, reasoning, and alertness lead the investor out of their initial positions and into aggressive positions. Tactics such as market timing, limit orders, and selling covered calls are teachable but you gain finesse only by doing them.

A game of chess transitions to endgame when major pieces have been exchanged and the energy and excitement of the middle game has diminished. There are fewer surprises to be had, the moves are sterile, and there is little room for style. With fewer possibilities it is almost possible to calculate the outcome of every move. Successful endgame players are cautious, patient, and calculating.

While chess has a distinct endpoint, an investing endpoint is elusive. It is true your options may be decreasing in terms of the risk you accept, the years to recover from a dip, or the ability to offset losses with wages. But ever-changing markets will not decrease their options or the surprises they can spring on you. Indeed the variety of financial instruments offered is rapidly increasing.

Nevertheless, it is commonplace to envision an investing endgame where one exchanges their equity wealth for fixed income wealth upon retirement. Consider one who accepts the conventional guidance and puts 90% of their wealth into CDs and retains 10% in equities. I contend that 10% is still playing the middle game. Consider one who receives a lump-sum pension payment and puts 90% of it into CDs and puts 10% into equities. I contend that person's 10% has just entered the opening. One's wealth is never entirely in an endgame.

Comments: View Comments |  Monday May 26, 2008