In chess the player that is creating the action, as opposed to reacting, can see farther ahead and maintain control of the game. Garry Kasparov discusses Attacker's Advantage in chapter ten of How Life Imitates Chess. The aggressive mentality involved in a successful chess attack is commonplace in many competitive endeavors, but has limited application in investing because investors are nearly always reacting. Reacting to market forces, earnings announcements, upgrades/downgrades, lawsuits, etc. And when investors are not reacting we are simply waiting. Waiting for the next earnings release, waiting for a given target price to be reached, waiting for product approvals, etc. But never does the typical investor have sufficient clout to create genuine pressure in markets nor the business of the companies whose equities we trade. We do not create action.

On the other hand Kasparov points out that the attacking player is exercising a vitality of play which is characterized by optimism, dynamism, innovation, and a degree of intuition. These are all positive characteristics desirable in an active investor. Every few weeks I run across an article lamenting the persistence of bullish sentiment among investors but I would expect investor sentiment to rarely be bearish. Prolonged bearish sentiment would lead to one abandoning the market. (By the way, I would contend that someone actively shorting the market remains optimistic their market participation is going to pay off for them.)

Many investing sages agree limiting losses is a key to successful investing. Cutting your losses by ruthlessly selling those weakened positions takes a very aggressive energy indeed. With the new cash you may not be exerting force on an opponent, but actively searching for the next opportunity is indeed an attacker's mind-set.

Comments: View Comments |  Saturday June 14, 2008