Garry Kasparov closes How Life Imitates Chess with a final chapter titled Endgame. The theme of this book has been inspiring readers to continually challenge themselves in pursuit of success. "My hope is that in this book I have managed to pass along some of the wisdom and strategies I've learned, and that you too will find ways to use the world's greatest game to your every advantage."

I opened SLO2 with How Investing Imitates Chess (1 of 17) and with this post the series is concluded. The theme of this blog series has been to glean a few morsels from Kasparov's book and apply them to investing. My hope is that you have enjoyed them. Summarizing three of my favorite morsels:
• There are often times when an investor must practice the art of useful waiting, which is an excellent opportunity to visualize market and economic scenarios.
• The keys to great investing are self-awareness and consistency.
• Investing is comprised of three phases (opening, middle game, and endgame) each with distinct characteristics that poses problems that benefit from different modes of thinking.

Comments: View Comments |  Sunday September 14, 2008

Garry Kasparov discusses Crisis Point in chapter fifteen of How Life Imitates Chess as a time when performing the best matters most. A crisis is neither a disaster nor a catastrophe. Disaster and catastrophe suggest finality. But a crisis embodies a critical moment when stakes are high and opportunity and danger are both present. Kasparov relates this material to his series of matches with Karpov and concludes he performed his best when it mattered most. But the portion of this chapter most related to investing is on the topic of detection.

Detecting a crisis in the making is a separate skill from solving a crisis. Success depends on detecting, evaluating, and controlling risks. Detection is often the most important and is the most difficult of these three. Detection of market bubbles is a clear component in managing investing risk. Detecting a rational bubble from a speculative bubble is even more difficult. Determining the inflection just before such bubbles burst poses further challenge. Bubbles are often accompanied with the statement "but it's different this time" and such statements are correctly ballyhooed by market kibitzers. But occasionally certain investors, when performing their best, really do determine when it indeed really is different.

It is prudent to guard against most of the "it's different this time" fear during a crisis and the "it's different this time" jubilation during a bubble. But my preference is to carefully watch and diligently search in order to detect situations where it really truly is different even though others have yet to notice. When no one is yet saying "it's different this time" is when it matters most.

Comments: View Comments |  Sunday September 14, 2008

Garry Kasparov discusses Intuition in chapter fourteen of How Life Imitates Chess. Intuition is a powerful force of recollected knowledge. You cannot ignore it and cannot fully explain it. It is the indispensable product of our experience, our knowledge, and our will to know and do more. The power of intuition and the ability to harness it and to use it like a master is at the heart of success. A well-developed intuition is used to distinguishing between an anomaly and a movement. Kasparov even uses an investing illustration. "Stock analysts search for visual patterns in stock charts ... the way chess players look for checkmating patterns. Intuition tells us not just what and how, but also when."

Many market observers speak often of fear and greed moving markets. Fear and greed are emotions that cause traders to step out of logical behavior and into irrational behavior. When we are trading on emotions such as fear and greed, we find we are suppressing not only our objective measures of the market, but also are suppressing our intuition.

Let's say we have our favorite overbought/oversold technical indicator and commence trading on its signals. We are trading objectively. But there are times when we will hesitate on these triggers. Once we pause and check our emotions to consider if fear or greed has led to the hesitation we look further. Is this the expected price movement the indicator was devised to capture? Is this an anomaly giving rise to a false signal? The answer lies in our experience, our knowledge and our drive to know more. Skillful use of this indispensable force of recollected knowledge is a key of successful investing.

Comments: View Comments |  Saturday September 6, 2008

Big Lots has a knack for upside surprises but its stock (BIG) demonstrates resistance near 34 as shown on a six-month chart. The 34 resistance point is evidenced on a three-year chart as well and perhaps motivated many traders to take profits upon its latest earnings announcement. BIG also exhibits support near 27 - an approximate 10% further decline from its current price. If it successfully tests 27, BIG will be a particularly tempting buy. A repeated run-up to 34 would net a 25% gain. Continued good results coupled with markets warming to retail stocks could very well propel BIG beyond 34.

Comments: View Comments |  Monday September 1, 2008