• Rubin Miller, CFA

Do Chess Players Make Good Investors?




Why do investment companies seemingly love to overlay large chess pieces onto their advertisements? I can venture a guess.


We are strategic. We have a tactical game plan.


We manage complexity. We are deep thinkers.


Here's a weird truth for those marketing departments:


Fundamentally, investing is nothing like chess.

Granted, they are both complex activities...but that's about it.


Take Candy Land which is an easy, leisurely activity. Not complex.


Yet Candy Land is like investing.



Monopoly, Scrabble, backgammon, Uno, poker...all varying degrees of complexity, but all very much like investing.


Investing isn't like chess, but is like Candy Land and Monopoly!?


Imagine that you are a fabulously talented Monopoly player, and that I'm a mediocre halfwit. And we begin to play, knowing full-well what should happen.


But what if I get some lucky rolls? What if I pick some lucky Chance or Community Chest cards? What if your rolls stink? What if your card-picks stink? One could imagine that, despite all elements of this situation aligning so that you should win, well...that on any given game, you might lose.


This doesn't happen with chess. No dice, no shuffled cards, no tile-picking.


Chess is complex, but not random.

Experts don't lose to beginners. Grandmasters don't lose to experts.


What's the common thread through all the other games mentioned? The players themselves don't entirely control the destiny of the game. There is randomness.


Here's one way to identify if there are random variables in a game:


Is there...

  • Card-picking?

  • Dice rolling?

  • Tile-picking?

  • Elements that can influence the outcome besides skill (or lack thereof)?

Here's another way:


There is information in the pattern of world champions.


A game of pure luck: no one would ever repeat as world champion.


A game of pure skill: world champions repeat until someone more skillful comes along.


A game of luck and skill: it depends.


Here are some lists of world champions going back 15 years, to 2007.


They tell you everything you need to know.

Elite Scrabble: luck+skill, mostly skill.

Nigel Richards 5x champion!





Elite backgammon: luck+skill, mostly luck.

Akiko Yazawa & Masayuki Mochizuki both repeat twice.






Elite poker: luck+skill, mostly luck.

No repeats.



Okay, I'm ready to offend some elite gameplayers:

The World Scrabble Champion is not necessarily the best Scrabble player in the world. 
The World Backgammon Champion is not necessarily the best backgammon player in the world. 
The World Poker Champion is not necessarily the best poker player in the world. 

Which is to say – to use backgammon as an example – that from 2009, when Masayuki first won a world championship, until 2021, when he won the world championship a second time...he could have been the best player in the world the entire time.


The outcomes just didn't reflect that.


The winners in between might not have been the best players, just the winners.


All else equal, Masayuki may have been the most talented. Unfortunately, in games with randomness involved, i.e. games with luckiness and unluckiness...all else isn't equal. You can't hold randomness constant.

He could have just been getting generally unlucky rolls in a game that depends somewhat on good rolls.


Other players may have gotten favorable rolls. And such are games with randomness.


Alas.


Here is chess, since 2007:


Skill only.



Persistent winning pattern. 15 years, only two names. Why?

The World Chess Champion is the best chess player in the world.

All else is equal.


No random variables.


Chess history is littered with streaks like this. Starting in 1894, Emanuel Lasker was World Chess Champion for 28 years straight!


Checkers is the same...no random variables. Marion Tinsley, the greatest human checkers player ever, played competitive checkers for 40 years and lost only 3 games total!


That doesn't happen with luck involved. Only by skill, and by skill-only.


Which brings us to the question...


Do Chess Players Make Good Investors?


Well, this is a topic where I have some relevant perspective.



I was the 4th- and 6th-grade National Chess Champion. I earned the U.S. Chess Master title at age 15.


And for the last 16 years, I've worked in the investment world.


And as appealing as it might be to connect the two activities, and as much as I'd like to up my own brand, chess players simply don't make great investors.


Chess and investing are unrelated at the most foundational element: investing, like life, is endlessly uncertain. 

Chess is complex, but not random.

Last week I was at a dinner event in Los Angeles. and I was asked if I would ever try to be a chess grandmaster. It struck me.


In chess, there isn't enough luck involved for me to ever reach grandmaster!

When it comes to people who have earned just the master title, I am toward the bottom in skill-level. Sure, it's an accomplishment, but it's very, very far from globally elite.


In 100 games, the top grandmaster would wallop a lower-end master 98-2 or better, easily. I would need some luck to compete.

Consider other games. Does a great (but not elite) backgammon player have a formidable chance against the top backgammon player? For sure. Scrabble? Yes. Poker? Of course.


Okay, so chess isn't random. How does this relate to investing?


I'll quote Morgan Housel (which is always easy to do, but even more apropos since he's the person that asked me the grandmaster question in the first place!); he wrote this back in 2020 during the height of the Covid-19 pandemic:


In investing, the average consequences of risk make up most of the daily news headlines. But the tail-end consequences of risk — like pandemics, and depressions — are what make the pages of history books. They’re all that matter. They’re all you should focus on. We spent the last decade debating whether economic risk meant the Federal Reserve set interest rates at 0.25% or 0.5%. Then 36 million people lost their jobs in two months because of a virus. It’s absurd.

Not only does investing have random variables, but we often don't know what they will be.


Here is Donald Rumsfeld's oft-cited quote regarding evidence whether Saddam Hussein had potentially supplied terrorists with weapons of mass destruction:


There are known knowns  there are things that we know.
 
We also know there are known unknowns  that is to say, we know there are some things we know we don't know. 

But there are also unknown unknowns, the ones we don't know we don't know.

Like Morgan's comments about interest rates, or guessing what inflation will be next month...it's easy to focus on the know-ables. Things we know are relevant but we don't know the updated numbers yet.


But those are not the data points that impact our outcomes the most.


Its not just investing. Look at us. There are a handful of moments in all of our lifetimes that upend everything, that cause us to meaningfully redirect life's traffic, that wreak havoc on our everyday as we know it, that destabilize us emotionally and sometimes physically it's when something we never could have expected, happened. Unknown unknowns.


It's hard to focus on stuff you can't know about yet.


I don't blame the marketing departments. It's intuitive to look at the complexities that drive investor outcomes and feel like you're playing chess.


Logical and strategic. Tactical. Deep-thinking. Calculating the future.


Yet it doesn't work that way. You can be right on so many things in investing, but a war can break out. A global pandemic can hit. Mortgage backed-securities, a niche investment, can blow up and cause a global contagion affecting all investments.


When Magnus Carlsen is thoughtful and prudent, he is World Chess Champion for ten years straight.

When investors are thoughtful and prudent, they might lose a bunch of money anyway.

The long-term average stock market return (which is about 10% per year) is packaged alongside the accompanying unexpected wars, unforeseen pandemics, weird mortgage blow-ups, random credit crises, etc...


This is what it looked like at the bottom of the Covid-19 market drop, down about 34%:




That's feeling an unknown unknown.


Here's a text I got from a former MBA classmate on March 18, 2020.


We hadn't spoken in years.


So many people wondered these same sorts of things.


It can be difficult to open a wider scope lens when the short-term is so painful and frenetic.


Investing in stocks is about knowing that over time they go up, yet the time horizon may not match up with our own preferred timeline. It's about expecting and embracing that we don't know what events will happen in the future to move prices, just that they will occur.

It's why I'd rather focus on my portfolio being resilient, and robust to external uncertainties, before I'd want to focus on it being tactical.


If you panicked at the bottom, here's what you've missed the last two years:




It's easier for people who aren't great chess players to be great investors.


They don't expect things to always work out perfectly. Disruption of well-laid plans, and navigating the unexpected, are familiar. That's how life works.


Whereas people who invest their time in a niche pursuit like chess, where perfect execution leads to ideal outcomes...have a potentially warped version of what drives success.


Chess players are familiar with wins and losses being honest feedback loops on the quality of their strategy and decisions.


But investing outcomes are often not helpful feedback loops, and completely unhelpful in the short-term. There is too much noise.

Of course, many investors assume they did something wrong when they have a bad outcome. But assessed properly, often bad outcomes are just reminders that completely unexpected shit happens.

And heaven forbid, if you do end up taking any investment advice from a chess player, just be a little extra cautious please.


Yours truly,



End.

 

Addendum


1. Did you like this piece? Here are 7 books that have influenced my thinking on luck, skill, games, and decision-making:


Seven Games (Oliver Roeder)

The Hot Hand (Ben Cohen)

Thinking In Bets (Annie Duke)

Fooled by Randomness (Nassim Taleb)

The Art of Choosing (Sheena Iyengar)

The Behavioral Investor (Daniel Crosby)

Noise (Kahneman, Sibony, Sunstein)