The Perpetual Amateur

Anyone who has played the game of chess for a fairly long time can understand the idea of ‘chunking’. Chunking, for the rest of us novices, is the ability of a seasoned chess player to identify moves or a pattern of moves within a game. This pattern recognition works like a filter in which they sort the good moves from the bad moves. This can make the difference between winning or losing the game.

So what does a novice chess player do exactly? The novice for lack of such pattern knowledge, tries to brute force his way till the end of the game. That means, the novice constantly uses trial & error to figure out which move to make. Basically trying to think ahead a few moves. This system has a very low rate of success, which is obvious because if pit against a master chess player the novice will be led into a pattern which is most favorable to the seasoned player. This will happen without the novice knowing anything of such a strategy. In fact an interesting thing to observe is that when two novice players play chess, they invariably play in a very random manner. There is no pattern to their movements & they eventually end up winning or losing merely because the game ends. But the clincher is not how many moves ahead we must see to win the game, but how many moves we can match in a pattern of good moves & bad moves. Continue reading

The Sport of Investing

I have always wondered if investing is a sport or a profession. What I mean to say is that should investing be about competition or should investing be about generating good returns on investment. Although a lot that an investor does, especially a very public one, can be qualified as a sport when we use league tables to judge fund managers, private equity investors, etc. But is investing really a sport or just another professional activity?

Well professional sportsmen will surely differ here, saying, ‘hey, even we are professionals.’ Sure they are, but the context is different when emotions are involved. It is weird since both investing & sporting involve the same level of emotional demands from the player. (S)He has to make decisions in a cold and calculated way which can make the difference between glory & defeat. An investor faces the same emotional dilemma, but not with glory or defeat (entirely), but with money & worse – other people’s money. So the emotional motivation to get glory at all costs is the fundamental difference between sporting & investing, because an investor can’t bet the ranch when the odds are not in favour (at least that’s what should happen in a rational universe). Continue reading

Getting it wrong

Investing requires a lot of conviction. Especially in equity investing where the future outcomes of any business are uncertain & many variables can affect business performance in the long run. In such a case conviction is a good currency to have.

But what is this conviction made of?

Conviction is to believe that something is right by judging the facts which we gather after going through available data. Why do we believe that something is right? Well its tricky to answer it this way. So we can try and invert the problem into thinking – why do we get things wrong? To put it into context, why do investors make mistakes?

Kathryn Schultz researches the phenomenon of ‘Being Wrong’. In her book & in her talk at TED she mentions what it feels when we are making a mistake. Does it feel horrible? Does it make us feel bad about our choice? No, while making a mistake we constantly feel we are right. All those miserable, horrible feelings come only after realizing that we have made a mistake. In most cases we can move on with our lives & forget about the mistake, but as an investor we have to pay our tuition fee. Continue reading