You don’t need to have a Ph.D in economics to be a successful investor, but even a Nobel Prize winner in economics can appreciate the value of viewing investing through the decision-making paradigms of a champion chess player.
Indeed, Nobel Prize laureate in economics, Michael Spence, is just one of a long list of distinguished endorsers of Rich as a King: How the Wisdom of Chess Can Make You a Grandmaster of Investing, already an investment bestseller today, its first day of publication (by Morgan James Publishing).
Co-written by chess grandmaster Susan Polgar and financial advisor Douglas Goldstein of Profile Investment Services, the book takes the reader outside the sometimes alienating world of stocks and bonds to the excitement of the chessboard to get a more objective view of how to strategically win the game of investing.
As behavioral finance expert Meir Statman says in his endorsement (disclosure: this author is also an endorser) of the book, “We do not see the rivals on the other side of our trades, blind to the likelihood that we are the losers. But we see the rivals on the other side of our chessboards, forcing us to ask whether we are likely to be the losers.”
That point was brought home to Goldstein, an international advisor catering to U.S. and Israel-based clients from his firm’s Jerusalem headquarters, when playing against his child’s chess coach (two of Goldstein’s children were chess champions in Israel, a country that ranks high in international competitions).
“In a post-mortem on a game, [the coach] asked me ‘why didn’t you move your bishop?’ and I said I had another idea of what I was trying to accomplish,” he tells ThinkAdvisor in a phone interview.
After another losing game, the coach (who trained a World Championship contender, among others), said “my bishop was still in a bad place; why didn’t I move it?” Goldstein recalls.
“It was then that I realized that the exact same excuses I gave to my chess coach were the same ones my clients gave to me when I asked why they don’t make changes in portfolios that are underperforming. I saw exact parallels to the world of personal planning.”
Goldstein was not alone. Harvard economist Ken Rogoff (of Rogoff and Reinhart fame), himself a chess grandmaster, noted in his endorsement of the book that “chess players who know little about investing, and investors who know little about chess, will gain fresh insights into both.”
Indeed, Rich as a King looks at both the psychological barriers that block investors and chess players from succeeding, along with a parallel discussion of the six-step financial planning process (Goldstein is a CFP) that planners use to build wealth, avoid debt and manage risk.
The final section of the book takes 64 chess strategies — one for each square on the board — and shows how they apply to one’s personal finances.
For example, one chess idea advisors and their clients must know is to never “move their protection,” a lesson Goldstein learned the hard way in game with his grandmaster co-author.
“I moved the protecting piece out of the way and she snagged my other piece. This is exactly what can happen with the protection surrounding [a client’s] money.
“Someone has an IRA and says, ‘I’m gonna take some money out and buy some cottage in Oregon by the Rogue River,’ says Goldstein, who like most advisors, has some recalcitrant clients who succumb to their wishes against his best advice.
Desirable as that goal might be, raiding a tax-protected account prior to the age of 59 ½ means paying a 10% penalty and income tax, reducing a $70,000 IRA to about $45,000.
“You’ve got to keep those key protections in place. The moment you move them [in this case, the tax-protective shell of the IRA] you’re setting yourself up for potential devastation,” says Goldstein, who advised that borrowing the money, deferring the property purchase to age 59 ½ (or not making the purchase at all) would be financially savvier moves.
The paramount importance of risk avoidance came as somewhat of a surprise to Goldstein when his co-author looked at him almost uncomprehendingly after he apparently naively asked her: “Aren’t great chess players aggressive?”
Although accustomed to seeing her clobber her opponents, Polgar nevertheless advised that a true champion never plays a risky move.
“When she prepares for a chess game, she can’t assume her opponents will make a mistake; she can’t play in a super-risky way; she has to be careful. Hope isn’t a strategy,” Golstein stays of Polgar, whom he describes the No. 1 chess coach in the world, having been the No. 1 female player in the world, and having been the first ever female grandmaster.
That same approach goes for investing too, Goldstein says.
“Don’t be dragged into the lure of risk. That’s not to say don’t look for inefficiencies you can exploit, but they’re not easy to find. Don’t assume a Yahoo screen on a stock will reveal the company that will go up this week.”
Spectacular or early successes can falsely increase an investor’s appetite for risk. Goldstein recalls how, at the end of the high-tech Internet stock boom, a young man came into his office and offered himself as a money manager for Goldstein’s clients, touting his 80% a year average return.
On further inquiry, Goldstein learned the young man had been trading for just six weeks, and the trader was “extrapolating” his yearly average.
“One good move doesn’t mean you’ve won the game,” says Goldstein, who naturally passed on the aspiring money manager.
With a disciplined approach to risk avoidance in hand, the appearance of aggressive wins Goldstein saw in his co-author’s chess performance came not from heedless risk but rather from a multifaceted strategy where “she would have many, many attacks going on simultaneously; one was layered upon the next. Combined in a phalanx, there’s simply nothing you can do; you’re just being crushed.”
Advisors need to take that same disciplined approach to an investment strategy that “covers both your growth and income, budgeting and insurance as well,” he says.
Importantly, he says investment success is unobtainable if even a good strategy is not properly implemented by clients, for which reason advisors must provide them with “specific tactics to follow…You can overwhelm your clients…and they’ll have no idea what to do.”
For that reason, finding a good money manager or mutual fund is like having a grandmaster handle your portfolio, says Goldstein, who says a client — and in most cases the advisor as well — shouldn’t be involved in day-to-day investment decisions.
“It’s a very different job to be CFP vs. a money manager. In the same way a surgeon should know about dermatology so he can talk about it intelligently [but not perform it himself], I speak with money managers and can talk the talk,” he says, adding: “But my job is to help clients; their job is to manage money.”
Advisors can best help their clients by getting them to clarify and achieve their strategic objectives, using what the book calls “STRATegy,” a mnemonic device whose initial letters stand for: “Specific goals” that are “Time-bound,” “Rigorous,” “Attainable” and “Tempting.”
That last one may sound a little odd, and may not be featured in financial planning curricula, but as an experienced advisor Goldstein says it is crucial to an advisor’s ultimate success with clients.
“A big problem advisors have is they drone on. They don’t inspire their clients. [But] they have to help their clients find the goal that they really want to achieve,” he says.
“It’s just not sexy talking to them about paying their phone bill every month; they have to get them inspired about goals.”
He cites philanthropy as one highly motivating goal.
“Wealthy people can change the world more than non-wealthy people because they have resources they can leverage.”
Goldstein and Polgar believe that chess can change the world.
Indeed, as the first female grandmaster, Polgar brought about global change since, like the 4-minute mile, once she pierced the game’s highest echelon, many other women, knowing it was now possible, followed suit.
Growing up in Communist Hungary during the Cold War, Polgar faced a number of obstacles, which she surmounted against the odds, with the benefit of a father with quite radical beliefs for his time and place.
“Her father had a radical belief about education,” Goldstein says, “which only today has been proven, which is that genius could be learned, it’s not only genetic.”
So the Polgars homeschooled their daughters in a Communist society that arrogated to itself the right to determine what a school was.
“That was the first strike,” he says. “Second, they [Polgar and her sisters, who all became champions] were girls and chess was a boy’s game; and the government had in mind who they wanted to be their chess champions. But the Polgar sisters were such a force the government couldn’t hold them down any more.”
Homeschooled Polgar became the first female grandmaster all while learning five different languages. She also insisted on competing against boys in the segregated tournaments.
Such was the humiliation of their losses that “I never beat a man who didn’t have a headache that day,” he quotes her as saying.
Ultimately, having a broad arsenal of chess strategies from which to draw benefits investors in coping with the many situations they face.
Goldstein humorously recalls one chess champion who protested to the game’s arbiter that his opponent was smoking. The judge looked down at the table and said his opponent’s cigar was unlit, to which the player remarked:
“Yes, but he’s threatening to smoke and any fool knows that the threat is more powerful than the execution.”
Advisors, like winning chess players, need “to identify which threats are genuine and which are perceived,” says Goldstein. “All too often, people investing in the stock market see every minor blip of the market as some huge threat.”
But there’s a difference, he says, between a stock falling a couple of pennies short of analyst expectations and a company that is still in the business of manufacturing payphone booths or print encyclopedias, he jokes.
“An advisor’s job is to guide clients through that understanding,” he says.
– Editor’s note: This article describes Susan Polgar as the first female grandmaster, and indeed she is the first to be bestowed that title according to all the traditional criteria; some chess fans, however, are aware that the International Chess Federation had earlier conferred that honor to Nona Gaprindashvili and Maia Chiburdanidze, who were thought to have merited the designation even if not according to all of the traditional criteria.
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