Chess and investment strategy: Can you explain your last move?

Nov 5, 2014, 10:47am CST
By Susan Polgar and Douglas Goldstein

Susan Polgar is a chess grandmaster and head of the Susan Polgar Institute for Chess Excellence at Webster University.Douglas Goldstein is a certified financial planner. Together they are authors of ” Rich As A King: How the Wisdom of Chess Can Make You a Grandmaster of Investing,” in order to give people a simple, strategic approach to taking care of their money. They agreed to share some of their insights and strategy from the book.

Stockbrokers call some companies “story stocks,” meaning they’ve got an interesting angle that attracts buyers. Too often, though, investors pick up a stock because they heard a single compelling bit of news, and they think they have done enough research. These stock enthusiasts remind skeptics of the legend of renowned money manager Peter Lynch who ran the Fidelity Magellan Fund from 1977 to 1990. Lynch’s wife one day bought some hosiery called “L’eggs.” When she told her husband that the product was fabulous, he bought shares in Hanes, the manufacturer of L’eggs, for the fund. After that, Consolidated Foods, later called Sara Lee, bought Hanes out, and the fund made 30 times its money from the stock… all because Mrs. Lynch found some stockings she liked.

The L’eggs myth leaves out a critical detail.Peter Lynch said that when his wife told him about the product, he “did a little research.” For Lynch and his team of analysts, that meant that they studied everything, from the price-to-earnings ratios and earnings growth, to the operations, management style and experience. He didn’t just hear from his wife about the product and call in an order to buy a million shares of Hanes.

Dan Simons, co-author of The Invisible Gorilla, summed up the idea well: “If you decide to invest in an individual stock because you feel you know a little bit about it, you are probably overestimating your knowledge of that stock and that company because by investing in that individual stock you are essentially saying that you know more about that stock than the market does as a whole, and it’s pretty rare that that’s the case unless you’re an insider, or really an expert, or Warren Buffett.”

When investing in stocks, follow the methods of great money managers who, like chess grandmasters, never make a move without fully investigating all of the details first.


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