Late into the fifth hour of play in his sixth game last week, Viswanathan Anand’s eyes looked moist. With a second successive defeat staring in the face, the challenger—Magnus Carlsen had succeeded in tormenting the champion—Anand. Before long, a hapless Anand extended his hand, acknowledging the youngster’s superiority. Even though, as Indians, the outcome of the 2013 FIDE World Chess Championship match taking place in Chennai may not be to our liking, it is a fair one. Champion chess players, like consistent performers in financial markets, win based on superior ability than on chance.
That’s the beauty of chess. You have perfect knowledge. There is no dice or other random chance. Yet the number of possible moves and games makes it impossible to analyse completely. Similarly, the number of forces in the financial markets are too many to be evaluated comprehensively. Even looking several moves ahead is beyond the capabilities of all but the most accomplished Grandmasters in chess. It is even more difficult as an investor to think of the dynamics of market forces and predict price movements. More often than not, anything unexplained is termed as random. But as the American statesman, Mark Helprin said, “Nothing is random, nor will anything ever be, whether a long string of perfectly blue days that begin and end in golden dimness, the most seemingly chaotic political acts, the rise of a great city, the crystalline structure of a gem, the distributions of fortune, what time the milkman gets up. Of this, one is certain.” Similarly, we can be certain that nothing is truly random in the financial markets or in chess.
For instance, Carlsen’s win, more often than not, looks accidental as it did in the fifth and sixth game where the games seemed to be heading for a draw and Anand lost in the relatively boring endgames. But Carlsen has a consistent record of winning the end-games even with a feeble advantage. It may look like chance, but much like consistent alpha-generating traders in financial markets, there is a plan to what seemingly looks unplanned.
I like to liken the process of investing in the financial markets to the game of chess in slow motion. There a few differences though. Chess is a zero-sum game: someone wins and someone loses. In the markets, everyone can win and everyone can lose, and the stakes obviously are a lot bigger, because chess at the end