If you are an investor – novice or professional, a few important things need to be picked up from the game of Chess. A trader is an argumentative subset of an investor and it becomes all the more important for him or her to follow a few rules – Rules of the Road.
Stock trading like a chess board
Chess play is an art and not a science although it requires calculation and avid sense of logic. One, who is a trader doesn’t go by the rules and often pay the price for misjudgment of their own investment. Learning how to play Chess can help them overcome the same.
The different categories of pieces have their own significance based on how they move on the board. Let’s put a price tag on each of the categories based on their supply and demand and not to forget the type of their individual move.
A Priceless King
Needless to say that the King is priceless, as that is what you are playing for and against. Defense is your best attack. You are the king as your money is on the line and with your portfolio of Queen, Bishops, Rooks, Knights and Pawns; you need to risk-weight your assets well. When you learn to defend your assets in the game of chess and know very well as to what is your downside risk as against an upside, that’s when you are ready to hit the real world.
Queen is the most beloved asset of the king not because it looks pretty but because of its singular nature and multidirectional moves. With the price tag as mentioned in the figure, if you lose your Queen, you are down on your portfolio by 23.08% i.e. close to one fourth of your total investment. So, you need to put equal that amount on a blue chip company which is stable, robust and can withstand the heat of the market in testing times. It can also be the debt component in your portfolio as against equities but definitely not a derivative.
Bishops & Knights – Bricks in the Wall
The Bishops are priced at $30 a piece due to its availability. A diagonal move in all four directions from a distance can be overlooked by your enemy and hence it’s important to play it wisely from a distance but you can still take a bit of risk on them. Higher return might come by through higher risk and you can afford to lose one of them in order to fit into a master plan. The Knights are no different except for the 2.5 L-shaped move in all four directions. However, when you lose one of the pairs, you need to ensure that the other piece derives more than double the value. In real-life as well, if you are doing sector-trading, try to put your money in at least two companies – preferably one public and the other private. It would give you the portfolio balance that you crave for.
The Rooks are of utmost value to the board. Although they are a pair, they comprise of 25.64% of your portfolio. They are as good as the Queen and the straight movements in all four directions make them a dangerous pair to play for. Defend them well and only lose one in a trade off against a Knight or Bishop. The essence in real life investment is to also to safeguard your largest piece of investment with limited risk. Trade your Rooks basket in the mid-cap category as some of those key stocks would grow into large-cap, provided you select the right companies. This is definitely called value-investing and who knows better about it than a player of chess?
Pawns are valued at $10 for the sole reason that they are aplenty, however, pawns play an integral part in your defense and attack strategy. You need to select the pawns that are for attacks while the rest that are defending your key investments. A pawn might seem to be a cheaper trade off against a queen sometimes, however, can play a huge role in defending you – the king in many occasions. So, invest them very strategically. Larger supply can sometimes fall short of your demand.
Every move you make on a chess board, it defines you, your character and mind. So does your real life investments – only difference being that you can go back five places in chess to mend a wrong move but you can’t do that with your hard earned money. Can you?