Fundamentals, Technicals, Rooks and Bishops – A look into the similarities between Stock Trading and Chess

In 1991 at the age of 18, Boaz Weinstein, now founder and CIO at Saba Capital Management was trying to get a summer job at Goldman Sachs. His attempts to land something at the Big G of Wall Street working through the traditional channels came to no good. He was told there was nothing available for him at the company but while on his way out he ran into a familiar face. David F. Delucia, head of corporate bond trading at Goldman and also a certified chess expert. Mr. Weinstein knew Mr. Delucia well as he was a certified chess master and both of them had played each other several times.

As luck would have it, David arranged for a series of interviews which finally resulted in Mr. Weinstein landing an internship at the Goldman trading desk. Today, he is at the helm of a multi-billion dollar hedge fund and if it weren’t for his passion of chess he may well have been someone unknown. Mr. Weinstein is not alone among Wall Streeters who have a chess or bridge connection. Peter Thiel, the billionaire co-founder of PayPal who now runs the hedge fund Clarium Capital, is also a chess master while Warren Buffet is an accomplished bridge player. It is thus quite apparent that there is a connection between Stock trading and Chess. Proficiency in the latter helps one take better risks and overcome setbacks with greater ease. The commonalities between stock trading and chess however don’t just end at the transferable skills, the key actors on the chess board can actually be connected to the basic concepts that operate on the stock market as illustrated below:

1. 1. Market sentiment is the “Queen” which can move in any direction. Understanding the market sentiment carries the biggest weight in stock investments similar to how the Queen has the most points for any one piece on the Chess Board

1. 1. Fundamentals of the company are like the two “Rooks” which can move up, down or sideways but at a slow pace signifying the movement of elephants

1. 1. Technicals of an organization can be visualized as the two “Bishops” which can move only diagonally. This is similar to how an online trading expert like CMC Markets can easily interpret the data of price/volume movement but its not easy to grasp for someone unfamiliar with financial trading platforms

1. 1. Mergers and Acquisitions are similar to the movement of the “Knights”, which has the most unique play in the game moving exactly two and half squares at a time (similar to how an M&A creates a differentiated entity in the market)

1. Finally, all employees are represented by “Pawns”. Those who are able to traverse through the politics and be among the last one’s standing become the Queen, but no one can take the position of the “King” which is the birth-right of the founders

From the analogy above it is apparent that the most important facet of stock trading is understanding the market sentiment. To strongly grasp the market sentiment one requires the intuitive ability to read the mind of other traders, a fact pointed out by Douglas Hirsch, founder of Seneca Capital who picked up chess after clearly seeing a connection between stock trading and chess.

Memory, pattern recognition and the order in which you play moves are important in chess, and the same is true in investing – Douglas Hirsch.

That chess masters have incredibly high retentive power is a well known fact. Leading grand-masters like Bobby Fischer, Gary Kasparov and Vishwanthan Anand are known to prepare for their key matches by studying previous games of their opponents. They are often able to remember all the moves from those games for long periods of time making it increasingly difficult for them to be defeated. This is true even for some of the youngest players of the game like Parimarjan Negi who became a grand-master at the age of 14 years and remembers all the moves from his previous matches.

In the stock trading and financial investments world this ability is exhibited by the likes of Rakesh Jhunjhunwalla and Warren E Buffet. These stock market wizards have used their retentive power and intuition to foresee the market sentiment, analyse the fundamentals accurately and predict the behavior of the market with technical analysis before others. In other words these grand-masters are able to transform the chess board in their favor by almost exactly knowing the opponents move before the opponent himself has figured it out.

So there you have it, the similarities between stock trading and chess are quite astounding and make complete sense. This leads to a word of advice for anyone keen to work at Goldman Sachs, Merill Lynch or the stock market in general; brush up your chess skills and make an investment to ace the game. That is likely to give you a better chance at career success than an MBA from Harvard, Stanford or Wharton.

Note: This feature has been inspired from previous works on this topic as published on Netequityresearch and DealBook@nytimes