How Kasparov's weaknesses can help you beat the market

Tuesday, Apr 17 2012 by
How Kasparovs weaknesses can help you beat the market

While the upstart Magnus Carlsen looks a phenomenal talent, in the world of chess few would dispute that the achievements of Garry Kasparov are second to none. In spite of Kasparov’s many great achievements he is perhaps unfairly best remembered as being the first world champion to lose a match against a computer - IBM’s Deep Blue in 1997. The news kicked up a media firestorm that challenged the superiority of the human mind over computers, leading to many asking the question - would the game of chess be solved as the lesser game checkers had been several years before? While such propositions are best left to the theorists, it is two lesser known games that Kasparov played against human opponents that are most instructive for the average investor. The question we are seeking to answer is whether ‘lesser’ investors can beat ‘master’ investors, solely by cultivating a better process.

Enter the cyborg…

In an article in the New York Review of Books Kasparov explained that having lost to Deep Blue in 1997 he became fascinated with ‘Moravec’s Paradox’ or the fact that what computers are good at, humans are weak at and vice versa. Computers are excellent at calculation and computation, but humans have far higher levels of strategic intuition, sacrificial awareness and pattern recognition. What if instead of pitting one against the other, the man and machine played in tandem - could it create the highest level of chess ever played?

In 1998 he and another Grandmaster Veselin Topalov played a match in this way armed with laptops loaded with software. While a month earlier Kasparov had beaten Topalov 4–0, in this instance the match ended a 3–3 draw. When both were armed with machines, Topalov had managed to draw level in skill with the usually superior Kasparov.

While such a result raised a few eyebrows, jaws didn’t drop until 2005 when took the ‘Advanced Chess’ idea even further by setting up a big prize-money tournament for all comers - grandmasters, amateurs, algorithms or any hybrid of each. The early rounds predictably showed the technologically enhanced grandmasters destroying all comers, but in the final rounds an astonishing result bore out, the tournament was won by a pair of amateur American chess players. As Kasparov noted:

Their skill at manipulating and coaching their computers to look very deeply into positions effectively counteracted the superior chess understanding of their grandmaster opponents”.

The crowd nearly ‘krushes’ the master…

At the same time as the computational power of computers was wowing the chess world, the capacity of the internet was bringing previously diffuse networks of people closer together with extraordinary results. Still nursing wounds from his defeat by the brute force of Deep Blue he agreed to take part in a chess match (this time sponsored by Microsoft) against ‘The World’. The idea was to allow one move every 24 hours with each move played by The World to be decided by a free for all internet vote. More than 50,000 people voted on moves throughout the game leading to an extremely hard fought battle that flummoxed Kasparov until he eventually prevailed as victor some 62 moves later. As explained in a tremendous article by Michael Nielsen Kasparov was apparently so stunned by the level of the chess played that he wrote an entire book about it admitting he’d spent more energy on it than any other game in his career.

How had ‘The World’ managed to achieve this feat? The average participant was magnitudes poorer in ability and their strategy and tactics were completely public on internet forums. Kasparov himself had apparently reviewed them extensively throughout the match - how could he have struggled so much?

There had been four teenage masters co-ordinating the efforts of the World Team who made public recommendations on each move, but according to Nielsen the critical individual was the 15 year old US Women’s champion Irina Krush.

Shrugging off flames and personal insults, she worked to extract the best ideas and analysis from the forum as well as building up a network of strong chess-playing correspondents’.

The quality of Krush’s networked contributions were so high that every move played by the World Team between moves 10 and 50 were recommended by her. Kasparov described Krush’s move 10 as ‘an important contribution to chess’ and the level of the resulting play reinforces the idea that the opinion of the crowd, well coordinated by a central well networked facilitator can solve problems way beyond those of the individuals alone.

The above examples both serve to illustrate how amateurs in any game can raise their playing level to that of the greatest players and beyond by fusing the capabilities of modern technology with an effective process. Kasparov wrote that:

 “Weak human+machine+better process [is] superior to a strong computer alone and, more remarkably, superior to a strong human + machine + inferior process”.

Process is power…

For Kasparov substitute the stock market as a whole. The market is a very worthy almost all knowing opponent that even the majority of fund managers struggle to beat. Many professional investors go about beating the market by gathering more and more knowledge and analysing stocks more and more deeply, but if there’s one lesson to take from the progress of the lesser chess players above, it is that knowledge isn’t necessarily power - ****process**** is power. Rather than focusing on being a better analyst, it may be more profitable to focus on creating a better process using increasingly available computational and social inputs.

These ideas clearly are a perfect fit for investment but they may not be developed enough in the public sphere for individual investors to benefit. While the wisdom of the crowd is evident in the ability of individuals to read bulletin boards, the nature of forums leaves a lot to be desired. As opposed to the structured consensus decision making evidenced in the Krush-Kasparov match above, investors using forums often individually herd into similar high risk names with poor aggregate results. Likewise the use of checklists, algorithms and quantitative approaches by individual investors is a niche practice rather than a common one.

We are attempting to make our own contributions to these fields with some of the quantitative tools developed for our subscribers at Stockopedia but the bar could be pushed so much further given the progress of development on the web. Meanwhile, in spite of some commendable attempts, crowd enhanced decision making tends to still only happen effectively in small investment clubs or offline teams rather than in investment products available to the wider public.

These are some of the things I’d like to see solved in coming years. We are always thinking about these ideas, so if you have any thoughts to add to the debate, let me know in the comments below.

Filed Under: Investing Process, Checklists,

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6 Comments on this Article show/hide all

m8eyboy 17th Apr '12 1 of 6

Hi Ed, fascinating article. I've just read Endgame, a biography of Bobby Fischer which is an excellent book because Fischer was such a gifted yet delusional character. If chess is an analogue of investing, you might conclude from that book that all you need to do to succeed is immerse yourself in the subject from an early age (although you might not emerge the most rounded of characters!). Fischer never played a computer, or the World.

To come back to the point of your post, that process is power, I agree. I think investing is about gathering and interpreting information and throughput is everything! Kush sounds like she'd make a good investor in terms of her organisational and analytical ability. One problem I can see with crowd-sourcing investment ideas is investors have conflicting interests unlike the World chess team (momentum v. value, people who already own the stock v. potential buyers) so any attempt to harness the wisdom of the crowd might have to start with defining who the crowd should be...

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Edward Croft 18th Apr '12 2 of 6

In reply to m8eyboy, post #1

Regarding defining the crowd that's definitely a good point but I'm not sure that it matters so much. I have had the experience of investing in an investment club situation which I found very enlightening as the ideas that were pulled from the members came from every walk of life rather than the biases of the few. The questions we posed each month were 'what are you seeing that's different in the world?', 'what new trends are happening?' - rather than the typical stock picking chat which is 'what's the latest rumour?' or 'whats out of favour right now?'. As a result we tended to buy good value growth stories like pizzas and old people's homes rather than exploration wells in failed states - and the portfolio did fantastically well up about 250% from 2005 to 2012.

While we've been clearly doing a lot on the quantitative side at Stockopedia of late, reading the Kasparov vs. the world article has definitely got me thinking about how we could help 'crowd source' investment ideas online in a more structured fashion again. Generally bulletin boards and blogs are v. good for scuttlebutt but tend to be more of a 'push' system where people post ad hoc in an informal fashion. What interests me is creating more of a 'pull' system which encourages submissions which are then either accepted or declined into a model fund - a bit more like an investment club. This would be a bit like but with the added interest of the best stock ideas actually contributing to a model fund's performance - or maybe even several across multiple styles (value, growth etc).

The interesting thing about the investment club model is that often ideas are only accepted for inclusion into a portfolio when the 'story' is ready for the market to accept. I notice you've started your 2 minute monologues on your blog - these monologues are just the kind of story format that I'd be encouraging people to submit as they are more easily digested and passed around. 10,000 word tomes that you find on some websites don't tend to get read !

Enough on that from me... we've tried some game formats before but I'm definitely warming to this idea. Feedback welcome.

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UK Value Investor 18th Apr '12 3 of 6

Hi Ed, very interesting. I have a couple of points I think:

Process - This is probably 80% at least of anybody's success (ignoring luck). If the process is bad the results are likely to be bad in the long run.

Yet another analogy here, this time from F1. When Schumacher came into F1 in 1991 there were two key areas where he excelled and was unique and which to a fair extent had nothing to do with talent but had almost everything to do with process. First, his fitness was at a totally different level to the existing competitors, even Senna who was Mr Fit at the time. Only Schumacher could drive every lap flat out and leap out of the car at the end as fresh as a daisy. Mansell typically looked like he was about to have a heart attack. Second, he used left foot braking from karting as a central part of his driving technique which few if any drivers did at the time. This gave him a huge advantage in keeping the car stable in high speed corners.

Go forward 20 years and everybody is super fit and left foot brakes. By the end of his career Schumacher was far less dominant because others had copied his process rather than becoming intrinsically better.

Crowd-sourcing ideas - How about a portfolio of 52 stocks where each week a new stock is voted in and held for 1 year. So it takes a year to fill the portfolio and after 12 months the first stock is sold and replaced with whatever is voted in next. That way the crowd at least knows the holding period, rather than just saying 'vote for your best idea' which is a bit ambiguous as my best idea for the next month might be different to my best idea for 12 months. It would also engage people on the site (perhaps) and might even be fun.

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Edward Croft 18th Apr '12 4 of 6

In reply to UK Value Investor, post #3

re. holding period I absolutely agree - have been wondering what the sell discipline should be, but just having a time period may be good enough. 1 year is probably right.

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m8eyboy 18th Apr '12 5 of 6

In reply to Edward Croft, post #2

I'm glad you spotted the two minute monologues, as they're central to my effort to increase my own throughput of ideas. If you can get people to put their ideas into a standard format (or a range of standard formats, different ones for different groups) you may be onto something, although a lot of the value in the two minute monologue is in all the work behind it and I'm not sure if I could bring myself to invest, or vote for an investment, without having done it.

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Asagi 19th Apr '12 6 of 6

What a thought-provoking article.

It all reminds me of The Motley Fool's 'Value Shares List' discussion board and also MW Tops.

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About Edward Croft

Edward Croft

CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »


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