I grew up
in Russia, where chess was a spectator sport. Chess is almost as old as
the New Testament and has only gone through minor changes over its long
history. Chess has the longest recorded history of any sport – you can
study the first recorded game, played in Valencia, Spain in 1475. The game, which was called “Scachs
d'Amor” (“The Chess Game of Love”) by those who played and recorded it,
comes to us in the form of a poem comprising 64 stanzas of 9 lines each.
Any player who takes chess seriously will carefully study every move in
the tens of thousands of games played by grandmasters over the last six
hundred years of recorded chess history. Chess players study opening
systems – the series of first moves (five to fifteen in number) early in
the game that lead to the middle-game formation of pieces. They study
opening systems to the point that the early part of the game requires
very little thinking; it is quite mechanical – you execute openings that
you’ve studied day and night and thoroughly memorized. As the game leaves
its opening phase and goes into middle- and then end-game stages, raw
thinking becomes more and more important.
Enter Fischer random chess, which was popularized by the eccentric
American world chess champion Bobby Fischer in 1996. It is the same as
the traditional game, except that the first rank, the standard opening
arrangement of kings, queens, bishops, knights, and rooks, is randomly
reshuffled (symmetrically for white and black) every game. The second
rank, where the pawns open the game, is untouched. The rules, objectives,
and strategies are the same – you want control to the center; your pieces
need to protect each other; your king has to be protected at all times;
and the goal is the same: kill the other king.
The beauty and the difficulty of Fischer random is that memorization of
the opening system is completely useless – there are 960 variations of
starting positions for your army (this is why this game is also called
Chess960). You cannot make an automatic move like pawn E2 to E4, because
the piece behind it may not be a king but a rook. Studying the middle and
end games still has tremendous value.
There is a parallel between today’s stock market and Fischer random
chess. The last time we faced a global pandemic was in 1918, and this
might as well have been in the BC era. Few of us were alive then, but
even the history books are not that useful, as the structure of the US
and global economy, the central bank system, the diversity and dynamism
of society, and the state of technological progress are nothing like the
world knew then.
Most of the mental models we as investors rely on are based on an
environment that no longer exists. The only common denominator between
now and then is that humans have not really changed that much – it takes
a few millennia to rewire our DNA and thus our fundamental behavior.
I look at my thinking from a few months ago – which seems like it was a
decade ago – and realize it was naïve. In the initial shock of pandemic,
I did not realize that I was using the playbook (opening moves) for a
traditional recession as we approached our investment decisions. We were
playing the wrong game.
We need to confront this environment on its own unique terms: we have
never been here before. We have to incredibly careful not to fall back on
using old mental models. With every move we make, we have to reexamine
our assumptions.
Let me give you this example. As the economy reopens and we come back to
work, a lot of people won’t return to their offices. Many companies have
already announced that they will expand WFH (work from home). This means
people will commute less … and the demand for cars and gasoline may be
very different.
I visited Russia in 2008 for the first time since leaving it in 1991, and
I discovered something interesting: When people talk, the distance they
maintain between each other is much shorter than in the US. Americans
keep at least two or three feet between them. Russians are comfortable
with one foot. I (being Americanized at this point) found myself slightly
uncomfortable being in such close proximity to friends I talked to, and I
kept stepping back. It did not take me long to realize why social
distance in conversation is different in Russia. Despite Russia’s
enormous size, public transportation is always packed, elevators are
tiny, and apartments are cramped. This built environment has shaped how
people interact socially.
Will this pandemic permanently reshape distancing requirements for us –
will two feet turn into four or six feet? Over the last few decades the
airlines, trying to lower their costs, increased the number of seats on
planes and thus shrank the distance between passengers. Will they have to
rewind the clock and make seating more spacious again? If they do, ticket
prices will have to go up, and may go up a lot, since airlines’ operating
costs will not decline; they will only go up.
Higher ticket prices may reshape air travel. Flying may turn into a
luxury item again. You’ll have fewer planes flying. Businesses may
substitute Zoom calls for travel. You’ll need fewer planes and fewer
hotel rooms. Thus, if you are in the business of making flying buses
(planes), your industry might go from 4-5% forever growth – this was the
expectation as people in emerging markets became wealthier and started
travelling – into a glacial decline.
In 2008 – despite the magnitude of the recession – we did not have to
think about such fundamental shifts. I am not sure whether the travel
industry will change this profoundly, but there is not a zero probability
that this scenario will be our reality, all because of a microbe we
cannot see.
As time passes and we enter into the middlegame, we’ll have a lot more
clarity. We’ll get more familiar with our position on the board with game
pieces like vaccines and cures, and the old normal may more or less
resume. But today we have to face the fact that we are playing Fischer
Random chess and must weigh our moves both carefully and creatively.
As we look today at the global economy, the potential outcomes are very
wide. We’ve taken a position of hoping for the best but investing for the
worst.
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