The Citadel Annual Client Presentation, hosted for the first time in Citadel’s history as an online webinar in October 2020, turned to a chess analogy to help make sense of the unprecedented and unpredictable events of the year, as well as the particular challenges this has posed for investors. “All the right moves” underlined the value of strategy and perseverance during times of crisis and volatility.
As Citadel’s Chief Investment Officer George Herman explained: “The year 2020 has indeed provided us with some unique scenarios, which is why we chose chess as our theme for this presentation. Chess is the ultimate juxtaposition between the long term and the short term, between defence and attack, between moving forward and moving backward, between understanding what is within your control and what is not.”
Having set the scene, a highlight of the webinar was Herman’s discussion with South Africa’s first chess grandmaster, Kenny Solomon, which offered a unique opportunity to examine the affinity between the strategic thinking required at the chess board and the investment approach taken by the Citadel Asset Management team.
Chess is a strategic game, said Herman, probing whether any lessons from the chess board can be applied to life. “Chess teaches you to be analytical and to think before you move,” responded Solomon. “Because when I count variations on the chess board, I tend to triple check and I’m like that at home and in life. I drive very cautiously. That comes from chess.”
Often, in chess, players are pushed into a situation where you have to make a move you wouldn’t have liked to make, said Herman, making the balance between defence and attack all important. “Sometimes you are focusing on the attack part and suddenly a move comes from the side and you have to defend. Do you have examples of how you handled that when you were forced to make a move that you didn’t really want to make?” asked Herman.
Solomon responded by sharing the meaning behind the chess term: Zugzwang. “It’s a term for when whoever moves is in trouble,” he explained, adding that in such a situation it was critical to consider the options open to your opponent.
“When I teach chess there is a tendency to move forward and attack,” explained Solomon. “The most difficult thing on the chess board is to calculate your opponent’s best move. One square makes a huge difference. You can make a mistake in the opening, you can rectify your error in the middle game. You make a mistake in the middle game you can come back in the end game. But in the end game, you make a mistake and you are gone. That is the importance of the end game. That is where you have to be very precise – precision is important and especially calculation. And it is also a stage at which we have to be vigilant and calculate every move.”
What I immediately take from this, said Herman, was the objectivity and the need to understand the other possibilities and the multiplicity of scenarios in play. The same applies to investing. As 2020 has proved, it is crucial to have a keen appreciation for all the pieces on the board and the many moves and options open to you.
Bearing this in mind, Herman took the time to reiterate the four investment pillars which underpin the Citadel approach.
PILLAR ONE: THE FUTURE IS UNCERTAIN AND WILL OFTEN SURPRISE
“We acknowledge randomness and that we have to be prepared for uncertainty and many different scenarios,” said Herman.
PILLAR TWO: ASSET ALLOCATION DRIVES LONG-TERM PERFORMANCE
“Just like in chess, you have to manage your valuable pieces,” said Herman. “So too in investment strategy we have to focus on the big picture, on the fundamental issues and not have investment strategies that are merely focused on noise or the very short term.”
PILLAR THREE: TO REDUCE RISK EFFICIENTLY THROUGH EVERYTHING WE DO
Here Herman was extremely clear: “Do not take any form of risk that you are not thoroughly rewarded for. The same goes for the chess board.”
PILLAR FOUR: VALUATION MATTERS
“You have to understand which asset classes are valued relative to everything else. Just like in chess, a player with the most valuable pieces in the end game will more than likely end victorious,” he concluded.