Great chess players think many moves ahead of their opponent. The only way to get an edge in chess is to break down the many possible future scenarios and always remain one step ahead of where your opponent is planning to move next. The market is no different, but most people don’t think like a chess player. They think like a Twitter user (what have you done for me lately). But the market isn’t a 140 character snippet of the here and now. The market is a chess board whose players are always thinking dozens of moves ahead of you. To succeed in the markets (regardless of your approach, long-term or short-term) you have to be able to think like a chess player.
A good example of this is the current market. Greece seems to be the only headline out there. All anyone can think of is how Greece is going to be the next Lehman Brothers. And the market has positioned for this event with a 8% decline in recent weeks. But the key to winning this game is in understanding the potential future outcomes of a worst case scenario like Greece. Most investors are just assuming it will be a disaster. Which it will be if there is no policy response. But if there’s one thing we can rely on from politicians who hate seeing their net worth decline it’s that they’ll respond. So the key to this market is gauging the political response in case of a Greek default. What will European leaders do? As I said on Twitter earlier today, the thing to fear is not a Greek default, but the response. Will politicians respond with a bazooka like Eurobonds? Or will they respond with nothing? Obviously, nothing would be a total disaster. But my guess is they’re assessing precisely how this sort of event will unfold and spread and they’re looking to ring fence and contain the effects. Will they succeed? Who knows.
What I do know is that over the last 4 years the investors who didn’t understand the next big policy and its effects were the players who got steamrolled by the Fed, ECB and other entities parading down Wall Street firing their various tools into the hearts of traders. This environment is no different. Personally, I’d be shocked if they let Greece default and defect without unveiling a bazooka. So to me, the key isn’t obsessing over the Greek default. The key is obsessing over the response. Thinking beyond today’s headlines to what the NEXT headline will be. Will it be:
“European leaders let Greece default, no policy response leads to market collapse”?
Or will it be:
“Greece defaults, European leaders unveil deposit guarantee, ECB credit facility, Eurobonds as markets soar in response”?
I guess you need to place your bet. If you’re on the wrong side of that headline it’ll be checkmate for you.