MarketInsight | Your Money or Your Life
Ossip Bernstein was born in Imperial Russia in 1882. He was a lawyer, a banker, and a pretty good chess player. He prospered under the reign of the Tsar. Like many, he lost everything during the Communist Revolution. And like many, he fled to Paris and started a new life. A year later he was back in the Ukraine, during the Ukrainian War of Independence in 1918. He was arrested by the secret police and sentenced to death for being a lawyer. He and the other bankers and lawyers were lined up against a wall awaiting the firing squad when one of the senior officers noticed his name on the list of the condemned.
The officer approached Ossip and asked if he was the same Bernstein who had won the Moscow City Chess Championship a few years before. Ossip averred that he was, but the officer was skeptical. He devised a plan to determine the truth. He proposed a game of chess. If Ossip Bernstein won, he would go free. If not, he would be shot with the rest of the capitalists. According to the legend, Ossip won that game with ease. The game itself continues to fascinate chess fans. Did it really happen or is it just another one of those crazy stories that crazy chess players often tell? William Steinitz, the first World Chess Champion, once announced that he was playing a game with God Almighty by telegraph, and he was winning!
No record exists of the moves of the game — but chess players have often mused about how one would play if one were playing for their life. It must put extra pressure on a game that is already one of the most psychologically stressful of human activities. The consensus is that you would not want to play too aggressively or too timidly. A mistake could be very costly.
It is unimaginable that any of us will ever play a game of Chess for our lives, or a game of Monopoly or Candyland at such weighty stakes either; however, each of us is engaged in the life-long “game” of preparing for retirement. It is an important game for us to “win.” Like Ossip, we do not want to be too aggressive or too timid. A mistake in either direction could be extremely costly.
According to Benjamin Graham, who taught Warren Buffett, our goal in building wealth should be to compound over time at a reasonable rate of return and at a reasonable risk. Graham annually suggested portfolio weightings that ranged from 75 – 25 percent stock. In no instance did the Columbia professor suggest that his institutional clients should seek to get 100 percent of the potential return. Why? Because Graham felt that investors did not want to take 100 percent of the risk either. There is a valuable lesson here. We do not want 100 percent of the return, because we do not want 100 percent of the risk. Like Ossip, the consequences are just too great. That is why we diversify.
Scott A. Grant is President of Standfast Asset Management in Ponte Vedra Beach. He welcomes your comments or questions at email@example.com.