Can You Tell a Genius Strategy from a Huge Mistake?

Summary. Chess can be played at different speeds, and when master players observe one move in isolation without knowing the kind of chess being played, it can be hard to identify smart play from poor play. Likewise in business, judging decisions can be difficult because of differentials in timing. Some investors focus on the extreme short term; others have an infinite holding period, and the kinds of managerial decisions that will be smart for one type of shareholder are often poor for the other.

I was recently watching chess videos with my brother, a huge fan of the game. These are videos in which seasoned masters are shown a set of moves from a game between two “mystery” players (the players’ identities are hidden). Based on the moves shown, the masters must answer this question: What are the ratings of the mystery players?

Chess is a game of skill and strategy. It leaves no real room for chance, luck, and randomness. Masters, who have studied thousands of games, therefore excel at sizing up other players. All they need to do is see someone play. That player’s chess rating, a number reflecting their skill level, becomes self-evident from their moves.

A very surprising thing happened in one of the videos we watched. The observing masters paused at a certain move, and noted: That is either a brilliant move made by a genius, or an accidental mistake made by a fool!

Their point was that the move could be indicative of genius-level skill, if played as a deliberate strategy to exploit a competitive edge. But the same move could also be foolish if played in isolation, without a “what next” plan. And it’s sometime not possible, even for seasoned masters, to tell the difference without seeing how the game evolves.

Now, if this is the case in chess, a deterministic game with definitive winning strategies, what about the world of business, with its infinitely greater uncertainty, randomness, and moving pieces?

“Masters” of the business world—board members, recruiters, management consultants, investment analysts and so on—are frequently tasked with evaluating or rating the skills of individual executives. Such evaluations are often based on reviewing the business moves these executives make. And here, too, certain moves are judged as signs of “genius” skill, apparently undertaken by someone at the top of the game, while others are deemed the “foolish” mistakes of those who must not know what they are doing.

Why It’s Hard to Assess Business Moves

But how meaningful are these assessments and the labels they result in? Consider the following examples:

• Steve Jobs was once fired by Apple’s board, who assessed his leadership skills as ineffective. Apple nearly went bankrupt in the years that followed. Jobs eventually returned and rebuilt the company into one of the greatest ever, by generally following the same playbook which got him fired in the first place.
• Senior executives at Wall Street banks were lauded by analysts and awarded among the highest performance-based bonus payouts in history leading up to 2007, due largely to their creative packaging of mortgage-backed securities. This was mere months before the Great Financial Crisis, in which these same strategies nearly destroyed the U.S. financial system.
• Warren Buffett was written off as an underperforming has-been at the peak of the tech boom in 1999-2000. Then the “dot-com” crash took place. And Buffett was re-anointed a corporate genius—not because he re-invented himself, but because many dot-com businesses collapsed while Berkshire Hathaway’s consistent, value-based approach re-demonstrated its worth.
• Elon Musk is frequently labeled both genius and a fool. In fact, many of his business decisions simultaneously elicit such labels, from different business experts, for the exact same move.

In sum, history repeatedly shows that today’s business genius can prove to be tomorrow’s fool, and vice-versa. This should not come as a complete shock. Firstly, because business leadership is situational. Different things work, or don’t, at different times and in different contexts. Secondly, because the only thing that business executives can control are the decisions they make. The outcomes of those decisions are subject to the vagaries of probabilities and chance. It can, therefore, be impossibly challenging to separate skill from luck.

But the chess analogy suggests that there’s an important, additional factor to consider. All chess players have the same ultimate objective: Get to checkmate. But there isn’t just one type of chess game. Bullet chess is played at lightning speed, with moves made in seconds and entire games lasting a handful of minutes. Rapid chess games usually last, at most, an hour or so. Classical games, in contrast, can feature many hours of play, sometimes spread across several days.

The skills required for success are not identical for each type of chess. Shorter games rely on intuition, reflexes, intimidation, and hustle. Longer ones on deep thinking, patience, discipline, and stamina. This adds a further nuance to the challenge of guessing a player’s rating by observing their moves. The answer can depend not only on what the player was thinking, but also on the type of chess game they are playing—bullet, rapid, or classical.

As with the universal checkmate goal in chess, business executives too share the one and same ultimate objective: Create shareholder value, by delivering returns which exceed the cost of capital invested. But who are these shareholders? What is their cost of capital? Are they all playing the same game? Or, like in the chess example above, are there a number of different sub-games which call for different moves and different skills?

The Different Games in Business

My experiences in the investing world suggest the latter. Consider the following:

• Trading-oriented hedge funds are usually not interested in what happens five or 10 years from now. They are generally betting on the next quarter, and specifically, on businesses which can surprise the crowd by delivering earnings reports materially different from market expectations.
• Private equity funds tend to rely on multi-year business plans—specifically, those with cash flow projections which allow for liabilities to be paid down and capital returned to investors. The goal is to “juice” equity returns as much as possible by using leverage, and make a timely exit within the life of the fund (generally around a decade). What may or may not happen after that matters little.
• Venture capital funds want disruptive businesses that aggressively swing for the fences, without being overly concerned about striking-out. Zeros are acceptable, since a handful of unicorn IPOs can more than compensate for scores of busts.
• “Permanent” capital—like that from endowments, family offices, or companies like Berkshire Hathaway—generally prioritizes principal protection. They don’t tolerate zeros. Subject to this condition, they are willing to wait patiently for as long as it takes to deliver value. As Warren Buffett says of Berkshire: “Our favorite holding period is forever.”

Depending on the context, all of the above can potentially be shareholders that business executives may need or choose to create value for. But each of the above is playing a very different type of game with very different timelines, scoreboards, and decision dynamics. What is genius for one may well be legitimately foolish for another—and vice-versa.

This nuance, however, is not always well appreciated and remembered, particularly in the current rush-to-judgement era. Moves made by business executives are under a public microscope. This can create enormous managerial pressure to perform. This pressure can lead to mistakes in which executives forget or overlook what really matters to their most important shareholders. In doing so, they may end up destroying not only value for these shareholders but also their own hard-built managerial reputations.

Given the above, maybe business executives, and those tasked with judging their skills, can learn something from chess masters. Here are three such lessons:

Know the game. Playing bullet chess over seconds is not the same as playing classical chess over days. Creating shareholder value for day-traders is not the same as doing so for permanent capital. Any confusion or lack of recognition on this front is not likely to end well. The same for attempts to play different games simultaneously. Many types of games can be valid options, given the context. But they have very different clocks, and very different skills that count towards racking up points on the scoreboard. Focus and fit is everything.

Know the voices. No matter how intelligent, self-disciplined, and thick-skinned we may think we are, we cannot help but be influenced by external voices. (Entire industries like advertising and PR are built on this fact.)

External voices abound in both the chess and business worlds. With a recent explosion in popularity, chess games are followed by millions. And everyone has a point of view (e.g., see YouTube livestream comment sections). But seasoned masters know not to pay any attention to the opinions of those who can’t help them improve their game.

In business, things are even noisier. There is business legend Warren Buffett preaching patience, discipline, and trust in his lengthy annual shareholder letters. Then there is Elon Musk rapid-firing provocative, daily, bite-sized, X-streams. And there is everything in between: TV pundits, consultant presentations, analyst reports, LinkedIn posts, Reddit chat rooms, generative AI engines, etc. So, who to listen to? It depends on which game you are playing. The key lies in tuning out the irrelevant noises in the context of that game. As a wide-range of thinkers such as Rumi, William James, and Nassim Nicholas Taleb have noted: Wisdom involves deliberately choosing what to ignore.

Know when you don’t know. Coming back to the chess video I mentioned at the beginning, another thing struck me: Well-known masters were willing to publicly say “I don’t know” in certain situations. In the business world, strength, confidence, and certainty are often seen as hallmarks of effective leadership. Rightly so. But admitting when you don’t know, and cannot know, something important is a sign of prudent wisdom, not of nervous weakness. Only then can one think about the follow up questions like: If we really cannot know yet, what should we do about it? Or what more information do we need before we can know? Such lines of thinking are likely to be much more productive than projecting false confidence, and then stumbling into avoidable, unforced errors.

In business, as in chess, there are indeed genius moves. And there are also foolish errors. But there is much nuance and context that must go into evaluating such moves and the executives who make them. Unfortunately, nuance and context aren’t always a feature of today’s noisy business environment. Labels are hastily handed out, only for time to prove them very wrong. In order to reduce such mistakes, maybe a more thoughtful approach inspired by the masters of chess can end up helping the masters of business, especially those undertaking the very difficult task of “skill-rating” executive talent.

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Harsha V. Misra is the founder of a private investment partnership. He has previously worked in private equity, management consulting, and data analytics. Harsha has a degree in math from the University of Cambridge and an MBA from Northwestern’s Kellogg School of Management.

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