Investing Lessons I Learned from Tic-Tac-Toe

If you have sat in a classroom dragging your feet through an uninteresting lecture, you must be familiar with the game of tic-tac-toe, also known as noughts and crosses or Xs and Os.

The game’s simplicity lies in fact that it takes not more than a minute to learn it and it can be played anywhere. All you need is a piece of paper, a pen/pencil and some time to kill. Like chess, it needs two players, but some people don’t mind it playing alone by taking turns and becoming their own opponent.

When I was a kid I even had a water bottle which had the grid of tic-tac-toe built on one of its side and plastic pieces (crosses and circles) to play.

In case, you’ve forgotten how the game is played, here’s a crash course to refresh your memory. A 3X3 grid is drawn on the paper and each player chooses their mark i.e. X or 0. The player who succeeds in placing three of their marks in a horizontal, vertical, or diagonal row wins the game.

Just like Chess and Go, tic-tac-toe is also a game of strategy. Although a game of tic-tac-toe lasts only for a minute, to play it effectively, you do need skill and observation.

But what’s most interesting thing about this game is once both players become adept at playing the game, the outcome of each game is very predictable i.e. a tie. The only way someone can win tic-tac-toe is to wait for the opponent to make a mistake i.e. to make an unforced error. That’s why an experienced player playing against an amateur player either always wins or ties the game, because a new player invariably makes an unforced error.

So the idea is that, if you know how to play it right, it’s almost impossible to lose in tic-tac-toe. That means the best strategy to win in tic-tac-toe is to play defence.

The game also has an element of first mover advantage. If you get the first turn, and you put your mark on the center square in the grid, you cannot lose the game even against a tic-tac-toe grandmaster. So your first few moves are always made with an aim to safeguard against losing. After that you just have to keep playing defensively until the game ties or the opponent makes a mistake.

Here’s an interesting trivia about tic-tac-toe. The game had an important place in the plot for 1983 movie War Games. A computer named Joshua takes control of the nuclear missiles in the United States with plans to launch an attack against the Soviet Union. To stop that, the protagonist’s character programs the computer to play itself in repeated games of tic-tac-toe, hoping to convince the computer that it is playing a game it cannot win. The trick finally works as Joshua concludes it cannot win at tic-tac-toe or a nuclear assault against an equally powerful enemy, and a computer-initiated war with the Soviet Union is averted.

So what does tic-tac-toe have to do with the stock market and investing? Plenty.

Investing Lessons from Tic-Tac-Toe
First of all, Joshua’s conclusion was only partially correct. Since it was a computer playing against itself, the possibility of opponent making a mistake was zero. A computer never gets tired, confused, bored or itchy to try something outside the rules. So Joshua’s conclusion was right in that context because two perfectly rational people playing tic-tac-toe will always tie every single game.

But in real world, and especially in investing, you don’t always play against perfectly rational opponent. Your opponent in investing is an imaginary character called Mr. Market. However, on most days he will be playing very rationally, like a seasoned player. Which means if you aim to win against him by trying to outsmart him everyday, you’re being delusional. It’s a game you can’t simply win every single day.

So your best strategy in investing is to follow the lesson from tic-tac-toe.

Winning a game of tic-tac-tie requires extreme patience and consistently keeping your focus on avoiding a loss. In fact, it’s not very difficult to avoid losing in tic-tac-toe once you know the trick (as shown in the video above). The secret is to stick to your trick irrespective of what’s the hottest new tic-tac-toe move that everyone is talking about.

Similarly, in investing you don’t need an IQ of 180 to avoid blunders.

And once in a while you get an opportunity to win because your opponent makes a mistake either because he loses his focus, or becomes tired or he simply can’t control his urge to try some new aggressive strategy. Mr. Market is prone to such occasional slip ups. If you have the patience to stick to your defensive strategy, your investment philosophy, some day you’ll find that Mr. Market is not in his senses. That day is the day of opportunity for you.

And even in the face of this opportunity, you don’t have to do anything different. Just stick to your basic rules of tic-tac-toe i.e., your investing process. This is how, as Thoreau said, you’ll meet with success unexpected in common hours.

Unfortunately, the market is crowded with people who, unlike Joshua, still haven’t learned that it’s a game they cannot win easily. Actually, it’s worse. While tic-tac-toe typically ends in a tie, stock market forecasters and those who listen to them often lose a lot of money. In fact, these are the very people who collectively represent the fictional character of Mr. Market.

So the lesson for investors is to first develop a sound investment policy, which according to Benjamin Graham is an investment operation which, upon thorough analysis, promises safety of principal and an adequate return. And then stick to his or her investment policy, come what may.

Don’t ever forget to put that mark on centre square in tic-tac-toe when you get the first move. Don’t stop your SIPs, don’t stop looking for good businesses, don’t lose hope on watchlist stocks.

That’s exactly how a successful investor plays in stock market. A consistent and long term game of extreme patience and defence.