The Queen’s Gambit Declined

Playing The Long Game….

The Queen’s Gambit miniseries helped propel Netflix to a winning earnings report last quarter, but in fact the chess strategy it is named after has helped propel chess players to winning games for decades. The player controlling the white pieces, which always moves first, attempts to entice the black piece player into an inferior position by using a pawn sacrifice as a lure - the “gambit” - an offer that unwitting opponents often find irresistible. Yet, while black would then be up on material early in the game (by capturing the offered pawn) any attempt to defend this lead would almost certainly result in defeat as the center of the board would be lost, and along with it the positional advantage for the rest of the game. Black’s best chance of winning against the powerful Queen’s Gambit is to decline to take the small lead, in favor of developing other pieces in the center of the board, resulting in better opportunities to capture opponents’ pieces later. That decision to ignore the early pawn is so influential on the game’s outcome that it is one of those rare instances in which the act of not making a critical move has been given its own title: The Queen’s Gambit Declined.

​Similarly, a cash allocation in portfolios can be thought of as dollars not being used to secure an available investable asset. And at first, having any cash allocation at all can seem a bit naive today. With interest rates at 0%, cash offers no return, and could even be considered a liability with a negative return if assessed either against the opportunity cost of owning an asset with positive return potential (FOMO in urban speak), or relative to inflation (via a negative real return).

Yet the game of chess shows us that there are reasons why declining to take a particular position today may actually offer better long-term prospects for portfolios, and a higher probability of winning the long game. Some opportunities, whether in very low yielding high quality fixed income, or in structurally challenged industries, offer simply too small of a return to warrant the risk, and could result in constrained overall portfolio positions down the line that preclude new risk from being taken. Against such slim opportunities, it may be better to hold cash instead and focus on developing other parts of the portfolio (for more details on the role of cash in portfolio construction today, see our recent note: More Cash, Fewer Treasury Bonds).