The Zurich Axioms

by Max Gunther

The rules of risk and reward used by generations of Swiss bankers

RISK

  • To make any kind of gain in life – a gain of wealth, personal stature, whatever you define as “gain” – you must place some of your material and/or emotional capital at risk. You must make a commitment of money, time, love, something. That is the law of the universe.
  • Bet with care and thought. Bet in such a way that large gains are more likely than large losses. Bet and win.
  • Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
  • Most people grasp at security as though it were the most important thing in the world.
  • If your main goal in life is to escape worry, you are going to stay poor. You are also going to be bored silly.
  • Worry is an integral part of life’s grandest enjoyments.
  • Perhaps we need tranquility at times too. But we get plenty of that at night when we sleep.
  • Adventure is what makes life worth living, and the way to have an adventure is to expose yourself to risk.
  • Unless you have a wealthy relative, the only way you are ever going to lift yourself above the great unrich – absolutely the only hope you have – is to take a risk.
  • If you speculate with your money, you stand to lose it. Instead of ending rich, you can end poor. But look at it this way. As an ordinary tax-hounded, inflation-raddled income-earner, carrying much of the rest of the world on your back, you are in a pretty sorry financial state anyhow. What real difference is it going to make if you get a bit poorer while trying to get richer?
  • There are times when you get that shuddery feeling, but such times come rarely and don’t usually last long. Most of the time you will be worried only enough to make life spicy. The degree of risk we are talking about really isn’t very great.
  • “All investment is speculation. The only difference is that some people admit it and some don’t”.
  • “Only bet what you can afford to lose”, says the old bromide. This formula almost assures poor results.
  • If an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring you any significant gains either.
  • In the normal course of speculative play, you must start out with a willingness to be hurt, if only slightly. Bet amounts that worry you, if only a little.

DIVERSIFICATION

  • Resist the allure of diversification.
  • Diversification means spreading your money thin. Putting it into a lot of little speculations instead of a few big ones.
  • Diversification, while reducing your risks, reduces by the same degree any hope you may have of getting rich.
  • If your entire starting capital is itself not very meaningful, diversifying is only going to make things worse. The more you diversify, the smaller your speculations get.
  • By diversifying, you create a situation in which gains and losses are likely to cancel each other out. Leaving you exactly where you began – at Point Zero.
  • By diversifying, you become a juggler trying to keep too many balls in the air all at once.
  • The more speculations you get into, the more time and study they will require. You can become hopelessly confused.
  • A little diversity probably won’t do any harm. Three good speculations, maybe four, maybe even six if you are strongly attracted to that many all at once.
  • “Put all your eggs in one basket, and then watch the basket”. This is one old financial bromide that stands scrutiny. Whoever first said it was obviously not a diversification fan. It is much easier to watch one or a few baskets than a dozen.

GREED

  • Always take your profit too soon.
  • Greed is built into the human psyche. Most of us have it in big amounts.
  • By reducing your greed, you improve your chances of getting rich.
  • Always bet on the short and modest. Don’t let greed get you. When you have a good profit, cash out and walk away.
  • Don’t fear regret. Since you can’t see the peak, you must assume it is close rather than far. Take your profit and get out.
  • To match against the time or two when the decision to quit early turns out wrong, there will be a dozen or two dozen times when it turns out right.
  • That which hurts, teaches.
  • “Never check the price of a stock you’ve sold”, says one of Wall Street’s ancient teachings. The admonition isn’t designed to help you make money but simply to protect you from weeping fits.

DECIDE YOUR EXIT PRICE

  • Decide in advance what gain you want from a venture, and when you get it, get out.
  • You have Rs10,000 and you’re attracted to a speculation in silver. Say to yourself, “I’m going into this with the purpose of . . .” (whatever the purpose may be). Don’t make it grandiose. Keep it relatively modest. Doubling to Rs 20,000 within two years perhaps. Or increasing to Rs 15,000 within one year. That is the finish line. Keep it in sight all the way through the race. And when you get there, quit.
  • Keep this feeling alive in you as the venture matures. Nurture it. If and when you do reach your goal, unless there are truly compelling reasons to turn the ending position into a new starting position (for example, dramatic, unforeseen change in the events and circumstances surrounding your venture; a whole new situation has arisen, and this situation makes you not just hopeful but next to certain that the winning set will continue), keep faith with yourself and get out.

HOPE

  • When the ship starts to sink, don’t pray. Jump. Note the wording: when it starts to sink. Don’t wait until it is half submerged. Don’t hope, don’t pray. Don’t cover your eyes and stand there trembling. Look around at what’s happening. Study the situation. Look for trustworthy and tangible evidence that improvement is on the way, and if you see none, take action without further delay.
  • Knowing how to get out of a bad situation may be the rarest of all speculative gifts. Learn how to lose.
  • One rule of thumb is that you should sell whenever a stock’s price has retreated 10 to 15 percent from the highest price at which you have held it, regardless of whether you then have a gain or a loss.
  • Take small losses to protect yourself from big ones.
  • Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.
  • Speculation on margin trading could be disastrous.
  • People find it difficult to admit they were wrong (about a trade).
  • Use stop-loss orders to cut your losses. A stop-loss order is a standing instruction to your broker: If the stock which you have bought at Rs 100 ever falls to Rs 90, or any other level you designate, the stop-loss oder is triggered to sell you out automatically.
  • If the broker has to sell you out, you don’t feel as though any significant loss at all has occurred.
  • The disadvantage is that a stop-loss order robs you of flexibility.

FORECASTING

  • Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.
  • Nobody has the faintest idea of what is going to happen next year, next week, or even tomorrow. If you hope to get anywhere as a speculator, you must get out of the habit of listening to forecasts. It is of the utmost importance that you never take economists, market advisers, or other financial oracles seriously.
  • Nostradamus wasn’t often right, but he sure was often (making numerous forecasts of which a few were right, most were wrong and the rest were gibberish).
  • Human events absolutely cannot be predicted, by any method, by anybody.
  • The stock market is a colossal engine of human emotion. Prices of stocks rise and fall because of what men and women are doing, thinking, and feeling.
  • Design your speculative program on the basis of quick reactions to events that you can actually see developing in the present.

PATTERNS

  • Chaos is not dangerous until it begins to look orderly.
  • Everybody is looking for a Formula (pattern in stock prices) to get rich. Unfortunately, there isn’t one.
  • Luck is the most powerful single factor in speculative success or failure.
  • It is true that history repeats itself sometimes, but most often it doesn’t, and in any case it never does so in a reliable enough way that you can prudently bet money on it.

STOCK PRICE CHARTS

  • Representing numbers by lines on graph paper can be useful or dangerous. It is useful when it helps you visualize something with greater clarity than you could achieve with numbers alone. It is dangerous when it makes the thing represented look more solid and portentous than it really is.
  • The human mind is an order-seeking organ. It is uncomfortable with chaos and will retreat from reality into fantasy if that is the only way it can sort things out to its satisfaction. Thus, when two or more events occur in close proximity, we insist on constructing elaborate causal links between them because that makes us comfortable. It can also make us vulnerable, but we don’t usually think of that until it is too late.

MOBILITY

  • Avoid putting down roots. They impede motion.
  • The more earnestly you seek that feeling of being surrounded by the old, the familiar, and the comfortable ( a state of mind, a way of thinking, a habitual method of organizing your life), the less successful you are likely to be as a speculator.
  • Do not become trapped in a souring investment because of sentiments like loyalty and nostalgia.
  • Never hesitate to abandon an investment if something more attractive comes into view.
  • Never get attached to things, only to people. Getting attached to things decreases your mobility, the capacity to move fast when the need arises. Once you get yourself rooted, your efficiency as a speculator goes down markedly.

INTUITION

  • A hunch can be trusted if it can be explained.
  • When you are hit with a strong hunch – “I think that company is in worse trouble than they’re letting on” – the possibility is that this conclusion is based on actual, solid information that is stored somewhere in your mind. What makes it perplexing is that it is information you don’t know you possess.
  • When a hunch hits you, the first thing to do is ask whether a big enough library of data could exist in your mind to have generated that hunch.
  • The reason for subjecting hunches to this rigorous testing is that sometimes we get flashes of intuition that aren’t based on good, hard fact. They are airy nothings.
  • No matter how good a hunch feels, don’t let it lull you into a state of overconfidence.

RELIGION AND OCCULT

  • It is unlikely that God’s plan for the universe includes making you rich.
  • No matter what your beliefs might be, thoughts of God or other supernatural help should play no part in your speculative behavior.
  • If astrology worked, all astrologers would be rich.

OPTIMISM AND PESSIMISM

  • Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.
  • Confidence springs from the constructive use of pessimism.

CONSENSUS

Disregard the majority opinion. It is probably wrong.

  • Disregard what everybody tells you until you have thought it through for yourself.
  • Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.
  • Study each situation for yourself, process it through your own good brain.

STUBBORNNESS

  • If it doesn’t pay off the first time, forget it.
  • Never try to save a bad investment by averaging down.

PLANNING

  • Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people’s, seriously.
  • Instead of attempting to organize your affairs to accommodate unknowable events in the future, react to events as they unfold in the present.

Disclaimer: The key points of the book presented here are not a substitute for reading the book. To get the entire holistic message the author has offered requires reading the book.

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