The full title of this book is The Zurich Axioms by Max Gunther (1985).
Gunther wrote that the Swiss are among the most affluent people in the world even though their country is small and does not have many natural resources. The reason being the Swiss are good at taking on risk and winning. The ‘Zurich Axioms’ came from a club of Swiss stock and commodity plungers around Wall Street after the Second World War, where Gunther’s father (Frank Henry) was a founding member.
This is a pretty interesting book of about 160 pages. While it is not clear from the title, this is essentially a book writing down the key rules of speculation. Many of the axioms on speculation are very good. I particularly find the 5th axiom on patterns interesting because with the advance in technology, there are lots of people analyzing what happened in history when a similar set of conditions occurred, to figure out what the market is likely to do the next day (e.g. quantifiable edges, paststat). There are also traders who look at correlated markets, or drivers (e.g. yen vs. Nikkei) when trading their instruments. Gunther with the 5th axiom is basically saying that these don’t work reliably enough to be used.
I remembered one recent incident where one such website highlighted that based on historical market behavior, the market was supposed to be up big on I can’t remember was it June 21 or June 25. Contrary to expectations, the market turned in a weak performance that day. And if you thought that the market was weak because it did not bounce as expected, then you would have been caught a second time when the market rebounded very strongly since then. So much for historical analysis. Yes I know this is a game of probabilities, but I would be interested if there is a research done on the accuracy of such expectations mined from historical data. For me, the effort to do that extra research or keep that additional bias in my head would be better spent just focusing on the present market.
The 5th axiom also highlighted that the market is essentially utter chaos and unpredictable. While I don’t fully subscribe to that view, I do agree with the resultant conclusion that speculation in the market is still a game of chance. It is also good to keep that in mind in case one gets over our heads during a winning streak or is despondent over a string of losers.
All in all, this is a pretty good read, and the axioms are still very relevant despite the book being published decades ago.
First Major Axiom: On Risk
- Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough
- If your main goal in life is to escape worry, you are going to stay poor. You are also going to be bored silly.
- Life ought to be an adventure, not a vegetation. 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.
- Frank Henry’s rule of thumb was that only half of one’s financial energies should be devoted to job income. The other half ought to go into investment and speculation.
- Many of Wall Street’s most celebrated plungers have said publicly that a state of almost constant worry is a part of their way of life. Few of them say this by way of complaint. They are almost always cheerful about it. They like it.
- Minor Axiom I: Always play for meaningful stakes
- The only way to beat the system is to play for meaningful stakes. 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.
- Frank Henry estimated that if all his speculations blew up in his face in a single great cataclysm, when the smoke cleared he would be worth roughly half of what he had been before.
- Minor Axiom II: Resist the allure of diversification
- Diversification, while reducing your risks, reduces by the same degrees any hope you may have of getting rich. It forces you to play for small stakes, have situations where gains and losses cancel each other out, and juggle 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. If you have a dozen balls in the air and half of them start to go in the wrong direction, your chances of getting out of the dilemma without a black eye are not very good. When things go wrong — which is inevitable — you can be driven to near-panic as one problem after another presents itself.
- My personal rule of thumb is to have no more than four going at any one time, and most often I keep the number to three or less.
Second Major Axiom: On Greed
- Always take your profit too soon
- When you have a good profit, cash out and walk away.
- It is like climbing a mountain on a black, foggy night. The visibility is zero. Up above you and ahead of you somewhere is the peak, and on the other side is a sheer drop to disaster. You want to climb as high as you can. Ideally, you would like to reach the peak and stop exactly there. But you know “ideally” doesn’t happen often in real life. So the only sensible course is to stop climbing when you have reached what you consider a good height.
- Sure, when the fog clears and the sun comes up, you may find you’re less than halfway to the top. You could have climbed a lot farther. But don’t nurse this regret. You aren’t all the way up, but you are up. You’ve main a solid gain. What’s more, you’ve made it and kept it. You are a good deal better off than all the blunderers who scrambled blindly to the peak and toppled over the other side.
- Minor Axiom III: Decide in advance what gain you want from a venture, and when you get it, get out
- You are going to have a hard time extricating yourself from a venture because when your speculation succeeds, each new position feels like a starting position, you don’t have a logical ending so you keep going.
- Decide where the finish line is before you start the race. Keep it in sight all the way through the race. And when you get there, quit.
- Do this even when everything looks rosy. The only reason for not doing it would be that some new situation has arisen, and this situation makes you all but certain that you can go on winning for a while.
- One excellent way to reinforce the “ending” feeling is to rig up some kind of reward for yourself. The ending thus becomes associated with an actual event, something concrete to look forward to.
Third Major Axiom: On 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. Look for trustworthy and tangible evidence that improvement is on the way, and if you see none, take action without further delay. Calmly and deliberately, before everybody else has started to panic, jump off the ship and save yourself.
- The first obstacle is the fear of regret. The second obstacle is the need to abandon part of an investment. The third obstacle is the difficulty of admitting you were wrong.
- Minor Axiom IV: Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.
- Get in the habit of taking small losses. If a venture doesn’t work out, walk away and try something else. Don’t sit on a sinking ship. Don’t get trapped.
Fourth Major Axiom: On Forecasts
- Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.
- In the world of money, which is a world shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word. Nobody.
- The successful speculator bases no moves on what supposedly will happen but reacts instead to what does happen. Design your speculative program on the basis of quick reactions to events that you can actually see developing in the present.
Fifth Major Axiom: On Patterns
- Chaos is not dangerous until it begins to look orderly
- The truth is that the world of money is a world of patternless disorder, utter chaos. Most advisers have some kind of orderly illusion to sell, for that is what sells.
- Formulas can be wrong, but the markets never are.
- Your studying may have improved the odds in your favor, but it is unlikely that your studying has created a sure thing for you, or even a nearly sure thing. You are still dealing with chaos.. As long as you remain keenly alert to that fact, you can keep yourself from getting hurt.
- Minor Axiom V: Beware the historian’s trap
- People believe that history repeats itself, hence the orderly repetition of history allows for accurate forecasting in certain situations.
- Stock and bond analysts will go back to the last time there was a bull market in a certain security or group of securities and collect great baskets of facts on everything that was happening around that time. They will observe that the GNP was rising, interest rates were falling, the steel industry was having a profitable year, etc. Then they will wait until the same configuration of circumstances comes together again, and shout “Look! Everything is in place! A new bull market is on the way!”. Maybe it is. And maybe it isn’t.
- 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.
- Minor Axiom VI: Beware the chartist’s illusion
- A chart line always has a comfortingly orderly look, even when what it depicts is chaos. Don’t you bet on it.
- Minor Axiom VII: Beware the correlation and causality delusions
- The human mind is an order-seeking organ. Even the most rational minds perceive links of cause and effect where none exists.
- Unless you can actually see a cause operating, really see it, regard all causal hypotheses with the greatest skepticism. When you observe events happening together or in tandem (e.g. IBM goes up when Honeywell goes down, stock market slumps in the first year of a Republican President), assume that the proximity results from chance factors unless you have hard evidence to the contrary.
- Minor Axiom VIII: Beware the gambler’s fallacy
- Don’t ever think that you are on a lucky streak and you can’t lose. Winning streaks happen with any game of chance.
Sixth Major Axiom: On 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, the less successful you are likely to be as a speculator.
- Minor Axiom IX: Do not become trapped in a souring venture because of sentiments likely loyalty and nostalgia
- Get attached to people, but not to houses, neighborhoods, or companies. It is a mistake to let yourself get too attached to any venture in which your capital is invested.
- Minor Axiom X: Never hesitate to abandon a venture if something more attractive comes into view
- It is possible to get trapped in a waiting game for years in which you are waiting for something to pay off, while dozens of other good speculative opportunities drift tantalizingly within reach of your fingers, which are powerless to grasp them.
- The decision to stay or switch should ride solely on the question of which speculation, in your judgment, seems to offer the best promise for a speedy payoff.
Seventh Major Axiom: On Intuition
- A hunch can be trusted if it can be explained
- 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. Ask yourself whether you are genuinely knowledgeable on the particular topic. Have you studied it? Have you been following its ups and downs?
- Trust your hunch only if you can explain it — that is, only if you can identify within your mind a stored body of information out of which that hunch might reasonably be supposed to have arisen. If you have no such library of data, disregard the 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.
- Minor Axiom XI: Never confuse a hunch with a hope
- My personal rule is to be highly skeptical anytime I have a hunch that something I want to happen will happen. By contrast, I’m much more inclined to trust an intuition pointing to some outcome I don’t want.
Eighth Major Axiom: On Religion and The Occult
- It is unlikely that God’s plan for the universe includes making you rich
- Leaning on supernatural help produces the same result as leaning on a forecast or an illusion of order. It lulls you into a dangerously unworried state.
- Minor Axiom XII: If astrology worked, all astrologers would be rich
- Astrologers and astrology believers are no richer as a group than anybody else. When it comes to money, they must all stumble around in the dark the way everybody else must.
- Minor Axiom XIII: A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place
- The time to let superstition into your financial life is when you are in a situation that absolutely will not lend itself to rational analysis (e.g. lottery). The way to do it is humorously. Relax. Have some fun.
Ninth Major Axiom: On 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
- The pro doesn’t have optimism. What he has is confidence. Confidence springs from the constructive use of pessimism.
Tenth Major Axiom: On Consensus
- Disregard the majority opinion. It is probably wrong
- Disregard what everybody tells you until you have thought it through for yourself.
- Descartes: “Scarcely anything has been pronounced by one learned person the contrary of which has not been asserted by another… And it would avail nothing to count votes… for in the matter of a difficult question, it is more likely that the truth should have been discovered by few than by many.”
- Minor Axiom XIV: Never follow speculative fads. Often the best time to buy something is when nobody else wants it
- This seemingly simple formula is amazingly difficult to put into practice. It is difficult, in large measure, because it requires the speculator to act against the pressure of popular opinion.
- None of this means you should always automatically do what the majority isn’t doing. Study each situation for yourself, process it through your own good brain.
- The herd isn’t always wrong. If you buy automatically and unthinkingly for the single reason that nobody else wants it, it is almost as silly as to bet unthinkingly with the herd.
Eleventh Major Axiom: On Stubbornness
- If it doesn’t pay off the first time, forget it
- Perseverance is like optimism: It has always had a good press. In speculation, however, while there are times when it can be useful, there are also times when it can lead to your financial doom.
- You do not have to make back your losses by persevering with the same venture that resulted in the losses in the first place.
- Minor Axiom XV: Never try to save a bad investment by averaging down
- In any situation where you are tempted to average down your costs, ask yourself this: Would you buy XYZ at the current price if you didn’t already own your current position? Is XYZ an investment I’d choose today on its merits alone? If the answer is no, don’t throw any new money into the soured venture.
- If the answer is yes, be very sure it isn’t just because you are trying to make yourself feel better by averaging down costs. Is it really the most promising bargain out of all the potential bargains around?
Twelfth Major Axiom: On 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
- When you depend on your plan too much, you get rooted in it. It makes you think that you had life all figured out, so there is no need to take any risks, and makes you blind to unexpected expenses and misfortunes.
- To plan for a future one cannot see — this seems like an egregiously silly undertaking. A plan is a lifelong illusion of order.
- Instead, stay light on your feet. Instead of attempting to organize your affairs to accommodate unknowable events in the future, react to events as they unfold in the present. When you see opportunities, go for them. When you see danger, jump out of the way.
- Minor Axiom XVI: Shun long-term investments
- Don’t get rooted in long-term investments. Put your money into ventures as they present themselves and withdraw it from hazards as they loom up. Value the freedom of movement that will allow you to do this. Don’t ever sign that freedom away.