Many years ago I had come across the Zurich Axioms on the usenet. Here it is for the record.
A set of simple (major and minor) rules devised by a set of Swiss investors, on how to succeed on the Stock Exchange – but which are generally applicable to any situation of selecting and managing risk.
The Zurich Axioms. Max Gunther, Unwin Paperbacks: ISBN 0-04-332126-7
THE (bare) AXIOMS
1: ON RISK Worry is not a sickness, but a sign of health. If you are not worried, you are not risking enough.
1.1: Always play for meaningful stakes.
1.2: Resist the allure of diversification.
2: ON GREED Always take your profit too soon.
2.3: Decide in advance what you want from a venture, and when you get it, get out.
3: ON HOPE When the ship starts to sink, don’t pray. Jump.
3.4: Accept small losses cheerfully. Expect to experience several whilst awaiting a large gain.
4: ON FORECASTS Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.
5: ON PATTERNS Chaos is not dangerous until it begins to look orderly.
5.5: Beware the Historian’s Trap (History does not repeat itself).
5.6: Beware the Chartist’s Illusion (Graphs lie).
5.7: Beware the Correlation and Causality delusions (don’t find patterns).
5.8: Beware the Gambler’s Fallacy (..it’s only luck).
6: ON MOBILITY Avoid putting down roots. They impede motion.
6.9: Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
6.10: Never hesitate to abandon a venture if something more attractive comes into view.
7: ON INTUITION A hunch can be trusted if it can be explained.
7.11: Never confuse a hunch with a hope.
8: ON RELIGION AND THE OCCULT It is unlikely that God’s plan for the universe includes making you rich.
8.12: If astrology worked, all astrologers would be rich.
8.13: A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.
9: 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.
10: ON CONSENSUS Disregard the majority opinion. It is probably wrong.
10.14: Never follow speculative fads. Often, the best time to buy is when nobody else wants it.
11: ON STUBBORNNESS If is doesn’t pay off first time, forget it.
11.15: Never try to save a bad investment by “averaging down” (buying more).
12: 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.
12.16: Shun long-term investments.
THE AXIOMS (plus notes)
Major Axiom #1: ON RISK
Worry is not a sickness, but a sign of health. If you are not worried, you are not risking enough. Adventure is what makes life worth living. And the way to have an adventure is to expose yourself to risk.
Minor Axiom #1.1 Always play for meaningful stakes.
Only bet what you can afford to lose. Decide what this really means to you. Choose your degree of worry, eg. if the risk fails you are setup so that you lose 50% of your investment (50% is then your chosen degree of worry). You won’t get rich by betting small.
Minor Axiom #1.2 Resist the allure of diversification. The more you diversify, the smaller your investments get, thus breaking #1.1.
By diversifying, the wins will only cancel out the losses. Also, you become a juggler, liable to lose control of the balls. ‘Put all of your eggs into one basket – and then watch the basket’.
A little diversity won’t harm, but don’t speculate on more than about six items, and only speculate on those in which you are genuinely interested. The only chance you have of getting rich is via risk. And the price of risk is worry.
Major Axiom #2: ON GREED
Always take your profit too soon. If you can conquer greed, you will be a better speculate than 99% of all others. If you want less, you will go home with more.
Don’t be ashamed of being an acquirer. But aquisitiveness gone haywire is greed.
Any series of events which produces a gain will be of short duration, and the profit will not be big. Don’t wait for the ‘big one’; it won’t come. Always bet on the short and modest. When you have a good profit, cash in and walk away.
Never check on the price of something you have sold.
Minor Axiom #2.3 Decide in advance what you want from a venture, and when you get it, get out.
A peculiar phenomenon: After each win, the win feels like a given right, and it seems like you’re back at the start again. The race ends only when you say it ends. Reinforce it by having a minor celebration.
Always sell too soon.
Major Axiom #3: ON HOPE
When the ship starts to sink, don’t pray. Jump.
About half your speculations will turn sour. Half your guesses will be wrong. It is one of the most difficult things, knowing how to get out of a bad situation. It takes courage, and a kind of honesty with a cutting edge like a razor.
The first obstacle is the fear of regret (see also #2), where you fear that a loser will win again if you cut loose. If you wait for the investment to go up again, you could wait years, and your capital will be stuck, languishing in the slough of despond.
The second obstacle is the need to abandon part of an investment. Cutting loose hurts. Never speculate on margin – ie. borrowing money to invest.
The third obstacle is the difficulty of admitting you were wrong. Refusing to admit you were wrong is the wrongest response of them all.
Minor Axiom #3.4 Accept small losses cheerfully. Expect to experience several whilst awaiting a large gain.
Take a small loss. If the ship continues to sink, get out.
Don’t use ‘Stop-loss’ orders (ie. standing order to sell if stock falls below a preset figure). It robs you of flexibility.
Don’t wait around for trouble.
Major Axiom #4: ON FORECASTS
Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.
More often than not, listening to prophets and tipsters turns out to be a mistake. You can’t profit from prophets. Prophets make their reputation on a few biggies. The cost is many failures, which are ignored.
Not even self-fulfilling prophesies work every time.
Share prices change because of what people think a company’s future is.
Major Axiom #5: ON PATTERNS
Chaos is not dangerous until it begins to look orderly.
Beware unit trusts and fund managers, who analyse everything. They promise to find order which isn’t there, selling only the illusion of order. Trust least those who find most order. Trust illusion and you lull yourself into a false sense of security.
If you follow a ‘pattern’ and get rich – you were only lucky. Be aware, the opposite can happen too. Any formula must fully recognise luck.
Minor Axiom #5.5 Beware the Historian’s Trap.
History does not repeat itself. Share price changes are random.
Minor Axiom #5.6 Beware the Chartist’s Illusion.
Graphs are dangerous – they can make the historian’s trap look real. Lines which go up, don’t go up forever. Fluctuations change period. Life doesn’t happen in a straight line.
Minor Axiom #5.7 Beware the Correlation and Causality delusions.
It’s easy to connect unconnected things. We seek order and find it (and reason for it) where none exists. People use this to explain things after the fact too.
Minor Axiom #5.8 Beware the Gambler’s Fallacy
If you think you’re ‘hot’, making all the right decisions, you’re not. Your just lucky. Winning streaks will happen. But each toss of the coin is equally likely to come down heads as tails. Don’t try to find out why random things happen. You can’t. ‘Lies, damned lies, and statistics’. The only approach is to study the market, and have a go on something that ‘looks good’. Work more by feel than numbers.
Major Axiom #6: ON MOBILITY Avoid putting down roots. They impede motion
The more you seek being surrounded by the old and familiar, the worse a speculator you will become.
Minor Axiom #6.9 Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
There may be times when you will have to choose between roots and money. Get attached to people, not to things (eg. houses, places, companies).
Minor Axiom #6.10 Never hesitate to abandon a venture if something more attractive comes into view.
Beware of speculations which turn into hobbies (eg. when speculating in art!). Don’t get trapped waiting for a payoff. Don’t get to feel the investment ‘owes’ you (or, worse, you ‘owe’ it). Make the ‘switch’ decision solely on the speed of payoff.
Major Axiom #7: ON INTUITION A hunch can be trusted if it can be explained.
Some will scorn hunches. Some will always follow them. The best approach is in between. Learn to use them discriminately, if you can. A usable hunch is not supernatural, it is the subconscious using information that you didn’t know you knew. A hunch can be trusted if it can be explained. ie. you might reasonably have acquired the necessary information somewhere, sometime.
Minor Axiom #7.11 Never confuse a hunch with a hope
When you want something enough, it is easy to believe it will happen. A simple rule: don’t trust hunches about things you’d like to happen.
Major Axiom #8: ON RELIGION AND THE OCCULT It is unlikely that God’s plan for the universe includes making you rich.
It may seem like divine providence, but before long, you’ll find that it’s really luck.
Minor Axiom #8.12 If astrology worked, all astrologers would be rich This applies to any esoteric doctrine.
No matter what any doctrine may do for your inner peace, it won’t fatten your bank balance. All ‘major’ prophets have had plenty of failures to balance out (statistically) their famous successes.
Minor Axiom #8.13 A superstition need not be exorcised. It can be enjoyed, provided it is ept in its place.
The way to use a superstition is with humour. The time to use it is in a situation which absolutely will not lend itself to rational analysis.
Major Axiom #9: ON OPTIMISM AND PESSIMISM Optimism means expecting the best, but confidence means knowing how you ill handle the worst. Never make a move if you are merely optimistic.
Beware of optimism in risky things – it is a dangerous state of mind. You feel that the best result will happen. It can lead you into places where you shouldn’t be, and it can persuade you not to leave. Never make a move if you are only optimistic.
You must have confidence. If a situation looks bad, it probably is. Confidence is knowing how you will handle the worst. 75% of ‘tips’ are based in optimism (because this is what people want to hear).
Major Axiom #10: ON CONSENSUS Disregard the majority opinion. It is probably wrong.
Don’t just follow the crowd. Think things through for yourself first. Beware of ‘experts’ (there is always another ‘expert’ who will disagree!). When there is varying opinion, only a minority will be right (often because the truth is hard to find). Psychological tests have proved that the majority can sway one away from an obvious decision. Advertising is forcing a ‘pseudo’ majority opinion.
Minor Axiom #10.14 Never follow speculative fads. Often, the best time to buy is when nobody else wants it.
Buying low and selling high is difficult, because it is going against the majority.
Major Axiom #11: ON STUBBORNNESS If is doesn’t pay off first time, forget it.
Perseverance falls into the same camp as optimism: it can often just dig a deeper hole. It is an emotional response, feeling that the investment ‘owes’ you something.
Minor Axiom #11.15 Never try to save a bad investment by “averaging down”. ie. if the price halves, double your investment (thus reducing the break-even price by 25%).
This is throwing good money after bad. See Axiom #3. Only buy at new price if you’d do it anyway.
Major Axiom #12: 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.
You can get trapped in your plans. See Axiom #6. Don’t let a plan immobilise you. Plans don’t account for the unexpected. A week ahead may be seen. A month is foggy. A year is almost invisible. Planning gives a lifelong illusion of order. It’s ok to plan, but keep it alive. A plan is never finished.
Minor Axiom #12.16: Shun long-term investments
Something that looks like a safe long term bet today may not tomorrow. Long term investors are big gamblers. They are also lazy and cowardly. Beware of unit trusts. Beware of statistics (lies, damned lies, and..). Always ask: Would I buy at the current price?
There is a balance between short term hopping and long term sitting. It is usually biased towards the short term.