The Zurich Axioms: The rules of risk and reward used by generations of Swiss bankers is all about risk and its management.
Many people, probably most, want to win without betting.
This book is about betting to win.
If you do not mind taking reasonable risks – or better, if you enjoy risk, as the Swiss do – then this book is for you.
The Swiss are among the most affluent people in the world. Max Gunther believes they are affluent by being the world’s cleverest investors, speculators, and gamblers.
The 12 major and 16 minor Zurich Axioms contained in this book are a set of principles providing a practical philosophy for the realistic management of risk. Several of the Axioms fly right in the face of the traditional wisdom of the investment advice business.
If you want to get rich, no matter how inexperienced you are in investment, this book can help you. Its message is that you must learn neither to avoid risk nor to court it foolhardily, but to manage it – and enjoy it too. The book can be understood for ‘anyone’, not just ‘experts.’
The Axioms apply to any situation in which you put money at risk in order to get more money.
The Zurich Axioms Book Summary
Note: This summary is made up of my notes, thoughts and highlights of important passages while reading the book. I keep updating the summary when I revisit it, and occasionally may edit it to reduce summary length. Don’t be surprised if it has changed between visits. The author’s words are in normal font, while my interpretations are in italics.
The 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.
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.
It is the central assumption of modern psychology that mental health means, above all, being calm.
Some Buddhist sects, for example, hold that one shouldn’t strive for possessions and should even give away what one has. The theory is that the less you own, the less you will have to worry about.
Life ought to be an adventure, not a vegetation. An adventure may be defined as an episode in which you face some kind of jeopardy and try to overcome it.
Worry is an integral part of life’s grandest enjoyments.
Adventure is what makes life worth living, and the way to have an adventure is to expose yourself to risk.
The vast majority of men and women do depend principally on job income, with savings as a backup.
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.
“Every occupation has its aches and pains. If you keep bees, you get stung. Me, I get worried. It’s either that or stay poor. If I’ve got a choice between worried and poor, I’ll take worried anytime.”
Gerald Loeb put it, “All investment is speculation. The only difference is that some people admit it and some don’t”.
Minor Axiom I
Always play for meaningful stakes.
“Only bet what you can afford to lose”
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.
Minor Axiom II
Resist the allure of diversification.
Diversification means spreading your money around. Spreading it thin. Putting it into a lot of little speculations instead of a few big ones. The idea is safety. If six of your investments get nowhere, maybe six others will get somewhere.
Diversification has three major flaws:
- It forces you to violate the precept of Minor Axiom I – that you should always play for meaningful stakes.
- By diversifying, you create a situation in which gains and losses are likely to cancel each other out.
- By diversifying, you become a juggler trying to keep too many balls in the air all at once.
“Put all your eggs in one basket, and then watch the basket”.
The Second Major Axiom: On Greed
Always take your profit too soon.
Always bet on the short and modest. Don’t let greed get you. When you have a good profit, cash out and walk away.
In the long run, you make more money when you control your greed.
“Never check the price of a stock you’ve sold”
Minor Axiom III
Decide in advance what gain you want from a venture, and when you get it, get out.
The Third Major Axiom: On Hope
When the ship starts to sink, don’t pray. Jump.
Half your guesses about the future will be wrong.
Knowing how to get out of a bad situation may be the rarest of all speculative gifts.
The inability to jump quickly off a sinking ship has probably cost more speculators more money than any other failing.
Ask yourself whether the developing problem is likely to get fixed. 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.
You take small losses to protect yourself from big ones.
Obstacles to implementing the Third Axiom
- The first obstacle is the fear of regret.
Sudden reversals of fortune do not happen often. More frequently, a situation that goes bad will stay bad, at least for a while.
- The second obstacle is the need to abandon part of an investment.
The inability to abandon part of an investment becomes twice as bad a problem if you speculate on margin.
- 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.
The most productive attitude – admittedly not an easy one to achieve – is to expect small losses the way you expect any other less than pleasant fact of financial life.
The Fourth Major Axiom: On Forecasts
Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.
The fact is, 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.
It’s easy to be a prophet.
You make twenty-five predictions and the ones that come true are the ones you talk about.
Dr. Theodore Levitt, Business Week.
You cannot profit by listening to a prophet.
Human events absolutely cannot be predicted, by any method, by anybody.
Since all money-world forecasts are about human behavior, you should not take any of them seriously.
Design your speculative program on the basis of quick reactions to events that you can actually see developing in the present.
The Fifth Major Axiom: On Patterns
Chaos is not dangerous until it begins to look orderly.
When you put your trust in an illusion of order, you lull yourself into a dangerous sleep.
The Axioms not only acknowledge it but are built on the basic assumption that luck is the most powerful single factor in speculative success or failure.
The majority of advisers, however, ignore luck, or pretend it isn’t there, or talk their way past it as rapidly as possible.
Minor Axiom V
Beware the Historian’s Trap.
Historian’s trap is based on the age-old belief that history repeats itself.
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 an prudently be money on it.
Minor Axiom VI
Beware the Chartist’s Ilusion.
Charts are useful to visualize something with greater clarity. It is dangerous when it makes the thing represented look more solid than it really is.
Life never happens in a straight line. Any adult knows this. But we can too easily be hypnotized into forgetting it when contemplating a chart.
Minor Axiom VII
Beware the Correlation and Causality Delusions.
It is characteristic of even the most rational minds to perceive links of cause and effect where none exist. When we have to, we invent them
Minor Axiom VIII
Beware the Gambler’s Fallacy.
This is a peculiar variety of the orderly illusion. In this case the perceived order is not in the chaotic world all around, but inside, in the self.
It is surprising how many smart people allow themselves to be fooled by the Gambler’s Fallacy. It shows up wherever money is wagered but is particularly prevalent around gambling casinos.
The Sixth Major Axiom: On Mobility
Avoid putting down roots. They impede motion.
It is certainly nice in many ways to have roots. To feel you belong in some familiar place amid old friends and good neighbors: this can bring a glow to the heart.
You should approach this roots business warily. If you let it impinge on your financial life, it can cost you a lot of money.
Minor Axiom IX
Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
Minor Axiom X
Never hesitate to abandon a venture 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.
The Seventh Major Axiom: On Intuition
A hunch can be trusted if it can be explained.
A good hunch is something that you know, but you don’t know how you know it.
It is a common human experience to know something without knowing how you know it.
Minor Axiom XI
Never confuse a hunch with a hope.
The Eighth Major Axiom: On Religion and the Occult
It is unlikely that God’s plan for the universe includes making you rich.
You can’t pray yourself rich. Indeed, if money is on your mind while praying, you are more likely to pray yourself poor.
Minor Axiom XII
If astrology worked, all astrologers would be rich.
And so it is with Tarot devotees.
Anybody can have a lucky hit or two, but the true test of any touted moneymaking approach is whether it works consistently.
Minor Axiom XIII
A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.
‘Superstition’ means a supernatural belief that isn’t shared by everybody.
There is a way to let a superstition into your financial life, and there is a time to do it. One of each: just one. All other ways and times can lead you to disaster.
- The way to do it is humorously.
- The time to do it is when you are in a situation that absolutely will not lend itself to rational analysis.
In handling your money, assume you are entirely on your own.
Lean on nothing but your own good wits.
The 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.
A general feeling of hope and good expectations cannot do you any harm. “I’ll learn. I’ll do well. I’ll make it.”
Confidence springs from the constructive use of pessimism.
The safest course, almost always, is to assume that if a situation looks bad, it is.
Knowing how you will handle the worst: that is confidence.
One reason why optimism is so treacherous is that it feels good. It feels much better than pessimism. It has a hypnotic allure.
Two reasons why bulls are vastly in majority –
- First, bulls do, in fact, outnumber bears – by a very big margin. The reason for this is, of course, that optimism feels better than pessimism.
- Second, financial journalists don’t usually seek equal bull bear representation in any case. Why not? Because they prefer interviewing bulls.
The Tenth Major Axiom: On Consensus
Disregard the majority opinion. It is probably wrong.
Descartes began his philosophy by doubting literally everything, including the existence of God, man, and himself. The trick, he said over and over again in any number of contexts, is to disregard what everybody tells you until you have thought it through for yourself.
This humble acceptance of the majority opinion spills into our financial lives. We listen not only to economists, bankers, brokers, advisers, and other experts, but also to majorities.
It is more likely that the truth has been found by few than by many.
Descartes
Minor Axiom XIV
Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.
Majority pressure can not only dislodge a good hunch; it can even make us doubt ourselves when we know we’re right.
Question to ask:
“Am I making this decision because it’s smart or because a majority says it’s smart?”
The trouble with contrarianism is that it starts with a good idea and then hardens it into a grandiose illusion of order.
The 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. For ordinary men and women like you and me the advice for perseverance that should be heeded selectively.
In speculation, however, while there are times when it can be useful, there are also times when it can lead you to your financial doom.
If you reject investments that for one reason or another offend your social or political sensibilities, that can narrow your field of choice somewhat but not necessarily badly.
Seasoned speculators will sometimes chase an investment out of sheer cussedness, determined to squeeze some juice out of it at all costs. They say ‘the stock owes them.’
How can an investment medium ‘owe’ you money?
It is illogical to personify the investment medium with thoughts about ‘owing’.
Not only is it illogical, but it can lead you into the chasing kind of behavior that is likely to cost you still more money.
The reasons for persevering are emotional and not easy to sort out. The thoughts about owing come from personification of the speculative entity, as we’ve noted. “This investment took money from me, and by God I’m going to haunt it until it pays me back!”
Somehow or other, you must defeat the wish to persevere when perseverance will lead you astray.
Minor Axiom XV
Never try to save a bad investment by averaging down.
The technique known as ‘averaging down’ or ‘averaging losses’ is one of the investment world’s most alluring traps.
In any situation where you are tempted to average down your costs, ask yourself this: “Would I buy Hoo Boy at $50 if I didn’t already own a bundle I’d bought at $100? Is Hoo Boy 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.
The 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.
Long-range plans engender a belief that the future is under control. This is a hair-raisingly dangerous belief.
A plan is a lifelong illusion of order.
Economists, financial advisers, and others who sell twenty-year plans always talk as though the money world is an orderly place that undergoes change very slowly and predictably, like a tree growing. They arrive at these reassuring conclusions by observing trends that characterize our world today and extending those trends into the future.
Don’t try to make long-range plans or allow other people to make them for you.
They will only get in your way. Instead, stay light on your feet, like the grasshopper.
The only long-range plan you need, as far as money is concerned, is an intention to get rich.
Minor Axiom XVI
Shun long-term investments.
The long-term investors are the big gamblers.
Betting on tomorrow is chancy enough. Betting on a day twenty or thirty years in the future is absolutely crazy.
If you have dependents who would be in financial trouble without you, protect them by buying the cheapest term insurance. This will pay off on your death, but that is its only purpose. It locks you into nothing.
All you can know about the future is that it will get here when it gets here. You cannot see its shape, but at least you can prepare yourself to react to its opportunities and hazards.
Read More Like This
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- Wealth: A Concept of Abundance
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Hi, great stuff. I read this book long ago, good summary.
Just a quick feedback. I think your web site will look better if you have a sidebar.
A very good prologue, now to read the book.