Book Review #43: The Zurich Axioms: Author: Max Gunther

 This is the review of the book 'The Zurich Axioms' written by Max Gunther, who also wrote the book 'How to get lucky'. You can read my review HERE (I have not published the post yet, I will update this link, once I do that). 

Swiss are famous for their prudent and successful money management. It is not for nothing that they have earned the moniker 'The Bankers to the World'. They have a legendary ability to take on and manage risk. At USD 83000, the nation of a couple of million people has the second highest per capita income in the world. 

They must be doing something right with money that we can learn from. 

What are their thought processes? What are the principles that they follow when it comes to money? What are the lessons that we could learn from them?

These are the questions that Max Gunther tries to answer in his book 'The Zurich Axioms'. The book discusses 12 major axioms and 16 minor axioms that together cover all the behavioural aspects that an investor (author uses the term 'Speculator') should consider to become a successful speculator. 

The book is structured well. Each major axiom is first explained. This is followed by the respective minor axioms that follow from the major one. Finally the chapter ends with a speculative strategy that one can follow. 

Without much ado, let us do a peekaboo into the secrets. 

This book starts with the assertion that most people wants to become rich, but most people do not want to bet. Here the word 'bet' means 'readiness to take calculated risks' rather than 'gamble'. Swiss are great risk takers. They welcome and manage risks. They take risks head on. 

To gain anything, you must put some of your material or emotional capital at risk. You must make a commitment in terms of money, time, emotions etc. The Swiss realize it and has developed a 'Philosophy' of risk-taking. This philosophy has 12 rules of risk management as its foundation. These rules are called 'Zurich Axioms'.

These axioms have multiple layers of meaning. Some are coldly pragmatic while others border on the mystical. They are guide posts of successful living. And by the way, they have made many people rich. 

So lets dive deep in.

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. Many people are driven by a need for security. But a Swiss speculator will tell you that if your main goal in life is to escape worry, you are going to live poor. Commitment to anything involves the risk of losing it. So worry is a natural part of commitment. Lack of worry implies lack of commitment. 

Minor Axiom 1: Always play for meaningful stakes: When you are speculating bet amounts that worry you. Don't bet 10000 rupees, bet 50000, bet 500000, bet a million rupees. You must be willing to be hurt when you make an investment. By taking a big chance, you tend to have interesting results.

Minor Axiom 2: Resist the allure of diversification: Diversification has three major flaws. One, it violates minor axiom 1. You have lower stakes in all the stocks. It is a form of risk avoidance. Two, in diversification the gains and losses cancel each other out. You reach nowhere. Three,  by diversifying you waste your energy trying to focus on too many stocks. You can't do a thorough analysis of any one of them.

Major Axiom #2: On greed. Always take your profit too soon: The paradox is that the more you are greedy, the less rich you become. By reducing greed, you become wealthier. Greed is excessive acquisitiveness. 'Acquisitiveness' - wanting to improve one's standing- is good. Greed is excess of that. The lesson is, when you have a good profit, cash out and walk away. The regret is that the stock will move further after you have sold. Do not think about that. You could also face the regret of having seen all time highs and then stock falling below your purchase price (tell me about that!)

Minor axiom 3: Decide your target price in advance: The fascinating part of speculation is that every position feels like a new position. If you do not decide on the end point, the target, you cede control to the markets and to your emotions. When you reach your target, cash out and walk away (give yourself a small reward if you want)

Major Axiom #3: When the ship starts to sink, don't pray, jump: Decide in advance your strategy to handle a loss. Knowing when to get out is a rare gift. When ship starts to sink, don't wait for it to be half submerged (My Mercator Lines shares, they have already sunk. Only the tip of the chimney is visible now. And it is a shipping company!!). Unfortunately people are unable to cut their losses due to three reasons. One, fear of regret. What is this is a temporary blip? Two, acceptance of loss. This is very difficult for most people. Three, selling out a loss means accepting your were wrong. Learning to take losses is a speculative technique.

Minor axiom 4 says you should accept small losses cheerfully. They lead to big gains. If you take small losses quickly you are unlikely to get hurt. Consider your losses as investment in learning and education. Author suggests not to use 'Stop Loss' and strengthen your decision making process instead. 

Major Axiom #4: You can't predict human behaviour. Beware of forecasts: Don't listen to forecasts. The things change too much for any forecast to work correctly. This is the same point that Morgan Housel made in his book 'The Psychology of Money' that I reviewed HERE

The point is, all forecasts are based on human behavior and it cannot be predicted. Just remember the forecasts in India after BJP won the election. 'Sensex will touch 60000 in five years", said one expert, "India is in the cusp of the mother of all bull markets", thundered another obnoxiously voluble worthy. 

Where are we now? Nowhere. Only five or six stocks are driving the Indian economy. The shares of L&T the bellwether of India's real economic growth is priced lower than it was in 2014 (I should know, I own it)

Do not plan based on 'what will happen'. Act based on 'what does happen'.

Major Axiom #5: On patterns. Chaos is not dangerous until it begins to look orderly. As per author, this is the most important axiom of all. The lesson is that world of money is world of disorder. A smart speculator will ignore any patterns. Do not see order where none exist.

Minor Axiom 5: Beware of  'Historian's Trap': This is the illusion that 'history repeats itself'. 

Minor Axiom 6: Beware of Chartist's Illusion: This is an extension of Historian's Trap. Do not fall for charts and the patterns they offer. 

Minor Axiom 7: Beware of correlation and causality delusions: Do not look for cause and effect where none exist. Always remember that you are dealing with chaos and deal with it accordingly. 

Minor Axiom 8: Beware of Gambler's Fallacy: Gambler's fallacy refers to the erroneous thinking that a certain event is more or less likely, given a previous series of events. In simple terms it is the belief that 'What happened on the first day of the month will continue to happen in the month'. 

Major Axiom #6: On mobility. Avoid putting down roots. They impede motion: This is not about building a house or anything. This is about a state of mind, a way of thinking, and a habitual method of organizing your life. 

Minor Axiom 9: Do not get trapped in a souring venture because of sentiments like loyalty and nostalgia: Don't fall in love with your stocks. 

Minor Axiom 10: Never hesitate to abandon a venture if something more attractive appears: Don't wait for an investment to pay off. This doesn't mean you move from stock to stock like a butterfly. 

Major Axiom #7: On Intuition: A hunch can be trusted if it can be explained: There are two types of hunches. One is just a feeling. Another is based on your past experiences the memories of which are stored in your brain. Do not ignore hunches. Many people either have a scorn, indiscriminate trust or they use a hunch in a deliberate, well-thought out way. In this approach we use the power of immense ideas stored in our brain. Trust a hunch if you can explain it.

Minor Axiom 11: Never confuse a hunch with a hope.  

Major Axiom #8: On religion and occult: They are not linked to money. Money and supernatural are an explosive mixture that could blow up in your face.

Minor Axiom 12: If astrology worked, all astrologers would be rich. 

Minor Axiom 13: Enjoy that superstition. Don't act on it. 

Major Axiom #9: Don't make a move just because you are optimistic. Only if you are confident of handling the worst outcome.  

Major Axiom #10: Disregard consensus. Majority opinion is probably wrong. 

Minor Axiom 14: Never follow speculative fads. The best time to buy is when nobody else wants it. The best strategy against majority pressure is the awareness that it exists.

Major Axiom #11: If it doesn't pay off the first time, forget it. Perseverance is not a good habit for a speculator. Do not get emotionally attached to your mistakes. 

Minor Axiom 15: Never try to save a bad investment by averaging down. Averaging down also goes against Axiom #3, when ship starts to sink, jump. 

Major Axiom #12: Never take long-range plans seriously. Always have many short-term plans. Long range plans gives an illusion of control over future. They also do not factor potential tail events like COVID. The only long range plan you need is the intention to get rich. You can't plan 'How' you are going to get rich. That depends on the decisions you take every day. Be free-floating. Try to learn from your experience. Be certain that you can't know the future. 

Minor Axiom 16: Shun long-term investments: Every investment should be made to justify itself every three months. (Assuming that you knew why you entered it in the first place)

The book terminates very abruptly. So here is the summary.

The mark of a great book is how the reader identifies with the points mentioned in the book. While reading this book, the reader often finds herself mumbling "Oh, god, this applies to me", "I made this mistake", "I remember the one time I chased this stock...", "Had I known this I would have got out of that dud very quickly"

While reading the chapter on 'Never Averaging Down', I was thinking about the time I 'averaged down' Yes Bank and HDIL from rupees 500 a share all the way down to 2 or 3 rupees per share. I also have my experience on Chasing a Fad (not covered in this book), where I chased a runaway stock from 200 finally managing to buy it at 568, a price that stock has never seen since then. 

Axiom #4 talks about ignoring forecasts. The future is unpredictable so forecasts won't work. While reading it I was thinking of the market expert on ET Now saying that 'current market feels exactly like 2003'. 2003 was the beginning of a major bull market that lasted six years !. 

If I have to mention one takeaway from this book that applies to me and that I should use often is to 'Jump the ship as it starts to sink'. The rule given in the book is '15-15% lower than the highest you have seen'. I guess protecting your wealth is as important as boosting your wealth. 

Another takeaway is the concept of 'every three months asking your investments to explain why you should retain them in the portfolio. Let the stocks earn their place'. That somehow puts the onus on the stocks. Like a performance appraisal of stocks.  

Nice idea.

The more I read Finance Books, the more confused I get by the mixed messages in the books. "Do not average down", says this book, "Follow SIP", says another. SIP is nothing but 'Dollar Cost Averaging'. One says 'Buy and forget', another says 'Review your investments every three to six months'...

Man, investing is tough. :)