The book The Zurich Axioms by Max
Gunther (1985) is a collection of Axioms. Axioms is “a statement or principle that is generally accepted to be true, but need not be so”. The book contains many statements which
helps us in taking better decisions.
Reading of the book is essential as they
serve as practical advises nurtured over a long period. The book is worth
reading:
My learning from the book is
reproduced below:
About Investments
“All Investments is speculation”
About bet what you can afford to lose
“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 gain either. The only way to win a big payoff from a small
wager is to go for a long, long shot. You might buy a $1 lottery ticket and win
a million, for instance. That is nice to dream about, but the odds against you,
of course, are depressingly high.”. In short “Always play for meaningful
stakes”
Best explanation about why not to diversify
“Most of us middle-class
plungers, at the start of our speculative adventures, have only a limited
amount of capital to play with. Let's say you have $5,000. You want to make it
grow. What are you going to do with it? The conventional wisdom would say diversify.
Make ten bets of $500 each. Buy $500 worth of GM because the auto industry
looks lively, put $500 in a savings account in case interest rates go up, $500 into
gold in case the bottom drops out of everything, and so on. There -- you're covered
for all kinds of eventualities. Makes you feel safe, doesn't it? Safe from just
about everything -- including the danger of getting wealthy.”
“But don't diversify just for the
sake of diversity. You then become like a contestant in a supermarket shopping
contest, in which the object is to fill your basket fast. You go home with a
lot of expensive junk you don't really want. In speculation, you should put
your money into ventures that genuinely attract you, and only those. Never buy something
simply because you think you need it to round out a "diversified
portfolio."
As some say around Wall Street,
"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. When the fox comes around to steal your eggs, you can handle him
without whirling around in circles.”
Importance of knowing when to
stop or book your profits
“There are many kinds of human
endeavors in which starting and ending positions are clearly seen, felt, and
understood. Athletics, for instance. When a runner comes to the end of a mile
race, he or she knows it's the end. There is no question of racing on for
another mile in the hope of winning two gold medals instead of one.
All energies are exhausted. The
tape is broken; the winners are on the record books.
It's all over. It is time to
quit, rest, gather new energies for another day.”
The philosophical Truth
An ending is a time when you
withdraw, breathe a sigh of relief, and briefly relax.
Problem on Greed of holding
stocks for higher returns
“But how do you arrive at such a
clearly seen stopping place in a world where there are no finish-line tapes, no
end-of-the-round bells? Especially when each succeeding position feels like a
new starting position? You've bought a handful of Union Carbide stock, let's
say. Or you've invested in gold. Or you own a house. These are races that aren't
going to "finish" in any ordinary future that you can foresee. Such a
race is open-ended. No arbitrarily chosen measure of time or distance, no judge
or referee will tell you when you can stop striving and flop down on the grass.
You are required to do that yourself -- you alone. The race ends when you say
it ends.”
About forecasting – How to be correct
If you can't forecast right,
forecast often.
The stock market, for example, is
a colossal engine of human emotion. Prices of stocks rise and fall because of
what men and women are doing, thinking, and feeling.
The price of a given company's
shares doesn't rise because of abstract figures in an accounting ledger, nor even
because the company's future prospects are objectively good, but because people
think the prospects are good. The market doesn't slump because a computer
somewhere determines selling pressure is on the rise, but because people are
worried, or discouraged, or afraid. Or simply because a four-day weekend is
coming and all the buyers are off for the seashore.
ON PATTERNS – How to avoid pattern trap in Stocks (Best Axiom)
Fate let him ride high for a
while so he would have farther to fall.
Clinging to his illusion of
order, Fisher was unprepared for his streak of luck to end.
(Pattern in stock markets help you to ride
high for a while, they create illusion that steak of luck will never end. On
the contrary it takes high to give us a higher fall)
A truth which is in practice even today i.e.
a prediction valid even today:
The trap that caught Professor
Fisher, the illusion of order, has caught millions of others and will go on
catching investors, speculators, and gamblers for all eternity.
Everybody is looking for this
Formula. Unfortunately, there isn't one.
The truth is that the world of
money is a world of patternless disorder, utter chaos. Patterns seem to appear
in it from time to time, as do patterns in a cloudy sky or in the froth at the
edge of the ocean. But they are ephemeral. They are not a sound basis on which
to base one's plans. They are alluring, and they are always fooling smart
people like Professor Fisher. But the really smart speculator will recognize
them for what they are and, hence, will disregard them.
On charts and signals
Making charts of stock prices is
like making charts of ocean froth. You'll see each pattern once, and then it
will be gone. Only by blind chance will you ever see it again. If you do see it
again it will have no significance, for it predicts nothing.
On Human Mind and searching for co-relations
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.
When chaos is dangerous
Always remember that you are
dealing with chaos and conduct your affairs accordingly. As the Axiom says,
chaos is not dangerous until it begins to look orderly.
On Making Money
When it comes to money, they must
all stumble around in the dark the way everybody else must.
In handling your money, assume
you are entirely on your own. Lean on nothing but your own good wits.
Optimism and Pessimism
"Never make a move if you
are merely optimistic," says the Axiom. Seek confidence instead.
Confidence comes not from expecting the best, but from knowing how you will
handle the worst.
The poker pro knows what he is
going to do if the cards fall against him. Of course, he hopes they won't, but
he doesn't let his fate ride on that hope. He goes into the game trained and
prepared to act sensibly in case his luck of the draw is bad. That’s what is
meant by constructive pessimism.
In poker, if a pro arrives at a
situation in which the odds say he shouldn't bet, he doesn't. He folds. This
means he must abandon what he has so far contributed to the pot, but it saves
him from a bigger loss.
Source:
http://neif.org Financial literacy
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