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Kindle Notes & Highlights
by
Gunther Max
Read between
October 10 - October 16, 2021
Everybody wants to win, of course. But not everybody wants to bet, and therein lies a difference of the greatest magnitude.
To bet, instead, with care and thought. To bet in such a way that large gains are more likely than large losses. To bet and win.
Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
But consider this. If you bet $100 and double your-money, you’re still poor.
The only way to beat the system is to play for meaningful stakes. This doesn’t mean you should bet amounts whose loss would bankrupt you. You’ve got to pay the rent and feed the kids, after all. But it does mean you must get over the fear of being hurt.
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.
Diversification has three major flaws: 1. It forces you to violate the precept of Minor Axiom I – that you should always play for meaningful stakes.
2. 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.
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’.
The Second Major Axiom: On Greed Always take your profit too soon.
Amateurs on Wall Street do it. Amateurs in poker games do it. Amateurs everywhere do it. They stay too long and lose.
A more pragmatic and promising course would be to think about the rich, strange paradox that lies at the heart of the Second Axiom: by reducing your greed, you improve your chances of getting rich.
Always bet on the short and modest. Don’t let greed get you. When you have a good profit, cash out and walk away.
“Never check the price of a stock you’ve sold”, says one of Wall Street’s ancient teachings. The admonition isn’t designed to help you make money but simply to protect you from weeping fits.
Decide in advance what gain you want from a venture, and when you get it, get out
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.
One excellent way to reinforce the ‘ending’ feeling is to rig up some kind of reward for yourself. A medal, if you will. Promise yourself in advance that if and when you achieve your stated goal, you’ll take some of the winnings and buy yourself a new car or coat, or a five-string banjo, or whatever makes you happy.
The Third Major Axiom: On Hope When the ship starts to sink, don’t pray. Jump.
Knowing how to get out of a bad situation may be the rarest of all speculative gifts. It is rare because it is difficult to acquire. It takes courage and a kind of honesty with a cutting edge like a razor blade. It is an ability that separates the men and women from the boys and girls. Some say it is the most important of all the tools in a gambler’s or speculator’s kit.
The problems that cause significant price drops in speculative entities – stocks, commodities, real estate – tend to be long-lived problems. They are slow to develop and slow to go away. More often than not, the correct course is to bail out when a price first develops an appreciable sag.
Refusing to be wrong is the wrongest response of them all.
The Fourth Major Axiom: On Forecasts Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.
As the Axiom says, human behavior cannot be predicted. 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.
If the speculation does succeed and you find yourself climbing toward a planned ending position, fine, stay with it. If it turns sour despite what all the prophets have promised, remember the Third Axiom. Get out.
Owen says you should buy stocks whose prices are nearing or have hit twelve-month highs. His illusion of order is that some kind of “momentum”, as he calls it, will tend to make price movements continue. Thus, a rising stock will continue to rise. Greenfield says you should buy stocks whose prices are nearing or have reached twelve-month lows. His illusion of order is that prices seesaw in a roughly predictable fashion. Thus, a stock nearing a low will soon turn upward.
Thus, suppose that at some time in the past, Event A was followed by Event B. A couple of years have gone by, and now here we are witnessing Event A again. “Aha!”, says nearly everybody, “Event B is about to happen!” Don’t fall into this trap. 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.
Formulas can be wrong, but markets never are. The market does what it does. It makes no predictions and offers no promises. It just is. Arguing with it is like standing in a blizzard and howling that it wasn’t supposed to arrive until tomorrow.
Minor Axiom VII Beware the Correlation and Causality Delusions
Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia
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.
This is the stuff hunches are made of. A good hunch is something that you know, but you don’t know how you know it.
The Eighth Major Axiom: On Religion and the Occult It is unlikely that God’s plan for the universe includes making you rich.
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.
One reason why optimism is so treacherous is that it feels good. It feels much better than pessimism. It has a hypnotic allure. It is like the Sirens of ancient Greek legend, whose sweet singing lured sailors to death on the rocks.
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. This can cost us money, for as Descartes said, it is more likely that the truth has been found 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. The
But it is notoriously hard to think ‘yes’ when everybody around you is shouting ‘no!’. Some speculators find this to be among their worst problems. Majorities are always dissuading them from carrying out good moves.
Probably the best defense against majority pressure is the simple awareness of its existence and coercive power. Novice speculators often seem to lack this awareness. A novice can be bulldozed by a majority without even realizing it’s happening.
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. “If at first you don’t succeed, try, try again”, an ancient English king is reported to have remarked, having watched a spider build a web after many bad starts. That is certainly good advice for spiders. Also for kings, who are usually born rich. For ordinary men and women like you and me, struggling to make a buck, it is advice that should be heeded selectively.
You lose some money on Sears stock, let’s say. Of course you want to gain the money back. But why does the gain have to come from Sears?
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.
But be very sure this isn’t just wishful thinking. If you are hunting bargains, the stock market and all other speculative worlds are always full of them. Before you throw that $5,000 into your second round lot of Hoo Boy, ask yourself: “Why into this particular investment? Of all the potential bargains around, does this one really look the most promising to me? Or am I just trying to make myself feel better by averaging down costs?”
Another problem with this down-averaging dance is that it encourages you to disregard the important Third Axiom, on hope: when the ship starts to sink, don’t pray. Jump.
Frank Henry knew a man who actually managed to talk himself into being happy when his speculations slumped. If he bought something and the price fell, he would buy more and average down his cost. The lower the price went, the more he would buy and the lower his average cost would fall and the happier he would become. This was one fancy psychological trick, but it kept him content. It didn’t make him rich, however. He got stuck in some bad investments for years, continually averaging down and genuinely believing he was being smart.
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.
