The Zurich Axioms: The rules of risk and reward used by generations of Swiss bankers

by Gunther Max

All of life is a gamble, as every adult knows. Many people, probably most, are unhappy with this fact and spend their lives figuring out how to place as few bets as possible. Others, however, take the opposite route, and among these are the Swiss.

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.

Yet strangely, most do this without admitting they are doing it. They pretend they are being very prudent and sensible. They aren’t taking risks. They aren’t speculating, they aren’t – whisper the dreaded word! – gambling. No, they’re “investing”.

“All investment is speculation. The only difference is that some people admit it and some don’t”.

If you’d bought IBM at its peak price in 1973, when nearly every adviser in the world was touting it, you’d have had to wait nine years to get your money back.

Calling it an investment doesn’t change the facts: a gamble is still a gamble.

My personal rule of thumb is to have no more than four going at any one time, and most often I keep the number to three or less – sometimes just one.

The first obstacle is the fear of regret – substantially the same fear we looked at under the Second Axiom. In this case, what you fear is that a loser will turn into a winner after you’ve gone away.

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.

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.

Since all money-world forecasts are about human behavior, you should not take any of them seriously.

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.

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 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.

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.

If you are betting on red at a roulette wheel and red comes up three times in a row, that is nice. But what does it tell you about the future? Are you in on the beginning of a run of twenty-eight? Are you hot? Should you increase the size of your bet?

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.

No matter what the stock market happens to be doing on any given day, there are always optimists around saying the next great bull market is going to start next week. There are also pessimists saying it isn’t. Who gets listened to? Most often the optimists, for their song is the sweeter.

If 75 percent of the people believe something, it seems almost sacrilegious to ask, even in a whisper, “Hey, wait a minute, could they be wrong?” Listen to Descartes. They could.

As a general rule, the price of a stock – or any other fluid priced speculative entity – falls when substantial numbers of people come to believe it isn’t worth buying.

Arguing with a majority is enormously hard. It is hard even when the debate deals with factual matters that can be verified by looking or measuring.