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Kindle Notes & Highlights
by
Gunther Max
Read between
December 17 - December 22, 2022
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.
More frequently, a situation that goes bad will stay bad, at least for a while. 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.
The second obstacle to implementation of the Third Axiom is the need to abandon part of an investment.
The willingness to abandon is usually the more trustworthy response. If you don’t sense or can’t cultivate this willingness in yourself, speculation of any kind could be difficult for you, and speculation on margin could be disastrous.
The third obstacle to the Third Axiom’s implementation 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.
Get in the habit of taking small losses. If a venture doesn’t work out, walk away and try something else. Don’t sit on a sinking ship. Don’t get trapped.
Some speculators prepare for small losses in advance through use of stop-loss orders.
Some find stop-loss orders useful and others don’t. The main advantage is that such an order saves you from the agony of deciding when to sell.
The Third Axiom tells you not to wait around when trouble shows itself. It tells you to get away promptly. Don’t hope, don’t pray. Hope and prayer are nice, no doubt, but they are not useful as tools of a speculative operation. Nobody pretends it is easy to carry out the teaching of this hard, unsentimental Axiom. We’ve looked at three obstacles to its implementation: fear of regret, unwillingness to abandon part of an investment, and difficulty of admitting a mistake. One or more of these problems may afflict you, perhaps severely. Somehow or other, you have to overcome them.
The Third Axiom says only that learning to take losses is an essential speculative technique. The fact that most men and women fail to learn the technique is
one of the key reasons why most are not good speculators or gamblers.
The Fourth Major Axiom: On Forecasts Human behavior cannot be predicted. Distrust anyone who claims to k...
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The most commonly used measure of investment performance is Standard & Poor’s index of 500 common stocks. In 1983 this index rose some 22 percent. To put it another way, if you had a 22 percent gain on your speculative portfolio that year, you were doing average work. The performance would rate you a grade of C. According to the Times survey, 60 percent of money managers did worse than that.
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.
if you can’t forecast right, forecast often.
There are things that can be predicted. We know precisely when the sun is going to come up each morning, for instance. Tide tables are prepared months ahead. The free calendar I get each January from the bank says what the moon’s phases will be throughout the twelve months ahead. Weather forecasts are less precise but still are reasonably trustworthy and getting more so. The reason why such things can be predicted, and why the predictions can be trusted, is that they are physical events. But the Zurich Axioms are about the world of money, and that is a world of human events. Human events
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One of the traps money-world prophets fall into is that they forget they are dealing with human behavior. They talk as though things like the inflation rate or the ups and downs of the Dow are physical events of some kind. Looking at such a phenomenon as a physical event, an oracle can understandably succumb to the illusion that it will be amenable to forecasting. The fact is of course, that all money phenomena are manifestations of human behavior.
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 ...
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There are simply too many unknowable variables involved to allow for trustworthy forecasts of something like the inflation rate. The rate is caused by millions of people making billions of decisions: workers about wages they want to be paid, bosses about wages they are willing to pay, consumers about prices they will swallow, everybody about diffuse feelings of hardship or prosperity, fear or security, discontent or buoyancy. To claim you can make reliable forecasts about this staggering complexity seems arrogant to the point of being ridiculous. As the Axiom says, human behavior cannot be
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No forecast about human behavior can ever be compounded of 100 percent foreseeable events. Every prediction is chancy. None can ever be trusted.
The Fourth Axiom tells you not to build your speculative program on a basis of forecasts, because it won’t work. Disregard all prognostications. In the world of money, which is a work shaped by human behavior, nobody has the foggiest notion of what will happen in the future. Mark that word. Nobody.
The successful speculator bases no moves on what supposedly will happen but reacts instead to what does happen.
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.
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 basic 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.
you can make money by investing in a fund – if you are lucky enough to pick the right one at the right time. What it comes down to is that buying into funds is just as risky as buying individual stocks, or art works, or whatever your chosen game may be.
Most advisers have some kind of orderly illusion to sell, for that is what sells.
The cooler and more bankerish a man is, the less readily will he admit that he deals with chaos, has never been able to figure it out, has no hope of figuring it out, and must take his chance like everybody else.
The lesson is that you should be wary of any adviser who, looking around at the investment scene, claims to see anything but chaos. The more orderly it looks to the adviser, the less does this man or woman merit your trust.
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 fact is, no formula that ignores luck’s dominant role can ever be trusted. This is the great, liberating truth of the Fifth Axiom.
Beware the Historian’s Trap The Historian’s Trap is a particular kind of orderly illusion. It is based on the age-old but entirely unwarranted belief that history repeats itself.
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.
Beware the Chartist’s Illusion Representing numbers by lines on graph paper can be useful or dangerous. It is useful when it helps you visualize something with greater clarity than you could achieve with numbers alone. It is dangerous when it makes the thing represented look more solid and portentous than it really is.
the stock market has no patterns. It almost never repeats itself and never does so in a reliably predictable way. 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.
A chart line always has a comfortingly orderly look, even when what it depicts is chaos.
Beware the Correlation and Causality Delusions
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. It can also make us vulnerable, but we don’t usually think of that until it is too late.
chaos is not dangerous until it begins to look orderly.
The Gambler’s Fallacy is a peculiar variety of orderly illusion. In this case the perceived order is not in the chaotic work all around, but inside, in the self. When you say you are ‘hot’, or you get the feeling that today is your lucky day, what you mean is that you are temporarily in a state in which random events will be influenced in your favor.
Nobody is invincible, not even for half a second.
The Axiom warns you not to see order where order does not exist. This doesn’t mean you should despair of ever finding an advantageous bet or a promising investment. On the contrary you should study the speculative medium in which you are interested – the poker table, the art world, whatever it is – and when you see something that looks good, take your best shot. But don’t be hypnotized by an illusion of order. Your studying may have improved the odds in your favor, but you still cannot ignore the overwhelmingly large role of chance in the venture. It is unlikely that your studying has created
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The Sixth Major Axiom: On Mobility Avoid putting down roots. They impede motion.
The more earnestly you seek that feeling of being surrounded by the old, the familiar, and the comfortable, the less successful you are likely to be as a speculator.
Minor Axiom IX Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia
There are times when you have to choose between roots and money. If you are interested in money – which is presumably why you are studying speculation – it is a mistake to let yourself get too attached to any physical thing in which your capital is invested. Get attached to people, but not to houses or neighborhoods. Not to companies, either. You never know when it may be wise to sell out. Be sure you don’t let roots impede you.
Minor Axiom X Never hesitate to abandon a
