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

by Gunther Max

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.

Never get rooted in an investment because of the feeling that it “owes” you something – or, just as bad, the feeling that you “owe” it enough time to show what it can do. If it isn’t going anywhere and you see something better, change trains.

The Sixth Axiom urges you to preserve your mobility. It warns against the many things that can get you rooted, to the detriment of your speculative career: sentiments like loyalty, hang-ups like the wish to wait around for a payoff. It says you must stay footloose, ready to jump away from trouble or seize opportunities quickly. This doesn’t mean you have to bounce from one speculation to another like a ping-pong ball. All your moves should be made only after careful assessment of the odds for and against, and no move should be made for trivial reasons. But when a venture is clearly souring, or when something clearly more promising comes into view, then you must sever those roots and go.

Be careful. Don’t let those roots grow too thick to cut.

The Seventh Major Axiom: On Intuition A hunch can be trusted if it can be explained. A hunch is a piece of feeling-stuff. It is a mysterious little clump of not-quite-knowledge: a mental event that feels something like knowledge but doesn’t feel perfectly trustworthy. As a speculator you are likely to be hit by hunches frequently. Some wi...

Dr. Eugene Gendlin, a University of Chicago psychologist who has spent years studying this subject, points out that it is a common human experience to know something without knowing how you know it.

Dr. Gendlin points out that you take in colossal amounts of data every day – vastly more than you can store in your conscious mind and recall in the form of discrete data bits. Most of it is stored in some other reservoir just below or behind the conscious level.

A good hunch is something that you know, but you don’t know how you know it.

Minor Axiom XI Never confuse a hunch with a hope

My personal rule is to be highly skeptical anytime I have a hunch that something I want to happen will happen. This doesn’t mean all such hunches are wrong. It means only that one should examine them with extra care and double one’s guard in case of trouble. By contrast, I’m much more inclined to trust an intuition pointing to some outcome I don’t want. If I had bought those paintings and generated a hunch that Trashworthy was never going to make it (and if I had enough knowledge of art to make such a hunch plausible), my inclination would be to unload fast.

The Seventh Axiom suggests that it is a mistake either to laugh at hunches categorically or to trust them indiscriminately. Though intuition is not infallible, it can be a useful speculative tool if handled with care and skepticism. There is nothing magical or otherworldly about intuition. It is simply a manifestation of a perfectly ordinary mental experience: that of knowing something without knowing how one knows it. If you are hit by a strong hunch telling you to make a certain move with your money, the Axiom urges you to put it to a test. Trust it only if you can explain it – that is, only if you can identify within your mind a stored body of information out of which that hunch might reasonably be supposed to have arisen. If you have no such library of data, disregard the hunch. The associated Minor Axiom XI warns, finally, that a hunch can easily be confused with a hope. Be especially wary of any intuitive flash that seems to promise some outcome you want badly.

The Eighth Major Axiom: On Religion and the Occult It is unlikely that God’s plan for the universe includes making you rich.

If there is a God, a question on which the Axioms hold no opinion, there is no evidence that this supreme being gives a hoot whether you die rich or poor.

Abraham Lincoln remarked once that God must have had a special love for the poor, since He made so many of them.)

One afternoon in December 1940, Jesse Livermore walked into New York’s Sherry-Netherland Hotel, drank two old-fashioneds, went to the men’s room, and shot himself dead.

Minor Axiom XII If astrology worked, all

astrologers would be rich

Minor Axiom XIII A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.

Now let’s review the Eighth Axiom. What does it have to say about money and religion and the occult? It says, essentially, that money and the supernatural are an explosive mixture that can blow up in your face. Keep the two worlds apart. There is no evidence that God has the slightest interest in your bank account, nor is there any evidence that any occult belief or practice has ever been able to produce consistently good financial results for its devotees. The most anybody has ever been able to show is an occasional, isolated bull’s-eye hit, which gets a lot of attention but proves nothing except that lucky flukes happen. To expect help from God or from occult or psychic powers is not just useless but also dangerous. It can lull you into an unworried state – which, as we’ve seen, is not a good state for a speculator to be in. In handling your money, assume you are entirely on your own. Lean on nothing but your own good wits.

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.

A general feeling of hope and good expectations cannot do you any harm. “I’ll learn. I’ll do well. I’ll make it.”

Indeed, without that fundamental buoyancy, how could one be a speculator at all? But be extremely wary of optimism as it applies to specific money ventures. It can be a dangerous state of mind. Professional gamblers know this. It is one of their most effective tools for emptying the pockets of amateurs.

The pro doesn’t have optimism. What he has is confidence. Confidence springs from the constructive use of pessimism.

In poker and a lot of other speculative worlds, things nearly always are as bad as they seem. A lot of times, they’re worse. They are worse at least as often as they are better. You can bet on better if you like, but in the absence of tangible evidence to the contrary, you’re being overoptimistic. The safest course, almost always, is to assume that if a situation looks bad, it is.

Optimism is altogether human and probably incurable. Peering blind-eyed into an impenetrable future, we hope for the best and talk ourselves into expecting the best. Perhaps life would be impossible without optimism. Speculation would be impossible too. The very act of betting money is a species of optimistic statement about an unknowable outcome. This is the paradox of it: optimism, which feels so good and may even be necessary, can lead to financial doom if allowed to get out of control.

from any given day’s viewpoint, the market’s future is just as likely to be bad as good. There should be pretty nearly an equal number of bears and bulls around. Yet if we are to go by the newspaper columns, bulls are vastly in the majority. Why? There are two explanations: First, bulls do, in fact, outnumber bears – by a very big margin. The reason for this is, of course, that optimism feels better than pessimism. So even if a conscientious journalist were to beat the bushes for an equal number of quotable bears and bulls, with the object of writing a carefully balanced report, he would be frustrated by the fact that bulls are considerable easier to find. Second, financial journalists don’t usually seek equal bull bear representation in any case. Why not? Because they prefer interviewing bulls. The song is sweeter. So even if there were an equal number of the two species wandering about on the Street, the bulls would still be over represented in the reports.

When you’re feeling optimistic, try to judge whether that good feeling is really justified by the facts. At least half the time, it won’t be.

The Ninth Axiom warns that optimism can be a speculator’s enemy. It feels good and is dangerous for that very reason. It produces a general clouding of judgment. It can lead you into ventures with no exits. And even when there is an exit, optimism can persuade you not to use it.

The Axiom says you should never make a move if you are merely optimistic. Before committing your money to a venture, ask how you will save yourself if things go wrong. Once you have that clearly worked out, you’ve got something better than optimism. You’ve got confidence.

The Tenth Major Axiom: On Consensus Disregard the majority opinion. ...

Cogito, ergo sum – “I think, therefore I am.”

The trick, he said over and over again in any number of contexts, is to disregard what everybody tells you until you have thought it through for yourself. He doubted the truths alleged by self-styled experts, and he refused even to accept majority opinions.

The many may be right, but the odds are they aren’t. Get out of the habit of assuming that any often heard assertion is the truth.

Minor Axiom XIV Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.

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. The more unappetizing they find it, the lower the price drops. Hence the great paradox that isn’t taught in seventh grade: the time to buy is precisely when the majority of people are saying, “Don’t!”

And the obverse is true when it comes time to sell. The price of a speculative entity rises when large numbers of buyers are clamoring for it. When everybody else is screaming, “Gimme!’ you should be standing quietly on the other side of the counter saying, “Gladly.”

Majority pressure can not only dislodge a good hunch; it can even make us doubt ourselves when we know we’re right.

None of this means you should always automatically do what the majority isn’t doing. It means only that you should stubbornly resist majority pressure instead of just drifting along with it. Study each situation for yourself, process it through your own good brain. The chances are you will find the majority wrong, but that doesn’t happen always. If you determine that everybody else is right, then by all means march with the majority. The point is: whatever you do, whether you bet with the herd or against, think it through independently first.

The Tenth Axiom teaches that a majority, though not always and automatically wrong, is more likely to be wrong than right. Guard against betting unthinkingly either with the majority or against, but particularly the former. Figure everything out for yourself before putting your money at risk.

The greatest pressures on you, and the most frequently felt, will be those that push you into betting with the majority. Such march-with-the-crowd speculations, the Axiom warns, can be costly, for it is in their nature that they tend to make you buy when prices are high and sell when they are low. The strongest line of resistance against these pressures is a keen awareness of their existence and insidious power.

The Eleventh Major Axiom: On Stubbornness If it doesn’t pay off the f...

Minor Axiom XV Never try to save a bad investment by averaging down

Now a quick review of the Eleventh Axiom. What does it counsel you to do with your money? It says that perseverance is a good idea for spiders and Kings but not always for speculators. Certainly you can persevere in your general effort to learn, improve, and grow rich. But don’t fall into the trap of persevering in an attempt to squeeze a gain out of any single speculative entity. Don’t chase an investment in a spirit of stubbornness. Reject any thought that a given investment ‘owes’ you something. And don’t buy the alluring but fallacious idea that you can improve a bad situation by averaging down.