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.
“Don’t just think in terms of a salary. People never get rich on salaries, and a lot of people get poor on them. You’ve got to have something else going for you. A couple of good speculations, that’s what you need”.
Nor are you ever going to get rich on salary or wage income. It is impossible. The economic structure of the world is rigged against you. If you depend on job income as your main pillar of support, the best you can hope for is that you will get through life without having to beg for food. Not even that is guaranteed.
Frank Henry’s rule of thumb was that only half of one’s financial energies should be devoted to job income. The other half ought to go into investment and speculation.
The First Major Axiom: On Risk
Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
Perhaps freedom from worry is nice in some ways. But any good Swiss speculator will tell you that if your main goal in life is to escape worry, you are going to stay poor. You are also going to be bored silly. Life ought to be an adventure, not a vegetation.
“Every occupation has its aches and pains. If you keep bees, you get stung. Me, I get worried. It’s either that or stay poor. If I’ve got a choice between worried and poor, I’ll take worried anytime.”
“All investment is speculation. The only difference is that some people admit it and some don’t”.
Minor Axiom I
Always play for meaningful stakes
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.
Minor Axiom II
Resist the allure of diversification
The fact is that diversification, while reducing your risks, reduces by the same degree any hope you may have of getting rich.
If your entire starting capital is itself not very meaningful, diversifying is only going to make things worse. The more you diversify, the smaller your speculations get. Carry it to extremes and you can end with amounts that are really quite trivial.
By diversifying, you create a situation in which gains and losses are likely to cancel each other out.
The more speculations you get into, the more time and study they will require. You can become hopelessly confused. When things go wrong – which is inevitable, as you are surely aware – you can be driven to near-panic as one problem after another presents itself.
A little diversity probably won’t do any harm. Three good speculations, maybe four, maybe even six if you are strongly attracted to that many 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.
If you can conquer greed, that one act of self-control will make you a better speculator than 99 percent of other men and women who are scrambling after wealth.
To match against the time or two when the decision to quit early turns out wrong, there will be a dozen or two dozen times when it turns out right. In the long run, you make more money when you control your greed.
“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. The “left-behind blues”, as Streeters call the malady, is felt to be among the most painful of all ailments stock speculators must contend with.
Minor Axiom III
Decide in advance what gain you want from a venture, and when you get it, get out
You have $1,000 and you’re attracted to a speculation in silver. Say to yourself, “I’m going into this with the purpose of . . .” (whatever the purpose may be). Don’t make it grandiose. Keep it relatively modest. Doubling to $2,000 within two years perhaps. Or increasing to $1,500 within one year. That is the finish line. Keep it in sight all the way through the race. And when you get there, quit.
If and when you do reach your goal, unless there are truly compelling reasons to turn the ending position into a new starting position, keep faith with yourself and get out.
Such reasons can arise only from a dramatic, unforeseen change in the events and circumstances surrounding your venture. Not merely a shift but an upheaval. A whole new situation has arisen, and this situation makes you not just hopeful but next to certain that the winning set will continue.
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. Or you’ll take your spouse or a friend out for a ridiculously expensive meal in the ritziest restaurant in town.
Don’t wait for booms to reach their peaks. Don’t hope for winning streaks to go on and on. Don’t stretch your luck. Expect winning streaks to be short. When you reach a previously decided-upon ending position, cash out and walk away. Do this even when everything looks rosy, even when you’re optimistic, even when everybody around you is saying the boom will keep roaring along. The only reason for not doing it would be that some new situation has arisen, and this situation makes you all but certain that you can go on winning for a while.
The Third Major Axiom: On Hope
When the ship starts to sink, don’t pray. Jump.
Half your guesses about the future will be wrong. Half your judgments of economic forces will be inaccurate. Half the advice you hear will be bad. Half your hopes are doomed never to be realized.
An amateur gambler hopes or prays the cards will fall his way, but a professional studies how he will save himself when they fall against him.
Note the wording: when it starts to sink. Don’t wait until it is half submerged.
Gerald Loeb’s rule of thumb was that you should sell whenever a stock’s price has retreated 10 to 15 percent from the highest price at which you have held it, regardless of whether you then have a gain or a loss. Frank Henry gave himself a bit more leeway and said 10 to 20 percent.
In the absence of compelling reasons to think things will get better, sell.
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.
Minor Axiom IV
Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.
If you habitually cut your losses in the ways we’ve discussed, you aren’t likely ever to be badly hurt. The only way you can get caught in a market crash is to get taken by surprise and then to find you can’t sell when you want to.
If you wait for sagging ventures to improve, you are doomed to frequent disappointment – and doomed, too, to remain unrich.
Try to think of small losses that way. They are part of the cost of speculation. They buy you the right to hope for big gains.
The Fourth Major Axiom: On Forecasts
Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.
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.
Not even self-fulfilling prophecies self-fulfil reliably.
But the Zurich Axioms are about the world of money, and that is a world of human events. Human events absolutely cannot be predicted, by any method, by anybody. 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.
Design your speculative program on the basis of quick reactions to events that you can actually see developing in the present.
Never lose sight of the possibility that you have made a bad bet.
The Fifth Major Axiom: On Patterns
Chaos is not dangerous until it begins to look orderly.
The minute you think you see an orderly design in the affairs of men and women, including their financial affairs, you are in peril.
Minor Axiom V
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.
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.
Minor Axiom VI
Beware the Chartist’s Illusion
Minor Axiom VII
Beware the Correlation and Causality Delusions
Unless you can actually see a cause operating, really see it, regard all causal hypotheses with the greatest skepticism. When you observe events happening together or in tandem, assume that the proximity results from chance factors unless you have hard evidence to the contrary. 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.
Minor Axiom VIII
Beware the Gambler’s Fallacy
Toss a coin enough times, and sooner or later you are going to have a long run of heads. But there is nothing orderly about this run. You cannot know in advance when it will start. And when it has started, you cannot know how long it will continue. And so it is with roulette, the horses, the art market, or any other game in which you put money at risk. If you play long enough, you will enjoy winning streaks – perhaps some memorable ones, with which you will undoubtedly bore your friends for the rest of your life. But there is no orderly way in which you can cash in on these streaks. You can’t see them coming and you can’t predict their duration. They are merely one more part of the chaos.
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
Minor Axiom X
Never hesitate to abandon a venture if something more attractive comes into view
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 Seventh Major Axiom: On Intuition
A hunch can be trusted if it can be explained.
When you are hit with a strong hunch – “I think that company is in worse trouble than they’re letting on” – the possibility is that this conclusion is based on actual, solid information that is stored somewhere in your mind. What makes it perplexing is that it is information you don’t know you possess.
When a hunch hits you, the first thing to do is ask whether a big enough library of data could exist in your mind to have generated that hunch. Though you don’t know and can’t know precisely what the relevant data bits might be, is it plausible to think they exist?
Minor Axiom XI
Never confuse a hunch with a hope
When you want something very much, you can all too easily talk yourself into believing it will happen. This fact of human psychology confounds little children dreaming of what they want for Christmas, and it confounds speculators dreaming of all the money they’re going to make.
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 Eighth Major Axiom: On Religion and the Occult
It is unlikely that God’s plan for the universe includes making you rich.
If you depend on God or any other supernatural power or agency to bring you wealth the chances are you will drop your guard and get flattened. 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.
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.
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.
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. It is probably wrong.
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.
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.”
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. It is vastly harder when the debate deals with questions of opinion that can’t be subjected to that kind of quick verification. Nearly all money-world questions are of the latter variety.
The herd isn’t always wrong. If the market value of Trashworthy’s art drops to 10 cents a square yard, that could be a good buying opportunity. On the other hand, perhaps the herd is right to shun these gummy expanses of oil paint. Maybe they will never be useful for anything but wrapping fish.
The Eleventh Major Axiom: On Stubbornness
If it doesn’t pay off the first time, forget it.
Minor Axiom XV
Never try to save a bad investment by averaging down
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.
“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?”
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.
That being so, don’t try to make long-range plans or allow other people to make them for you. They will only get in your way. Instead, stay light on your feet, like the grasshopper. Instead of attempting to organize your affairs to accommodate unknowable events in the future, react to events as they unfold in the present. When you see opportunities, go for them. When you see danger, jump out of the way. The only long-range plan you need, as far as money is concerned, is an intention to get rich.
The only kind of preparation I can make for the next century, therefore, is to continue studying the market, to go on learning and improving. If you can call anything so vague a plan, then that’s it – that’s my plan.
Minor Axiom XVI
Shun long-term investments
“The [long-term] investors are the big gamblers.” They surely are. Betting on tomorrow is chancy enough. Betting on a day twenty or thirty years in the future is absolutely crazy.
Don’t get rooted. Every investment should be, at the very least, re-evaluated and made to justify itself afresh every three months or so. Keep asking yourself: would I put my money into this if it were presented to me for the first time today? Is it progressing toward the ending position I envisioned?