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

A Book Summary by Omer Aziz

This is one of the most interesting books I’ve ever read on the topic of investing in the stock market. More relevant than ever, in my opinion. If you look carefully, these principles also help you get into that state of peak performance called Flow.

On Risk

Worry is normal. If you are not worried enough, you’re not risking enough. Spice up your life with some risk.

“High-risk experience can precipitate radical shifts in consciousness”

Albert Heim (1871)

Always play for meaningful stakes. If you’re too conservative, your rewards will be small. Resist the allure of diversification, they run the risk of cancelling each other out. Make 1 or 2 significant investments at any given time.

On Greed

Always take your profit too soon. Decide in advance what gain you want from a venture and when you get it, get out.

On Hope

When the ship starts to sink, don’t pray, jump. Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

On Forecasts

Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

On Patterns

Chaos is not dangerous until you start seeing patterns in it. Beware of the age old illusion that history repeats itself. Just because wiggles and jiggles were seen before a past large increase does not mean the appearance of the same jiggle is predicting a future increase. Beware of correlation and causality delusions, just because two events occur in close proximity does not mean we should construct an elaborate link between them. Beware of the gambler’s fallacy, there is no such thing as a hot hand.

On Mobility

Avoid putting down roots, they impede motion. Don’t 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.

On Intuition

A hunch can be trusted if it can be explained. Never confuse a hunch with hope. Be highly skeptical when you have a ‘hunch’ that something you want to happen will happen.

On Religion and the Occult

It is unlikely that God’s plan for the universe includes making you rich. You are not the centre of the universe. If astrology worked, all astrologers would be rich. A superstition need not be exercised, it can be enjoyed, provided it is kept in its place.

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.

On Consensus

Disregard the majority opinion, it is probably wrong. Never follow speculative fads, often the best time to buy something is when nobody else wants it.

On Stubbornness

If it doesn’t payoff the first time, forget it. Don’t forget, you’re in the market to make money. Don’t stubbornly ‘chase’ a stock determined to get money out of it. Never try to save a bad investment by averaging down. By throwing in new money you make the old money look smarter. If something goes down by a lot, study why before buying more of it. Ask yourself, would I buy more of this stock at the lower price on its merits alone, if the answer is no, don’t throw new money into it.

On Planning

Long-range plans engender the dangerous belief that the future is under our control. It is important never to take your own long-range plans, or other people’s, seriously. (See Mobility – roots come partly from long range plans) Don’t retreat into the cozy comfort of your plan. Shun long-term investments. Money lost in short term speculation is small compared to money that can be lost by riding an investment over the long-term. Act promptly to hold your losses to a minimum. The long-term investors are the big gamblers. Value the freedom of movement, don’t ever sign it away. Only long-range plan you should have is the intention to get rich. The how is un-knowable and un-planable. All you need to know is you will do it somehow.