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The Twelve Axioms of Investing
By Joseph Dancy
Created 01/26/2012 - 10:29
Max Gunthers The Zurich Axioms [1] addresses risk management strategies that can be used
in the investment decision making process. The risk management strategies can also be used
when making career or business decisions.
Gunther notes many individuals seek to avoid all risks in investments and in lifes daily activities.
But to obtain any type of substantial gain in life, wealth, or personal stature Gunther claims risks
must be taken at the least an individual will need to put capital, time, or effort at risk in an
undertaking.
The book sets out a formula, or philosophy, consisting of twelve risk-related elements that should
be considered when making important decisions. These twelve elements are labeled the Zrich
Axioms.
The goal of the Axioms is to maximize personal wealth, return on investment, and personal
satisfaction. Most people don't obtain wealth from low-risk savings strategies. Those individuals
who are financially successful have generated their wealth through investment in real estate,
stocks, or some other type of enterprise where risk played a major element in the investment
decision making process.
The following is a list, and brief discussion, of the Axioms:
Axiom number one: In order to obtain a respectable return, or to maximize one's well-being or
career ambitions, an individual must assume a certain level of risk.
Risk makes many individuals uncomfortable. Many seek to avoid all risk. But successful
investors always play for meaningful stakes, assume risks, and resist the allure of
diversification.
Diversification has three major flaws: (1) diversification is contrary to the notion one should
always play for meaningful stakes, (2) by diversifying a situation is created which gains and
losses are likely to cancel each other out, and (3) by diversifying too many investments are
involved to closely track, therefore it is difficult to assess the risks and rewards of each.
In summary the first axiom says to put your money at risk. Don't be afraid of getting hurt,
especially if you are younger and have time to recover from cyclical downturns. The degree
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of risk embraced should not be hair-raising. On the other hand the risk incurred must reflect
a meaningful investment
Axiom number two: Always take your profit too soon.
The successful investor recognizes their gains early rather than waiting too long to sell.
Markets are cyclical whether dealing in real estate, gold, grains, or stocks, and gains can
quickly reverse. An investor should sell and recognize a profit when the investment reaches
the expected goal.
The issue of when to sell to recognize a gain is a very difficult one even for expert investors.
An investor should set a goal for returns at the start of the venture. When that return is
realized in investor should sell. In rare instances the situation may change. Facts may
indicate that further upside is possible; in that case an investor may want to re-examine and
only sell a portion of the investment.
Axiom number three: When problems arise sell quickly.
This strategy will assist an investor in preserving capital. Selling quickly when difficulties
arise is difficult to implement because of the fear of regret, investment loss, and the
admission that one has mis-analyzed the opportunity. Good investors expect accept small
losses as part of the investment business. Large gains should over time exceed the small
losses that are recognized.
Axiom number four: Human behavior, and market behavior, cannot be predicted. Distrust
anyone who claims to know the future.
An investor should not build an investment program based on expert forecasts. Disregard
those prognostications. Nobody knows what the future holds, therefore it cannot be
predicted. Make your own decisions based on the applicable facts.
Axiom number five: Chaos cannot be made orderly by the use of formulas
Because history rarely predicts the future, historical data and trends should be considered
suspect when analyzing risk. Complex mathematical formulas of financial behavior have
failed numerous times even for very sophisticated investors. An investor should not try to
see order where order and predictability does not exist. The focus should be finding a
promising investment where the odds are tilted heavily in the investors favor.
Axiom number six: Preserve your mobility and investment options.
An investor should not maintain their investment position due to loyalty to a company or
individual. Losses should be cut short regardless. If a better investment comes along an
investor should sell and move on. Once losses begin they tend to continue, therefore
investor should recognize losses quickly and reinvest the proceeds.
Axiom number seven: Hunches can be trusted if they can be explained.
It is a mistake to ignore hunches altogether, however it is also a mistake to trust them
indiscriminately. Through intuition and life experiences people compile a set of
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subconscious facts and information which may lead them to an investment idea. Trust a
hunch only if you can logically explain it.
Axiom number eight: Religion, superstition, and astrology have no role in investing.
Relying on religion, superstition, or the occult to provide wise investment decisions,
especially with regard to risk management, is not a wise strategy.
Axiom number nine: Beware of excess optimism
You should never make an investment because you are merely optimistic about the future.
Investors should be confident with regard to their judgment, and the facts on which their
analysis is based.
Axiom number ten: Disregard the majority opinion, it's probably wrong
Many times a majority of investors will draw the wrong conclusion. It is very difficult to take a
minority viewpoint with regard to a potential investment in the face of consensus. An
investment thesis supported by facts and reasoning is preferable blindly investing with the
majority.
Axiom number eleven: If it doesn't pay off the first time forget it
If an investor makes a bad decision they should cut their losses quickly and move on. Very
rarely is it a wise decision to revisit the idea at a future date. The investor should never try to
save a bad investment by averaging down as a stock price declines.
Axiom number twelve: Don't become entrenched to an inflexible long-range investment plan.
Business and economic conditions change constantly. A party should have the flexibility to
sell or to add to a position and should not be locked into an inflexible position. Invest money
in ventures that are attractive as they present themselves, and sell or withdraw money from
investments as hazards present themselves or investment goals are realized.
Bottom line, the Zurich Axioms set out well reasoned rules with regard to decision making and
risk management:
1. Run a concentrated portfolio
2. Keep the odds are in your favor
3. Cut your losses short
4. Let winners run, but sell when they reach fair market value
5. Do your own analysis
6. Beware of excess optimism or pessimism and of expert options
7. Remain flexible and adapt to the investment environment
Overall a well written and insightful book on managing risk in the decision making process.
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About Joseph Dancy [5]
Joseph Dancy [5]
SMU School of Law Professor at LSGI Market Letter
Primary Tel: 972-780-1805
1007 Beaver Creek Dr Duncanville TX 75137 USA
jdancy @ smu.edu
http://lsgifund.com/ [6]
Joseph Dancy [5] Archive
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[1] http://www.amazon.com/Zurich-Axioms-M-Gunther/dp/1897597495/ref=sr_1_fkmr0_1?
ie=UTF8&qid=1327599086&sr=8-1-fkmr0
[2] http://visitor.r20.constantcontact.com/manage/optin/ea?
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[3] http://www.financialsense.com/print/print/contributors/joseph-dancy/2012/01/26/the-twelve-axioms-of-investing
[4] http://www.addthis.com/bookmark.php?v=250&username=financialsense
[5] http://www.financialsense.com/contributors/joseph-dancy
[6] http://lsgifund.com/
[7] http://www.financialsense.com/contributors/joseph-dancy/natural-gas-will-robust-injection-season-elevate-prices
[8] http://www.financialsense.com/contributors/joseph-dancy/natural-gas-markets-revitalized-while-oil-plows-ahead
[9] http://www.financialsense.com/contributors/joseph-dancy/iea-shale-mirage-future-crude-oil-supply-crunch
[10] http://www.financialsense.com/contributors/joseph-dancy/fed-pres-monetary-easing-needed-address-labor-
market-issues
[11] http://www.financialsense.com/contributors/joseph-dancy/fundamental-analysis-supports-triple-digit-oil-prices
[12] http://www.financialsense.com/contributors/joseph-dancy/correlation-broke-commodities-index-underperforms-
the-sp500
[13] http://www.financialsense.com/contributors/joseph-dancy/energy-sector-remains-out-of-favor-with-investors
[14] http://www.financialsense.com/contributors/joseph-dancy/oecd-study-forecasts-sharply-higher-global-crude-oil-
demand
[15] http://www.financialsense.com/contributors/joseph-dancy/the-success-equation-skill-vs-luck
[16] http://www.financialsense.com/contributors/joseph-dancy/oil-agriculture-stock-market-outlook-2013