May 5, 2011

The Zurich Axioms

The First Major Axiom:
Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.

Minor Axiom I
Always play for meaningful stakes.

Minor Axiom II
Resist the allure of diversification. Diversification has three major flaws:

1. It forces you to violate the precept of Minor Axiom I: that you should always play for meaningful stakes. 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.

2. By diversifying, you create a situation in which gains and losses are likely to cancel each other out, leaving you exactly where you began -- at Point Zero.

3. By diversifying, you become a juggler trying to keep too many balls in the air all at once.

The Second Major Axiom
Always take your profit too soon.

Minor Axiom III
Decide in advance what gain you want from a venture, and when you get it, get out.

The Third Major Axiom
When the ship starts to sink, don't pray. Jump.

Minor Axiom IV
Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

The Fourth Major Axiom
Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly.

The Fifth Major Axiom
Chaos is not dangerous until it begins to look orderly.

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. People who hold this belief -- which is to say perhaps ninety-nine out of every hundred people on earth -- believe as a corollary proposition that the orderly repetition of history allows for accurate forecasting in certain situations.

Minor Axiom VI
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.

Minor Axiom VII
Beware the Correlation and Causality Delusions. It is characteristic of even the most rational minds to perceive links of cause and effect where none exist. When we have to, we invent them.

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.

Minor Axiom VIII
Beware the Gambler's Fallacy. The Gambler's Fallacy is a peculiar variety of orderly illusion. In this case the perceived order is not in the chaotic world 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.

The Sixth Major Axiom
Avoid putting down roots. They impede motion. In the lexicon of modern mental-health theory, rootlessness is in the same category as worry. Both are felt to be bad for you.

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. There are many ways in which you can get rooted in a speculative medium, to the detriment of your overriding goal of making money. One of the most common -- it sneaks up and takes people by surprise -- is to get into a situation in which you aren't sure whether you are conducting a speculation or a hobby.

The Seventh Major Axiom
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 notquiteknowledge:
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 will be strong and insistent. What should you do about them? Learn to use them, if you can.

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.

The Eighth Major Axiom
It is unlikely that God's plan for the universe includes making you rich.

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
Optimism means expecting the best, but confidence means knowing how to handle the worst. Never make a move if you are merely optimistic.

The Tenth Major Axiom
Disregard the majority opinion as it is probably wrong.

Minor Axiom XIV
Never follow speculative fads. Often, the best time to buy something is when nobody else wants it. The pressure of majority opinion is especially troublesome when it comes to the questions of what to invest in and when to invest. This is when many an otherwise clever speculator lets himself or herself be pushed around, with unprofitable results.

The Eleventh Major Axiom
If it doesn't pay off the first time, forget it.

Minor Axiom XV
Never try to save a bad investment by "averaging down." The technique known as "averaging down" or "averaging losses" is one of the investment world's most alluring traps. It is like those fail-safe, surefire, double guaranteed systems for beating a roulette wheel, which are hawked in the streets and bars of Las Vegas and Atlantic City. When you first examine such a system it seems unassailably logical. "Why, yes, this really would work, wouldn't it?" you say, wide-eyed with wonder. The loss-averaging technique is like the roulette systems, too, in that it will work sometimes -- when the player is lucky. That, of course, adds to its allure. But you must be careful not to let it beguile you. It is a rose with poisonous thorns.

The Twelfth Major Axiom
Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own or other people's long-range plans seriously. The Twelfth Axiom says there is only one long-range financial plan you need, and that is the intention to get rich. The how is not knowable or plannable. All you need to know is that you will do it somehow.

Minor Axiom XVI
Shun long-term investments.