I’m a keen supporter of the idea that one should not depend on emotions when making business, poker or investing decisions. I’m also a firm believer that life doesn’t neccessarily need to be difficult nor bad. It’s the way you want it to be. Life’s the way you make it to be.
I’m gonna talk about a book I read recently – „The Zurich Axioms” by Max Gunther. Many of the spoken about there might contradict my current thoughts and views on life, trading and everything related, but we need to keep our minds open towards everything. In this post I’m gonna consentrate on more what could be useful from the trading focus, but still just a bit less than in my previous posts as from psychological point of view also some other ideas could be rather useful.
Worry is not sickness, if you are not worried at all, it means you’re not risking enough. Even though your risks should be calculated, the truth is – risk means an adventure. Without taking any risks you can’t have an adventure. If your life’s purpose is to escape worry, you are going to stay poor and bored as hell, most likely unhappy. Life needs to be an adventure not vegetation. Risks are neccessary, in business, in investing, in life.
„Adventure is what makes life worth living. And the way to have an adventure is to expose yourself to risk.”
Life and money
If you ever want to get rich, you can’t hope on salary from your employer. That’s just not the way to get rich. It might be possible in very few cases but other than that it’s as possible as winning a large sum with a lottery. Like Max Gunther says – „The economic structure of the world is rigged against you.” (when talking about getting rich with a salary or wage income)
So taking risks is absolutely important. Of course, taking risks means that you can also get busted...but without taking the risks you can’t also achieve too much. There’s endless number of possibilities and opportunities in life but for people who don’t like to take risks, the number is VERY limited.
With life, with investing, whatever else – if done correctly, you can always win more than you risk with. If you’re involved in investing/trading then you probably know about the risk/revenue ratio and that revenue potential should always be at least couple of times bigger than the amount of money you’re risking. And generally speaking, even if you do lose, you’ve had an adventure or you’ve gotten smarter by taking that risk. Is that bad?
You always need to be concerned about the safety of your risks but you can’t let the idea of safety let you stop from doing anything.
You must also remember one very old fact – if you risk a little, you can also gain only a little.
Life is speculation, that’s one of the main points of this book.
He also contradicts one very popular and always followed and believed to be true ...fact(?) – „Only bet what you can afford to lose”. Don’t most of us believe it’s true? Don’t most of us agree with it? At least I can honestly say that I do, right now anyway. But there’s things to consider before answering yes to this question. Max Gunther says that the way it is interpreted by most of the people, only brings us poor results. Because the amount that we can afford to lose is usually intepreted as the amount that we can afford to lose without hurting us. Right? Right! And this amount usually is small. And if we manage to doubble this small amount, does it make us rich? If you’re not rich before and this amount you can risk is millions, even then you can’t say this 100% made you rich – because you were rich before! And most likely because you took risks!
He says that the only way to beat the system is to play for meaningful stakes, you’ve got to get over the fear of getting hurt. Of course, it all doesn’t mean you should risk everything so that in case of a loss you’d be bankrupt. It’s far from that. It’s the general idea you need to understand and agree with. You should bet amounts that aren’t too big, but enough to slightly worry you and also make you richer in case you manage to doubble it up.
If you never take risks, if you’re never ready to take a chance, you can also never hope for anything good to happen with you. Neither money nor personal life wise.
While you need to take risks, you should diversify your risks. You should put a a little money into a lot of speculations instead of a few big ones. Right? Right???? Well, that’s another idea in the book that I just started to agree with...until it said „Or so they like to tell you”...
If you read what I previously wrote then you definitely do understand where this sentence is coming from. While diversification is good for risk management purposes, it also reduces your chance of success.
The smaller investing capital you have the less meaningful it is and the less it makes you worry about it, the less risks you take. And if you now start to diversify this little amount, then....while the risks are tiny, also the possible positive outcome is pretty much non existant. And...if you diversify your tiny investment, there’s a good chance that your wins and losses cancel each other, leaving you with no profit.
Another thing is that – the more speculations you get into, the more time you need to commit in order to make proper research about all of them. And eventually you end up with lots of speculations and no proper analysis about any of them.
Note that he’s not saying more than one speculation is not good, but rather, the smaller your capital, the less speculations you should have at any one time. Plus...independent of your capital...3-6 should be maximum.
You have previously probably also read that you should never exit a trade too early. Do you agree? Well, he says you shouldn’t. Don’t be greedy! If you have won a nice sum, stop. Don’t get too greedy – greed is number one reason why people lose in casinos. They win a lot but then they keep on playing in hopes to win more. You can say it’s addiction, I say it’s greed and stupidity. It’s very often a good idea to sell „too soon” and then never check the price in the future again. Before doing a trade, think what you’d like to get from it and once it has been achieved, get out. The general rule is that you should always do that. Exceptions are very rare. I’m well aware that it’s difficult not to be greedy, especially if you have reached your decided ending point just to see that...it looks like I might be able to get some more. Get out, still get out. Max Gunther suggests that always, after taking out your winnings, make yourself a present, spend a part of your earned money. Don’t re-invest it all. That’s another thing what others usually don’t suggest.
One of the axioms brought out is hope. He has a rather good saying about that – „When the ship starts to sink, don't pray. Jump.”. The words „starts to sink” are important here. You have to be ready to take the fact that half of what you do in your life will go wrong, maybe more than half. But this isn’t as terrible as it may sound – if something goes bad, just get out in a good time. Just like in poker, one of the most important knowledge in it is – know when to fold.
From this idea there’s also one good advice for speculators in financial markets. You should sell whenever the stock has reatreated 10 to 15 percent from the highest price you have held it. Yes, the stock can boom up and maybe actually doubble up within the next hours. But more often than not you’ve done the very right decision.
So if you make a bad decision that costs you money, the best idea is to jump out of the investment in order NOT to lose any more money. And admit it! Many people have difficulties admitting they are wrong so that even just this reason might not make them jump – everything might turn out well, right? NO! Just jump and we’re not kidding. Protecting your ego is usually extremely painful to your wallet or your life generally.
You should accept small losses (and small shall they be if you jump at the right time) as there will be many compared to big gains. But the big gains are then more than worthwhile. Small losses should be valued as they protect us from big losses. Small losses are part of life.
Max Gunther also says that the old Chinese proverb „All things come to him who waits” can’t be taken too seriously. You shouldn’t believe it as it is total nonsense. If you wait for your bad ventures to improve you will be very disappointed very often. And just to bring in a personal thought - have you ever achieved anything in your life by waiting instead of taking action?
There is also one good idea about stop losses on stock markets and such in the book. While stop losses might be good very often, Gunther feels that it is better off to work without them. I’m aware that if you are unable to follow your investments status at all times then stop loss is a good idea. But then again, if you don’t have the time, should you be investing? And if you followed his advice to only keep 3-6 speculations at any one time then it’s possible to follow them all at once. Of course it really depends and stop loss usually is good. However, the point he is making, is also very good – if you depend on your own hard decisions every time you need to end a trade manually you will become tough with just a little practice and this will help you on your way to risk-taker’s way or life.
Not only should your bank account grow, You should too.
He also touches the topic that I personally very agreed with already before – don’t believe people who are making forecasts because they tend to be wrong very often. For that you need to gain your own knowledge and eventually make your own decisions instead of counting on anyone else. Take Nostradamus, the prophet much talked about, according to Gunther – “Three forecasts were correct, eighteen were incorrect, and the remaining seventy-nine were such dense gibberish that I simply didn't know what the old Frenchman was driving at.”
Patterns don’t work, history does not repeat itself – this goes pretty much against anything technical analysis in stock market stands for. But to go deeper into this issue, I would say that technical analysis does work – for those who know how to interpret it according to the current situation. Lines on graphs can be either useful or dangerous. It’s useful in a way that it helps you visualize what is happening. But it is dangerous to see strong or even stronger signals that actually aren’t there. Often you do win or often different patterns work just due to LUCK. And luck is something that can’t be repeated intentionally.
Avoid putting down roots. The more you seek to be surrounded by old and familiar, the less successful you will be as a speculator. This mainly applies to the way we think. Loyalty and nostalgia are often not the right way to go. Especially when we are talking about real estate business or investing/trading. Get attached to people not your houses, locations, investments or anything similar.
You shouldn’t hesitate to get out of a venture if you see something better coming along.
These were just few thoughts from Max Gunther’s book that you might find useful. Some of them of course, do contradict your current knowledge. However, he does give something useful to think about.