Minor Axiom III – The Indissoluble

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

The purpose of Minor Axiom III is to help you answer the always difficult and often paralyzing question. What is enough?

As we’ve seen, greed is the main reason why this question is so hard to answer. However much one has, one wants more. That is the way humans are made.

But there is another factor that contributes heavily to the difficulty for many people, perhaps for nearly all. This is the peculiar fact that as a speculation succeeds and your wealth grows, every new position feels like a starting position.

You start out with $1,000, let’s say. You put it into a margined bet on the price of silver. Your hunch is correct, and a year later you’ve got $2,000. You’ve doubled your money.

That’s nice. If you could do that every year, you’d soon be a millionaire. But the baffling fact is that it doesn’t feel as nice as it is. Instead, that money quickly comes to feel as though it is yours by some kind of entitlement. You tend to take it for granted, especially if it came to you rather slowly through the year rather than all at once. Instead of saying, “Hey, wow, I’ve doubled my money!” or “Hey, look at this, I’ve got a grand I didn’t have before!” you feel as though you have always had this much wealth.

Your two grand doesn’t feel like an ending position. It feels like a new starting position. Because of that, you are going to have a hard time extricating yourself from the venture.

This may seem puzzling to you if you haven’t often speculated or at least played penny-ante poker. It may seem like a weird little problem that afflicts others but won’t happen to you. It is understandable that you should think that, but you are being too optimistic. The problem afflicts almost everybody in time. There is only the most remote chance that you are immune. You must learn to deal with the problem when it hits you.

There are many kinds of human endeavors in which starting an ending positions are clearly seen, felt, and understood. Athletics, for instance. When a runner comes to the end of a mile race, he or she knows it’s the end. There is no question of racing on for another mile in the hope of winning two gold medals instead of one. All energies are exhausted. The tape is broken, the winners are on the record books. It’s all over. It is time to quit, rest, gather new energies for another day.

Few such clear break points exist in the world of gambling and speculation. Poker games end, it is true. Racetracks close at the end of the day. Once in a great while, a stock market venture of yours might end when a company in which you’ve invested is absorbed by a bigger company and passes out of existence. But most of the time you will be required to call your own endings.

This is very, very hard to do, so hard that most people fail to get the hang of it. (Most, indeed, fail even to grasp the necessity of it.) But it is a technique you must master. It is an essential part of a good speculator’s equipment.

An ending is a time when you withdraw, breathe a sigh of relief, and briefly relax. Like a runner at the end of a race, you flop down on the grass at the side of the track. You think, “Okay, it’s over. I’ve done what I set out to go. I’ve won my medal. I’ll sit here a while and enjoy it”. Or you think: “Well, all right, I lost, but it’s ended. I’ll rest, and think, and plan. And tomorrow I’ll race again.” Either way, you have come to an ending.

But how do you arrive at such a clearly seen topping place in a world where there are no finish-line tapes, no end-of-the-round bells? Especially when each succeeding position feels like a new starting position?

You’ve bought a handful of Union Carbide stock, let’s say. Or you’ve invested in gold. Or you own a house. Thee are races that aren’t going to ‘finish’ in any ordinary future that you can foresee. Such a race is open-ended. No arbitrarily chosen measure of time or distance, no judge or referee will tell you when you can stop striving and flop down on the grass. You are required to do that yourself – you alone. The race ends when you say it ends.

Minor Axiom III tells you how to arrive at this ending. Decide where the finish line is before you start the race.

Does this make it easy to cash out? No, of course not. But it does make the exercise much easier than to enter each speculation with the idea that it is a race with no ending.

Let’s go back to the example we talked about before. You have $1,000 and you’re attached 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.

Now see how this helps you psychologically. Here you are the starting line with $1,000, looking forward to a time when it may grow to $2,000. You are not in a position to take the $2,000 for granted, for you don’t have it yet and, as you are surely aware, may never get it. At this point in the venture, at the starting line, the hope-for $2,000 feels like a prize worth striving for. It doesn’t feel like a new starting position. It feels like an ending.

Keep this feeling alive in you as the venture matures. Nurture it. If and when you do reach your goals, unless there are truly compelling reasons to turn the ending position into a new starting position, keep faith with yourself and get out.

What might these ‘truly compelling reasons’ be – the reasons for staying in a race that you had planned to end? 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.

For example, suppose you’re speculating in commodities. You’ve got some frozen-orange-juice futures. You’ve reached an ending position. Keeping faith with yourself, you’re about to sell out and bank your profit. But then you hear that a freak freezing spell has destroyed a lot of the Florida citrus crop. In circumstances like that, it might be wise at least to stay in the race a while and see what happens.

But such situations are rare. Most of the time, arrival of an ending position should signal just one thing: it’s over.

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.

The ending thus becomes associated with an actual event, something concrete to look forward to. Many speculators use this psychological strategy on themselves, even when they are veterans of the game. Frank Henry used to reward himself with oysters and American-style steaks, which he loved and which weren’t easy to find in his native Switzerland. Jesse Livermore, who sometimes had great difficulty bringing his speculations to a close, would reward himself for a win by buying a new item for his collection of antique shaving mugs. With Gerald Loeb’s friend Mary, it was usually a new dress or suit.

Such rewards may seem trivial when compared with the amounts of money being wagered – in Livermore’s case, sometimes seven-figure amounts – but what is important is the sense of ending that even a seemingly silly reward may engender. If it works for you, treasure it.

There are many investment counselors who would frown on this procedure. Ever since the eighteenth century, for reasons that nobody has ever been able to explain very well, there has been a widely held belief that investment money should be considered inviolable. You aren’t supposed to spend it, especially for something frivolous like a plate of oysters or a new coat. There is a special phrase for such a sacrilegious act. It’s called invading capital. The shame of it!

But as Gerald Loeb was fond of asking, “Why do you go to all the trouble of making this money? What’s it there for? To look at?” Loeb was possibly the first counselor to say publicly, without apparent shame, that an investor/speculator should spend some of his or her winnings. Indeed, Loeb went so far as to urge spending a portion of one’s gain in any gainful year, whether or not one has arrived at an ending position.

Investment capital is money just like any other money, Loeb pointed out. It needn’t be segregated and marked ‘hands off’. Certainly, there are all sorts of good reasons for sitting on it. It will comfort you in your old age, it’s a parachute for emergencies, it’s something to pass on to your kids, it gives you that cozy immersed feeling, and so on. All that is nice. But you might as well have a little fun with the money too. Skimming some off the top once in a while, especially at ending positions, is a better idea than it is generally credited with being.

For this reason, I would advise you to keep your speculative capital in some easily accessible form if you can. This is more readily accomplished in some speculative media than in others, of course. If your money is locked up in a house or a rare-coin collection, it may have to stay locked until you find a buyer. But more and more banks are offering flexible equity-access deals for non-liquid wealth of that kind. In effect, such a deal lets you get at your equity by borrowing against it at low rates of interest. Perhaps you can work out something like that.

In other speculative media the goal of ready access is easier to achieve and is getting still easier all the time. Banks and brokers handling stocks, stock options, commodities, currencies, and precious metals have developed highly innovative new kinds of accounts for their customers in recent years.

I now keep all my stock market money in an odd-shaped basket called a cash management account, devised by my broker, Merrill Lynch. It is a combination of many things: partly an ordinary margin account through which I buy and sell stocks in the traditional way, partly a checking account, partly a Visa credit-card account. When dividends are paid out by stocks I own, the cash automatically lands in this hybrid account. If I don’t use the money, it gets scooped into a deposit account. Anytime I want some of it, all I do is write a check or flash my Visa card. Checks and card charges are paid directly out of the account. That’s what I call ready access.

It’s a perfect setup for celebrating ending positions. When I hit such a position, my wife and my Visa card and I go off for a weekend of sinful luxury in New York.

Speculative Strategy

Now let’s see just what the Second Axiom advises you to do.

It says, “Sell too soon”. Don’t wait for booms to reach their peaks. Don’t hope for winning streaks to go on an 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 al but certain that you can go on winning for a while.

Expect in such unusual circumstances, get in the habit of selling too soon. And when you’ve sold, don’t torment yourself if the winning set continues without you. In all likelihood it won’t continue long. If it does, console yourself by thinking of all the times when selling too soon preserved gains you would otherwise have lost.

The Zurich Axioms By Max Gunther

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