The Zurich Axioms By Max Gunther
Previous Chapter | Next Chapter
Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.
Ideally we should welcome our small losses, since they protect us from large losses. That is asking too much, however. Welcome a loss? I never met anybody who could or did. But if we can’t do that, we can at least accept those small losses with good grace.
They really provide excellent protection. If you habitually cut your losses in the ways we’ve discussed, you aren’t likely ever to be badly hurt. The only way you can get caught in a market crash is to get taken by surprise and then find you can’t sell when you want to. This can happen in some non-liquid speculative worlds such a real estate or antiques, where you must protect yourself by careful and constant study of changing market conditions. You are less likely to get accidentally trapped in the case of daily-traded entities such as stocks or commodity futures, where you can almost always find somebody making a market in whatever you want to sell.
Get in the habit of taking small losses. If a venture doesn’t work out, walk away and try something else. Don’t sit on a sinking ship. Don’t get trapped.
“All things come to him who waits”, says an ancient Chinese proverb. If the ancient Chinese believed that, they cannot have been very good speculators. You certainly should not believe it, for at least as it applies to the world of money, it is perfect nonsense. If you wait for sagging ventures to improve, you are doomed to frequent disappointment – and doomed, too, to remain unrich.
The most productive attitude – admittedly not an easy one to achieve – is to expect small losses the way you expect any other less than pleasant fact of financial life. The way you expect taxes, for instance, or electric bills. Your annual waltz with the Internal Revenue Service isn’t fun by any definition, but you probably don’t let it unhinge you. You say, “Well, all right, this is all part of earning a living. This is what it costs.” Try to think of small losses that way. They are part of the cost of speculation. They buy you the right to hope for big gains.
Some speculators prepare for small losses in advance through use of stop-loss orders. A stop-loss order is a standing instruction to your broker: If the stock which you have bought at $100 ever falls to $90, or any other level you designate, he is to sell you out automatically.
Some find stop-loss orders useful and others don’t. The main advantage is that such an order saves you from the agony of deciding when to sell. It puts you in a frame of mind to accept the loss if and when it occurs. You think, “Okay, I’m going into this venture with $10,000. The least it can shrink to is $9,000, less brokerage commissions.” That’s comforting. In time, with luck, you come to think of $9,000 as the base. If the broker has to sell you out, you don’t feel as though any significant loss at all has occurred.
The disadvantage is that a stop-loss order robs you of flexibility. There are some situations in which you might think it sensible to dump that stock at $90, but others in which it might make more sense to hold to $85. With a stop-loss order on the books, you tend to stop thinking.
Stop-loss services are available only with certain daily-traded entities such as stocks and commodities, and many brokerages offer the service only to accounts over a certain size. If you are a speculator in rare coins or antiques, only one person in the world is going to help you with your loss-taking, and that person is you.
My own opinion is that you are better off operating without any automatic loss-taking mechanism. Depend instead on your own capacity to reach hard decisions and follow them through. You may be amazed at how tough you can become with a little practice – and that will be an extra reward of the risk-taker’s way of life. You and your bank account can both grow larger simultaneously.
Speculative Strategy
The Third Axiom tells you not to wait around when trouble shows itself. It tells you to get away promptly.
Don’t hope, don’t pray. Hope and prayer are nice, no doubt, but they are not useful as tools of a speculative operation.
Nobody pretends it is easy to carry out the teaching of this hard, unsentimental Axiom. We’ve looked at three obstacles to its implementation : fear of regret, unwillingness to abandon part of an investment, and difficulty of admitting a mistake. One or more of these problems may afflict you, perhaps severely. Somehow or other, you have to overcome them.
The Axioms are about speculation, not psychological self-help, and therefore they have no advice to offer on how you overcome these obstacles. That is an internal and individual process; the how is probably different for each of us. The Third Axiom says only that learning to take losses is an essential speculative technique. The fact that most men and women fail to learn the technique is one of the key reasons why most are not good speculators or gamblers.
The Zurich Axioms By Max Gunther
Previous Chapter | Next Chapter