The Second Major Axiom : On Greed

Always take your profit too soon

Amateurs on Wall Street do it. Amateurs in poker games do it. Amateurs everywhere do it. They stay too long and lose.

What makes them do it is greed, and that is what the Second Axiom is about. If you can conquer greed, that one act of self-control will make you a better speculator than 99 percent of other men and women who are screaming after wealth.

But is is a hard act to pull off successfully. Greed is built into the human psyche. Most of us have it in big amounts. It has probably inspired more Sunday sermons than any other of our less than laudable traits. The sermons tend to have a despairing sound, with sighs for periods. The despair stems from the feeling that greed is so deeply entrenched in our souls that we can no more easily extract it than change the color of our eyes.

Patently, it cannot be exorcised by sermons. Sermons have never had the slightest effect against it. You are not likely to conquer it either by listening to other people’s sermons or by preaching at yourself. A pragmatic and promising course would be to think about the rich, strange paradox that lies at the heart of the Second Axiom : by reducing your greed, you improve your chances of getting rich.

Let’s pause to define our terms. Greed, in the context of the Second Axiom, means excessive acquisitiveness: wanting more, more, always more. It means wanting more than you came in for or more than you have a right to expect. It means losing control of your desire.

Greed is the bloated, self-destructive cousin of acquisitiveness. As we use the term here, ‘acquisitiveness’ is the natural wish to improve one’s material well-being. The Zurich Axioms were put together by people with a healthy dose of acquisitiveness, and it is unlikely you would be studying the Axioms unless you, too, had the trait. Every animal on earth has the instinct to acquire food, a nesting place, and the means of self-protection, and in this respect we differ from other creatures only in that our wants are more complicated. Don’t be ashamed of being an acquirer. The trait is part of your survival equipment.

But acquisitiveness gone haywire, acquisitiveness gone out of control to the extent that it defeats its own purposes – that is greed. Fear and hate it. It is a speculator’s enemy.

One man who made a nearly lifelong study of greed was Sherlock Feldman, for many years casino manager of the Dunes, one of the bigger Las Vegas gambling clubs. A beefy man with thick-rimmed glasses and a look of sad good humor, Feldman used to observe his club’s patrons during his chosen duty hours of 2:00 a.m. to 10:00 a.m. daily, and what he saw often made him break into fits of philosophy.

“If they wanted less, they’d go home with more”, he would say. That was his own axiom on greed.

He understood greed well, for he was himself an accomplished gambler. He made and lost several small fortunes in his youth but finally learned to control himself and died comfortably rich. Talking about his patrons at the Dunes, he would say, “What they do in here doesn’t matter all that much for most of them. They’re just playing. They lose a couple of hundred, who cares? But if the way they play here is the way they play their lives, then maybe it matters. You can tell why they aren’t rich, a lot of them. Just watching them in here, you can see why they’ll never get anyplace that counts.”

He told of a woman who came in with a little wad of money that she was prepared to lose for fun. “She goes to a roulette wheel and puts $10 on one number. I forget what it was, her lucky number or birthdate or something. And what do you know? The number comes up, and she’s richer by $350. So she takes $100 and puts it one some other number, and that number comes up! She collects three and a half big ones this time. All her friends gather round and tell her to bet some more, this is her lucky night. She looks at them, and I can see her starting to get greedy.”

Feldman paused in telling the story to mop his forehead with a handkerchief. “Well, she goes on betting. She’s had enough long shots, so she starts betting on the colors and the dozens – bets a few hundred each time and goes on winning. Six, seven wins in a row. She’s really on a streak, this woman! Finally she has something like $9,800. You’d think that would be enough, right? I’d have stopped long before. A couple of grand would have made me happy. But this woman isn’t even happy with $9,800. She’s dizzy with greed by now, see. She keeps saying she only needs another couple of hundred to make ten grand.”

Reaching for that big round number, she began to lose. Her capital dwindled. She placed bigger bets at greater odds to recoup it. Finally she lost everything, including her original $10.

This story illustrates the original meaning of the popular admonition “Don’t push your luck” or, as the Swiss more often put it, “Don’t stretch your luck”. Most people use it in casual speech without understanding that it has a serious meaning. It deserves more careful study than it usually gets.

What it means is this. In the course of gambling or speculative play, you will from time to time enjoy streaks and runs of luck. You will enjoy them so much that you will want to ride them forever and ever. Undoubtedly you will have the good sense to recognize that they cannot last forever, but if greed has you in its grip, you will talk yourself into hoping or believing that they will at least last a long time …. and then a bit longer … and then just a little longer. And so you will ride and ride, and in the end you and your money will go over the falls.

We will study the troublesome phenomenon of winning streaks in more detail when we come to the Fifth Axiom. (The Axioms are intricately interwoven. It is hardly possible to talk about one without mentioning others.) For now, the point to be appreciated is that you cannot know in advance how long a given winning streak is going to last. It might last a long time. On the other hand, it might end with the next tick of the clock.

What should you do, then? You should assume that any set or series of events producing a gain for you will be of short duration, and that your profit, therefore, won’t be extravagantly big.

Yes, certainly, that lovely set of events might continue until it produces a colossal win. Might. But from where you stand at the beginning of the set, needing to make a sit-or-quit decision without being able to see the future, you are much better off playing the averages. The averages overwhelmingly favor quitting early. Long, high winning streaks makes news and get talked about at parties, but they are newsworthy for the very reason that hey are rare. Short, modest ones are vastly more common.

Always bet on the short and modest. Don’t let greed get you. When you have a good profit, cash out and walk away.

Once in a while you will regret having walked away. The winning set will continue without you, and you will be left morosely counting all the money you didn’t make. In hindsight, your decision to quit will look wrong. This depressing experience happens to every speculator once in a while, and I won’t try to minimize it. It can make you want to cry.

But cheer up. To match against the time or two when the decision to quit early turns out wrong, there will be a dozen or two dozen times when it turns out right. In the long run, you make more money when you control your greed.

Always take your profit too soon, the Second Axiom says. Why ‘too soon’? What does that puzzling little phrase mean? It refers to the need to cash out before a set of winning events has reached its peak. Don’t ever try to squeeze the last possible dollar from a set. It seldom works. Don’t worry about the possibility that the set still has a long way to go – the possibility of regret. Don’t fear regret. Since you can’t see the peak, you must assume it is close rather than far. Take your profit and get out.

It is like climbing a mountain on a black, foggy night. The visibility is zero. Up above you and ahead of you somewhere is the peak, and on the other side is a sheer drop to disaster. You want to climb as high as you can. Ideally, you would like to reach the peak and stop exactly there. But you know ‘ideally’ doesn’t happen often in real life, and you aren’t naïve enough to think it is going to happen now. So the only sensible course is to stop climbing when you have reached what you consider a good height. Stop short of the peak. Stop too soon.

Sure, when the fog clears and the sun comes up, you may find you’re less than halfway to the top. You could have climbed a lot farther. But don’t nurse this regret. You aren’t all the way up, but you are up. You’ve made a solid gain. What’s more, you’ve made it and kept it. You are a good deal better off than all the blunderers who scrambled blindly to the peak and toppled over the other side.

This happened to a lot of real estate speculators in the early 1980s. As an example, consider the sad story of Alice and Harry, a Connecticut couple. They told me about their experience because they felt they had learned much from it. That which hurts, teaches. They wanted to explore their new knowledge. I promised not to reveal their identities. Alice and Harry are not their real names.

They are a married couple in their mid-forties, both of them attractive, bright, and acquisitive. Both hold jobs that pay good salaries. Their combined incomes, lifestyle, and general social orientation place them somewhere at the lower edge of the upper middle class. They have two kids in college.

Like many middle-income people in this end of the twentieth century, they have always found it a struggle to live within their income. They have not been able to put much aside for investment, and what they have invested has gone mainly into bank accounts, life insurance, and other savings-like deposits. Their one good speculation has been their family home.

In the early 1970s they went to Connecticut’s affluent Fairfield County and bought a house that stretched their financial capabilities to the limit. This was a deliberate decision. After saving for years and still feeling unrich, they were beginning to develop an awareness of the First Axiom. They were coming to understand that they hadn’t been risking enough.

As many middle-class people do, they looked at their home as a double-duty entity: not only a place to live but also a way to score a capital gain, maybe a big one. The speculation turned out to be an excellent one. Real estate values in Fairfield County rose spectacularly in the 1970s (though not as spectacularly as in some other places like California’s Marin County or Florida’s Dade).

Early in the 1980s, Harry and Alice, estimating conservatively, figured that the market value of their home was something like two and a half to three times what they had paid for it less than a decade before.

It was time to sell. The kids were grown and gone. Alice and Harry didn’t need a big house anymore. Indeed, both were fed up with the suburban life and the burdens of homeownership. They wanted to move into a smaller, easier place, perhaps a rental apartment. The healthy growth in their home’s capital value made the idea of selling look still more attractive. They had a dandy gain. The market value of their home had multiplied threefold or so, but because of the leverage supplied by their mortgage loan – and effect exactly like that of buying stocks or commodity futures on margin – they had more than sixfolded the value of their own capital invested in the venture. Not a bad showing at all. But greed got them. They held on for more.

Alice recalls that they had read or heard about people in places like Marin County whose homes market value had tenfolded in ten years. “We thought, if it can happen in Marin, then it can happen in Fairfield. If our house tenfolded, we’d be millionaires!”

Harry recalls that his main motivation was the fear of regret. “I said to myself, well, sure, it’s nice that we can sell this place for three times what we paid. But suppose we sell it, and then suppose a few years down the pike, I find out that the guy I sold it to turned around and resold it for triple what he paid. I’ll kick myself!”

So, they held on. Reached the peak. And fell into the canyon on the other side.

As happens much more often than not, the peak was far closer than they wanted to believe. The real estate market in Fairfield – as in most of the suburban United States – collapsed in 1981 and 1982, particularly the market for big houses. In some neighborhoods, houses could hardly be sold at any price.

When Alice and Harry belatedly put their house on the market, the world rudely declined to beat a path to their door. There were few lookers and even fewer serious shoppers. Even the local realtors, normally an ebullient lot, seemed bored and discouraged. In a whole year on the market, Alice and Harry received just one offer from a buyer. The amount offered was shockingly low. It was more than they had paid for the house, but not by much. They would have earned more by keeping their capital in a savings account.

When I last saw them they were waiting for the slumped market to recover. They had learned. They were not hoping any longer to make a killing on their house. They had arrived at an idea of the price at which they would like to sell it – a price that gave them a good profit but not a bonanza. They were determined to sell whenever they could get that price, no matter how buoyant the market or how high everybody’s expectations for the future.

They were determined, in other words, to sell too soon. I hope they stick with that decision.

Carrying out the precept of the Second Axiom seems to be extraordinarily difficult for some. The main difficulty may be the fear of regret. This fear was Harry’s worst enemy and may continue to be. Harry is not alone.

The fear is particularly common and particularly intense around the stock market. “Never check the price of a stock you’ve sold”, says one of Wall Street’s ancient teachings. The admonition isn’t designed to help you make money but simply to protect you from weeping fits. The “left-behind blues”, as Streeters call the malady, is felt to be among the most painful of all ailments stock speculators must contend with.

Painful? Oh Lord, yes. Like the time I sold Gulf Oil at about $31 and watched it soar to nearly $60 a year later. Or the time I dumped 1,500 shares of IBM at $70 and a fraction, and the doggone stock then leaped to $130. Or the time ……. but enough, enough! One must try not to torture oneself. Instead of glooming over these outcomes, I should be congratulating myself on all the times when selling too soon was brilliantly correct.

I should be, but even for one as thoroughly steeped in the Axioms as myself, the blues come creeping in the night. I promised you that I wouldn’t minimize the pain of possible regret, and I won’t. It can indeed hurt. I have no medicines to offer. There is no analgesic for this pain. It is simply something every speculator must put up with.

The fear of regret may be bad around Wall Street because the trading prices of stocks are quoted every business day. This is true of some other speculative media but not of others – not of real estate, for instance. You may have a broad, vague idea of the long-term ups and downs in the market value of your home, or holiday cottage in the Caribbean, but you can’t get a precise fix on it every day in the Wall Street Journal. This lack of daily quotes provides you with some emotional protection. It buffers you. Unless the place is actually on the market and you are hearing offers, you can’t do much more than guess what price it might bring. You are similarly and blessedly uninformed about the market value of a home you sold last year or ten years ago.

But if you speculate in stocks, you can pick up the paper any day, or phone your broker, and find out to the penny what people were willing to pay yesterday for any actively traded stock you own, ever owned, or ever wanted to own. A month or a year after you’ve cashed out, you can, if you wish, torment yourself by looking to see if the winning set continued without you.

Stock speculators are always doing that and are always working themselves into frenzies over it. Such a frenzy can cloud one’s judgment to a hazardous degree.

I had a drink one night with an old friend of Frank Henry’s, a South American speculator. He was feeling sorry for himself and seemed to have been drinking all afternoon. His story came out in pieces. When I finally was able to fit them together, I saw that I had been listening to financial tragedy.

It had always been Frank Henry’s opinion that this likeable man was too emotional for the Wall Street game. I didn’t know about that, though I did know the man was always getting his pockets emptied by Americans and Swiss who liked to lure him into high-stakes poker games. As he poured out the pieces of his sad story, I began to think Frank Henry might have been right. The man had problems in the stock market for the same reason, probably, that he had problems at the poker table. The reason was that though he was intellectually aware of the right thing to do in various situations, he couldn’t always steel himself to do it.

The particular problem that was troubling him that night had begun a long way back. He had bought a large bundle of stock in Wometco Enterprises, a company with interests in the TV and movie industries. The price rose pleasantly, then faltered. He had a good profit, and he saw no compelling reason to think the winning set had a lot farther to go. So, sensibly, he sold out. Whereupon, because of unforeseen events, the price quadrupled.

This threw him into a frenzy of rage and regret. It got so bad that he became afraid to sell anything. He was clutched by the fear that history would inexorably repeat itself – as soon as he sold a stock, zoom, up it would go. The fear seemed to have paralyzed him.

There were trades he knew he should be making, but he couldn’t move. One situation in particular was tormenting him. After cashing out of Womentco he had put most of that money into another TV-movie company, Warner Communications. He had a solid understanding of the entertainment industry and, with better control, might have done well in it. His Warner stock rose, once again giving him a good profit. The combined Wometco-Warner parlay had just about doubled his money.

Enough, one might think. It was time to get out. As the Axiom puts it, it was too soon.

But he couldn’t make the move. He held on to the stock. And without warning, Warner’s Atari video-games division tumbled into a quagmire of problems. Warner Communications stock lost about two-thirds of its value in one dizzy, non-stop plunge.

The Zurich Axioms By Max Gunther

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