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The Zurich Axioms

Max Gunther set forth basic trading principles called The Zurich Axioms:

On Risk:
– Worry is not a sickness but a sign of health – if you are not worried, you are not risking enough.
– Always play for meaningful stakes – if an amount is so small that its loss won’t make any significant difference, then it isn’t likely to bring any significant gains either.
– Resist the allure of diversification.

On Greed:
– Always take your profit too soon.
– Decide in advance what gain you want from a venture, and when you get it, get out.

On Hope:
– When the ship starts sinking, don’t pray. Jump.
– Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

On Forecasts:
– Human behaviour cannot be predicted. Distrust anyone who claims to know the future, however dimly.

On Patterns:
– Chaos is not dangerous until it starts to look orderly.
– Beware the historian’s trap – it is based on the age-old but entirely unwarranted belief that the orderly repetition of history allows for accurate forecasting in certain situations.
– Beware the chartist’s illusion – it is characteristic of human minds to perceive links of cause and effect where none exist.
Beware the gambler’s fallacy – there’s no such thing as “Today’s my lucky day” or “I’m hot tonight”.

On Mobility:
– Avoid putting down roots. They impede motion.
– Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia.
– Never hesitate to abandon a venture if something more attractive comes into view.

On Intuition:
– A hunch can be trusted if it can be explained.
– Never confuse a hunch with a hope.

On the Occult:
– If astrology worked, all astrologers would be rich.
– A superstition need not be exorcised. It can be enjoyed, provided it is kept in its place.

On Optimism & Pessimism:
– Optimism means expecting the best, but confidence mean knowing how you will handle the worst. Never make a move if you are merely optimistic.

On Consensus:
– Disregard the majority opinion. It is probably wrong.
– Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.

On Stubbornness:
– If it doesn’t pay off the first time, forget it.
– Never try to save a bad investment by “averaging down”.

On Planning:
– Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans or other people’s seriously. In essence these axioms point to the benefit of having an investment strategy and sticking to it, regardless of what other investors say or do. If you don’t have an investment strategy, you could do worse than adopt these principles. However, don’t be afraid to add or subtract ones according to what works for you.

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