This is one of those books that challenges societal beliefs. Victor Niederhoffer made his displeasure obvious in his review of the book. He labelled it “one of the worst books ever written” and “[a] totally worthless book”. Interestingly, the Amazon ratings were not that bad after all. Anyway, I decided to give it read.
Max is the son of a Zurich-born banker, Frank Henry. The axioms were preached by his father and some of his Swiss associates. It is about how the Swiss made it rich. The book was to record these wealth principles and it is organised into 12 major and 16 minor axioms. I will not go through all the axioms but only those that are thought-provoking to me.
If you want to be rich, you need to take risk. He said that if you are poor now, there will be little difference if you get a little poorer while trying to get richer. But if you are right, you can get very much richer. In his view, the potential gain is much higher than the potential loss.
But risk taking is worrying for most people. For that, he quoted the famous speculator, Jesses Livermore, “If I’ve got a choice between worried and poor, I’ll take worried anytime.”
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Taking risk means putting up meaningful stakes. The stake must be large enough to make you worry but not enough to bankrupt you. This will ensure the gain is significant when you are right.
On the other hand, he advises people not to be greedy – never try to sell at the top. He said, “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.”
And he believes no one can predict accurately. He scorned those who make a living by providing forecasts saying, “[i]f you can’t forecast right, forecast often.” If they forecast often, they are going to be right sometimes, and the right predictions are what they will boast about all the time. He is especially against long term planning because no one can see far into the future. It is more important to react to events as they unfold in the present.
There isn’t a fixed way or a formula to make money. He said, “[t]he truth is that the world of money is a world of patternless disorder, utter chaos. Patterns seem to appear in it from time to time, as do patterns in a cloudy sky or in the froth at the edge of the ocean. But they are ephemeral. They are not a sound basis on which to base one’s plans.”
He went on to make an audacious claim, “[t]he truth is that the price of a stock, or anything else you buy in hope of making a profit, will rise if you are lucky.”
The world is unpredictable but humans often have false sense of order or patterns. Some of the illusions of order are seen in:
- History – “It is true that history repeats itself sometimes, but most often it doesn’t, and in any case it never does so in a reliable enough way that you can prudently bet money on it.”
- Charting – “… the stock market has no patterns. It almost never repeats itself and never does so in a reliably predictable way.”
Cause and effect reasoning – “The human mind is an order-seeking organ. It is uncomfortable with chaos and will retreat from reality into fantasy if that is the only way it can sort things out to its satisfaction. Thus, when two or more events occur in close proximity, we insist on constructing elaborate causal links between them because that makes us comfortable.”
If the above do not work, what should you do? Gunther said you should study the speculative medium such as poker games to learn about speculations. A learned speculator will say to himself, “Okay, I’ve done my homework as well as I know how. I think this bet can pay off for me. But since I cannot see or control all the random events that will affect what happens to my money, I know that the chance of my being wrong is large. Therefore, I will stay light on my feet, ready to jump this way or that when whatever is going to happen happens.”
Emphasizing on being wrong, he says we need to be nimble to get out of a wrong position – “Never get rooted in an investment because of the feeling that it “owes” you something – or, just as bad, the feeling that you “owe” it enough time to show what it can do. If it isn’t going anywhere and you see something better, change trains.”
He did talk about being a contrarian, though not all the time: “…majority, though not always and automatically wrong, is more likely to be wrong than right.”
He is very against long term investment. He quoted Livermore once more, “The [long-term] investors are the big gamblers. They make a bet, stay with it, and if it goes wrong, they can lose it all.” He used harsh words like “laziness and cowardice” to describe long term investors.
Do you find uncomfortable reading the article? Do you agree with his views about life and the investment world?
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