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How The Swiss Got Rich: The Zurich Axioms Part 1

8 July 2008 10 Comments

As I recently spent a few days in Zurich, I decided to read a very interesting book entitled The Zurich Axioms. In this book, the author discusses how despite a small, land locked, mountainous country with minimal natural resources, the Swiss have become some of the wealthiest people on the planet. A disproportionate amount of the world’s wealth is held in Swiss banks. Truly amazing and fascinating. This book describes several of the axioms of rules that have guided the Swiss to extraordinary wealth and how to apply it to your life. In this post, I’ll take a look at a few of the Axioms, some examples of where I’ve seen them in play in my investment experience, and how to leverage them in your pursuit of wealth.

First Major Axiom: On Risk – Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.

The book talks about how the Swiss do not seek to avoid risk as much of the world does, but they look for opportunities to add calculated risk in order to get a higher return. Adventure, love, speculating and other forms of risk require you to put forth something that you may lose, whether it be emotional capital or monetary capital. Do you seek safety in your life because you are afraid of losing something? Life offers a great deal, but much of it requires a degree of risk.

Minor Axiom #1: Always play for meaningful stakes

When it comes to gambling or investing, we are taught to only risk what we are willing to lose. Well, what are we willing to lose? Typically it means only risking an amount that you can be fine if your lose. Well, if you only risk what you can afford to lose, then you will only gain an amount that won’t effect you much either. Basically, you won’t get rich by not risking meaningful stakes. By employing rules to minimize loss and calculate when you have a great opportunity in front of you, you should be willing to risk more for a higher return.

Minor Axiom #2: Resist the allure of diversification

This minor axiom goes with the previous one in that if your goal is diversification then anyone one of your individual investments is not risking any meaningful stake. Diversification seeks to spread the risk of any one investment over many so that if one investment goes bad, then hopefully another will compensate and earn a return. Lastly, by diversifying you become a “juggler trying to keep too many balls in the air all at once.” The more investments you make, the more research and time is required to ensure you are making sound judgement.

If you goal is diversification, as I talk about at length on this blog, then that is fine, but realize you are not going to earn a significant gain. If you wish to diversify, put your money in an Index Fund that tracks the market, and forget about the rest of the Axioms. This year, about half of my portfolio has been in two stocks: Apple (AAPL) and Chesapeake Energy (CHK). Both have been huge winners. Because I played both of these investments with meaningful stakes, I have soundly beat the overall market. If I diversified more, I would own a bank, a retailer, maybe some other sectors and I would be closer to the overall market performance which is way down year to date.

Second Major Axiom: On Greed – Always take your profit too soon

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This is probably one of the hardest things to do. It requires so much discipline that the Swiss clearly understood its importance. How many of us have made investments, earned a nice return, and stayed in too long to end up losing money? I have, and I’m sure you have too. Whether you lost big in the dot com bust years ago or in the real estate bust recently, would you have been hit as hard if you held strictly to this principle? Probably not.

I have been publicly detailing some decisions to sell part of my position in Chesapeake Energy and have been criticized for it in many instances. “But the stock is going higher, why are you selling it?!!” Well, at first, I knew I wanted to protect my profits; then, after reading this book, I have a formal definition of my actions for the first time. Taking profit too soon is a great investment principle. Sure, many times your investment will go on to higher returns after you have sold. It is part of the game and you cannot avoid it. However, the money you save yourself from a drastic downturn you avoided will more than compensate for the additional gains you missed out on.

Minor Axiom #3: Decide in advance what gain you want from a venture, and when you get it, get out

This is a great thing to implement in your investment journey. It requires immense discipline, but like taking a profit too soon, it will help you secure your gains and avoid a loss. Before buying a stock or other investment, decide what return would be enough to sell out your position. That is the easy part. The hard part is acting on your previous decision. If you own a stock, that is trending higher more and more, it is very hard to get out because you want to ride the wave as long as possible. The Swiss are telling you to take your profit at the point of your previously determined price.

My next follow up post to the Zurich Axioms will include a discussion on some of my favorite topics such as dollar cost averaging; when to do it and when not to do it. I have enjoyed experiencing the Swiss culture in Zurich and have enjoyed reading The Zurich Axioms to further understand their methods for gaining immense wealth. Hope you enjoyed it also.

10 Comments »

  • torbjorn rive said:

    …learning to take profits faster – (and naming my position upon entry a ‘swing trade’ helps) – is something that seems to take a few mistakes to learn. I’ve passed up on at least 3 opportunities to do so, and one took me significantly lower and then eventually to losses.

    So, a very good point made there. But be ready to make the mistake a few times before one finally learns!

    Also, I like the diversify – but not too much, point.

  • SBF said:

    Good point. This just happened:

    UPL, great stock. Bought in with plan to sell at $100. Guess what? It went to $102. What did I do? I called another trading buddy with a stake in UPL and told him it’s time to sell. But that’s all I did. I never unloaded, not even 1 share. Today it’s at $84.

    Greed will get you everytime!

  • kevin duffey said:

    SBF, I agree. I think everybody has gone through such a scenario at one time in their investing career!

  • torbjorn rive said:

    There’s the greed of holding on too long – may lead to losses – and the greed of taking profits too soon, for the wrong reasons.

    I guess we’re getting into ‘greed management’ here.

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  • Moving New York said:

    This year, about half of my portfolio has been in two stocks: Apple (AAPL) and Chesapeake Energy (CHK) scenario at one time in their investing tough time for market investing

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