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How The Swiss Got Rich: The Zurich Axioms Part 2

14 July 2008 No Comment

In my previous post regarding the Zurich Axioms, I discussed the first two major axioms for how the Swiss got rich. Continuing the series, we will examine the next few major axioms and continue the discussion! Hopefully, these rules will give you some insight on how to improve your investment strategy.

Third Major Axiom: On Hope – When the ship starts to sink, don’t pray. Jump.

The last axiom dealt with what to do when things go right. This one addresses what to do when things go wrong. It is highly likely that a good percentage of your investments will, in fact, go wrong. You must know what to do to prevent losses from becoming large losses.

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A popular investment approach today is dollar cost averaging. This strategy has you continue to purchase shares as the stock price declines in order to decrease the average cost per share of your entire position. Dollar cost averaging, simply put, is not effective in and of itself. It is only worth while when the stock you continue to acquire has significant reason for upside potential. Check out this article of a fellow blogger’s continual dollar cost averaging of a horrendous stock. After I read that article, I commented on the post to unload the stock for heaven’s sake! Buying a crappy stock cheaper does not negate the fact that it is a crappy stock!

If you are unsure of the upside of a declining stock, you may be better off to abandon ship than to stay in.  Before committing additional capital, you better have a great case for upside to the share price!

Minor Axiom #4: Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.

If you are a consistent investor, you will be hit with losses. Learn to accept them without panic, and learn how to manage them to avoid large losses.

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

I have talked about this at length on this blog. The “experts” on CNBC, the internet and in fancy financial firms do not know the future of the markets. Unfortunately, neither do I. If the experts knew better, financial firms in America would not be going under. Guess what? The people running firms like Bear Stearns and Fannie Mae are very smart people. Smarter than you and I. And look at the results.

What are we to do then? Throw in the towel? Nope. Start by calling investing what it is: speculating. By understanding that you are speculating and you can very well make bad decisions in your pursuit of making successful bets, you can minimize losses and maximize gains. This goes along with the previous axiom that will help you minimize losses.

Fifth Major Axiom: On Patterns – Chaos is not dangerous until it begins to look orderly

Wall Street experts, day traders and Mutual Fund managers will tell you they have a formula figured out that will guarantee a specific gain each year. This always works until of course it stops working. Then, a new magic formula is figured out! Bottom line, don’t trust somebody’s magic formula.

Minor Axiom #5: Beware the historian’s trap

How many times have you heard that history repeats itself? Actually, sometimes it does… and, sometimes it doesn’t. Pay attention to market actions that can repeat itself, but don’t bank on them.

Minor Axiom #6: Beware the chartist’s illusion

Technical analysis is very popular among day traders these days. The Zurich Axioms say to avoid the illusion of such analysis. I have seen very successful day trading, however even the most successful strategies result in losses. I believe that excellent traders also utilize rules to minimize losses on bad trades, and maximize gains on successful trades. Without proper loss management, charts should be regarded as risky.

Minor Axiom #7: Beware the correlation and causality delusions

Be careful not to jump to conclusions regarding two events in ways like assuming one event causes the other. Assuming one thing in the stock market or the economy is causing something else is usually incorrect, and definitely is not something worth risking money over. Fully research any theories you may have regarding causality and correlation.

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