Thursday, June 17, 2004
The first chapter of Max Gunther's The Zurich Axioms introduces the cornerstone of investment strategy, risk and attitude to risk.
Gunther awards one Major and Two Minor axioms to the subject but his philosophy is not completely in harmony with mine.
Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
But how worried should we be? Stress and angst aren't easily measured. My Ben Bailey and Chaucer investments concern me, I'm worried they will never reach the fair prices I've calculated or take so long that too many better opportunities will pass while my capital is tied up. Worries like this are inherent to investing - suffer and savour them. The absence of worry implies an ignorance of risk or an insignificant exposure - each is an aberration but the amount of worry present should never be less than some.
Always play for meaningful stakes
Gunther explains:
The only way to beat they system is to play for meaningful stakes. This doesn't mean you should bet amounts whose loss would bankrupt you...but it does mean you must get over the fear of being hurt
There is no point entering a venture if the outcome won't make a difference. I adhere to Minor Axiom I in my own portfolio, only buying on the prospect of a thirty percent gain and each time I try to invest more than the last. As per my previous blog: Failure to adhere to Minor Axiom I 'Always Play for Meaningful Stakes' as an investor is akin to an acrobat performing cartwheels on a park bench. If you suffer a loss it won't hurt too bad but you won't make much dough at it either.
Resist the allure of diversification
it means spreading your money around.Spreading it thin. Putting it into a lot of little speculations instead of a few big ones
I disagree. Numerous studies have shown via statistical analysis how diversification will reduce portfolio risk. My motivation for diversifying is that an investment is made when the individual believes the balance of probability is in his favour. Investors aren't clairvoyants and error is present in any judgement. As we continue to diversify, we would be less confident in each investment/speculation than the previous, slavish diversification is bad but some diversification is essential. Randomness and luck are always present, concentration to say, one or two positions leaves the portfolio extremely vulnerable to misfortune specific to a single company or industry.
Ten thousand pounds could pay for a farm with a hundred chickens, fifty sheep and a dozen pigs. Or a farm with two prize bullocks. Now even if the expected return from the concentrated farm was superior to the diversified farm, the risk is just too great to be taking. A force majeure event such as a lightning strike at the diversified farm might kill a dozen chucks. Better than losing one of your bullocks.
The Artful Dodger
Gunther awards one Major and Two Minor axioms to the subject but his philosophy is not completely in harmony with mine.
Major Axiom I: on Risk
Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.
But how worried should we be? Stress and angst aren't easily measured. My Ben Bailey and Chaucer investments concern me, I'm worried they will never reach the fair prices I've calculated or take so long that too many better opportunities will pass while my capital is tied up. Worries like this are inherent to investing - suffer and savour them. The absence of worry implies an ignorance of risk or an insignificant exposure - each is an aberration but the amount of worry present should never be less than some.
Minor Axiom I
Always play for meaningful stakes
Gunther explains:
The only way to beat they system is to play for meaningful stakes. This doesn't mean you should bet amounts whose loss would bankrupt you...but it does mean you must get over the fear of being hurt
There is no point entering a venture if the outcome won't make a difference. I adhere to Minor Axiom I in my own portfolio, only buying on the prospect of a thirty percent gain and each time I try to invest more than the last. As per my previous blog: Failure to adhere to Minor Axiom I 'Always Play for Meaningful Stakes' as an investor is akin to an acrobat performing cartwheels on a park bench. If you suffer a loss it won't hurt too bad but you won't make much dough at it either.
Minor Axiom II
Resist the allure of diversification
it means spreading your money around.Spreading it thin. Putting it into a lot of little speculations instead of a few big ones
I disagree. Numerous studies have shown via statistical analysis how diversification will reduce portfolio risk. My motivation for diversifying is that an investment is made when the individual believes the balance of probability is in his favour. Investors aren't clairvoyants and error is present in any judgement. As we continue to diversify, we would be less confident in each investment/speculation than the previous, slavish diversification is bad but some diversification is essential. Randomness and luck are always present, concentration to say, one or two positions leaves the portfolio extremely vulnerable to misfortune specific to a single company or industry.
Ten thousand pounds could pay for a farm with a hundred chickens, fifty sheep and a dozen pigs. Or a farm with two prize bullocks. Now even if the expected return from the concentrated farm was superior to the diversified farm, the risk is just too great to be taking. A force majeure event such as a lightning strike at the diversified farm might kill a dozen chucks. Better than losing one of your bullocks.
The Artful Dodger
Comments:
Post a Comment
