Tuesday, July 13, 2004
The Second Major Zurich Axiom
A previous blog was dedicated to the opening chapter of Max Gunther's treatment of investment and speculation, The Zurich Axioms.
After castigating the congregation on risk, the second chapter concerns the deadly sin of avarice, or as to use his terms, greed.
Gunther shows how savvy an author he is by ensuring the key concepts of risk and greed are dissected so early in the book.
Always take your profit too soon
Gunther explains:
Greed is built into the human psyche..get in the habit of selling too soon. And when you've sold, don't torment yourself if the winning continues without you.
This could be couched as 'leave something for the next man' and is a cornerstone of my strategy. It's commonplace on bulletin boards across the internet for investors to chide themselves with 'knowing when to sell is the difficult bit' or comfort themselves with nebulous truism 'no-one went broke taking a profit'. To me always take your profit too soon and leave something for the next man demand the investor sells while some reasons to hold on remain. It's a delicate point and needs careful consideration before its merit becomes clear. It helps to understand that shares are traded on a market that matches buyers to sellers. A buyer (the next man) needs good reason to enter the market to make a bargain. The next man must exist to allow you to get out - leave something to tempt him in. In my investments this is anything above what I consider to be fair value. I also leave momentum for the next man, the share having risen to fair value, he buys on the assumption it can continue. I leave the next man with the improved sentiment on the stock's future. The sooner a profit is taken, the more is left for the next man.
Decide in advance what gain you want from a venture and when you get it, get out
What is enough? As we've seen, greed is the main reason why this question is so hard to answer. However much one has, one wants more. That is the way humans are made
I'm with Gunther on Major Axiom II but we diverge here. My strategy involves establishing an exit price on entry but continually updating that exit price as the situation changes. For example, my original exit price for Dana Petroleum was 326p, adjusted to 318p following the final results but now adjusted higher to reflect favourable circumstances in the industry. Fair prices are moving targets, don't slavishly stick to the one set initially. A farmer has his eye on a summer harvest when he plants fruit but won't do so until it's ripe.
Consider a company bought at a P/E of ten with thirteen calculated to be fair value. If that company's earnings rise, multiply this amount by thirteen to give the new target price - don't leave too much for the next man.
The Artful Dodger
After castigating the congregation on risk, the second chapter concerns the deadly sin of avarice, or as to use his terms, greed.
Gunther shows how savvy an author he is by ensuring the key concepts of risk and greed are dissected so early in the book.
Major Axiom II: on greed
Always take your profit too soon
Gunther explains:
Greed is built into the human psyche..get in the habit of selling too soon. And when you've sold, don't torment yourself if the winning continues without you.
This could be couched as 'leave something for the next man' and is a cornerstone of my strategy. It's commonplace on bulletin boards across the internet for investors to chide themselves with 'knowing when to sell is the difficult bit' or comfort themselves with nebulous truism 'no-one went broke taking a profit'. To me always take your profit too soon and leave something for the next man demand the investor sells while some reasons to hold on remain. It's a delicate point and needs careful consideration before its merit becomes clear. It helps to understand that shares are traded on a market that matches buyers to sellers. A buyer (the next man) needs good reason to enter the market to make a bargain. The next man must exist to allow you to get out - leave something to tempt him in. In my investments this is anything above what I consider to be fair value. I also leave momentum for the next man, the share having risen to fair value, he buys on the assumption it can continue. I leave the next man with the improved sentiment on the stock's future. The sooner a profit is taken, the more is left for the next man.
Minor Axiom III
Decide in advance what gain you want from a venture and when you get it, get out
What is enough? As we've seen, greed is the main reason why this question is so hard to answer. However much one has, one wants more. That is the way humans are made
I'm with Gunther on Major Axiom II but we diverge here. My strategy involves establishing an exit price on entry but continually updating that exit price as the situation changes. For example, my original exit price for Dana Petroleum was 326p, adjusted to 318p following the final results but now adjusted higher to reflect favourable circumstances in the industry. Fair prices are moving targets, don't slavishly stick to the one set initially. A farmer has his eye on a summer harvest when he plants fruit but won't do so until it's ripe.
Consider a company bought at a P/E of ten with thirteen calculated to be fair value. If that company's earnings rise, multiply this amount by thirteen to give the new target price - don't leave too much for the next man.
The Artful Dodger
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