Monday, August 23, 2004
The Third Major Zurich Axiom: Hope
Continuing the review of Max Gunther's The Zurich Axioms it's time for the Third Major Axiom, which deals with an emotion that lives the life of a barnacle on logic and reason: hope.
Major Axiom III:
Gunther explains:
Knowing how to get out of a bad situation may be the rarest of all speculative gifts. It is rare because it is difficult to acquire. It takes courage and a kind of honesty with a cutting edge like a razor
Any investment strategy will incur losses from time to time, the challenge is to formulate a strategy that minimises the likelihood of losses and is more likely to give positive returns. Closing a position at a loss or a position far below the planned exit requires courage, humility and a detachment from emotion most just do not possess.
Each week that passes in my career as an investor I become more convinced this is not an intellectual pursuit or an endeavour we can be raised into. An analytical ability and a rudimentary knowledge of economics are vital but successful investing requires character to put the research into action.
Character is required to accept the loss, learn any useful lessons and move on to the next opportunity. Investors must recognise their fallibility, even an excellent investor suffers losses, they are inherent to the activity.
I'm in full agreement with Gunther here. Previously, I've managed to get out as soon as the story turned septic. At this point you recognise the future profits you were counting on will not materialise and the cash is better employed elsewhere. Disappointing results, poor industry outlook or a profit warning can all knock smoke out of an investment. Profit warnings are particularly precipitous, they arrive without warning and can result in an instantaneous discount prior to market opening. They reaffirm the requirement that investments be monitored daily.
Gunther continues:
Study the situation. Ask yourself whether the developing situation is likely to get fixed. Look for trustworthy and tangible evidence that improvement is on the way, and if you see none, take action without further delay. Calmly and deliberately, before everybody else has started to panic, jump off the ship and save yourself
Minor Axiom IV:
I'd agree (hopefully) small losses are a fact of life. I don't think they should be accepted cheerfully however and neither should they significantly outnumber gains.
Losses may carry useful information, highlighting strategic flaws, inadequate research or effeminate execution. This information could help augment a strategy to help avoid future losses. The danger, however, is over-fitting - assuming a lesson is present that must be obeyed in the future, ruling out swathes of money-making opportunities, when the outcome may only have been a result of misfortune. A common delusion borne of a lack of confidence.
Bad company news could be your cue to exit but poor share price performance presents an opportunity to increase your holding. Know the difference.
The Artful Dodger
Major Axiom III:
When the ship starts to sink, don't pray. Jump
Gunther explains:
Knowing how to get out of a bad situation may be the rarest of all speculative gifts. It is rare because it is difficult to acquire. It takes courage and a kind of honesty with a cutting edge like a razor
Any investment strategy will incur losses from time to time, the challenge is to formulate a strategy that minimises the likelihood of losses and is more likely to give positive returns. Closing a position at a loss or a position far below the planned exit requires courage, humility and a detachment from emotion most just do not possess.
Each week that passes in my career as an investor I become more convinced this is not an intellectual pursuit or an endeavour we can be raised into. An analytical ability and a rudimentary knowledge of economics are vital but successful investing requires character to put the research into action.
Character is required to accept the loss, learn any useful lessons and move on to the next opportunity. Investors must recognise their fallibility, even an excellent investor suffers losses, they are inherent to the activity.
I'm in full agreement with Gunther here. Previously, I've managed to get out as soon as the story turned septic. At this point you recognise the future profits you were counting on will not materialise and the cash is better employed elsewhere. Disappointing results, poor industry outlook or a profit warning can all knock smoke out of an investment. Profit warnings are particularly precipitous, they arrive without warning and can result in an instantaneous discount prior to market opening. They reaffirm the requirement that investments be monitored daily.
Gunther continues:
Study the situation. Ask yourself whether the developing situation is likely to get fixed. Look for trustworthy and tangible evidence that improvement is on the way, and if you see none, take action without further delay. Calmly and deliberately, before everybody else has started to panic, jump off the ship and save yourself
Minor Axiom IV:
Accept small losses cheerfully as a fact of life. Expect to experience several while awaiting a large gain.
I'd agree (hopefully) small losses are a fact of life. I don't think they should be accepted cheerfully however and neither should they significantly outnumber gains.
Losses may carry useful information, highlighting strategic flaws, inadequate research or effeminate execution. This information could help augment a strategy to help avoid future losses. The danger, however, is over-fitting - assuming a lesson is present that must be obeyed in the future, ruling out swathes of money-making opportunities, when the outcome may only have been a result of misfortune. A common delusion borne of a lack of confidence.
Bad company news could be your cue to exit but poor share price performance presents an opportunity to increase your holding. Know the difference.
The Artful Dodger
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