With the markets sliding leaps and bounds, you need to keep your calm and find ways to cushion the free fall. Reviewer's Note: The author (Max) son of a very wealthy Swiss citizen by name, Franz Heinrich, (whom Americans preferred to call Frank Henry), jotted down all the principles of speculation strategies, particularly in stocks, adopted by his father and his father's several other Swiss friends to make large fortunes on the Wall Street in USA in roaring Eighties. Principles perfected by these Swiss gentlemen have therefore been called "Zurich Axioms" by Max.
Enumerated below are twelve major principles and sixteen minor ones with brief comments:
First Major Axiom: On Risk “Worry is not a sickness but sign of health. If you are not worried, you are not risking enough.”Adventure is what makes life worth living. Every occupation has its aches and pains. The rich have to worry about their wealth. But, if there is a choice between remaining poor and worry-free, the selection is obvious. It is better to be wealthy and worried than to be worry-free and poor.
Minor Axiom I: “Always play for Meaningful Stakes.”If you invest Rs. 1000 and your investment doubles, you have only Rs. 2000 and are still poor! So if you want to be rich, you must increase your stakes.
Minor Axiom II: “Resist the allure of diversification”. Firstly, diversification negates the earlier principle of playing for meaningful stakes. Secondly, it may keep you where you began so that your gains on few will cancel out the losses on the other few. Thirdly, it entails keeping track of many more items leading to confusion and occasional panic. Second Major Axiom: On Greed “Always take your profit too soon.”Lay investors having made the investment tend to stay too long on it out of greed for higher profits. But, one must conquer this weakness and book profits soon. If one is less greedy for more profits one will take in more. Don't stretch your luck. In effect, it suggests, SELL sooner than later.
Minor Axiom III: "Decide in advance what gain you want from the venture, and when you get it, get out. Decide where the finish line is before you start the race".
This is self explanatory and hence needs no comment.
Third Major Axiom: On Hope “When the ship starts to sink, don't pray, jump”This axiom is about what to do when things go wrong. Learn how to accept a loss. One should accept small losses to protect oneself from big ones. When the market starts falling, sell, take your money and run!
Minor Axiom IV: "Accept small losses cheerfully as a fact of life." Expect to experience several smaller losses while awaiting a large gain.
Fourth Major Axiom: On Forecasts"Human behavior cannot be predicted. Distrust anyone who claims to know the future, however dimly." The story of a monkey throwing darts on the stock exchange page of a newspaper, to select the companies to buy, and coming out a winner is too well known to be recited. Recent news from London, further proves the truth, when an untrained chemist's stock selections, in a widely publicised contest open to all and sundry, registered higher appreciation over several full time highly qualified fund managers' well researched selections. Human events cannot be predicted by any method by anyone and, hence, don't trust anybody's predictions.
Fifth Major Axiom: On Patterns "Chaos is not dangerous until it begins to look orderly." The truth is that the world of money is a world of patternless disorder and utter chaos. This axiom is a commentary on Technical Analysis - a branch of investment strategies based on charts and patterns. The fact is, no formula that ignores own intuition's dominant role can ever be trusted.
Minor Axiom V: "Beware the Historian's Trap". This is based on the age old but entirely unwarranted belief that history repeats itself.
Minor Axiom VI: "Beware the Chartist's Illusion". Life is never a straight line. Let us not be hypnotised by a line on a chart.
Minor Axiom VII: "Beware the Co-relation and Causality Delusions." Don't be taken in by coincidences in the market.
Minor Axiom VIII: "Beware the Gambler's Fallacy." There is a gambling theory which suggests that one should put small stakes initially and test their luck, and if these turn out well one should go for big stakes on the dice table. But this is not correct. It only shows that winning streaks happen. But nothing is orderly about it. You can't know how long it will last or when it will strike. Sixth Major Axiom: On Mobility "Stay away from putting down roots. They impede motion". You may feel socially comforting to have roots. But in financial life, roots can cost a lot of money. Have a flexible approach while investing. This axiom implies a state of mind.
Minor Axiom IX: "Do not become trapped in a souring venture because of sentiments like loyalty and nostalgia." Do not develop emotional attachment to your investment. You should feel free to sell when desired.
Minor Axiom X: "Never hesitate to abandon a venture if something more attractive comes into view." Never get attached to things, but only to people. Otherwise it hits your mobility. Never get rooted in an investment. You should remain footloose, ready to jump away from trouble or into a profitable opportunity as and when circumstances demand.
Seventh Major Axiom: On Intuition 'A hunch can be trusted if it can be explained.' A good hunch is something that you know but you don't know how to recognise it. When a hunch hits you, try to locate some data in your mind for any familiarity. Then only should you act on it.
Minor Axiom XI: 'Never confuse a hunch with a hope'. Be highly skeptical. Examine every hunch with extra care.
Eight Major Axiom: On Religion and The Occult'It is unlikely that god's plan for the universe includes making you rich'. You can't only pray that you should be made rich. You will have to work at becoming rich. Mere prayers will not suffice.
Minor Axiom XII: 'If Astrology worked, all astrologers would be rich.' This is self explanatory. Don't trust predictions.
Minor Axiom XIII: 'As superstition need not be exorcised, it can be enjoyed provided it is kept in its place.' In your day-to-day financial matters, act rationally. But, when buying a lottery ticket, give it a full play to amuse yourself.
Ninth Major Axiom: On Optimism and Pessimism 'Optimism means expecting the best, but confidence means knowing how you will handle the worst. Never make a move if you are merely optimistic.' In poker and a lot of other speculative worlds, things are never as bad as they seem - most of the times they are WORSE.
Confidence comes not from expecting the best but from knowing how you will handle the worst. Optimism can be treacherous because it makes you feel good.
Tenth Major Axiom: On Consensus 'Disregard the majority opinion. It is probably wrong'. It is likely that the Truth has been found out by a few rather than by many.
Minor Axiom XIV: 'Never follow speculative fads. Often, the best time to buy something is when nobody else wants it.' This is the best way to get a good stock cheaply.
Eleventh Major Axiom: On Stubbornness 'If it doesn't pay off the first time, forget it'. If at first you don't succeed, try and try again and you will succeed in the end. This is good advice for spiders and kings but not for ordinary persons with regard to financial matters. Every trial is a costly error.
Minor Axiom XV: 'Never try to save a bad investment by averaging down.' If the price of the stock goes down after your purchase don't buy more to bring down' the average cost of your total holding. Investigate why the price went down rather than put good money in a bad bargain.
Twelfth Major Axiom: On Planning 'Long-range plans engender the dangerous belief that the future is under control. It is important never to take your own long-range plans, or other people's seriously.' This is self explanatory and hence needs no comment.
Minor Axiom XVI:'Shun long-term investments.' If possible try to stay away fro long-term investments. The author noticed that the Swiss group never took a long-term view of their stock purchases. They always sold out as soon as their targeted profit was achieved.
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The book, “How Buffet Does It”, is a step-by-step guidebook for investing like Buffet in any market environment. This book presents 24 ideas Buffet has followed from day one.
1. Choose Simplicity over Complexity
When investing, keep it simple. Do what’s easy and obvious.
If you don’t understand a business, don’t buy it.
2. Make Your Own Investment Decisions
Don’t listen to the brokers, the analysts, or the pundits. Figure it out for yourself.
Become a value investor. It’s proven to be a very rewarding technique over the long term.
3. Maintain Proper Temperament
Let other people overreact to the market.
To succeed in the market, you need only ordinary intelligence. But in addition, you need the kind of temperament to help you ride out the storms and stick to your long-term plans. If you can stay cool while those around you are panicking, you can surely prevail.
4. Be Patient
Think 10 years, rather than 10 minutes
Don’t dwell on the price of stocks. Instead, study the underlying business, its earnings capacity and its future. If the question is, “How long will you wait?” – “If we’re in the right place, we’ll wait indefinitely” says Buffet.
5. Buy Business, Not Stocks
Once you get into the right business, you can let everyone else worry about the stock market.
Business performance is the key to picking stocks. Study the long-term track record of any company that is on your buy list. Buffet looks for following five main things before investing in a company.
(i) Business he can understand
(ii) Companies with favorable long-term prospects
(iii) Business operated by honest and competent people
(iv) Businesses priced very attractively
(v) Business with free cash flow
Don’t think about “stock in the short term.” Think about “business in the long term”.
6. Look for a Company that is a Franchise
Some businesses are “franchises”. Franchise generates free cash flows.
7. Buy Low-Tech, Not High-Tech
Successful investing is rarely a gee-whiz activity. It’s less often about rockets and lasers and more often about bricks, carpets, paint, shaving blades and insulation.
Do not be tempted by get-rich-quick deals involving relatively complex companies (e.g., high-tech companies). They are the most unpredictable in the long run. Look for the absence of change. Look for the business whose only change in the future will be doing more business, e.g Gillette Blades.
8. Concentrate Your Stock Investments
A the “Noah’s Ark” style of investing – that is, a little of this, a little of that. Better to have a smaller number of investments with more of your money in each.
Portfolio concentration – the opposite of diversification – also has the power to focus the mind. If you’re putting your eggs in only a few baskets, you’re far less likely to make investments on impulse or emotion.
9. Practice Inactivity, Not Hyperactivity
There are times when doing nothing is a sign of investing brilliance.
Be a decade’s trader, not a day trader.
10. Don’t Look at the Ticker
Tickers are all about prices. Investing is about a lot more than prices. It is about value. It is about wealth.
Abstain from looking at share prices every day. Study the playing field and not the scoreboard. Know the value of something rather than the price of everything.
11. View Market Downturns as Buying Opportunities
Market downturns aren’t body blows; they are buying opportunities.
Change your investing mind-set. Reprogram your thinking. Learn to like a sinking market because it presents great buying opportunity. Pounce when the three variables come together. When a strong business with an enduring competitive advantage, strong management, and a low stock price come onto your investment screen.
12. Don’t Swing at Every Pitch
What if you had to predict how every stock in the Standard & Poor’s (S&P) 500 would do over the next few years? In this scenario you have very poor chance of being correct. But if your job was to find only one stock among those 500 that would do well? In this revised scenario you have a good chance.
A few good investments are all that is needed.
13. Ignore the Macro; Focus on the Micro
The big things – the large trends that are external to the business – don’t matter. It’s the little things, the things that are business-specific, that count.
It’s possible to imagine a cataclysm so terrible that the markets would collapse and not bounce back. Externalities don’t matter – and you can’t predict them, anyway. And what can you do about them? Focus on what you can know: the workings of a good business.
14. Take a Close Look at Management
The analysis begins – and sometimes ends – with one key question: Who’s in charge here?
Assess the management team before you invest. A investing in any company that has a record of financial or accounting shenanigans, (creative accounting, accounting jugglery). Weak accounting usually means weak business performance. Strong companies do not have to resort to tricks.
15. Remember, The Emperor Wears No Clothes on Wall Street
Wall Street is the only place where people go to in Rolls Royce to get advice from people who take the subway.
Ignore the charts. A value investor is not concerned with charts. Invest like Benjamin Graham. Graham told investors to “search for discrepancies between the value of a business and the price of small pieces of that business in the market.” This is the key to value investing, and it’s far more productive than getting dizzy studying hundreds of stock charts.
Offer documents of most mutual funds say – in small print – that past performance is no guarantee of future success. Buffet says the same thing about the market: If history revealed the path to riches, librarians would be rich.
16. Practice Independent Thinking
When investing, you need to think independently
Make independent thinking one of your portfolio’s greatest assets. Being smart isn’t good enough, says Buffet. Lots of high-IQ people fall victim to the herd mentality. Independent thinking is one of Buffet’s greatest strengths. Make it one of your own.
17. Stay within Your Circle of Competence
Develop a zone of expertise, operative within that zone.
Write down the industries and businesses with which you feel most comfortable. Confine your investments to them.
18. Ignore Stock Market Forecasts
Short-term forecasts of stock or bond prices are useless. They tell you more about the forecaster than they tell you about the future. Take the time you would spend listening to forecasts and instead use it to analyze a business’s track record. Develop an investing strategy that does not depend on the overall movement of the market.
19. Understand “Mr. Market” and the “Margin of Safety”
What makes for a good investor? A good investor is one who combines good business judgment with an ability to ignore the wild swings of the marketplace. When the emotions start to swirl, remember Ben Graham’s “Mr. Market” concept, and look for a “margin of safety”.
Make sure that you also understand Buffet’s concepts of Mr. Market and the margin of safety. Like the Lord, the market helps those who help themselves. But, unlike God, the market doesn’t forgive those who “know not what they do”.
Bide your time, and wait for Mr. Market to get depressed and lower stock prices enough to provide a margin-of-safety buying opportunity.
20. Be Fearful when Others Are Greedy and Greedy When Others Are Fearful
You can safely predict that people will be greedy, fearful, or foolish. Trouble is you just can’t predict when or in what order.
Buy when people are selling and sell when people are buying.
21. Read, Read Some More, and Then Think
Mr. Warren Buffet spends something like six hours a day reading and an hour or two on the phone. The rest of the time, he thinks.
He therefore advises get in the habit of reading. The best thing to start is to read Buffett’s annual reports and letters. Finally, restrict your time only to things worth reading.
22. Use All Your Horsepower
How big is your engine, and how efficiently do you put it to work? Warren Buffett suggests that lots of people have “400 – horsepower engines” but only 100 horsepower of output. Smart people, in other words, often allow themselves to get distracted from the task at hand and act in irrational ways. The person who gets full output from a 200-horse-power engine, says Buffett, is a lot better off.
Make sure that you have the right role models. Strive for rational behaviour, good habits, and proper temperament. Write down the habits, practices and philosophies that you want to make your own. Then be sure to keep track of them and eventually own them. Financial success is a “matter of having the right habits”.
23. A the Costly Mistakes of Others
This is self explanatory and need no comments!
24. Become a Sound Investor
Buffet says that Ben Graham was about “sound investing”. He wasn’t about brilliant investing or fads and fashions, and the good thing about sound investing is that it can make you wealthy if you are in not too much of a hurry, and it never makes you poor.
To become a sound investor, you need to develop sound investing habits. Always fight the noise to get the real story. Always practice continuous improvement.
