This is a relatively old book, first published in 1985. However, I find this to be highly relevant also today. So, even though my review of this book breaks with my practice of only reviewing recently published books, there seems to be no doubt that certain older books nevertheless remain highly relevant (this book included). The French author and philosopher René Descarte’s writings are more than 300 years old, for instance, but are just as relevant today as they were then (mathematics, philosophy regarding the power of simple minds, in contrast to “group thinks”, etc.).
The author, Max Gunther, has identified eleven so-called “principles” for how Swiss bankers might tend to invest. Based on my observation of Swiss banking, having lived in Switzerland now for more than 30 years, my sense is that he largely tends to be spot on. These so-called axioms are, in part at least, based on observations from the author’s father who was head of the US branch of Schweizische Bankverein, then Switzerland’s second largest bank (now part of UBS). To elaborate on and to further clarify the eleven axioms, the author has developed 15 so-called “minor” axioms, with additional in-depth detailing relating to what the various axioms stand for. But before getting into the substance of these, let me first say a few words about the author. Max Gunther was a leading US business journalist who had worked for several leading US publications and had written several best-selling books and scores of feature articles. He passed away in 1998 at the age of 81.
Now to the book. Before delving into the eleven axioms, let me highlight a key point raised by the author of the book’s foreword, James O’Shaughneesy, namely that you shall have to take some risks in order to make money – you do need to place some bets if you expect to do well over time. But to do this in an orderly way is what this book is all about. The eleven axioms are all about having a good, thorough process for investing.
The first axiom states that to worry about outcomes when taking risks is normal. Worrying might indeed be seen as a sort of enjoyment! A good investor is driven by a sense of adventure! The author then proposes three minor axioms to further clarify. First of all, he stresses that to place meaningful bets is crucial, i.e., no small “listening posts”. He then warns against too much diversification. Focus is needed in order to build relevant competences and to learn. In my opinion, some diversification is good, but this should be done in such a way that a sense of focus in maintained. Fundamental is to find a good degree of balance here. For instance, in my own investment firm, I focus on five business areas, not too broad, not too narrow, I hope!
The author then highlights another main principle, namely, to take profit when you can, say, without waiting too long when a market is rising, thus risking to “tip over” and end up falling into the other steep valley on the other side. A broker once told me that “the market tolerates bull and bears, but not pigs”. So, take profit when you can, and do not be driven by greed. To set some approximate targets for when to exit from an investment might be good (minor axiom number three!).
The third axiom states that one should exit without any hesitation, “jump” as the author says, whenever an investment might develop negatively, in comparison with what one might have planned for, i.e., expected. While hesitation and procrastination might perhaps often be the more comfortable, it is typically better to cut losses sooner rather than later. No hesitations, no delays! To counteract feelings of regret, to be ready to abandon, and indeed admit that one might have made a mistake are important for being able to jump ship resolutely.
Human behavior cannot be predicted. Be skeptical to forecasts (axiom four). Chaos is to be expected. Do not assume that things are orderly, when the reality calls for accepting that there is chaos. It can be dangerous indeed to believe in orderly patterns (axiom five). To avoid this trap, stay awake, one should avoid believing that history repeats itself. To draw curves, graphs and charts typically add to false feelings of orderly patterns. The same tends to be the case when looking for correlations. While the author does not explicitly discuss this, a sound skepticism when it comes to believing in the power of various lead indicators is probably merited. Stay away from “feeling hot on a particular day,” which is also a way for many gamblers to incur losses. Do not be hypnotized by an illusion of order. Do not fall in love with a particular investment. Always be ready to move on. I saw how dangerous it might be if one allows oneself to “put down roots” when many shipowners who were in the offshore supply ship segment failed to get out on time and incurred big losses! Some owners even got totally wiped out! Many of those in charge of these companies were trapped in this souring business segment due to loyalty and nostalgia. To move one’s assets into more attractive opportunities that might emerge is key.
To have solid instincts is indeed good. The author’s test of whether one effectively might be talking about an instinct, rather than a more-or-less loose idea, or a rumor perhaps, is whether an instinct can be “explained”, i.e., backed up by some logical arguments. To sort out “dead end” investment options is paramount. Instinct can play an important role here.
The author warns against confusing an instinct with a hope. Steer away from wishful thinking! Do not expect miracles! Religious prayers typically do not help. Astrology is perhaps not that useful either. While some degree of superstition might be ok, this must never be allowed to take over. In the end one should stick to one’s own thinking, reasoning and instincts.
Optimism is needed, but not enough. Confidence is called for, in contrast to mere insightful thinking. Constructive use of pessimism is called for, to build confidence through examining how to cope with various negative scenarios. To always have an exit is important.
To go with the majority shall typically not cut it, so-called “flock-mentality” typically. Disregard the majority opinion, the author says (axiom ten): “cogito, ergo sum” as Descartes said (“I think, therefore I am”). Stay away from speculative feels.
The eleventh axiom states that one should look for relatively immediate positive outcomes or forget it! We know from discounting approaches that the value of positive money streams would be far less if it comes through only sometime in the distant future than soon. So, an expectation of relatively immediate payout is key!
This brings me to the final axiom which simply states that so-called long-range planning should be seen as an exercise to be considered with a healthy degree of skepticism. Having done quite a lot of work in the area of long-range planning, I could at first think about disagreeing with this final axiom. But actually I agree! Both for the author as well as for me, the power of long-term planning is to stimulate critical thinking, and nothing more! As such, long-term plan outputs should not be taken as more than mere inputs. What matters is the process that one might have gone through in coming up with the plan documents.
These twelve axioms are indeed quite firm recommendations. They indicate what to do, and what not to do. Can we be this firm, so as to come up with such definite recommendations in today’s world? Is there, perhaps, a paradox here, in the sense that the fourth axiom that the author provides explicitly states that one should not believe in firm forecasts?
I have myself provided several recommendations when it comes to how members of my family and I have invested. In fairness, we have done relatively well. Even though the author states that one should not believe in firm patterns or “rules” when it comes to how investments might develop in the future (axiom four), my sense is that to provide some relatively broad guidelines might still be useful. Such guidelines should of course not be interpreted as “firm rules” however. They should never be interpreted as more than they are meant to, namely as inputs for thinking, i.e., issues that it normally might make sense to think about before investing. As such, I also find the twelve axioms provided by the author to be very useful. In today’s world I would perhaps relabel these axioms as guidelines, however. I stand by the guideline which I have given in other writings of mine, particularly perhaps in my books from 2019 and 2021.
So, in summary this book is indeed very useful for me, as an investor. Its twelve major recommendations, as well as the sixteen supporting prescriptions seem to be in line with my own experiences. The logic that the author provides is particularly impressive, however, indeed much more articulate (and elegant) than what I have been able to articulate in my own writings about investment. I am impressed and am recommending this book wholeheartedly to all of you, perhaps particularly if you are an active investor. It goes without saying that relatively old writings (1985) may still be to the point!
REFERENCES
Lorange, P. (2019), Adaption and Flexibility in the Family Firm: A Brief History of S. Ugelstad Invest, Smøyg
Lorange, P. (2021), Reinventing the Family Firm, IMD
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