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Lessons from The Zurich Axioms

March 13, 2019

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Jon

Few people understand risk in a way that makes it actually rewarding. That’s the message offered in The Zurich Axioms. The book lays out 12 Axioms that play off this idea.

In some cases, the Axiom runs counter to typical investor behavior. In others, it runs counter to popular thinking. And some are obvious. I guarantee you won’t agree with all of them, but it should, at least, give you something to think about.

These are the lessons from a few Axioms that stood out (check out the notes linked below or read the book for the full list).

Axiom #1: Worry is not a sickness but a sign of health. If you’re not worried, you are not risking enough.

In investing, most people want a risk-free reward. Yet, risk and reward are intertwined. No matter how hard you try to remove one, it affects the other. Not many get that. Continue Reading…
The Zurich Axioms by Max Gunther

March 13, 2019

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Buy the Book: Print | eBook

The Zurich Axioms is a book about managing risk and reward. Twelve Axioms define how to think about risk and uncertainty in such a way that you’re more likely to be rewarded than not.

The Notes

Continue Reading…
Lessons in Down Markets

March 8, 2019

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Jon

Before the financial crisis, there was the 1980s real estate bust. The southwest part of the country was particularly hit hard.

Along with the bust, came the S&L crisis, many bank failures, and for one company, Trammell Crow, a post-mortem on the numerous mistakes different partners made during the boom times. In 1989, a memo was sent asking partners “to reflect upon the environment which lead to the collapse of the Southwest real estate markets.” The replies were pieced together into over a 100-page list, consisting mostly of mistakes made during the period.

If you work in commercial real estate or study it, it’s a great resource. Being real estate, excess leverage is a recurring theme. Diworsification is another mistake that pops up often. There’s the typical behavioral stuff too — overconfidence, overoptimism, greed, FOMO, etc. — that always surface in hindsight.

It’s interesting how booms, universally, push people to reach for things, lower their standards (while raising expectations), chase more and more investments (instead of staying focused on their top ideas), or do deals because money’s available. That belief that if they don’t do it, someone else will, and they’ll miss out, is like sitting on a time bomb with a hidden countdown during a boom. Continue Reading…
Charlie Munger’s Uncommon Sense

March 6, 2019

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Jon

Charlie Munger has a system that flips things on their head in a way that makes complete sense. He refers to it as inversion, and when combined with avoidance, it works wonders.

For example, instead of studying successful people in the hopes of also being successful, study what it takes to be unsuccessful and do the opposite. You may never be a huge success, but your chance of total failure decreases dramatically. And by studying unsuccessful people, you avoid any problems of confusing success with the role luck played in some people’s lives.

Munger explains his system like this:

My system in life is to figure out what’s really stupid and then avoid it.

Last week I finished transcribing the Daily Journal Meeting held a few weeks back. Examples of Munger’s system of inversion and avoidance run throughout, which are highlighted below, along with a couple of other important lessons that stood out. Continue Reading…
Lessons From Buffett’s Letter

March 1, 2019

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Jon

The old Buffett letters are the best. His recent letters have mellowed in a way to be more suitable for a broader shareholder base.

Of course, that’s not a bad thing. Buffett understands his audience well enough to recognize the need to shift. But for the diehards hoping for a glimpse of the old letters in the new ones, we might be out of luck.

If you’ve been living under a rock, his latest letter — the 2018 version — was released last Saturday to the usual fanfare and excitement. As is tradition, I put off reading it until Monday morning and did my best to ignored the Twitter hot-takes till then.

If you’re forced to only read one section, the section on “The American Tailwind” is it. Read it. It’s worth it.

As far as letters go, lessons were sparse. So to mix things up this year, I added some hot-takes from the CNBC interview Buffett does every Monday following a letter release.

Let’s get to it: Continue Reading…
Howard Marks on Inefficiencies and a Contrarian Mindset

February 27, 2019

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Jon

Howard Marks talked to the CFA Society Chicago last week and streamed it live via Youtube. The video is embedded below (with links).

The entire talk is worth watching but the Q&A portion is what stood out most (his answer to why the market collapsed in the fourth quarter is brilliant @ 55:22). The Q&A starts around 31:35.

Three things stood out in the Q&A, which I transcribed below. The first question was on finding the line between market efficiency and inefficiency. The short version is markets are efficient but some inefficiency exists but it’s hard. Much of it is psychological and tends to be more pronounced at certain points in the market cycle. Marks explains what it takes to take advantage of those periods.

Later, Marks was asked about the right structure for capturing inefficiencies, which is where contrarianism comes in and he circled back around to the contrarian mindset at the end of the talk. He offers a great example on second-level thinking. And finally, he points out that it’s not about always being a contrarian but being an intelligent contrarian only when an opportunity exists that be taken advantage of.

Here’s Marks: Continue Reading…

Lessons from The Zurich Axioms

The Zurich Axioms by Max Gunther

The Notes

Lessons in Down Markets

Charlie Munger’s Uncommon Sense

Lessons From Buffett’s Letter

Howard Marks on Inefficiencies and a Contrarian Mindset