The Swiss Rule: Theories on Money & Speculation

Switzerland is a very small country, has no access to the world’s oceans, practically no raw materials, and even agriculture is only possible to a limited extent in the Alpine republic. Nevertheless, the Swiss are among the richest citizens in the world and have one of the strongest currencies, the Swiss franc.

Why is that so? If it’s up to Max Gunther, author of the “Zurich Axioms”, the answer is clear: The Swiss are among the smartest speculators in the world – and they follow a catalog of rules that have become known as the Swiss Rules.

  • Rule 1 : About risk – “If you don’t worry, you stay poor”!

“Safe” investments are the rage especially in Switzerland. Whether savings bank bonds, federal bonds or guarantee certificates: For most investors the most important aspect is the safety aspect – the main thing is that the stake is not lost! Risk-averse thinking prevails in the majority of the population. Behind it also a psychological basic conviction is:
Low risk means little worry and is a partial aspect of inner peace.

But is inner calm worth striving for at all? Sigmund Freud did not think so: In one of his works, the master of psychology came to a remarkable conclusion: Those who neglect other aspects of life in favor of inner peace have “sacrificed their lives. And for what?”

This is exactly to the liking of Max Gunther. He sees risk-taking as an adventure that adds spice to life. For all the great joys in life, there is always worry. Think of children, love affairs and other things that make life worth living.
Of course, you can avoid risks to a large extent! You can, for example, not even look for a partner, then you will never fall in love and can then also not have a lovesickness. You can do without children and then they will not wake you up at night and you will not have to worry about the little ones. They can lead a completely quiet life, as “calm as the water surface of a pond”. But Gunther rightly asks the question:

” Who would want such a life?”

He advocates viewing life in all its facets as an adventure.

This reasoning can also be applied to the financial realm. You can buy federal bonds and then get, say, 3% p.a. interest for sure (let’s start from this premise, which is by no means correct, because of course federal bonds also have a default risk!). There is a very clear conflict between the safety of an investment and its expected return. The whole secret of successful speculation actually revolves around getting the most out of it.

Gunther is (or was, because he died in 1998) a friend of clear words and statements. What you all know in your innermost being, of course, he says openly:
You will never become rich with “normal” earned income. You can live more or less well on it, but you will never stand out from the “masses of the financially less well-off”. A somewhat harsh formulation, perhaps due to an unfortunate translation. But he’s right, of course: if you don’t have a large inheritance in sight, aren’t a top athlete or actor, then your probably only chance to achieve high wealth is to take risks. The “right” way to take those risks is what this book is about. But first of all, of course, you have to create the mental basis. In general, you have to be prepared to take risks. In concrete terms, this means accepting losses and not throwing in the towel just because of them.

  • Side Rule 1 : Always stake significant sums – “If a sum is so small that its loss makes no difference, then it is unlikely to bring you significant profits”.

One of the classic 08/15 pieces of wisdom, of which there are whole armies in the financial world, is the recommended limitation of the stake – and often to an extremely puny amount.

“Risk only as much as you can get away with”.

So let’s say you earn 40k dollars a year and save 5k of it. Then such an amount that “doesn’t hurt you” is maybe 500 dollars. Possibly even only 300 or 100 dollars. Imagine you see a promising speculation opportunity with perhaps 100% chance of profit. You double your capital from 500 to 1000 USD. What does this change in your financial situation? Hardly anything! As little as it would have changed if you had lost. Gunther correctly states: “Big winnings with small stakes can only be achieved if the probability of winning is very low”. Think of lotto or roulette!

Therefore, if you want to speculate sensibly and thus also with the prospect of higher profits, you must be prepared to “suffer a loss”. I remain with the above example. You have saved 5000 USD? Then you risk at least half of it! This leads us directly to the second side rule.

  • Rule 2 : Resist the appeal of diversification – “Put all your eggs in one basket – and then take good care of the basket”.

The usefulness of spreading investment capital over as many different investment instruments as possible – diversification – is considered an iron law in the financial industry. Behind it, once again, is the idea of security. If you make 20 different investments with e.g. 1/20 of the volume each, you will hardly suffer comprehensive shipwreck. However, the concept has considerable disadvantages, at least in its current form.

  • You can only use small amounts per investment, which directly contradicts side rule 1.
  • Diversification tends to result in winners and losers balancing each other out. This gives you a relatively high degree of security, but also a low expected return.
  • High diversification means that you have to look after many investments in parallel. This makes active management more difficult and costs you a lot of time and effort.

Diversification is not bad per se – but the number of positions should be manageable and in a reasonable proportion to the assets. If you have a total of 10k dollars then you should not own 10 or 20 different investment instruments, but rather two to four. Max Gunther says: “Never buy something just because you think you need it to round out a diversified portfolio”.

DepthTrade Outlook

You have to put your money on the line in a significant amount if you want to make profits.

  • You must not be afraid of suffering losses. That is part of the game.
  • Don’t bet on too many horses at the same time and keep a close eye on the few horses that do.
  • Taking risks is the only realistic chance for the vast majority of people to make significant wealth.
  • The price for this chance is that you will worry. Accept those worries, and consider them the “spice of life.” They also make life more exciting.

Christian Zürcher Send an email

From 1990 to 2005, Mr. Zürcher was a risk analyst in the institutional swiss banking sector - thereafter, he specialized exclusively in private trading of financial products. He is a certified real estate agent and studied economics. For more than thirty-five years, Mr. Zürcher has been intensively involved in the observation of financial markets, globalization, and the monetary system. Mr. Zürcher enjoys an excellent reputation as a political analyst and commentator related to finance.
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