“Speculation. How to take risks and win.” Zurich Axioms and CRE
During my graduate studies at New York University, I was introduced to the book Zurich Axioms by Max Gunther on a suggested reading list for a class I was taking. For those who have not read it but are interested in investing, risk-taking, betting, or just reading a very insightful book on behavioral habits, I highly recommend getting a copy. In summary, the author’s father was a member of an informal club of Swiss stock and commodity brokers that associated on Wall Street around the time of World War II and continued through the 1970s. What came of this informal investing club were rules around speculation that were implicit understandings in the world of Swiss banking. As Gunther starts the book, the main questions he posits to the reader is thus, and I paraphrase, “How does a country that is so mineral and natural resource poor, become one of the most affluent behind only the Americans, Japanese and Germans (the book was written in 1985 for context)?” The position he puts to his readers is by being the world’s most intelligent investors, gamblers, and speculators.
In the last year, I recently had a chance to reread the book, and I have spent some time thinking about his twelve Axioms in the context of a real estate investor. Below are three of the twelve axioms, with the author’s one-line explanation and my thoughts (a full citation at the end.) All twelve of them and the book are worth a read, but the three below have a lot of parallels with things I am seeing in the CRE market right now.
The Second Major Axiom – On Greed “Always take your profit too soon.” (Gunther, 1985, p. 29) A few parallels come to mind here. I had a sponsor with a large Class C multifamily deal in a top 5 Sunbelt city with legitimate offers to sell on hand in late 2021 that would have yielded generational wealth for him and his family. The implied cap rate would have been 3% on day one. He didn’t hit the bid though, and decided to hold out for more dollars, as all trees grow to the sky. We know how that worked out. But another parallel comes to mind: anyone trying to bottom-tick interest rates right now, holding out for the lowest possible rate. As I read it, axiom number two suggests that if the deal works for your investment thesis, you like the terms and the rate, so just take the deal and not look back—the “what ifs” will always eat you up.
The Third Major Axiom – On Hope “When the ship starts to sink, don’t pray. Jump.” (Gunther, 1985, p. 47). The immediate parallel that comes to mind is anyone sitting in an overleveraged deal, “surviving to 2025,” waiting for rates to drop, or whatnot. It sounds like we are praying a lot for things outside anyone’s control. Buying the rate cap does buy time, and who knows, maybe things do change. But the third Axiom would tell you to deal with the problems now and not kick them down the road.
The Tenth Major Axiom – On Consensus “Disregard the majority opinion. It is probably wrong.” (Gunther, 1985, p. 145). “Rates will come down soon,” or “Cap rates will compress when the Fed starts cutting rates again,” or my favorite, “The Fed has to lower rates because the cost to finance the government is so high.” Jamie Dimon would appear to be the only one who disregards the majority opinion when he says rates could go to 7% or 8%. (Thaler, 2024) Last time I checked though, outside of Jerome Powell, he is the second most powerful man in our banking system.
We all have built frameworks and certain doctrines in our lives to help guide our decision-making process. Further, we all take risks daily, some of them more benign than others, but as Gunther says for his first Axiom on risk, “Worry is not a sickness but a sign of health. If you are not worried, you are not risking enough.” (Gunther, 1985, p. 7)
Hopefully, everyone will get a chance to read this book, and I welcome anyone else’s interpretations.
Citations:
Gunther, M. (1985). The Zurich Axioms. Hampshire, UK: Harriman House LTD.
Thaler, S. (2024, April 8th). Jamie Dimon warns interest rates could soar above 8%, throws doubt on ‘soft land.’g’. Retrieved from NY Post: https://nypost.com/2024/04/08/business/jamie-dimon-warns-interest-rates-could-soar-above-8/
John Darrow
Principal / Managing Director
O: 214.717.6301
john.darrow@slatt.com