The Most Important Thing – Howard Marks

The Most Important Thing explains the keys to successful investment and the pitfalls that can destroy capital or ruin a career. Utilizing passages from his memos to illustrate his ideas, Marks teaches by example, detailing the development of an investment philosophy that fully acknowledges the complexities of investing and the perils of the financial world.

Risk: Understand, Recognize and Control It

  • Riskier asset does not have higher returns
  • Bad company does not mean bad investment => could be at the right price
  • Need a way to identify what a risk certain asset carries, and then deciding if that is reasonable for the price
  • High downside with low upside = bad risk/reward
  • Risk is determined by the difference between the value and the price. Lower the value is when compared to the price, the lower the risk is
  • Rule #1: never lose money, Rule #2: don’t forget rule #1

Be Aware of the Cycles

  • Market is always swinging between the high/low
  • Cycles is always self correcting, swinging from both extremes

Mind your Psychological Influences

  • Biggest investing errors come not from factors that are information or analytical, but from those that are psychological
  • Combating negative influences
  • Confirmation bias: ignoring information and contradict your own worldview
  • Stick to the concepts of intrinsic value and margin of safety
  • Avoid investing when you’re feeling greedy and selling when you’re fearful

Don’t be a Sheep in a Herd

  • To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage but provides the greatest profit
  • If consensus is positive for a stock, the positivity is already priced in making the stock overvalued
  • Apply second level thinking: What do my peers miss (requires knowledge and confidence)
  • Requires Stamina and conviction: even if you are right, you may have to wait

The Role of Chance

  • Randomness contributes to or wrecks investment records to a degree that few people appreciate fully
  • Cannot judge the propriety of an investment decision by the outcome
  • Sometimes good decisions lead to bad outcomes and vice versa
  • Protect your downside and limit the exposures to risk and random events