Book to Read: ‘The Most Important Thing’ by Howard Marks

INVESTOPAPER

‘The Most Important Thing: Uncommon Sense for the Thoughtful Investor’ written by Howard Marks is one of the important books on value investing. The book focuses mainly on defensive investing where an investor will try to minimize the mistakes rather than maximize the return chasing popular stocks. 

Co-founder of Oaktree Capital Management, Marks emphasizes on the need to protect oneself from the drastic loss in any investment. Risk control is one of the foundation for the long term success in the field of investment.


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Here we have compiled some of the important insights from the book. Hope it is useful.

Important Excerpts From ‘The Most Important Thing’

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.


The correctness of a decision can’t be judged from the outcome. Nevertheless, that’s how people assess it. A good decision is one that’s optimal at the time it’s made, when the future is by definition unknown. Thus, correct decisions are often unsuccessful, and vice versa.


Skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.


There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time. That’s one of the most important things you can know about investment risk.


The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring.


Most people view risk taking primarily as a way to make money. Bearing higher risk generally produces higher returns…But it can’t always work that way, or else risky investments wouldn’t be risky. And when risk bearing doesn’t work, it really doesn’t work, and people are reminded what risk’s all about.


There are old investors, and there are bold investors, but there are no old bold investors.


It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.


We have to practice defensive investing, since many of the outcomes are likely to go against us. It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.


The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.


Investing scared, requiring good value and a substantial margin for error, and being conscious of what you don’t know and can’t control are hallmarks of the best investors I know.


When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.


In good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place, even though it turned out not to be needed.


Buying something for less than its value. In my opinion, this is what it’s all about—the most dependable way to make money. Buying at a discount from intrinsic value and having the asset’s price move toward its value doesn’t require serendipity; it just requires that market participants wake up to reality. When the market’s functioning properly, value exerts a magnetic pull on price.


Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on.


Most investors think quality, as opposed to price, is the determinant of whether something’s risky. But high quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them.


Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.


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