I read the book The Most Important Thing by Howard Marks and in this post, I will list the 20 most important things that were cited in the book. The book is excellent, I really enjoyed reading it.
As the author himself says, the book is much more a book on investor mindset than a book on how to select assets. Howard Marks says that there is not ONE thing more important when it comes to investing, but he lists 20 things that are the most important things in his opinion.
But who is Howard Marks?
Howard Marks
Howard Marks is the co-founder and co-chairman of Oaktree Capital Management, a Los Angeles-based distressed debt investor.
Marks started his career at Citibank, where he started a portfolio of high-yield bonds after meeting with the king of junk bonds, Michael Milken.
He became an asset manager at TCW, where he met Oaktree co-founder Bruce Karsh. The duo left with four colleagues in 1995 to found their own store.
In September 2019, Brookfield Asset Management acquired 61% of Oaktree for an estimated $4.9 billion in cash and stock. Marks now sits on Brookfield’s board.
He and Karsh still lead Oaktree, which continues to operate independently of Brookfield. His stake in the company is now around 8%.
The Most Important Thing book by Howard Marks
In this case, the 20 most important things. I will list below the 20 most important things in the author’s view with a brief comment. I recommend reading the book, it is an excellent book.
1. The most important thing is… Second Level Thinking
According to the author, first-level thinking is simplistic and superficial, and almost anyone can do it (a bad sign for anything that involves an attempt at superiority). First-level thinkers look for simple formulas and easy answers. Second-tier thinkers know that investment success is the antithesis of simplicity. That’s not to say you don’t find many people who try their hardest to look simple.
2. The most important thing is… Understand the efficiency of the market (and its limitations)
The author states that the market is efficient in terms of speed of information analysis, but not in terms of being right. He agrees that investors are working hard to analyze information and its impacts, but that consensus is not necessarily correct.
3. The most important thing is… Value
For the investment to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope of consistent success as an investor is just that: hope.
4. The most important thing is… The relationship between price and value
Of all the possible routes to investment profit, buying cheap is clearly the most reliable. Even so, it is not certain that it works. You could be wrong about the current value. Or events may arise that reduce the value.
Trying to buy below value isn’t foolproof, but it’s the best chance we have.
5. The most important thing is… Understanding the risk
Investing consists of exactly one thing: dealing with the future. And since none of us can know the future with certainty, the risk is inevitable. So dealing with risk is essential – I think the essential – element of investing.
6. The most important thing is… Recognize the risk
A key element in creating risk is the belief that risk is low, perhaps even disappears altogether.
This belief drives up prices and leads to embracing risky stocks despite low prospective returns.
As with the opportunities to make money, the degree of risk present in the market derives from the behavior of participants, not from securities, strategies, and institutions.
People vastly overestimate their ability to recognize risks and underestimate what it takes to avoid them; thus, they unknowingly accept risks and, in so doing, contribute to their creation.
7. The most important thing is… Risk Control
Whatever few prizes are presented for risk control, they are never delivered in good times. The reason is that the risk is secret, invisible. The risk – the possibility of loss – is not observable. What is observable is loss, and loss usually happens only when risk collides with negative events.
8. The most important thing is… Be aware of cycles
According to the author, it is essential to remember that almost everything is cyclical. There’s little I’m sure of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow into the sky. Few things go to zero. And there is little that is as dangerous to the health of investors as the insistence on extrapolating today’s events into the future.
9. The most important thing is… Pendulum Awareness
When things are going well and prices are high, investors rush to buy, forgetting all prudence. So when there is chaos and assets are at risk, they lose all willingness to take risks and rush to sell. And it will always be so.
10. The most important thing is… Fighting negative influences
Inefficiencies – incorrect pricing, misperceptions, mistakes made by others – offer potential opportunities for superior performance. Exploiting them is, in fact, the only path to consistent performance. To differentiate yourself from others, you need to be on the right side of these mistakes.
11. The most important thing is… Being Contrary
The author cites that it’s important that you don’t follow the herd, don’t be a trend follower. But that will be difficult for you as an investor.
12. The most important thing is… Finding bargains
The author cites that our objective should not be to find good assets, but good purchases. So it’s not what you buy, but how much you pay for it.
13. The most important thing is… Patient Opportunity
In this chapter, the author says that sometimes the best thing to do is nothing. That is, waiting for bargains to appear is often the best strategy.
14. The most important thing is… Knowing what you don’t know
In this chapter, the author says that we have to accept that predicting the future with consistency is for few (maybe no one), and knowing this makes you focus on things you have control over.
15. The most important thing is… Having a sense of where we are
According to the author, the market is cyclical and we cannot predict the future, what we have to do is know where we are in the cycle. This will help us make better decisions regarding the allocation of our assets.
16. The most important thing is… Appreciate the role of luck
According to the author, luck is an important factor and the investor should appreciate and know that some investments do not make him a genius, but they were just strokes of luck.
17. The most important thing is… Investing defensively
The author argues that we should not always try to win the market, but not try to lose. He says that in bull markets, it’s a good strategy to just follow the market, and actually win in bear markets.
18. The most important thing is… Avoiding pitfalls
The author believes that most mistakes are primarily analytical/intellectual or psychological and emotional and so we must understand what are the traps that make us make mistakes.
19. The most important thing is… Generate value
The author mentions that no matter how difficult it is to generate value, it should be our goal if we choose to select stocks.
20. The most important thing is… Putting it all together
In this final chapter, the author summarizes the previous chapters in a simplified way.
concluding
I really liked the book, it brings several important points that we sometimes neglect when investing.
I recommend reading for everyone.
Happy investing!
Photo by Peter Murphy