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The Most Important Thing
Author: Howard Marks
BBooookk SSuummmmaarryy
We have often heard people lament that the ground reality is different from what we read. "The Most
Important Thing" by Howard Marks is just the opposite. Insights gleaned from decades of memos that
billionaire value investor Howard Marks wrote throughout his investment career span the pages of this book,
giving people a ground-up perspective on markets and investments. This book consists of opinions and insights
from not only Howard, but also from investment educators like Joel Greenblatt, Paul Nicholson, Seth A.
Klarman and Christopher Davis. Together, these experts talk about various concepts including defensive
investing, opportunities, and second level thinking. Basically, the book outlines the strategies necessary for a
successful investor and also defines the dangers associated with it, especially for people who tend to invest
blindly. While the book illuminates the many aspects of investing it also succinctly discusses the concept of risk.
Novice, as well as seasoned investors, can find value in the book. As the legendary investor Warren Buffet
remarked about the book, "It is that rarity, a useful book".
Key Takeaways
? Successful investors possess a second-level thinking that helps them see things and find value where others
cannot
? The Efficient Market Theory does not hold true all the time
? "Buying Low" and "Selling High" is not just about the price but also about the value
? It is important to determine the intrinsic value of a stock and then assess price relative to the intrinsic value
? Since the future is uncertain, there will always be some amount of risk involved in investing. Successful
investors recognise this risk, understand it and then take steps to mitigate it
? Stock markets move in cycles. Identifying these cycles can be helpful in making good investment decisions
? Do not fall prey to your lack of knowledge. Learning is essential to becoming a successful investor
? Patience is a virtue and a great asset for the successful investor
? Investing has a dual goal - maximise returns while minimising losses
Second - Level Thinking
Earning average returns is not the most difficult task in the world. However, consistently earning above-
average returns requires a special something that not all investors possess. While there are many people who
are content with investing in anything that offers average returns, others want to stay a step ahead and beat
the market. In order to accomplish this, it's necessary to be adaptive and intuitive instead of making investing a
mundane and mechanised process. Although an investor can follow his role model and mimic his rules, he
cannot actually perfectly mimic his role model to replicate the gains. What works for one investor might be
disastrous for another. Therefore, in order to generate better than average returns, the most important thing
an investor should possess is perceptive or second-level thinking. Second-level thinking is a thought process
that will enable him to see beyond the obvious. This will help the investor find value and exploit opportunities
that others might not see.
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The Most Important Thing
Author: Howard Marks
BBooookk SSuummmmaarryy
Understanding Market Efficiency (and Its Limitations)
A lot of financial literature waxes eloquent about the "Efficient Market Hypothesis". Basically, the EMH states
that all information relevant to a stock is publicly available and is immediately reflected in the price of the stock.
While this concept does hold true most of the time, it is in no way sacrosanct. For instance, in January 2000,
Yahoo was selling at $237, but in 2001, it had plummeted to just $11. Therefore, the market was wrong in at
least one of these instances. When prices reflect the consensus, sharing the same view might only deliver
average results. In order to beat the market, it's very important to have a unique and different view.
Value and the Relationship between Price and Value
"Buy Low and Sell High" is something that all investors attempt to do. However, in order to determine the "low"
and the "high", it's important to determine the accurate intrinsic value. Therefore, it's obvious that an investor
needs to purchase stocks well below its intrinsic value and then sell it at a much higher price. The only way one
can arrive at an accurate intrinsic value is through fundamental analysis. It is only after carefully evaluating a
company, its current performance and its future growth potential can one arrive at an intrinsic value for the
stock. Once an investor estimates the intrinsic value of an asset or stock, he/she can go ahead; however, even if
the estimated intrinsic value is correct, it's equally important to figure out the asset/stock's price that is relative
to the value. Therefore, it is very important to establish a good relationship between the fundamentals, value
and the price. As a value investor, one must also be cognisant of the fact that price is merely the starting point
and that no asset is too good to be true. Any asset that seems attractive at a low price should also seem like a
bad deal when the price is way too high.
Recognising, understanding and handling risk is essential
It's not really impossible to find investments that could deliver outstanding returns in the future; however, an
investor is probably not going to be successful if he/she shies away from dealing with risks. Investment
performance is something that is going to happen in the future. So, risk is something that will have to be
experienced either now or later. Risk simply means that you're uncertain about the future and also about the
loss that you might incur. When prices are high, participating in the market along with the rest of the crowd
rather than avoiding it could be a major risk. Similarly, there's no such thing as "low prices = low risk". No
matter what the value is, there is a certain amount of risk involved because it is not possible to predict the
future. Risk assessment is essential due to three reasons. Firstly, since there are too many theories about risk,
the investor has to first understand whether he can take it and live with it later. Secondly, the investor also has
to think about the potential return. Thirdly, the investor will also have to assess the risk itself and evaluate
whether it's worth it. Once you have assessed the risk, the next step is to mitigate or control it. While all
investors face risk at one point of time or the other, bearing risk intelligently for profit is what makes an investor
stand out from the rest. Great investors are judged for their capability to manage and control risk and also
generate returns.
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The Most Important Thing
Author: Howard Marks
BBooookk SSuummmmaarryy
Cycles - The Ups & Downs
What goes up must come down and then go up again. Eventually, everything is cyclical and nothing moves in
one direction for a long time. The mood swings of the market are similar to the swings of the pendulum. While
it may swing from one extreme to another, it also swings from risk aversion to risk tolerance, from greed to fear,
from optimism to pessimism and from low prices to high prices. In reality, we aren't capable of predicting which
way the pendulum may swing. Even though it is next to impossible to predict things, it's definitely possible to
prepare so that the loss or damage is controlled. When it comes to investing, there are many unknown factors.
However, what is known is that stock markets move in cycles. Understanding and paying heed to cycles can be
very instructive when it comes to investment decision making. There are only a few things that are sure.
However, you can be absolutely sure that just about everything is cyclical. If you are attentive to cycles even
when others stop paying heed to it, you are more likely to become a successful investor.
Learn, Be Aware and Combat Negative Influences
While there are many investors who suffer from inefficiencies such as mispricing, miscalculations and other
mistakes, the ones who are cognisant of these mistakes and are able to address them will eventually be
successful. Since it is not possible to identify what might occur in the future and since very few people have the
wisdom of using their knowledge to their advantage, knowledge plays a major role in making the right
investments. Therefore, an investor who is aware of his limited knowledge, no matter how knowledgeable he
is, will definitely have an advantage over others. Market cycles have ensured that investors continue to face
daunting challenges. Firstly, the highs and lows are inevitable. Secondly, the cycles will also influence the
investor's performance and thirdly, unpredictability is not the only issue but the timing as to when it occurs can
also make an investor lose sleep. Therefore, it is essential for an investor to understand where he/she stands.
Of course, the cycles can help to estimate things to a certain extent, but cannot predict the future with
certainty. However, it is most probably the best estimate. At the end of the day, investors should have realistic
expectations. Often, people expect high returns with no or little risk. Here, greed and fear also make them
forget the golden rules of investing. It's certainly tough to combat these negative influences, but the ones who
refuse to join the crowd even when it is very tempting are the ones who will be successful.
Successful Investing
It is not always possible to find the best deals. Sometimes we hit and miss. The most important thing for an
investor is to learn patience. Therefore, instead of chasing deals, it's a good strategy to wait for things to come
your way. In addition, you should purchase something that the seller wants to sell rather than buy something
only because you need or want it. Do not expect cycles to occur all the time and don't think that the market is
under/overpriced all the time, because, everything can be balanced and there may be no mistakes. While
most investors tend to follow the trend, superior investors go the opposite way. As stated by Sir John
Templeton, "It takes a great amount of courage to sell when others are buying and buy when others are
desperately selling". However, this strategy offers the greatest profit. One can't be successful by simply
following the trend because if that was the case, just about everybody would have made money as an investor.
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