“The Most Important Thing” by Howard Marks

This book has been on my “to read” list for a while now. I have been receiving Howard Marks' investment newsletters for the past few years and have found his comments about the markets both interesting and insightful. Every time his newsletter pops up in my inbox, I stop what I’m doing and read it.

For those who don’t know, Howard Marks is the co-founder of Oaktree Capital Management, a large and successful institutional investor and a proponent of value investing. His book, “The Most Important Thing,” is a collection of wisdom from Howard’s investment newsletters written over the past 20 years. It can be thought of as a practitioner’s guide to value investing in the context of listed securities markets.

Listed securities markets feature a finite opportunity set (such as 4,000 stocks or 60 bonds). The prices of these assets fluctuate every day depending on investor sentiment. Furthermore, these fluctuations follow cycles and swing between one extreme and the other, like a pendulum.

“What a wise man does at the beginning, a fool does at the end.”

Due to the fact that humans are irrational and emotional, Howard believes that the proverbial pendulum rarely rests idle (and the asset trades at “fair value”). It is either too far to the right or too far to the left, and always gaining momentum in one direction. Having the stomach to sell at the height of euphoria and buy at the peak of panic takes a lot of courage, conviction, and wisdom.

The best investors are those who have a good understanding of the value of an asset and have a good feel for the relationship between the current price and value. That really holds the key to investment success. It requires second-level thinking (thinking beyond the consensus), learning things others don’t, or being better at analyzing them - or ideally, all three.

“If we avoid the losers, the winners will take care of themselves.”

Oaktree’s investment philosophy has been built on a curious mantra of defensive investing: prioritizing the avoidance of pitfalls rather than hunting for shiny investment opportunities. Howard thinks it is a lot more beneficial to be consistent in delivering average (or slightly above average) performance when things are “good,” but really “outperforming” by not losing money during infrequent (but guaranteed) market crashes.

“Being too far ahead of your time is indistinguishable from being wrong.”

Buying based on strong value, low price relative to value, and depressed general psychology is likely to provide the best results. Even then, however, things can go against us for a long time before turning as we think they should. Underpriced does not mean going up soon.

“Never forget the six-foot-tall man who drowned crossing a river that was five feet deep on average.”

Therefore, understanding and managing risk must lie at the core of defensive investing. Three chapters are dedicated to this subject. Howard is a cautious investor and thinks that risk defense in a portfolio is a “hidden asset” that you only appreciate in difficult markets when the tide “comes out.” It is important to have a comfortable “margin for error” in the portfolio that acts as a cushion when things go against you unexpectedly.

The future cannot be known, so any serious effort to predict it is wasted time. Very few people who accurately predict a future event can do so repeatedly over a long period of time. This is because, while we can model the future based on the past, we cannot reliably account for improbable events that happen (reliably) every now and then. A probabilistic approach to thinking about future outcomes is wiser. Therefore, a good investment decision, when thought of in this manner, is a good investment decision regardless of the outcome. Time is therefore better spent on the micro and areas that are more “knowable”: studying industries, companies, and securities.

I read the book over a few days and would recommend it to anyone on the journey to becoming a better investor.