The Reading Room

The Most Important Thing – Uncommon Sense for the Thoughtful Investor

Howard Marks

Published: 2011, Columbia University Press

Howard Marks needs no introduction. As Chairman and co-founder of Oaktree Capital Management, he is well-known for his regular memos on market insights & opinions for the last 30 years or so, which have given lots of wisdom to investors. Through this book, he shares his investment philosophy, articulating the most important aspects of investing through different topics and chapters. The book draws a lot of passages from his old memos and in a way, this book is a collection of those memos. He has organised the book into 20 chapters covering different topics, explaining them with examples. My endeavour here is to summarise a few key thoughts on the book.

• Second level thinking: This is the need to go beyond the simple & superficial knowledge since the subject matter is deep & complex. He stresses the need to consider likely future outcomes and what’s already “built-in” to the price.
• Efficient Market Hypothesis: It is relevant most of the time and towards the mainstream stocks. However, inefficiencies always exist and presenting good opportunities in smaller companies.
• Value & Price: The key to making superior returns is buying well. As an investor, one should be clear about the value you are paying, be ready to wait for the right price to buy and adding more if it falls further, whilst holding on to the conviction.
• Risk: This is the most under-rated element of an investment process. The author puts in great effort to define and explain risk. High reward is usually associated with high risk, however, but Marks explains how one can achieve high returns by buying low risk stocks for less than they’re worth.
• Market Cycles: Cycles provide huge opportunity to profit, but ignoring cycles and extrapolating trends is the most dangerous aspect of investing. Cycles don’t last forever and do not require an “external event” to reverse the trend, often self-correcting.
• Avoid emotional mistakes such as greed, fear, the willing suspension of belief, herd mentality, envy, ego and capitulation. As investors, we tend to believe that these don’t impact us, but Marks cites how they played a big part in tech bubble of the early 2000s.
• Contrarian approach. Most investors are trend followers and one needs to avoid the same path. In fact, he urges investors to do the opposite, requiring complex second level thinking.
• Patient Opportunism. Wait for the right price, as every stock has a price to buy. Superior returns can’t be generated by chasing stocks. Be patient enough to wait for the stock to come to the price you desire.
• Understanding the cycle: An interesting topic and one which I agree with totally. Rather than trying to predict future, our efforts should be to ascertain where we are in terms of each cycle and understanding that should logically define our actions. Put another way, if we can’t know in advance how far a trend will go or when it will turn, better to work out where we are in the cycle, in order to decide the next course of action. He uses interesting indicators to explain, such as “taking market’s temperature” (testing the market’s response to new products or investment schemes). These indicators can give a sense of what’s happening in the present. The author puts together a simple exercise which he calls the “Poor Man’s Guide to Market Assessment” which recommends investors check market sentiment across a range of parameters giving each parameter a tick or a cross before summing the scores and taking ones investment cue from the overall pulse.
• Avoiding Pitfalls. Marks explains that the key to generating consistently better returns is to avoid loss making investments. Some reasons for these potential losses such as greed, fear, scepticism, herd mentality, envy have already been discussed, as well as my personal misgiving, which is the failure to understand market cycles.
• Investing Defensively: The defensive investor’s main emphasis is to avoid doing “the wrong thing”. The strategy is to generate higher returns through the avoidance of “minuses”, rather than the inclusion of “pluses”. Marks believes that the strategy of avoiding losers is the more dependable approach.

For me, this is a book which helps the reader to review their investment style by going back to basics. He talks about simple steps and thoughts, but with the onus placed upon the reader as how best to implement these steps to become successful investors.

Saurabh Chugh

June 2022