The Most Important Thing Illuminated – by Howard Marks
Date read: 1/19/20. Recommendation: 9/10.
One of the most important books you can read on investing. Marks details his investment philosophy through an accessible discussion of the market environment, cycles, investor psychology, and what factors contribute to success (or lack thereof) in this space. While the book focuses on investing, many of the lessons and principles outlined apply to life in general. It could double as a modern philosophy book. Marks digs into second-level thinking, contrarianism, patience, uncertainty, and risk. If you appreciate the Warren Buffett/Charlie Munger school of thought, this book will hit home.
See my notes below or Amazon for details and reviews.
My Notes:
“A philosophy has to be the sum of many ideas accumulated over a long period of time from various sources. One cannot develop an effective philosophy without having been exposed to life’s lessons.” HM
“Experience is what you got when you didn’t get what you wanted.” HM
Second-level thinking:
First-level thinking is simplistic and superficial, and just about everyone can do it. Second-level thinking is deep, complex and convoluted.
First test of an appealing investment idea should be, “And who doesn’t know that?” Second-level thinkers depend on inefficiency. The market (and humans) are prone to mistakes that can be taken advantage of.
Value investing:
“There’s no such thing as a good or bad idea regardless of price!” HM
“Since buying from a forced seller is the best thing in our world, being a forced seller is the worst. That means it’s essential to arrange your affairs so you’ll be able to hold on—and not sell—at the worst of times. This requires both long-term capital and strong psychological resources.” HM
Good assets and good buys are two different things. Good buys are investment opportunities where price is low relative to value and potential return is high relative to risk.
“A high price both increases risk and lowers turn.” Christopher Davis
Market cycles:
Understanding that cycles are eventually self-correcting is one way to maintain some optimism when bargain hunting after large market drops.” Joel Greenblatt
Most dangerous premise that’s proven wrong every time: “this time it’s different.” Opportunity for profit for anyone who understands the past and knows it repeats.
“Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.” HM
Don’t reach for returns (requires high risk and exception skill): “You simply cannot create investment opportunities when they’re not there.” Instead, buy when others are forced to sell.
Investment markets follow a pendulum-like swing:
-between euphoria and depression
-between celebrating positive developments and obsessing over negatives, and thus
-between overpriced and underpriced
Investor psychology spends more time at extremes than it does at a midpoint.
Unknowns…
-How far the pendulum will swing in its arc
-What might cause the swing to stop and turn back
-When this reversal will occur
-How far it will then swing in the opposite direction
Three stages of a bull market:
-The first, when a few forward-looking people begin to believe things will get better
-The second, when most investor realize improvement is actually taking place
-The third, when everyone concludes things will get better forever
Three stages of a bear market:
-The first, when just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy
-The second, when most investors recognize things are deteriorating
-The third, when everyone’s convinced things can only get worse
Negative influences:
“The gravest market losses have their genesis in psychological errors, not analytical miscues.” HM
“In the long run, the market gets it right. But you have to survive over the short run, to get to the long run.” Joel Greenblatt
“Never forget the six-foot-tall man who drowned crossing the steam that was five feet deep on average. Margin for error gives you staying power and gets you through the low spots.” HM
Contrarianism: “It’s certainly undesirable to be part of the herd when it stampedes off the cliff, but it takes rare skill, insight, and discipline to avoid to it.” HM
Be skeptical of what everyone else is saying or doing.
“The best opportunities are usually found among things most others won’t do.” HM
Uncertainty:
“We have two classes of forecasters: Those who don’t know—and those who don’t know they don’t know.” John Kenneth Galbraith
“It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.” Amos Tversky
“It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.” HM
The thoughtful investor:
Healthy respect for risk, awareness that we don’t know what the future holds, an understanding that the best we can do is view the future as a probability distribution and invest accordingly, insistence on defensive investing, and emphasis on avoiding pitfalls.
“When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.” HM
“Investment expectations must be reasonable. Anything else will get you into trouble.” HM