The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing)

by Howard Marks

I like to say, “Experience is what you got when you didn’t get what you wanted.” Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk. The most valuable lessons are learned in tough times.

A Short History of Financial Euphoria, by John Kenneth Galbraith (New York: Viking, 1990) and Nassim Nicholas Taleb’s Fooled by Randomness (New York: Texere, 2001). Each did a great deal to shape my thinking.

Psychology plays a major role in markets, and because it’s highly variable, cause-and-effect relationships aren’t reliable.

It seems clear that momentum investing isn’t a cerebral approach to investing. The greatest example came in 1998–1999, with the rise of people called day traders.

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

as John Maynard Keynes pointed out, “The market can remain irrational longer than you can remain solvent.”

Having been borne aloft on the crowd’s excitement and elevated to what I call the “pedestal of popularity,” they offer the possibility of continued

And yet, risk cannot be measured. Certainly it cannot be gauged on

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.

In fact, I’ve recently boiled down the main risks in investing to two: the risk of losing money and the risk of missing opportunity. It’s possible to largely eliminate either one, but not both. In an ideal world, investors would balance these two concerns.

The market has a mind of its own, and it’s changes in valuation parameters, caused primarily by changes in investor psychology (not changes in fundamentals), that account for most short-term changes in security prices. This psychology, too, moves like a pendulum.

“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.” The belief that some fundamental limiter is no longer valid—and thus historic notions of fair value no longer matter—is invariably at the core of every bubble and consequent crash.

There can be few fields of human endeavor in which history counts for so little as in the world of finance.

The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets.

willingness to look wrong while the market goes from misvalued to more misvalued (as it invariably will), and • like-minded friends and colleagues from whom to gain support (and for you to support).

Markets can be over- or underpriced and stay that way—or become more so—for years.

Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out. •

The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panic selling, we should become aggressive.

One of the first things I remember learning after entering Wharton in 1963 was that the quality of a decision is not determined by the outcome.

or nature can serve up a catastrophe.

Defensive investing sounds very erudite, but I can simplify it: Invest scared! Worry about the possibility of loss. Worry that there’s something you don’t know.

The markets are a classroom where lessons are taught every day. The keys to investment success lie in observing and learning.

Most of these eleven lessons can be reduced to just one: be alert to what’s going on around you with regard to the supply/demand balance for investable funds and the eagerness to spend them.

“too much money chasing too few ideas” may have to do.

Sometimes the divergence of price from value affects individual securities or assets and sometimes whole markets—sometimes

Only a strong sense of value will give you the discipline needed to take profits on a highly appreciated asset that everyone thinks will rise nonstop, or the guts to hold and average down in a crisis even as prices go lower every day.

“What the wise man does in the beginning, the fool does in the end.” The ability to resist excesses is rare, but it’s an important attribute

Underpriced is far from synonymous with going up soon. Thus the importance of my second key adage: “Being too far ahead of your time is indistinguishable from being wrong.”

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