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

by Howard Marks

This paradox exists because most investors think quality, as opposed to price, is the determinant of whether something’s risky.

high quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them....

achieving high returns with high risk means very little—unless

loss is what happens when risk meets adversity.

the absence of loss does not necessarily mean the portfolio was safely constructed.

the manager’s value added comes not through higher return at a given risk, but through reduced risk at a given return.

risky assets can make for good investments if they’re cheap enough.

The [2008] headlines are full of entities that have seen massive losses, and perhaps meltdowns, because they bought assets using leverage....

In all aspects of our lives, we base our decisions on what we think probably will happen.

Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.

Skillful risk control is the mark of the superior investor.

Cycles always prevail eventually. Nothing goes in one direction forever.

“You Can’t Predict. You Can Prepare,”

Rule number one: most things will prove to be cyclical. • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.

When people feel good about the way things are going and optimistic about the future, their behavior is strongly impacted. They spend more and save less.

“Everything that was good for the market yesterday is no good for it today.” The extremes of cycles result largely from people’s emotions and foibles, nonobjectivity and inconsistency.

Cycles are self-correcting, and their reversal is not necessarily dependent on exogenous events.

“the worst loans are made at the best of times.”

The credit cycle corrects itself through the processes described above, and it represents one of the factors driving the fluctuations of the economic cycle.

Investors will overvalue companies when they’re doing well and undervalue them when things get difficult.

“this time it’s different.” These four words should strike fear—and

One of my favorite books is a little volume titled Oh Yeah?, a 1932 compilation of pre-Depression wisdom from businessmen and political leaders. It seems that even then, pundits were predicting a cycle-free economy:

Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.

When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.

When investors are too risk-averse, prices can offer more return than risk.

the three stages of a bull market. Now I’ll share them with you. • The first, when a few forward-looking people begin to believe things will get better • The second, when most investors realize improvement is actually taking place • The third, when everyone concludes things will get better forever

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

the 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

The swing back from the extreme is usually more rapid—and thus takes much less time—than

investing is an action undertaken by human beings, most of whom are at the mercy of their psyches and emotions.

There’s nothing wrong with trying to make money. Indeed, the desire for gain is one of the most important elements in the workings of the market and the overall economy. The danger comes when it moves on further to greed,

Greed is an extremely powerful force. It’s strong enough to overcome common sense,

Time and time again, the postmortems of financial debacles include two classic phrases: “It was too good to be true” and “What were they thinking?”

A Short History of Financial Euphoria

the combination of pressure to conform and the desire to get rich causes people to drop their independence and skepticism,

People who might be perfectly happy with their lot in isolation become miserable when they see others do better.

follow a path that emphasizes humility, prudence and risk control. Of course, investing shouldn’t be about glamour,

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. This is especially true at the market extremes. The result is mistakes—frequent, widespread, recurring, expensive mistakes.

To avoid losing money in bubbles, the key lies in refusing to join in when greed and human error cause positives to be wildly overrated and negatives to be ignored.

strongly held sense of intrinsic value,

insistence on acting as you should when price diverges from value,

enough conversance with past cycles—gained at first from reading and talking to veteran investors, and later through experience—to know that market exces...

a thorough understanding of the insidious effect of psychology on the investing pr...

a promise to remember that when things seem “too good to be true...

willingness to look wrong while the market goes from misvalued to more misvalued (as...

like-minded friends and colleagues from whom to gain support (and...

To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.

There’s only one way to describe most investors: trend followers.

“The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” He is urging us to do the opposite of what others do: to be contrarians.

Markets swing dramatically, from bullish to bearish and from overpriced to underpriced.