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

by Howard Marks

The polar opposite of conscientious value investing is mindlessly chasing bubbles, in which the relationship between price and value is totally ignored. All bubbles start with some nugget of truth: • Tulips are beautiful and rare (in seventeenth-century Holland). • The Internet is going to change the world. • Real estate can keep up with inflation, and you can always live in a house. A few clever investors figure out (or perhaps even foresee) these truths, invest in the asset, and begin to show profits. Then others catch on to the idea—or just notice that people are making money—and they buy as well, lifting the asset’s price. But as the price rises further and investors become more inflamed by the possibility of easy money, they think less and less about whether the price is fair. It’s an extreme rendition of the phenomenon I described earlier: people should like something less when its price rises, but in investing they often like it more.