The Most Important Thing: Uncommon Sense for The Thoughtful Investor

by Howard Marks

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.

to achieve superior investment results, you have to hold nonconsensus views regarding value, and they have to be accurate. That’s not easy.

sharing the consensus view will make you likely to earn just an average return. To beat the market you must hold an idiosyncratic, or nonconsensus, view.

it’s impossible to consistently do the right thing at the right time. The most we value investors can hope for is to be right about an asset’s value and buy when it’s available for less. But doing so today certainly doesn’t mean you’re going to start making money tomorrow.

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

Investment success doesn’t come from “buying good things,” but rather from “buying things well.”

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity.

For self-protection, then, you must invest the time and energy to understand market psychology.

when everyone believes something embodies no risk, they usually bid it up to the point where it’s enormously risky. No risk is feared, and thus no reward for risk bearing—no “risk premium”— is demanded or provided. That can make the thing that’s most esteemed the riskiest.

The combination of greed and optimism repeatedly leads people to pursue strategies they hope will produce high returns without high risk; pay elevated prices for securities that are in vogue; and hold things after they have become highly priced in the hope there’s still some appreciation left. Afterwards, hindsight shows everyone what went wrong: that expectations were unrealistic and risks were ignored.

The herd applies optimism at the top and pessimism at the bottom. Thus, to benefit, we must be skeptical of the optimism that thrives at the top, and skeptical of the pessimism that prevails at the bottom.