The Most Important Thing: Uncommon Sense for The Thoughtful Investor

by Howard Marks

People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it;

A good builder is able to avoid construction flaws, while a poor builder incorporates construction flaws. When there are no earthquakes, you can’t tell the difference.

if the company can sell a policy to someone likely to die at age eighty at a premium that assumes he’ll die at seventy—they’ll be better protected against risk and positioned for exceptional profits if things go as expected.

“You Can’t Predict. You Can Prepare,”

we never know what lies ahead, but we can prepare for the possibilities and reduce their sting.

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

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.

Stocks are cheapest when everything looks grim.

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

“Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.”

most people find it terribly hard to sit by and watch while others make more money than they do.

most typical of market victims: the six-foot-tall man who drowned crossing the stream that was five feet deep on average.

Pollyannaish.

skepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.

It’s our job as contrarians to catch falling knives, hopefully with care and skill.

The best opportunities are usually found among things most others won’t do.

“investment is the discipline of relative selection.”

necessary condition for the existence of bargains is that perception has to be considerably worse than reality.

The market’s not a very accommodating machine; it won’t provide high returns just because you need them. PETER BERNSTEIN

You’ll do better if you wait for investments to come to you rather than go chasing after them.

An opportunist buys things because they’re offered at bargain prices.

Mujo was defined classically for me as recognition of “the turning of the wheel of the law,” implying acceptance of the inevitability of change, of rise and fall. . . .

mujo means cycles will rise and fall, things will come and go, and our environment will change in ways beyond our control.

All we can do is recognize our circumstances for what they are and make the best decisions we can, given the givens.

allegory

“The Cat, the Tree, the Carrot and the Stick.”

the cat pursues high returns, even in a low-return environment, and bears the consequences—increased risk—although often unknowingly.

Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns.

We have two classes of forecasters: Those who don’t know—and those who don’t know they don’t know. JOHN KENNETH GALBRAITH

We may never know where we’re going, but we’d better have a good idea where we are.

Every once in a while, someone makes a risky bet on an improbable or uncertain outcome and ends up looking like a genius. But we should recognize that it happened because of luck and boldness, not skill.

The truth is, much in investing is ruled by luck.

$10 million earned through Russian roulette does not have the same value as $10 million earned through the diligent and artful practice of dentistry. They are the same, can buy the same goods, except that one’s dependence on randomness is greater than the other. To your accountant, though, they would be identical. . . . Yet, deep down, I cannot help but consider them as qualitatively different.

Taleb calls them “alternative histories”— that could have occurred just as easily as the “visible histories” that did.

At a given time in the markets, the most profitable traders are likely to be those that are best fit to the latest cycle.

dichotomization

Coincidence looks like causality.

Several things go together for those who view the world as an uncertain place:

Charles Ellis, titled “The Loser’s Game,” that appeared in The Financial Analysts Journal in 1975.

in amateur tennis, points aren’t won; they’re lost.

The choice between offense and defense investing should be based on how much the investor believes is within his or her control.

Investing is a testosterone-laden world where too many people think about how good they are and how much they’ll make if they swing for the fences and connect.

An investor needs do very few things right as long as he avoids big mistakes.

“Failure of imagination”— the inability to understand in advance the full breadth of the range of outcomes—is particularly interesting, and it takes effect in many ways.

Too much capital availability makes money flow to the wrong places.

Widespread disregard for risk creates great risk.

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.