Renowned for his market wisdom, Howard Marks, the Chairman and Co-founder of Oaktree Capital Management, has summed up decades of investment insights into a book: The Most Important Thing. Marks's book, drawn from his insightful thoughts and ideas, offers an invaluable resource for seasoned investors and people who just start to invest.
It's a treasure trove of investment philosophy and sage advice, addressing the complexities and uncertainties of #investing while putting forth concepts like second-level thinking, patient opportunism, and defensive investing.
What stands out is Marks's unique contrarian approach to investing - he adroitly navigates market cycles and generates returns through aggressive and cautious action.
The bottom line? Successful investing requires attention to many factors, and in Marks's wise words, every detail can prove to be the most important thing.
SECOND-LEVEL THINKING
Investing in anything that offers average returns may be good enough for some, but it takes adaptability and intuition for those who want to stay ahead and beat the market. Simply following someone else's rules won't guarantee the same results. Each investor is unique, and what works for one may not work for another.
💡 Perceptive thinking will help
What works for one investor might not be good for another. Since there's no exact process involved in investing, your perceptive thinking or second-level thinking will help.
UNDERSTANDING MARKET EFFICIENCY
Howard discusses the efficient market hypothesis and says that although it's a great way to incorporate information, it's sometimes wrong.
For instance, in January 2000, Yahoo was selling at $237, but in 2001, it had plummeted to just $11. Therefore, the market was wrong in at least one of these instances.
💡 Unique view matters
When the prices reflect the consensus, sharing the same view might only deliver average results, but to beat the market, it's essential to have a unique view.
VALUE
Howard talks about how investors follow the old adage that dictates you to buy low and sell high. But, to determine the "low" and the "high," it's important to determine the accurate intrinsic value. Therefore, it's obvious that an investor needs to purchase stocks well below their intrinsic value and then sell it at a much higher price.
💡 Fundamentals are just about everything
THE RELATIONSHIP BETWEEN PRICE AND VALUE
As an investor, it's essential to estimate the intrinsic value of an asset or stock before making a move. But it's not enough to stop there - you also need to determine the asset/stock's relative price to its value. Doing so ensures that your investment decisions are backed by solid research and analysis.
The importance of establishing a good relationship between the fundamentals, value, and price. In other words, if this is followed, an investor can succeed since it's the core of good investing methods.
💡 Do research and analysis
A value investor needs to recognize the fact that the price is the starting point and that no asset is too good to be true. Any asset that seems attractive at a low price should also seem like a bad deal when the price is way too high.
UNDERSTANDING RISK
It's not really impossible to find investments that could deliver outstanding returns in the future. However, an investor will probably not be successful if s/he shies away from dealing with risks. After all, it's something that will happen in the future, so the risk will have to be experienced now or later.
💡 Risk assessment is essential
Risk assessment is essential due to three reasons. Firstly, since there are too many theories about risk, the investor must understand whether he can take it and live with it later. Secondly, the investor has to also think about the potential return. Thirdly, the investor will also have to assess the risk itself and evaluate whether it's really worth it.
RECOGNIZING RISK
An investor needs to primarily recognize the risk to control it.
Risk means that you're uncertain about the future and also about the loss you might incur. Participating in it along with the rest of the crowd, rather than avoiding it, could be a major risk when prices are high. Similarly, there's no such thing as low prices = low risk.
💡 Recognize the risk to control it
No matter what the value is, there is a certain amount of risk involved because it's not possible to predict the future.
CONTROLLING RISK
Investing can be risky, but how you manage that risk sets you apart as a successful investor. The best investors are known for their ability to intelligently control risk while still generating returns. Don't shy away from risk - learn to navigate risk strategically for a better investment outcome.
💡 Learn to navigate risk strategically
For instance, investors like Warren Buffett and Peter Lynch aren't exactly known for their high returns but are more famous for their consistency. It's also possible that they might have had a few bad years, but since they have averted disasters and controlled their risk, they shine.
PATIENT OPPORTUNISM
The most important thing for an investor to learn is patience. Therefore, instead of chasing deals, it's a good strategy to wait for things to come your way.
💡 Be patient
You can purchase something the seller wants to sell rather than buying something only because you need or want it.
Do not expect cycles to occur all the time, and don't think that the market is under/overpriced all the time because, sometimes, everything can be balanced, and there may be no mistakes made.
KNOWING WHAT YOU DON'T KNOW
An investor's knowledge plays a major role in investing. Since it is impossible to identify what might occur in the vast future and very few people have the great wisdom to use their knowledge to their advantage, learning plays a significant role.
💡 Knowledge plays a major role in investing
Therefore, an investor aware of his limited knowledge will have more advantages than others, no matter how knowledgeable he is.
INVESTING DEFENSIVELY
An investor should strike a good balance between making money and avoiding losses. One can't make a great profit and prevent loss simultaneously. It's like choosing between offense and defense.
💡 strike a good balance between making money and avoiding losses
The position an investor chooses will be critical for his decisions in investing. It's all right to invest defensively and avoid losses rather than trying to hit winners and make money.
ADDING VALUE
It's relatively easy for an investor to gain some knowledge and perform according to the market's demands, but investors who take it a step further and outperform the market are the ones who add real value to it. This takes extreme skill, and it's also necessary for investors to be second‐level thinkers.
THE MOST IMPORTANT THING
You can't do the same things others do and expect to outperform. The most dependable way to outperform the market is to buy something for less than its value. Price, not quality, determines value: high-quality assets can be risky, and low quality assets can be safe.
💡 Investing requires a deep understanding of the fundamentals that drive stock prices.
💡 Successful investing requires you to look and think differently to consensus and, most importantly, buy mispriced assets.
Value is the very foundation for a good investment career. When an investor learns something others don't, perceives things differently, and can analyze the value, she stands a better chance at investing. Value is best when it's analytical and based on solid facts.
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