The Most Important Thing – by Howard Marks

Having recently read The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks, I thought I’d shared it with everyone.

Howard Stanley Marks is one of the more well-known value investors who specializes in the field of distressed investing. Having co-founded Oaktree Capital Management in 1995, Howard Marks invests in a wide range of asset classes including high-yield bonds, convertible securities, distressed debt, and real estate. To date, the alternative investment management firm boasts assets under management (AUM) of  more than US$70 billion. Most of Oaktree Capital Management’s business principles have been largely attributable to Howard Marks’ investment philosophies found in his memos which are  made available to the public. His thoughts are then penned down into the book which lists and summarizes the memos.

The Most Important Thing

So what then is the most important thing in this book? Obviously, there isn’t a one “most important thing” which would ascertain investors profits but rather, it is a set of ideas which would form the basis of Howard Marks’ investment process. It is very much like several bricks of “most” important things which make up the author’s great wall of knowledge. This book isn’t about the quickest ways to make money but what it had taught me was to better appreciate the qualitative side in perceiving financial markets and its psychological behaviors.

The book lists 20 “most” important things, each having their own chapter. Among them, I do like to share one of my favorite chapters which I found pretty thought-provoking.

Chapter 14: Knowing What You Don’t Know

“There are two kinds of people who lose money: those who know nothing and those who know everything.”  – Henry Kaufman

This chapter takes reference to one of Howard Marks’ memos titled  The Value of Predictions and The Value of Predictions II which tells us that we should be skeptical of what forecasters say. Predictions are most useful when they correctly anticipate change. That is, excess profits can’t really be earned if a particular prediction predicts something that will not change and doesn’t change. It adds little value. It is like the weather forecaster predicting that Singapore will not have a major earthquake over the next 6 – 12 months. How does the statement really benefit us? Most forecasters tend to extrapolate the past and project into the future where things were but not where they are going to go. They tend to be overconfident in predicting that there is one certain route into the future when, in actuality the future is akin to a weighted probability of various scenarios, most of which uncertain. Imagine driving with our eyes fixed into the rear-view mirror thinking we know what is ahead of us, till we crash that is. Of course, there are times when forecasters get it right and Singapore does really have an earthquake. However the question is, are they able to get it right consistently over a prolonged period?

Forecasters tend to focus on knowing what they think they might know. Instead, wouldn’t it be easier if we had focused our time and energy trying to know the smaller-picture things such as where we currently stand in the economic cycle, evaluating the fundamental value of companies and ascertaining an estimated price we should pay for a piece of that business?

Value in Action

A simple read for the weekends. If you wish to understand better on what market behavior, learning to discern the difference between price and value of a stock and understanding risk, do take a look!

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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.

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