‘The Most important thing illuminated’ book written by Howard Marks is a detailed compilation of his celebrated ‘Client Memos’ put into a single volume and in this edition, Marks`s investing wisdom is annotated by commentaries from four investing legends – Chris Davis, Seth Klarman, Joel Greenblatt and Paul Johnson. In the foreword detailed by Bruce Greenwald, Value investing began at Columbia with the publication of Benjamin Graham and David Dodd`s Security Analysis in 1936. In 2001, the Heilbrunn centre for Graham and Dodd Investing was established at Columbia business School. The Most Important Thing original and the illuminated versions were conceived at Columbia student Investment management Association which is the academic home of value investing.
Howard Marks, the American investor who co-founded Oaktree Capital Management is the author of this book and he has used this volume to compile all his investment philosophies and client memos in a way that the readers can benefit from. There are 20 chapters put together indicating each of the Most Important things, each is a brick in the wall and indispensable and at the same time can act as a guidepost for aspiring successful investors.
This book doesn’t delve much into financial analysis or investment theory but rather into finer nuances of human Psyche which is the key determinant of success in investing. Howard Marks recommends 3 good articles, books which can be added to one`s reading list and they are ‘Loser`s game’ by Charles Ellis, A short history of financial euphoria by John Galbraith and Fooled by Ramdomness by Nicholas Taleb.
My favorite were the first chapter about ‘Second –Level Thinking’ and the last chapter ‘Putting it all together’. As Marks puts it, few people have what it takes to be great investors. Those can be taught, cant be taught everything. And investing cant be turned into an algorithm due to the major role of Psychology in investing which are highly variable and so cause and effect relationships aren’t reliable. Marks explains in detail the importance of second level thinking which are deep, complex and convoluted and plays a significant role in shaping someone as ‘Contrarian’ in the likes of Warren Buffet or Howard Marks himself. Best take away of this chapter is to be a second level thinker, one needs to look into inefficiencies. The best bargains at any point in time are found among the things other investors cant or wont do.
Next he digs into Value or intrinsic value arriving analytically at which Howard Marks calls indispensable starting point. Good takeaway is the differentiation between Growth Investing and Value investing. Value investors aim to come up with the security`s current intrinsic value and buy when the price is lower and growth investors try to find securities whose value will increase rapidly in the future (I think he meant value rising with rapid earnings growth in future). One of the Buffet`s tenet is that growth in factored in the calculation of value. Its interesting to see how well human thoughts are captured that leads to provocative selling when prices fall continuously, thinking they should sell before price goes to zero. Also the biggest pain in value investing is fact that the convergence of price and intrinsic value can take painstakingly longer as John Maynard Keynes pointed out. To quote, “the market can remain irrational longer than you can remain solvent”.
Chapters 5,6 and 7 are really the crux of this book and key takeaway from Howard Marks memos which is understanding risks, recognizing risk and controlling risks. He has clearly articulated different forms of investment risks like falling short of goals, underperformance, loss of capital and illiquidity. On riskiest things: The most dangerous investment conditions generally stem from psychology that’s too positive. For this reason, fundamentals don’t have to deteriorate in order for losses to occur; downgrading of investor opinion will suffice. High prices often collapses of their own weight. The clearest definition of risk by Marks states that Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do. When markets are rising, we don’t get to find out how much risk a portfolio entailed. Controlling risk can be gauged only in the form of what-if like how much losses the portfolio avoided which are difficult in placid times.
Next few chapters from 8 talks all about cycles, contrarianism, pendulum type behavior of the market and how to prepare oneself for the cycles extreme behaviors. Howard Marks the best known contrarian in investing world has clearly blue printed his approaches in these chapters and it will help investors prepare for the cycles extremes if not predicting it exactly. Chapter 10 that talks about key negative influences will definitely help investors understand different sins like greed, fear, ego, herd mentality and how they can negatively influence investor psyche. In chapter 13 on patient opportunism, there is a good statement made by Marks and it goes “You will do better if you wait for investments to come to you rather than go chasing after them”.
In last 3-4 chapters he talks about the role of luck and randomness in investing as well as life. He quotes lot of wisdom from Nicholas Taleb`s fooled by randomness book which is a great read again. This chapter clearly advocates defensive investing practices to avoid loss of capital since the outcomes are quite uncertain in investing and we should spend our time trying to find value among knowables among company, business industries. And the final chapter puts it all together which is a good way to conclude. Investors aspiring to be successful should read the final chapter atleast once a month like a refresher to keep the risk under control and prepare for the extremes