Ready to GROW your business by 40% - 173% this year?Alternate Text
22 June 2020

5 Key Investment Lessons from The Most Important Thing by Howard Marks

Jairek Robbins

Howard Marks is one of the top investors and has a track record along the lines of Warren Buffett and Peter Lynch. In fact, it was Warren Buffett who pushed Marks to write this particular book, and that shows you how important the ideas he shares are.

Howard Marks was in the habit of saying the most important thing is…and then he would go on and enumerate those things. This book is titled The Most Important Thing in line with how he talked to prospective investors in his investment management company. Here are some of the key lessons that you can start to implement in order to turn your investing fortunes around.

1. Understand, Recognize and Control Risk

Marks explains that not enough people understand risk. For example, many think that riskier investments translate into higher returns, yet this isn’t necessarily the case. In order to get above-average returns, you need to have an ability to recognize the risks an asset carries, and how reasonable it is to face those risks. 

For example, the price at which a certain company is being offered on the market may suggest that it would make business sense to buy that company. However, a savvy investor may notice that so many competitors have emerged of late to offer what that company offers, so the likelihood of the value of the company dropping is high.

In short, high quality assets can be risky while low quality assets can be safe. The key difference is the price at which you acquire those assets.

Skillful risk control is what distinguishes a smart investor from all others. However, controlling risk can only be measured by the losses which don’t occur, and that makes it hard to quantify how good you have been at controlling risk.

2. Be Aware of Cycles

Cycles will always exist in markets because people aren’t always logical when making investment decisions. It is therefore important for you to be aware of these cycles since they are a tool that gives you an edge in the market.

Marks says that you can liken the markets to the swings of a pendulum. The extreme points at which the pendulum turns are the turning points in market cycles. Markets spend most of the time moving towards the extremes (greed and fear, overpriced and underpriced, euphoria and depression, etc.). Cycles are self-correcting, and they reverse on their own.

When times are good, investors tend to think that the trend will keep going up. In contrast, those same investors will think this is the end of the market if the trend is downwards. Marks says smart investors analyze trends and know when a change is imminent. Be aware of where markets are at the moment and look for major turning points which may show what the future will be like.

3. Mind Your Psychological Influences

Howard Marks says that the biggest market errors don’t come from factors to do with having or not having the right/enough information. Rather, most errors come from psychological factors. You should therefore combat your negative influences in order to succeed. These include greed and fear, as well as the occasional dismissal of logic and reason, being envious, and ego are all psychological forces which can have powerful negative influences. As Warren Buffett puts it, “be greedy as others are fearful, and fearful when others are greedy.” 

Be wary of herd bias which can drive whole populations to make bad decisions in what is called confirmation bias.

One of the ways to protect yourself from negative influences is by sticking to the concepts of intrinsic value and margin of safety. Avoid investing when you are feeling greedy, envious or fearful.

4. Don’t be a Sheep in a Herd

Sir John Templeton puts this very well when he says, “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage but provides the greatest profits.” The most important thing in this case is contrarianism. 

Average investors say they should just follow the current trend but the best investors decide to do the opposite. When there is broad consensus among investors, it means that most investors have already acted and that’s why the price of the asset will be high. At this point, there is a lot of risk and little in the way of an upward trend or further rise in the price of that asset.

The reverse is also true if the general consensus is that the value of a company is very low. In this case, the risk of a further drop is low while the potential for a rise is very high.

Nevertheless, being a contrarian isn’t easy. You have to apply second level thinking by trying to identify what your peers have missed. You need both knowledge and confidence in order to think in this way. You also need to have stamina and conviction because your convictions may not unfold immediately.

For example, during the dotcom bubble, a person like Howard Marks had to exercise a lot of restraint to watch other people getting rich while you wait for the trend to turn and grab your opportunity. Charlie Munger, Warren Buffett’s investing partner says “anyone who finds investing to be easy must be stupid since investing isn’t meant to be easy.”

5. The Role of Chance

Marks believes that randomness wrecks or contributes to investment records to an extent that few people fully appreciate. For this reason, the dangers that lurk in investing strategies that have so far been successful are underrated. 

It is therefore important to appreciate the role of luck. Sometimes, good decisions produce bad outcomes and sometimes, bad decisions produce good outcomes. For example, at any one moment, there are some investors betting on a bear market. At some point in time, some of those investors will turn out to be right. This doesn’t necessarily mean they were genius and others stupid, it was just luck.

Related: Interview – Talking Sex, Love & Money

An intelligent investor will invest in a way that limits his downside while also leaving room for a large upside. High priority should go towards limiting risk and exposure to random events which can severely damage returns. 

Buffett says, “Never lose money.” That is how you get compounding to work for you, rather than work against you (for those who keep losing money.

So, in hindsight, which mistakes have you realized made you lose on you investment journey and which of the lessons above holds the greatest promise for turning around your outcomes? Share in the comments below!

To Your Success,

Jairek Robbins



Never Miss A Post! Opt-In for Our Weekly Newsletter!

Sign up