Lessons: The Most Important Thing by Howard Marks

Lessons: The Most Important Thing by Howard Marks - Part 1

Global market indices are down almost in the range of 20-25% from the peak, we must believe this too shall pass and good times for (select) equities are not too far.

Amidst this extreme volatility in my portfolio and client meetings, I managed to read a book by Howard Marks; The Most Important Thing, Uncommon Sense for the Thoughtful Investor- Uncommon Sense for the Thoughtful Investor. He is an extremely successful investor and a founder of Oaktree Capital Management. I have divided the lessons from this book in four parts. This post is part 1. I will post the remaining lessons very soon!

1. What is Second-level thinking?

First-level thinking says, "It's a good company; let's buy the stock." Second-level thinking says, "It's a good company, but everyone thinks it's a great company, and it's not. So, the stock is overrated and overpriced; let's sell."

There are numerous examples like this to understand what is exactly second-level thinking...

First-level thinking is superficial and everyone can do it, however, second-level thinking is deep, complex and convoluted.

Charlie Munger on Second-level thinking: It's not supposed to be easy. Anyone who finds it easy is stupid

2. The Most Important Thing Is...Value?

For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without, it, any hope for consistent success as an investor is just that: hope.

Also, there are two essential ingredients for profit in a declining market (like what we're observing now in Feb-Mar 2020); you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you're wrong.

Oh, yes, there's third: you have to be right in the first place!

3. The Most Important Thing Is...The Relationship Between Price and Value

They say, "Well bought is half sold". Don't spend a lot of time thinking about what price we're going to be able to sell. If you've bought it cheap, eventually those questions will answer themselves...

The discipline that is important is not accounting or economics, but psychology...

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity, and thus its price, can only go one way: up.

All bubbles start with some nugget of truth:

> Tulips are beautiful and rare (17th century - Holland)

> The Internet is going to change the world (The year 2000 - Dot Com bubble)

> Real estate can keep up with inflation, and you can always live in a house. (The year 2008 - US Housing bubble)

As John Maynard Keynes pointed out, "The market can remain irrational longer than you can remain solvent".

Trying to buy below value isn't infallible, but it's the best chance we have.

You may contact me in case you need to ask or tell me something. I am waiting to hear from you.

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Stay home! Stay safe!

Thank you very much for your time!

With respect,
Aaditya Chhajed
CA, CFA(US) All Levels Cleared, MCom

E: chhajedaaditya@gmail.com
M: +91-9404055222.

Aaditya is the founder of Aaditya Chhajed Financial Advisory Services, a financial planning and wealth management firm in Pune.

He loves helping family, friends, and, clients make better financial decisions. He believes learning is perpetual.

He loves reading books, traveling around the world.

He is a commerce postgraduate and Chartered Accountant. He has also cleared all levels of CFA(US) in the first attempt.

Disclaimer:
Investors should seek the advice of their financial advisor prior to making any investment decision based on this report or for any necessary explanation of its contents. Future estimates mentioned herein are personal opinions and views of the author. This post is not a recommendation to buy or hold or sell securities. Investments are subject to market risks. Please read all scheme related documents carefully.

Comments

Bhavesh Jain said…

nicely summarized and highly relevant in the current market

March 17, 2020 at 4:11 PM

Unknown said…

Very nicely explained the facts which should be regularly taken care off by each investor.

April 16, 2020 at 11:29 AM

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Aaditya Chhajed, CA, CFA

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