Lessons: The Most Important Thing by Howard Marks

Lessons: The Most Important Thing by Howard Marks - Part 4

The below post is the last article on lessons from the book: The Most Important Thing by Howard Marks - Uncommon Sense for the Thoughtful Investor.

Reading time: 5 minutes

You can read the previous posts here - Part 1, Part 2, Part 3.
I hope all of you have enjoyed the timeless lessons as much as I have enjoyed.
Here goes the final post:

1. Parameters to assess the market

I have listed below market characteristics. Circle of the once which you think are most descriptive of today. If you find most of the circles on the left-hand side, be cautious.

Economy:	Vibrant	Sluggish
Outlook:	Positive	Negative
Lenders:	Eager	Reticent
Capital markets:	Loose	Tight
Capital:	Plentiful	Scarce
Terms:	Easy	Restrictive
Interest rates:	Low	High
Spreads:	Narrow	Wide
Investors:	Optimistic	Pessimistic
	Sanguine	Distressed
	Eager to buy	Uninterested in buying
Asset Owners:	Happy to hold	Rushing for exits
Sellers:	Few	Many
Markets:	Crowded	Starved for attention
Funds:	Hard to gain entry	Open to anyone
	New ones daily	Only the best can raise money
	General Partners hold all the cards	Limited partner have bargaining power
Recent performance:	Strong	Weak
Asset prices:	High	Low
Prospective returns:	Low	High
Risk:	High	Low
Popular qualities:	Aggressiveness	Caution and discipline
	Broad reach	Selectivity

2. Appreciating the Role of Luck

Every once in a while, someone makes a risky bet on an improbable or uncertain outcome and ends up looking like a genius. But we should recognize that it happened because of luck and boldness, not skill.

$10 million earned through Russian roulette does not have the same value as $10 million earned through the diligent and artful practice of dentistry. They can buy the same goods, except that one's dependence on randomness is greater than the other.

Short-term gains and short-term losses are potential imposters, as neither is necessarily indicative of real investment ability (or the lack thereof).

To improve our chances of success, we have to emphasize acting contrary to the herd when it's at extremes, being aggressive when the market is low and cautious when it's high.

2. Investing defensively

There are old investors, and there are bold investors, but there are no old bold investors.

The similarity between sports and investing:

It's competitive- some succeed, some fail and the distinction is clear.

It's quantitative- you can see the results in black and white.

It's a meritocracy- in the long term, better returns go to the superior investors.

It's team-oriented- an effective group (basket of global stocks like a cricket team which includes Sachin Tendulkar, MS Dhoni, Virat Kohli, Shane Warne, Muttiah Muralitharan, Chris Gayle, AB de Villiers, Brett Lee) can accomplish more than one person (a single stock).

It's satisfying and enjoyable- but much more so when you win.

But as in sports, there are also negatives.

There can be a premium in aggressiveness, which doesn't serve well in the long run.

Unlucky bounces can be frustrating.

Short-term success can lead to widespread recognition without enough attention being paid to the likely durability and consistency ( consistency like Sachin Tendulkar, Virat Kohli, Cristiano Ronaldo, Lionel Messi).

A soccer coach has to decide whether to field a team that emphasizes offense or defense or one that's evenly balanced. Because coaches know they won't have many opportunities to switch between offensive and defensive personnel during the game, they have to come up with winning lineup and pretty much stick with it.

What's more important to you: scoring points or keeping your opponent from doing so?

In investing, will you go for winners or try to avoid losers?
Great danger lies in acting without having considered these questions.

By the way, there's no right choice between offense and defense. Lots of possible routes can bring you success. Your decision should be a function of your personality, leanings, belief in your ability, the markets you work and the clients you work for.
Ensuring the ability to survive under adverse circumstances is incompatible with maximizing returns in the good times, investors must choose between the two.

If we avoid the losers, the winners will take care of themselves. We go for batting average, not home runs. Operating a high-risk portfolio is like performing on the high wire without a net. The payoff for success may be high and bring oohs and aahs. But those slipups will kill you.

4. Avoiding Pitfalls

Warren Buffett - An investor needs to do very few things right as long as he avoids big mistakes.

What We Learn from a Crisis-

Too much capital availability makes money flow to the wrong places.
When capital goes where it shouldn't, bad things happen.
Inadequate due diligence leads to investment losses.
Leverage magnifies outcomes but doesn't add value.
Markets change - "Quant" funds primarily profit from patterns that held true in the past, they can't predict changes in those patterns. They overestimate the reliability of past norms.

5. Adding Value

It's not hard to perform in line with the market in terms of risk and return. The trick is to do better than the market: to add value.

In good years in the market, it's good enough to be average.

There is a time (especially bear market), however, when we consider it essential to beat the market, and that's in the bad years. Well, that's your / investment advisor's skill.

6. Pulling It All Together

The best foundation for a successful investment- or a successful investment career- is value. Your insight into value has to be superior.

Thus, you must

learn things others don't,
see things differently,
do a better job of analyzing them

ideally, all three.

What the wise man does in the beginning, the fool does in the end.

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

---

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.

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Aaditya Chhajed, CA, CFA

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