"The Most Important Thing" by Howard Marks

"The Most Important Thing" by Howard Marks is a book that will help you in thinking about the three most important elements of investing: price, value, and risk.

After all, your goal as an investor is to maximize your risk-adjusted returns and these three are the key metrics to use to make your investment decisions.

"The Most Important Thing" is a must read for value investors. In the book, Marks talks extensively about how to think about value and how to go about purchasing it.

"The Most Important thing" big idea #1:
Evaluating intrinsic value:

Marks believes you should try to evaluate the "intrinsic value" of the security you are considering buying.

"The most we value investors can hope for is to be right about an asset's value and buy when it's available for less."

Doing so requires a good deal of skepticism.

According to Marks, many investors think: "it's a good company; let's buy the stock" whereas a more perceptive investor might think: "it's a good company, but everyone thinks it's a great company, and it's not. So the stock's overrated and overpriced; let's sell."

You need to look not just at the surface but dig deeper and ask probing questions.

"The Most Important thing" big idea #2:
Becoming a second level thinker:

In Marks' view, this level of skepticism is what differentiates a first level from a second level thinker. Which are you?

He argues that second level thinking can help you outperform the market. If you keep your mind open and are prepared to dig beneath the surface then opportunities can open up that you didn't know existed.

Marks outlines how thinking as a contrarian allows you to see big price moves as giving you more opportunities. In a very poor market, you may have the chance to buy excellent assets off motivated sellers.

The key is to recognize these market swings and then not being afraid of diverging from the crowd. Being a contrarian just for the sake of it isn't going to help you but do not be afraid to make your own decisions and invest in situations that look attractive to you once you've weighed up the facts.

"The Most Important thing" big idea #3:
Understanding Cycles:

Marks talks about cycles and how you need to be aware of them.

Prices will go up and down but stocks rarely go to zero. This means price falls can open up opportunities for you.

These cycles are self correcting in many ways. Strong markets can lead more competitors coming into the market, increased production, and more pricing pressure.

This can lead to lower returns on capital invested which means the boom can reverse.

If the market goes down far enough then returns become so poor that companies (and producers) leave the market which reduces production. This can result (for those that are left) in an ability to raise prices, increasing margins and work in a marketplace with less competition. This should reverse the cycle and lead to increasing returns.

In terms of price drops, we think there are times to be wary and times when they can present opportunity. Stocks that generate large amounts of cash and have little or no debt and diverse revenue streams can look very interesting after a price drop. This sort of security may merit further investigation.

If a stock drops a long way but has a large amount of debt or is not generating cash then the company could be forced to raise capital.

This can result in permanent value destruction (such as AIG during the financial crisis) and may not be such a compelling opportunity. Each situation is unique and it is up to you, as an investor, to study the individual situation and see if you can form an opinion.

If you can't form an opinion, no problem, just move onto the next security and no harm is done.

"The Most Important thing" other takeaways:

"The Most Important Thing" mentions many other attributes that can help you as an investor. Marks talks extensively about risk and how to recognize it.

He also highlights crucial attributes of excellent investors, such as:

  • being patient
  • appreciating the importance of luck
  • being defensive
  • avoiding pitfalls.

In short, "The Most Important Thing" is an excellent book by a terrific investor.

It makes our shortlist of the best books on investing and is well worth a read for a serious investor.

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