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The Most Important Thing Is Destined to Become an Investment Classic—It Ments of Market Opportunity and Risk

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The Most Important Thing Is Destined to Become an Investment Classic—It Ments of Market Opportunity and Risk $29.95 praise for MARKS Howard Marks, tH e cH a irM a n and cofounder of Oaktree Capital Manage- ment, is renowned for his insightful assess- “The Most Important Thing is destined to become an investment classic—it ments of market opportunity and risk. After should easily earn its place on every thinking investor’s bookshelf. Howard Uncommon Sense for theThoughtful Investor four decades spent ascending to the top of Marks has distilled years of investment wisdom into a short book that is lucid, the investment management profession, he is entertaining, and ultimately profound.” today sought out by the world’s leading value — Joel Greenblatt, COlumbia Business School , foun dEr investors, and his client memos brim with an d ma naging pA rt ner of g Ot ha M CA pI tA l astute commentary and a time-tested, funda- mental philosophy. Now for the first time, all readers can benefit from Marks’s wisdom, con- “If you take an exceptional talent and have them obsess about value investing centrated into a single volume that speaks to for several decades—including deep thinking about its very essence, with both the amateur and seasoned investor. written analysis along the way—you may come up with a book as useful to value investors as this one. But don’t count on it.” Informed by a lifetime of experience and study, — Jer eM y G r a n t H a M , cofoun dEr an d ch ief in v est me Nt The Most Important Thing explains the keys to St r At Egist, gr an tha M M AyO Va N Ot t Er loo successful investment and the pitfalls that can destroy capital or ruin a career. Utilizing pas- © b illGallery.com sages from his memos to illustrate his ideas, “regular recipients of Howard Marks’s investment memos eagerly await their Marks teaches by example, detailing the devel- arrival for the essential truths and unique insights they contain. Now the opment of an investment philosophy that fully wisdom and experience of this great investor are available to all. The Most acknowledges the complexities of investing Important Thing, Marks’s insightful investment philosophy and time-tested and the perils of the financial world. Brilliantly approach, is a must read for every investor.” HOWARD MARKS is chairman and cofounder applying insight to today’s volatile markets, — se tH a . k l a r M a n , pr esi den t, The E Bau post grou p of Oaktree Capital Management, a los Ange- Marks offers a volume that is part memoir, part les–based investment firm with $80 billion creed, with a number of broad takeaways. under management. He holds a bachelor’s “Few books on investing match the high standards set by Howard Marks in Marks expounds on such concepts as “second- degree in finance from the Wharton School and The Most Important Thing. It is wise, witty, and laced with historical perspec- level thinking,” the price/value relationship, an MBA in accounting and marketing from the tive. If you seek to avoid the pitfalls of investing, you must read this book!” patient opportunism, and defensive investing. University of Chicago. — Jo Hn c . boG l e , foun dEr an d for mer CEO, Frankly and honestly assessing his own deci- The E Va Ngua r d grou p sions—and occasional missteps—he provides valuable lessons for critical thinking, risk assessment, and investment strategy. Encourag- “When I see memos from Howard Marks in my mail, they’re the first thing I ing investors to be ‘contrarian,’ Marks wisely open and read. I always learn something, and that goes double for his book.” judges market cycles and achieves returns — warren buffett, chai r ma N an d ceO, through aggressive yet measured action. Which ber ksh I r E hat haway element is the most essential? Successful p rinted in the investing requires thoughtful attention to many ISBN: 978-0-231-15368-3 separate aspects, and each of Marks’s subjects 52995 proves to be the most important thing. u . s . 9 780231 153683 a j a c k e t d e s i g n : n o a h a r l o w . c o l u m b i a u n i v e r s i t y p re s s / n e w y o r k w w w . c u p . c o l u m b i a . e d u THE MOST IMPORTANT THING Columbia University Press Publishers Since 1893 New York Chichester, West Sussex Copyright © 2011 Columbia University Press All rights reserved Library of Congress Cataloging-in-Publication Data Marks, Howard, 1946– Th e most important thing : uncommon sense for thoughtful investors / Howard Marks. p. cm. ISBN 978-0-231-15368-3 (cloth : alk. paper)—ISBN 978-0-231-52709-5 (ebook) 1. Investments. 2. Investment analysis. 3. Risk management. 4. Portfolio management. I. Title. HG4521.M3216 2011 332.6—dc22 2011001973 Columbia University Press books are printed on permanent and durable acid-free paper. Th is book is printed on paper with recycled content. Printed in the United States of America c 10 9 8 7 6 5 4 3 2 1 References to Internet Web sites (URLs) were accurate at the time of writing. Neither the author nor Columbia University Press is responsible for URLs that may have expired or changed since the manuscript was prepared. For Nancy, Jane and Andrew With All My Love Contents Introduction ix THE MOST IMPORTANT THING IS . 1 Second-Level Th inking 1 2 Understanding Market Effi ciency (and Its Limitations) 7 3 Value 16 4 Th e Relationship Between Price and Value 24 5 Understanding Risk 31 6 Recognizing Risk 46 7 Controlling Risk 57 8 Being Attentive to Cycles 67 viii CONTENTS 9 Awareness of the Pendulum 73 10 Combating Negative Infl uences 80 11 Contrarianism 91 12 Finding Bargains 100 13 Patient Opportunism 107 14 Knowing What You Don’t Know 116 15 Having a Sense for Where We Stand 124 16 Appreciating the Role of Luck 133 17 Investing Defensively 141 18 Avoiding Pitfalls 153 19 Adding Value 166 20 Pulling It All Together 173 Introduction For the last twenty years I’ve been writing occasional memos to my clients— fi rst at Trust Company of the West and then at Oaktree Capital Manage- ment, the company I cofounded in 1995. I use the memos to set forth my investment philosophy, explain the workings of fi nance and provide my take on recent events. Th ose memos form the core of this book, and you will fi nd passages from many of them in the pages that follow, for I believe their lessons apply as well today as they did when they were written. For inclusion here I’ve made some minor changes, primarily to make their mes- sage clearer. What, exactly, is “the most important thing”? In July 2003, I wrote a memo with that title that pulled together the elements I felt were essential for in- vestment success. Here’s how it began: “As I meet with clients and prospects, I repeatedly hear myself say, ‘Th e most important thing is X.’ And then ten minutes later it’s, ‘Th e most important thing is Y.’ And then Z, and so on.” All told, the memo ended up discussing eigh teen “most important things.” Since that original memo, I’ve made a few adjustments in the things I consider “the most important,” but the fundamental notion is unchanged: they’re all important. Successful investing requires thoughtful attention to many separate aspects, all at the same time. Omit any one and the result is likely to be less than satisfactory. Th at is why I have built this book around x INTRODUCTION the idea of the most important things— each is a brick in what I hope will be a solid wall, and none is dispensable. I didn’t set out to write a manual for investing. Rather, this book is a statement of my investment philosophy. I consider it my creed, and in the course of my investing career it has served like a religion. Th ese are the things I believe in, the guideposts that keep me on track. Th e messages I deliver are the ones I consider the most lasting. I’m confi dent their rele- vance will extend beyond today. You won’t fi nd a how- to book here. Th ere’s no surefi re recipe for investment success. No step- by- step instructions. No valuation formulas containing mathematical constants or fi xed ratios— in fact, very few num- bers. Just a way to think that might help you make good decisions and, perhaps more important, avoid the pitfalls that ensnare so many. It’s not my goal to simplify the act of investing. In fact, the thing I most want to make clear is just how complex it is. Th ose who try to simplify in- vesting do their audience a great disser vice. I’m going to stick to general thoughts on return, risk and pro cess; any time I discuss specifi c asset classes and tactics, I do so only to illustrate my points. A word about the or ga ni za tion of the book. I mentioned above that successful investing involves thoughtful attention to many areas simulta- neously. If it were somehow possible to do so, I would discuss all of them at once. But unfortunately the limitations of language force me to take one topic at a time.
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