แก่นการลงทุนแบบเน้นคุณค่า

by Howard Marks, พรชัย รัตนนนทชัยสุข (Translator)

"พอผมเห็นบันทึกของมาร์คในตู้ไปรษณีย์ มันเป็นสิ่งแรกเลยที่ผมจะเปิดอ่าน ผมได้เรียนรู้อะไรบางอย่างจากบันทึกเหล่านี้เสมอ และยิ่งเป็นหนังสือเล่มนี้ของมาร์คด้วยแล้ว มันยิ่งดีเข้าไปใหญ่"
- Warren Buffett, ประธานกรรมการและประธานเจ้าหน้าที่บริหาร, Berkshire Hathaway

"ถ้าคุณผสานทักษะชั้นเลิศกับความลุ่มหลงการลงทุนแบบเน้นคุณค่ายาวนานหลายทศวรรษ ซึ่งมีการขบคิดถึงแก่นของมันอย่างลึกซึ้งและมีการเขียนวิเคราะห์มาโดยตลอด เข้าด้วยกัน คุณก็อาจจะได้หนังสือที่มีประโยชน์ต่อนักลงทุนแบบเน้นคุณค่าอย่างหนังสือเล่มนี้ออกมา แต่มันก็ไม่ใช่เรื่องง่าย ๆ หรอก"
- Jeremy Grantham, ผู้ร่วมก่อตั้งและประธานเจ้าหน้าที่ฝ่ายกลยุทธ์การลงทุน, Grantham Mayo Van Otterloo

"มีหนังสือการลงทุนน้อยเล่มนักที่จะมีมาตรฐานสูงอย่างหนังสือ "แก่นการลงทุนแบบเน้นคุณค่า" ของโฮเวิร์ด มาร์ค มันให้ข้อคิดฉลาดๆ, เฉียบคม และเต็มไปด้วยมุมมองเชิงประวัติศาสตร์ ถ้าคุณอยากจะหลีกเลี่ยงข้อผิดพลาดทางการลงทุน คุณต้องอ่านหนังสือเล่มนี้!"
- John C. Bogle, ผู้ก่อตั้งและอดีตประธานเจ้าหน้าที่บริหาร, The Vanguard Group

Genres: Finance, Business, Nonfiction, Economics, Money, Personal Finance, Psychology

365 pages, Paperback

First published January 1, 2011

About the author

Librarian Note: There is more than one author in the Goodreads database with this name. If adding books to this author, please use Howard^^Marks.

Howard Stanley Marks is an American investor and writer. He holds a B.S.Ec. degree cum laude from the Wharton School of the University of Pennsylvania with a major in finance and an M.B.A. in accounting and marketing from the Booth School of Business of the University of Chicago, where he received the George Hay Brown Prize. He is a CFA® charterholder and a Chartered Investment Counselor.

In 1995, he co-founded Oaktree Capital Management. From 1985 until 1995, he led the groups at The TCW Group, Inc. that were responsible for investments in distressed debt, high yield bonds, and convertible securities. He was also Chief Investment Officer for Domestic Fixed Income at TCW. Previously, he was with Citicorp Investment Management for 16 years, where from 1978 to 1985 he was Vice President and senior portfolio manager in charge of convertible and high yield securities. Between 1969 and 1978, he was an equity research analyst and, subsequently, Citicorp's Director of Research.

(source: http://www.oaktreecapital.com/people/...)

Reviews

[Marcelo Bahia · Rating 3 out of 5]

Although not a totally useless book, it’s a disappointing read. Disappointing due to my high expectations given Howard Marks' track record and his very interesting memos to Oaktree clients. To be honest, depending on your case, this can be a 2-star or a 5-star book - I’m rating it a “3” to try to be fair on the whole universe of people reading this.

If you're a beginner in the investing camp and still doesn't have much knowledge on the subject, this is a 5-star primer on how a good experienced investor actually thinks. The fact that it’s short and written in simple English is a bonus for starters as well.

But if you’re either a professional or an amateur who has already some investing experience and reading background, you will be, like me, frustrated. There’s nothing in here that you haven’t seen before in the classics of Graham, Buffett and Klarman or in books by Taleb, Montier and Mauboussin. What you actually get is a summary of all of them rewritten in the clear and witty “Howard Marks writing style” - if you’re familiar with his memos, you already know that, like Buffett, he has the incredible ability of expressing complex things in a perfectly understandable manner. This may add value to you, if his intelligent and simple way of saying things help you to reinforce the important concepts in investing.

Still, a relevant negative is that the text is VERY repetitive. Both within and among chapters. I had the sense that some chapters could be easily reduced to 25% of their actual size without compromising the message (but of course the smaller size would compromise the book as a whole commercially speaking!). And clearly the book could be reduced even more if the author did not repeat the most important concepts all over again in more than half a dozen chapters throughout the book.

So my recommendation to you is clear: if you’re a seasoned investor who’s looking for the next useful and money-making read, skip this book without regret. But if you see value in a recap of the “best of the best” or you’re just starting on investing, give it a quick read.

[Zak · Rating 5 out of 5]

The version I read is actually titled 'The Most Important Thing Illuminated' but I don't see it here on Goodreads. It is actually a reissue of the earlier book, this time with annotated comments from Christopher Davis, Joel Greenblatt, Paul Johnson and Seth Klarman. Greenblatt and Klarman are contemporary value investing legends familiar to many people. I can't say that the comments really add much to the original text though. If you pay enough attention to what Marks himself says, you could probably do just as well with the original version.

After two decades in the financial industry and having devoured scores of books on investing / trading, I can say with almost absolute certainty that there is no magic "silver bullet" for investment success (at least not of the type that lasts). Which is why this book resonates with me, because Marks offers no fancy formulae for assured astronomical market profits but instead goes back to the basics and underlines the key principles to adhere to for financial longevity. Yes, I say principles (plural) as there is no ONE most important thing revealed as the title suggests, but in fact, 21 of them (lol).

Moving on from this slight transgression for which I totally forgive him, I would say that he has managed to lay out, in a highly accessible manner, a solid foundation for staying in the game and letting the magic of compounding do its work. The main gist of it revolves around avoiding large losses or being wiped out completely (you can't win if you can't play). This is extremely important due to the asymmetrical relationship between gains vs losses (for eg. it will take a 100% gain to recover from a 50% loss). A huge drawdown in any one year can really wreck years of compounded returns. How to avoid this is largely through being constantly aware of where we currently are in the market cycle, adjusting our risk/return tradeoffs accordingly and having the courage and resources (preserved by avoiding large losses) to go against the crowd at extreme ends of the investor psychology pendulum. This necessarily entails never participating when asset prices diverge too much from intrinsic value (unless you plan to go short), no matter how enticing an opportunity might seem (of course, this is when price > value. On the flip side, a wide divergence of value > price would be the time to jump in and buy).

I highly recommend reading this book first if you are thinking of taking your investments into your own hands for the first time. These are everlasting principles from which even seasoned investors/traders would benefit to be reminded of from time to time.

[Mike · Rating 4 out of 5]

More of 3.5 stars, which was disappointing given how insightful his memos are and his outstanding investment performance over a long time frame. I follow Oaktree on Twitter so I never miss one of his memos again.

A review by "Max" in May 2015 sums it up extremely well and is quoted below.

One outstanding illustration he shows is in the Understanding Risk chapter (fig 5.2). Risk / reward is not merely a positive sloping line, you must include the greater uncertainty that comes from higher risk - including the possibility of losses. Marks shows the positively sloping line with a series of bell-shaped distributions along it, which get larger/wider the further out the risk curve you go. Best visualization of risk that I have seen. "Risk means more things can happen than will happen."

From Max's review:
"But ultimately I think the memos themselves are significantly better. You can see that somewhat in the book, which includes extensive quotes from the memos, and those quotes are the best part of the book. But another reason is that the memos place those thoughts in an important context, the time and investment environment in which they were written. And they tended to do a better job of linking his general concepts to specific examples (basically whatever was going on at the time, that prompted him to write on that topic at that moment). So even though reading all his memos would not be as organized, I think it would ultimately be time better spent. they are all available on Oaktree's website, I believe.

One additional comment on the "Illuminated" version, which includes interspersed comments from Marks as well as other luminaries including Seth Klarman and Joel Greenblatt. These make the book worse! For starters it is probably very hard to improve an existing text with interspersed comments. Second, they are not long enough to be interesting (if one of them wrote a few pages in response to some thought in the book, that would have been much more interesting I believe). Third, they interrupt the flow of the book (that could have been solved by making them footnotes instead of breaking up the text with them). And finally, many of the comments are essentially applause ("well said!" "this is a particularly important point!" "Marks really hits the nail on the head with this paragraph!" etc...). Not every commentator does that equally (Klarman and Greenblatt do less of it) but it really give the book a weird vibe, like it has a piped in applause track. I recommend the non-illuminated version."

[Francisco · Rating 3 out of 5]

If you know most of these concepts and principles, in the context of investing:

-market efficiency;
-value investments (as opposed to growth investments);
-good investments are those whose price is below their intrinsic value;
-risk, to most investors, has more to do with risk of losing money than with price volatility;
-participating in the market when prices are high and rising is the main source of risk;
-risk can't be eliminated, but it should be controlled;
-it's difficult, if not possible, to predict the timing of market cycles, but one should prepare for them;
-contrarianism;

then don't read this book. You won't learn anything.

Otherwise, it might be worth your time. It's only 180-pages long anyway.

My main complaint is that the book is not technical or specific enough. It's a list of generalities corresponding to the value-oriented philosophy of investing.

[ScienceOfSuccess · Rating 5 out of 5]

This book is based on 20 notes Howard Marks left for his team in Oaktree Capital -global asset management firm. All of them started with "the most important thing...." and every chapter is short and informative.
I really liked it for the different point of view on the same mantras like "buy low sell high" etc.

Would read again for sure :)

[Liquidlasagna · Rating 5 out of 5]

“Prices are too high” is far from synonymous with “the next move will be downward.” Things can be overpriced and stay that way for a long time . . . or become far more so.


There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.” That’s one of the most important things you can know about investment risk.


We have to practice defensive investing, since many of the outcomes are likely to go against us. It’s more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.


Here’s the key to understanding risk: it’s largely a matter of opinion.


Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.


There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite. Superior investing, as I hope I’ve convinced you by now, requires second-level thinking—a way of thinking that’s different from that of others, more complex and more insightful.


The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological. Investor.


Selling for more than your asset’s worth. Everyone hopes a buyer will come along who’s willing to overpay for what they have for sale. But certainly the hoped-for arrival of this sucker can’t be counted on. Unlike having an underpriced asset move to its fair value, expecting appreciation on the part of a fairly priced or overpriced asset requires irrationality on the part of buyers that absolutely cannot be considered dependable.


people should like something less when its price rises, but in investing they often like it more.


If everyone likes it, it's probably because it has been doing well. Most people seem to think that outstanding performance to dates presages outstanding future performance. Actually, it's more likely that outstanding future performance to date has borrowed from the future and thus presages subpar performance from her on out.


It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on.


Will Rogers said, “You’ve got to go out on a limb sometimes because that’s where the fruit is.” None of us is in this business to make 4 percent.


Most people strive to adjust their portfolios based on what they think lies ahead. At the same time, however, most people would admit forward visibility just isn't that great. That's why I make the case for responding to the current realities and their implications, as opposed to expecting the future to be made clear.


If your behavior is conventional, you’re likely to get conventional results—either good or bad. Only if your behavior is unconventional is your performance likely to be unconventional, and only if your judgments are superior is your performance likely to be above average.


It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.


The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring.


Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on. . . . Look around the next time there’s a crisis; you’ll probably find a lender.

No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right.


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.


It's worth noting that the assumption that something can't happen has the potential to make it happen, since people who believe it can't happen will engage in risky behaviour, and thus alter the environment.


If you've settled on the value approach to investing and come up with an intrinsic value for a security or asset, the next important thing is to hold it firmly. That's because in the world of investing, being correct about something isn't at all synonymous with being proved correct right away.

An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse. This one statement shows how hard it is to get it all right.


In bubbles, infatuation with market momentum takes over from any notion of value and fair price, and greed (plus the pain of standing by as others make seemingly easy money) neutralises any prudence that might otherwise hold sway.


Risk arises as investor behaviour alters the market. Investors bid up assets, accelerating into the present appreciation that otherwise would have occurred in the future, and thus lowering prospective returns. The ultimate irony lies in the fact that the reward for taking incremental risk shrinks as more people move to take it.


This paradox exists because most investors think quality, as opposed to price, is the determinant of whether something's risky. But high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them...Elevated popular opinion, then, isn't just the source of low return potential, but also of high risk.


In good years, defensive investors have to be content with the knowledge that their gains, although perhaps less than maximal, were achieved with risk protection in place, even though it turned out not to be needed.


What is it that makes something the superior investment we look for? As I mentioned in chapter 4, it’s largely a matter of price. Our goal isn’t to find good assets, but good buys. Thus, it’s not what you buy; it’s what you pay for it. A high-quality asset can constitute a good or bad buy, and a low-quality asset can constitute a good or bad buy.


The purpose of this chapter is to explain what it means for skillful investors to add value. To accomplish that, I’m going to introduce two terms from investment theory. One is beta, a measure of a portfolio’s relative sensitivity to market movements. The other is alpha, which I define as personal investment skill, or the ability to generate performance that is unrelated to movement of the market. As I mentioned earlier, it’s easy to achieve the market return. A passive index fund will produce just that result by holding every security in a given market index in proportion to its equity capitalization. Thus, it mirrors the characteristics—e.g., upside potential, downside risk, beta or volatility, growth, richness or cheapness, quality or lack of same—of the selected index and delivers its return. It epitomizes investing without value added. Let’s say, then, that all equity investors start not with a blank sheet of paper but rather with the possibility of simply emulating an index. They can go out and passively buy a market-weighted amount of each stock in the index, in which case their performance will be the same as that of the index. Or they can try for outperformance through active rather than passive investing.


Active investors have a number of options available to them. First, they can decide to make their portfolio more aggressive or more defensive than the index, either on a permanent basis or in an attempt at market timing. If investors choose aggressiveness, for example, they can increase their portfolios’ market sensitivity by overweighting those stocks in the index that typically fluctuate more than the rest, or by utilizing leverage. Doing these things will increase the “systematic” riskiness of a portfolio, its beta. (However, theory says that while this may increase a portfolio’s return, the return differential will be fully explained by the increase in systematic risk borne. Thus doing these things won’t improve the portfolio’s risk-adjusted return.) Second, investors can decide to deviate from the index in order to exploit their stock-picking ability—buying more of some stocks in the index, underweighting or excluding others, and adding some stocks that aren’t part of the index. In doing so they will alter the exposure of their portfolios to specific events that occur at individual companies, and thus to price movements that affect only certain stocks, not the whole index. As the composition of their portfolios diverges from the index for “nonsystematic” (we might say “idiosyncratic”) reasons, their return will deviate as well. In the long run, however, unless the investors have superior insight, these deviations will cancel out, and their risk-adjusted performance will converge with that of the index.


Although I dismiss the identity between risk and volatility, I insist on considering a portfolio’s return in the light of its overall riskiness, as discussed earlier. A manager who earned 18 percent with a risky portfolio isn’t necessarily superior to one who earned 15 percent with a lower-risk portfolio. Risk-adjusted return holds the key, even though—since risk other than volatility can’t be quantified—I feel it is best assessed judgmentally, not calculated scientifically.


It’s not just your return that matters, but also what risk you took to get it.


It’s important to keep these considerations in mind when assessing an investor’s skill and when comparing the record of a defensive investor and an aggressive investor. You might call this process style adjusting. In a bad year, defensive investors lose less than aggressive investors. Did they add value? Not necessarily. In a good year, aggressive investors make more than defensive investors. Did they do a better job? Few people would say yes without further investigation. A single year says almost nothing about skill, especially when the results are in line with what would be expected on the basis of the investor’s style. It means relatively little that a risk taker achieves a high return in a rising market, or that a conservative investor is able to minimize losses in a decline. The real question is how they do in the long run and in climates for which their style is ill suited. A two-by-two matrix tells the story. Aggressive Investor Defensive Investor Without Skill Gains a lot when the market goes up, and loses a lot when the market goes down Doesn’t lose much when the market goes down, but doesn’t gain much when the market goes up With Skill Gains a lot when the market goes up, but doesn’t lose to the same degree when the market goes down Doesn’t lose much when the market goes down, but captures a fair bit of the gain when the market goes up


The key to this matrix is the symmetry or asymmetry of the performance. Investors who lack skill simply earn the return of the market and the dictates of their style. Without skill, aggressive investors move a lot in both directions, and defensive investors move little in either direction. These investors contribute nothing beyond their choice of style. Each does well when his or her style is in favor but poorly when it isn’t. On the other hand, the performance of investors who add value is asymmetrical. The percentage of the market’s gain they capture is higher than the percentage of loss they suffer. Aggressive investors with skill do well in bull markets but don’t give it all back in corresponding bear markets, while defensive investors with skill lose relatively little in bear markets but participate reasonably in bull markets. Everything in investing is a two-edged sword and operates symmetrically, with the exception of superior skill. Only skill can be counted on to add more in propitious environments than it costs in hostile ones. This is the investment asymmetry we seek. Superior skill is the prerequisite for it. Here’s how I describe Oaktree’s performance aspirations: In good years in the market, it’s good enough to be average. Everyone makes money in the good years, and I have yet to hear anyone explain convincingly why it’s important to beat the market when the market does well. No, in the good years average is good enough. There is a time, however, when we consider it essential to beat the market, and that’s in the bad years. Our clients don’t expect to bear the full brunt of market losses when they occur, and neither do we. Thus, it’s our goal to do as well as the market when it does well and better than the market when it does poorly. At first blush that may sound like a modest goal, but it’s really quite ambitious. In order to stay up with the market when it does well, a portfolio has to incorporate good measures of beta and correlation with the market. But if we’re aided by beta and correlation on the way up, shouldn’t they be expected to hurt us on the way down? If we’re consistently able to decline less when the market declines and also participate fully when the market rises, this can be attributable to only one thing: alpha, or skill. That’s an example of value-added investing, and if demonstrated over a period of decades, it has to come from investment skill. Asymmetry—better performance on the upside than on the downside relative to what your style alone would produce—should be every investor’s goal.


The key during a crisis is to be (a) insulated from the forces that require selling and (b) positioned to be a buyer instead.


Neither defensive investors who limit their losses in a decline nor aggressive investors with substantial gains in a rising market have proved they possess skill. For us to conclude that investors truly add value, we have to see how they perform in environments to which their style isn’t particularly well suited. Can the aggressive investor keep from giving back gains when the market turns down? Will the defensive investor participate substantially when the market rises? This kind of asymmetry is the expression of real skill. Does an investor have more winners than losers? Are the gains on the winners bigger than the losses on the losers? Are the good years more beneficial than the bad years are painful? And are the long-term results better than the investor’s style alone would suggest? These things are the mark of the superior investor. Without them, returns may be the result of little more than market movement and beta.


good builder is able to avoid construction flaws, while a poor builder incorporates construction flaws. When there are no earthquakes, you can’t tell the difference.


Put simply, if both a U.S. Treasury note and small company stock appeared likely to return 7 percent per year, everyone would rush to buy the former (driving up its price and reducing its prospective return) and dump the latter (driving down its price and thus increasing its return). This process of adjusting relative prices, which economists call equilibration, is supposed to render prospective returns proportional to risk.


The received wisdom is that risk increases in the recessions and falls in booms. In contrast, it may be more helpful to think of risk as increasing during upswings, as financial imbalances build up, and materializing in recessions.


Risk arises when markets go so high that prices imply losses rather than the potential rewards they should. Dealing with this risk starts with recognizing it.


Worry and its relatives, distrust, skepticism and risk aversion, are essential ingredients in a safe financial system. Worry keeps risky loans from being made, companies from taking on more debt than they can service, portfolios from becoming overly concentrated, and unproven schemes from turning into popular manias.


nvestment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism.


a great deal of investment success can result from just being in the right place at the right time.


Fear of looking wrong: Not only should the lonely and uncomfortable position be tolerated, it should be celebrated.


The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst.


risky assets can make for good investments if they’re cheap enough.


I think it’s essential to remember that just about everything is cyclical. There’s little I’m certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky. Few things go to zero. And there’s little that’s as dangerous for investor health as insistence on extrapolating today’s events into the future.


Rule number one: most things will prove to be cyclical. • Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.


There aren’t always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive. Patient opportunism – waiting for bargains – is often your best strategy.


You can’t do the same things others do and expect to outperform.


That’s why I make the case for responding to the current realities and their implications, as opposed to expecting the future to be made clear.


One of the great sayings about poker is that “in every game there’s a fish. If you’ve played for 45 minutes and haven’t figured out who the fish is, then it’s you.” The same is certainly true of inefficient market investing.


forecast key events, but it’s unlikely to be the same people consistently. The sum of this discussion suggests that, on balance, forecasts are of very little value.


In particular, you’ll find I spend more time discussing risk and how to limit it than how to achieve investment returns.


The easy way to see this is that in boom times, the highest returns often go to those who take the most risk. That doesn’t say anything about their being the best investors.


Too much capital availability makes money flow to the wrong places.


Most people view risk taking primarily as a way to make money. Bearing higher risk generally produces higher returns...But it can’t always work that way, or else risk investments wouldn't be risky. And when risk bearing doesn't work, it really doesn't work, and people are reminded what risk's all about.

[John · Rating 4 out of 5]

I find Howard Marks great to read because everything he says is the correct way to go about investing, but it is not easy to follow his advice - hence why investing is such a challenging field to be successful in over many years. While at first, I found this book a bit difficult to go through as every other page is a long quote from one of his memos, after a bit, I got used to the format of the book. I also found the form, mainly 21 areas that Howard has found to be “the most important thing” at some point in time, a proper flow for what he was looking to achieve. The field of investing has many different aspects that one needs to master, and Howard has done a great job bucketing all of these areas into digestible components.

My favorite concepts taken away from the book are 1) second-level thinking, 2) the relationship between price and value, 3) the idea of risk to Howard, and finally, investing defensively/avoiding pitfalls. This book is a good read for an experienced investor who wishes to deepen his understanding of the investment process. Here are some of my favorite quotes and sections.

1. A very central concept to investing is thinking differently from the crowd or as Mark’s calls it “second-level thinking” - here is a quote to summarize his thoughts on that concept "For your performance to diverge from the norm, your expectations—and thus your portfolio—have to diverge from the norm, and you have to be more right than the consensus. Different and better: that’s a pretty good description of second-level thinking.” (Page 7)

2. Howard speaks at length in several chapters about value, but one of the age-old debates is how does one define value investing vs. growth investing. I thought this quote summed up the debate better than I have ever seen, "The difference between the two principal schools of investing can be boiled down to this: Value investors buy stocks (even those whose intrinsic value may show little growth in the future) out of conviction that the current value is high relative to the current price. Growth investors buy stocks (even those whose current value is low relative to their current price) because they believe the value will grow fast enough in the future to produce substantial appreciation.” (Page 22)

3. I really enjoyed the chapters on risk and find this to be an area that is vastly under appreciated. Howard devoted three chapters on this concept and I found this quote to be the most important, "The possibility of permanent loss is the risk I worry about, Oaktree worries about and every practical investor I know worries about.” (Page 45)

4. Another quote on the concept of risk I thought was interesting this "Controlling the risk in your portfolio is a very important and worthwhile pursuit. The fruits, however, come only in the form of losses that don’t happen. Such what-if calculations are difficult in placid times.” (Page 75). In particular, the frustrating that most times you are protecting yourself from risks that NEVER happen - but when those situations finally do arise, you are exceptionally happy you have taken this into account!

5. Again, another way to think about the concept of risk and how important it is to long term investing. "The road to long-term investment success runs through risk control more than through aggressiveness. Over a full career, most investors’ results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners. Skillful risk control is the mark of the superior investor.” (Page 80)

6. The chapter on Contrarianism reminded me, in addition to second-level thinking, how important it is to be different in your thinking and your actions. Here are some good quotes relating to this area. To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit. (Page 111). If everyone likes it, it’s probably because it has been doing well. Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out. (Page 116)

7. In the finding bargains chapter, one of the best quotes I’ve ever seen summing up the investment process. "The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst. The raw materials for the process consist of (a) a list of potential investments, (b) estimates of their intrinsic value, (c) a sense for how their prices compare with their intrinsic value, and (d) an understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled.” (Page 122)

8. This is one concept that really stuck with me - investing defensively. There are many ways to make money in the market, but one avenue (advocated by Marks) is taking a defensive posture. By doing so, you have the greatest chances to stay in the game for a long period of time. "Of the two ways to perform as an investor—racking up exceptional gains and avoiding losses—I believe the latter is the more dependable. Achieving gains usually has something to do with being right about events that are on the come, whereas losses can be minimized by ascertaining that tangible value is present, the herd’s expectations are moderate and prices are low. My experience tells me the latter can be done with greater consistency.” (Page 179)

9. Finally, in the chapter on avoiding pitfalls, I found the following point an excellent reminder of the errors in investing. "Finally, it’s important to bear in mind that in addition to times when the errors are of commission (e.g., buying) and times when they are of omission (failing to buy), there are times when there’s no glaring error. When investor psychology is at equilibrium and fear and greed are balanced, asset prices are likely to be fair relative to value. In that case there may be no compelling action, and it’s important to know that, too. When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.” (Page 199)

[Max Stone · Rating 4 out of 5]

I'm giving it 4 stars because I think that is probably objectively what it deserves, but really I was disappointed in this book, since I love Howard Marks' investment letters and had high expectations for a 5 star read.

This book is based on his investment memos. That's a good thing, since that is where he has collected his (very significant) investment wisdom over the years. And there are some good aspects of that, mostly that he can try to organize the many thoughtful things he has written into a single book representing what he thinks is most important, in a logical order, etc.

But ultimately I think the memos themselves are significantly better. You can see that somewhat in the book, which includes extensive quotes from the memos, and those quotes are the best part of the book. But another reason is that the memos place those thoughts in an important context, the time and investment environment in which they were written. And they tended to do a better job of linking his general concepts to specific examples (basically whatever was going on at the time, that prompted him to write on that topic at that moment). So even though reading all his memos would not be as organized, I think it would ultimately be time better spent. they are all available on Oaktree's website, I believe.

One additional comment on the "Illuminated" version, which includes interspersed comments from Marks as well as other luminaries including Seth Klarman and Joel Greenblatt. These make the book worse! For starters it is probably very hard to improve an existing text with interspersed comments. Second, they are not long enough to be interesting (if one of them wrote a few pages in response to some thought in the book, that would have been much more interesting I believe). Third, they interrupt the flow of the book (that could have been solved by making them footnotes instead of breaking up the text with them). And finally, many of the comments are essentially applause ("well said!" "this is a particularly important point!" "Marks really hits the nail on the head with this paragraph!" etc...). Not every commentator does that equally (Klarman and Greenblatt do less of it) but it really give the book a weird vibe, like it has a piped in applause track. I recommend the non-illuminated version.

All that said, I think Howard Marks is smart/wise/thoughtful/perceptive/learned and this book is worth reading. It just isn't as great as his 5-star memos.

[Eugene · Rating 5 out of 5]

Lovely book full of wisdom about investments and the decision making. not much about financial calculations but more the psychology , economical cycles, estimates, behavior of the market, risk management, how best investors think, about the difference between loser's game and winner's game, difference between offense and defense. Made highlights on almost every page.

[Massgreen · Rating 4 out of 5]

This is not a how-to book that provides step-by-step investment guides but rather Howard's investment philosophy that he adheres to in his decades of investing. Overall, there are a whole lot of discussions on risks and by that it should convince why investors should invest defensively by requiring enough margin of safety because the future developments may unfold in unexpected and unfavorable ways.

Warning:
There are a few concepts being repeatedly told within and among chapters. That being said, this is a very repetitive book in text, for example sometimes two adjacent paragraphs can tell almost exactly the same thing without adding much new content.

Important concepts are:
1. UNDERSTANDING MARKET EFFICIENCY (AND ITS LIMITATIONS)
The key turning point in my investment management career came when I concluded that because the notion of market efficiency has relevance, I should limit my efforts to relatively inefficient markets where hard work and skill would pay off best.

2. CONDEMNATION OF MOMENTUM INVESTING
The way I see it, day traders considered themselves successful if they bought a stock at $10 and sold at $11, bought it back the next week at $24 and sold at $25, and bought it a week later at $39 and sold at $40. If you can’t see the flaw in this— that the trader made $3 in a stock that appreciated by $30— you probably shouldn’t read the rest of this book.

3. VALUE APPROACH IN INVESTING
Of all the possible routes to investment profit, buying cheap is clearly the most reliable. Even that, however, isn’t sure to work. You can be wrong about the current value. Or events can come along that reduce value. Or deterioration in attitudes or markets can make something sell even further below its value. Or the convergence of price and intrinsic value can take more time than you have; 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.

4. UNDERSTANDING RISK
Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.

5. RECOGNIZING RISK
Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion.

• When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.
• And, of course, as demonstrated by the experience of Nifty Fifty investors, when everyone believes something embodies no risk, they usually bid it up to the point where it’s enormously risky. No risk is feared, and thus no reward for risk bearing— no “risk premium”— is demanded or provided. That can make the thing that’s most esteemed the riskiest.
This paradox exists because most investors think quality, as opposed to price, is the determinant of whether something’s risky. But high quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them. . . . Elevated popular opinion, then, isn’t just the source of low return potential, but also of high risk.

6. CONTROLLING RISK
Bottom line: risk control is invisible in good times but still essential, since good times can so easily turn into bad times.

Most observers think the advantage of inefficient markets lies in the fact that a manager can take the same risk as a benchmark, for example, and earn a superior rate of return. This manager has done a good job, but I think this is only half the story— and for me the uninteresting half. An inefficient market can also allow a skilled investor to achieve the same return as the benchmark while taking less risk, and I think this is a great accomplishment (figure 7.2). Here the manager’s value added comes not through higher return at a given risk, but through reduced risk at a given return. This, too, is a good job— maybe even a better one.

Of course, when markets are stable or rising, we don’t get to find out how much risk a portfolio entailed. That’s what’s behind Warren Buffett’s observation that other than when the tide goes out, we can’t tell which swimmers are clothed and which are naked.

The road to long-term investment success runs through risk control more than through aggressiveness. Over a full career, most investors’ results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners. Skillful risk control is the mark of the superior investor.
~~~~~~~~~~
This is so true, when people go burst, they really go burst.
Think of it as Texas Poker that we play online, who doesn't win big money at some point in time? But when you lose and start betting aggressively again and again, you will go burst soon, i.e. your result will be determined by how many losers you have, and how bad they are, than by the greatness of your winners.
~~~~~~~~~~~

7. BEING ATTENTIVE TO CYCLES
Every once in a while, an up- or down-leg goes on for a long time and/or to a great extreme and people start to say “this time it’s different.” They cite the changes in geopolitics, institutions, technology or behavior that have rendered the “old rules” obsolete. They make investment decisions that extrapolate the recent trend. And then it turns out that the old rules do still apply, and the cycle resumes. In the end, trees don’t grow to the sky, and few things go to zero. Rather, most phenomena turn out to be cyclical.
“You Can’t Predict. You Can Prepare,” November 20, 2001

There are a few things of which we can be sure, and this is one: Extreme market behavior will reverse. Those who believe that the pendulum will move in one direction forever— or reside at an extreme forever— eventually will lose huge sums. Those who understand the pendulum’s behavior can benefit enormously.

8. BE A CONTRARIAN IN FINDING BARGAINS
Fairly priced assets are never our objective, since it’s reasonable to conclude they’ll deliver just fair returns for the risk involved. And, of course, overpriced assets don’t do us any good.

Our goal is to find underpriced assets. Where should we look for them?
A good place to start is among things that are:
• little known and not fully understood;
• fundamentally questionable on the surface;
• controversial, unseemly or scary;
• deemed inappropriate for “respectable” portfolios;
• unappreciated, unpopular and unloved;
• trailing a record of poor returns; and
• recently the subject of disinvestment, not accumulation.
To boil it all down to just one sentence, I’d say the necessary condition for the existence of bargains is that perception has to be considerably worse than reality. That means the best opportunities are usually found among things most others won’t do. After all, if everyone feels good about something and is glad to join in, it won’t be bargain-priced.

Investment bargains needn’t have anything to do with high quality. In fact, things tend to be cheaper if low quality has scared people away.

9. PATIENT OPPORTUNISM
You simply cannot create investment opportunities when they’re not there. The dumbest thing you can do is to insist on perpetuating high returns— and give back your profits in the process. If it’s not there, hoping won’t make it so.
When prices are high, it’s inescapable that prospective returns are low (and risks are high).

10. THE MACRO FUTURE IS, BY AND LARGE, UNKNOWABLE, BUT YOU MUST HAVE A SENSE FOR WHERE WE STAND IN A CYCLE
Investors who feel they know what the future holds will act assertively: making directional bets, concentrating positions, levering holdings and counting on future growth— in other words, doing things that in the absence of foreknowledge would increase risk. On the other hand, those who feel they don’t know what the future holds will act quite differently: diversifying, hedging, levering less (or not at all), emphasizing value today over growth tomorrow, staying high in the capital structure, and generally girding for a variety of possible outcomes.
The first group of investors did much better in the years leading up to the crash. But the second group was better prepared when the crash unfolded, and they had more capital available (and more-intact psyches) with which to profit from purchases made at its nadir.
“Touchstones,” November 10, 2009

11. INVEST DEFENSIVELY BY COMMANDING A LARGE MARGIN OF SAFETY AND PREPARE FOR UNTOWARD DEVELOPMENT
The critical element in defensive investing is what Warren Buffett calls “margin of safety” or “margin for error.”
It’s not hard to make investments that will be successful if the future unfolds as expected. There’s little mystery in how to profit under the assumption that the economy will go a certain way and particular industries and companies will do better than others. Tightly targeted investments can be highly successful if the future turns out as you hope.
But you might want to give some thought to how you’ll fare if the future doesn’t oblige. In short, what is it that makes outcomes tolerable even when the future doesn’t live up to your expectations? The answer is margin for error.

I don’t think many investment managers’ careers end because they fail to hit home runs. Rather, they end up out of the game because they strike out too often— not because they don’t have enough winners, but because they have too many losers. And yet, lots of managers keep swinging for the fences.
• They bet too much when they think they have a winning idea or a correct view of the future, concentrating their portfolios rather than diversifying.
• They incur excessive transaction costs by changing their holdings too often or attempting to time the market.
• And they position their portfolios for favorable scenarios and hoped-for outcomes, rather than ensuring that they’ll be able to survive the inevitable miscalculation or stroke of bad luck.
At Oaktree, on the other hand, we believe firmly that “if we avoid the losers, the winners will take care of themselves.” That’s been our motto since the beginning, and it always will be. We go for batting average, not home runs. We know others will get the headlines for their big victories and spectacular seasons. But we expect to be around at the finish because of consistent good performance that produces satisfied clients.
“What’s Your Game Plan?” September 5, 2003
~~~~~~~~~~~~~~~
Charles Ellis even likens investing to amateur's tennis, where amateurs win by not hitting losers rather than hitting winners like professionals in his article "The Loser's Game".
~~~~~~~~~~~~~~~

12. ADDING VALUE TO PORTFOLIO BY OUTPERFORMING IN BULLISH MARKET AND/OR LOSING LESS IN BEARISH MARKET. AND, OAKTREE'S ASPIRATION ERR ON THE SIDE OF DEFENSE
Here’s how I describe Oaktree’s performance aspirations:
In good years in the market, it’s good enough to be average. Everyone makes money in the good years, and I have yet to hear anyone explain convincingly why it’s important to beat the market when the market does well. No, in the good years average is good enough.
There is a time, however, when we consider it essential to beat the market, and that’s in the bad years. Our clients don’t expect to bear the full brunt of market losses when they occur, and neither do we.
Thus, it’s our goal to do as well as the market when it does well and better than the market when it does poorly. At first blush that may sound like a modest goal, but it’s really quite ambitious.
In order to stay up with the market when it does well, a portfolio has to incorporate good measures of beta and correlation with the market. But if we’re aided by beta and correlation on the way up, shouldn’t they be expected to hurt us on the way down?
If we’re consistently able to decline less when the market declines and also participate fully when the market rises, this can be attributable to only one thing: alpha, or skill.
That’s an example of value-added investing, and if demonstrated over a period of decades, it has to come from investment skill. Asymmetry— better performance on the upside than on the downside relative to what your style alone would produce— should be every investor’s goal.

[Russ · Rating 2 out of 5]

I only expect to find one thing in books like these that I can positively apply to my life or business. As a Registered Investment Advisor, my expectations for this book were high. The author has a long history of success in investing other people's money. The problem with this book is that it betrays all of his insecurities with endless references to Warren Buffet, Wharton and risk aversion. He does not understand the practical use of technical analysis, derides it but ends up using it in to select securities (or avoid overpriced ones). It is one of his several hypocrisies that he doesn't realize.

However, if you are new to investing and only want to match the market's return over a long period of time, you may get more out of this book than I did.

I did find one profitable thing to take away from the book and I plan to modify and use it in my practice. This saved the book from getting only one star.

[Steve · Rating 3 out of 5]

A disappointing read given Howard Marks' reputation and thoughtful investing style.  The book is a clumsy cut-and-paste job performed on the Oaktree shareholder letters (freely available on their website).  After a promising first few chapters, the book fails to launch into any real meat.  Clearly we need to use "second level thinking" to take into account the expectations of the rest of the market - but how does one put that into practice?  Some nitty-gritty real world advice would not have gone amiss.

If you're looking for some investing wisdom from a successful practitioner read the Intelligent Investor by Ben Graham or Contrarian Investment Strategies by David Dremen.  Both will provide a lot more value for your time and money (something you'll clearly appreciate as an investor!)

[Pedro Aguiar · Rating 3 out of 5]

Bom livro para quem se está a iniciar na área.
Dá uma boa perspectiva do que deverá ser o controle emocional de um investidor e das armadilhas as quais deve estar atento. Ou seja, acaba por ser um bom conselheiro psicológico.
Peca claramente por ser muito filosófico (teórico) pouco prático, ficamos sem saber como aplicar o que é falado a nível prático. Além disto é bastante repetitivo falando dos mesmos assuntos várias vezes ao longo do livro, muitas delas até da mesma forma.

[Evan · Rating 5 out of 5]

This was really a fantastic book on investing, but I don't thinking listening to it as an audiobook was the correct approach. ;)

Luckily, I did listen to the book right after the finance class for my MBA program, so I understood much more of it. I think you don't need a finance background to understand his 18 "most important things," but a finance course would make it much more understandable. ;)

My first takeaway is that I agree with him on his take on the Efficient Market Hypothesis - that the market immediately prices in news, but the market does not always price the new information correctly, which means there is a chance for investors to outperform the market other than by chance.

My second takeaway is that I should not be investing in individual stocks. He pretty much explained that for most investors they should invest passively or with active managers who know what they are doing. He doesn't say this directly, but his explanation of risk makes it pretty clear. Most investments that offer higher yields, aren't offering higher risk-adjusted yields. This means that seeking higher yield results in higher risk. Or, if an investor is buying growth, or "momentum" stocks, they are buying stocks at a higher price than the value of the stock in the hope that someone else will pay a higher price. Just like gambling!

Anyway, I plan to read the book version next, but I currently left with the conclusion that I should not be buying individual stocks.

[Robert · Rating 5 out of 5]

So full of investment wisdom – I wish I had read this book in March. While I sold most of my portfolio in February, missing the majority of the drop, I'll be the first to admit that I was slow on the rebound. The Most Important Thing is a short read and is split into 20 chapters, each detailing a different lesson. Marks manages to share his considerable wisdom with humility and without platitude. The only possible criticism is that there is a huge amount of focus on the 2004-2009 time period, but these are precisely the parts that I wish I had read sooner.

One of the biggest takeaways is the importance of "second-level thinking". The first level is often trivially easy (i.e coronavirus is bad for the markets) and consequently does not offer sustainable opportunity unless you are good at market timing and very quick to react (very few people are – myself included). You need to think of second-order effects, have a keen sense of value relative to price, and know where you are in the cycle. The Most Important Thing is not a practical guide to investment, but it is a wonderful book on how to think about markets.


"You must do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong."

"Experience is what you got when you didn’t get what you wanted."

"An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse."

[Asta · Rating 5 out of 5]

I fully agree with Warren Buffett's quote on the cover: "This is that rarity, a useful book."

Howard Marks is the co-founder and co-chairman of Oaktree Capital Management (more than $200 billion AUM).

The book focuses on the understanding and management of risk, which is quite often an afterthought for (retail) investors even if they know the fundamental risk-return relationship.

This is a book to read and re-read.
I highlighted quotes from nearly every chapter.
Here are some of them:

"It's not just your return that matters, but also what risk you took to get it."

"Risk - the possibility of loss - is not observable. What is observable is loss, and loss generally happens only when risk collides with negative events."

"In fact, I've recently boiled down the main risks in investing to two: the risk of losing money and the risk of missing opportunity. It's possible to largely eliminate either one, but not both."

"A good decision is one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known."

"Rather than doing the right thing, the defensive investor's main emphasis is on not doing the wrong thing."

[Lee Klein · Rating 4 out of 5]

A good listen, well-read by someone who will forever make me think that the considerably New York-y Howard Marks sounds like a British thespian. I've heard most of these ideas (and many of his memorable phrases, eg "trees don't grow to the sky") in podcasts with Mr. Marks, who summarizes everything well enough to receive a rare Warren Buffett blurb. Value, second-level/contrarian thinking, margin of safety, the pitfalls of psychology, erring on the side of risk management over chasing reward, asset allocation like soccer players on a field -- a clear demonstration of complexity that makes no attempt to simplify. Great quotations generously interspersed throughout. Sometimes seems too general or too aimed at institutional investors managing others' money, broad-based and thematic, and worth the time of anyone trying to learn more than the nearly nothing they knew about all this until recently -- and worth revisiting, I'm sure.

[Justas Šaltinis · Rating 5 out of 5]

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

"Every once in a while, someone makes a risky bet on an improbable or uncertain outcomes and ends up looking like a genius."

"We never know where we're going, we ought to know where we are. We can infer where markets stand in their cycle from behavior of those around us."

"The seven scariest words in the world for the thoughtful investor - too much money chasing too few deals - providing an unusually apt description of market conditions."

"Large amounts of money are not made by buying what everybody likes. They are made by buying what everybody underestimates"

"Prices are too high” is far from synonymous with "the next move will be downward." Things can be overpriced and stay that way for a long time . . . or become far more so."

[Janet · Rating 3 out of 5]

First - I'm proud of me for finishing this book. It was a little more technical than I'd expected. I had to take notes to help me think through the details Howard Marks included.

Did I benefit from the read? Yes.

I found it repetitive, though. It is evident the author had difficulty working the categories for the papers he included here. But, repetition also provides permanence so it probably added to my personal benefit.

[Joseph · Rating 5 out of 5]

This book is a very good read especially when you have some practical experience investing.

It describes time tested concepts that we can adopt to become successful investors.

Price and valuation is something that has been deeply hammered into me from this book although it takes a lot of courage to buy low when sentiment is bad.

[Doug O'laughlin · Rating 5 out of 5]

An amazing book that really helped define me as an investor. Beyond prolific.

[Pat Voigt · Rating 5 out of 5]

Must read for beginning investors (really ALL investors) who wish to have long-term success investing.

[Brian Ooi · Rating 4 out of 5]

A lucid argument for value investing, and a reminder to always ask where your views are different from the market.

[Arun Pandiyan · Rating 5 out of 5]

Warren Buffet often gets nostalgic about the days when his life changed after he read the Intelligent Investor by Benjamin Graham and continues to urge others to read specific chapters eight and twenty. "Chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years," he says. "I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak." Similarly, I might choose to reread The Most Important Thing by Howard Marks at least once a year from hereon, as the twenty chapters from this book are nothing but timeless wisdom and lessons on the two foundational pillars for successful value investing: investor psychology and pendulum effect of the market. I consider this book an essential reading for anyone who wants to be a sensible and successful investor.

[José Luis · Rating 4 out of 5]

Sem dúvida alguma, o caminho correto para aprender e entender de alguma área de conhecimento, é começar pelos fundamentos. Fica tudo mais claro, a percepção do que é ou não relevante muda muito. Este livro do Howard Marks tem dois aspectos interessantes: para um principiante, é uma leitura muito útili, muitas dicas de experiência, sem receita de bolo; para o experiente e já calejado da estrada, uma bela organização das ideias, com muitas referências que vale a pena ler. Eu estava (e ainda estou) interessado em saber como o autor percebe os ciclos de mercado, as mudanças que levam os investidores ao paraíso ou ao inferno. Neste livro, tem apenas um capítulo dedicado a este assunto. Parece que o que interessa mesmo, está em outro livro dele, DOMINANDO O CICLO DE MERCADO: APRENDA A RECONHECER PADRÕES PARA INVESTIR COM SEGURANÇA, que está na minha fila de leituras. Com uma certeza: não é simples, tem que estudar, ir aos fundamentos, entender mais alguma matemática. Gostei do livro, valeu muito a leitura.

[Duke Dahl · Rating 4 out of 5]

Investment success doesn’t come from “buying good things,” but rather from “buying things well.” Thus, it’s not what you buy; it’s what you pay for it.

Check out the full takeaways @ https://bulletpointreading.com/2021/0...

[Alexander Ruchti · Rating 4 out of 5]

A collection of financial wisdom from one of the investors with the best long-term track record. Hardly anything in the book will completely change how you think about markets, but everything is worth reading nonetheless. 4 stars (really liked it).

Summary of chapters

Second level thinking
Since other investors may be smart, well-informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently.
First level thinking: “It’s a good company; let’s buy the stock.” Second level thinking: “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.”
All investors can’t beat the market since, collectively, they are the market.

Understanding Market Efficiency
If prices in efficient markets already reflect the consensus, then sharing the consensus view will make you likely to earn just an average return. To beat the market, you must hold an idiosyncratic, or non-consensus, view.
The Efficient Market Hypothesis says the market knows everything so you can’t beat it. Second-level thinkers depend on inefficiency. According to Marks, markets are neither entirely efficient nor inefficient. Its nuanced. He believes strongly that mainstream securities markets can be so efficient that it is largely a waste of time to work at finding winners there. Inefficiency is a necessary condition for superior investing. Attempting to outperform in a perfectly efficient market is like flipping a fair coin.

Value
Part of the decline of technical analysis can be attributed to the random walk hypothesis. Momentum investing might enable you to participate in a bull market that continues upward, but I see a lot of drawbacks. One is based on economist Herb Stein’s wry observation that “if something cannot go on forever, it will stop.”
The quest in value investing is for cheapness. Value investors typically look at financial metrics such as earnings, cash flow, dividends, hard assets, and enterprise value and emphasize buying cheap on these bases.
Growth investing lies somewhere between the dull plodding of value investing and the adrenaline charge of momentum investing. Its goal is to identify companies with bright futures.
In general, the upside potential for being right about growth is more dramatic, and the upside potential for being right about value is more consistent.
It is hard to consistently do the right thing as an investor. But it’s impossible to consistently do the right thing at the right time. 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. “Being too ahead of your time is indistinguishable from being wrong.”
Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out.

The relationship between price and value
No asset is so good that it can’t become a bad investment if bought at too high a price.
At Oaktree we say, “Well bought is half sold.” By this we mean we don’t spend a lot of time thinking about what price we’re going to be able to sell a holding for, or when, or to whom, or through what mechanism. If you’ve bought it cheap, eventually those questions will answer themselves.
There is nothing better than buying from someone who has to sell regardless of price during a crash. Since buying from a forced seller is the best thing in our world, being a forced seller is the worst.
Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge.
All bubbles start with some nugget of truth:
• Tulips are beautiful and rare (in seventeenth-century Holland)
• The internet is going to change the world
• Real estate can keep up with inflation, and you can always live in a house
“Prices are too high” is far from synonymous with “the next move will be downward.” Things can be overpriced and stay that way for a long time…or become far more so. Eventually, though, valuation has to matter. John Maynard Keynes pointed out, “the market can remain irrational longer than you can remain solvent.”

Understanding risk
When you consider investment results, the return means only so much by itself; the risk taken has to be assessed as well.
Riskier investments absolutely cannot be counted on to deliver higher returns. Why not? It’s simple: if riskier investments reliably produced higher returns, they wouldn’t be riskier! The correct formulation is that in order to attract capital, riskier investments have to offer the prospect of higher returns.
Riskier investments should entail: higher expected returns, the possibility of lower returns, in some cases the possibility of losses.
Risk is subjective, hidden, and unquantifiable.
Here’s the key to understanding risk: It’s largely a matter of opinion. It’s hard to be definitive about risk, even after the fact.

Recognizing risk
Recognizing risk often starts with understanding when investors are paying it too little head, being too optimistic and paying too much for a given asset as a result. High risk, in other words, comes primarily with high prices.
Risk arises when markets go so high that prices imply losses rather than the potential rewards they should.
In bull markets – usually when things have been going well for a while – people tend to say, “Rik is my friend. The more risk I take, the greater my return will be. When people aren’t afraid of risk, they’ll accept risk without being compensated for doing so … and risk compensation will disappear. There are few things as risky as the widespread belief that there’s no risk, because only when investors are suitably risk-averse that prospective returns will incorporate appropriate risk premiums.
Like opportunities to make money, the degree of risk present in a market derives from the behavior of the participants, not from securities, strategies, and institutions.
Only when investors are sufficiently risk-averse will markets offer adequate risk premiums.
People vastly overestimate their ability to recognize risk and underestimate what it takes to avoid it; thus, they accept risk unknowingly and in so doing contribute to its creation.
“I wouldn’t buy that at any price – everyone knows its too risky.” That is something I’ve heard a lot in my life, and it has given rise to the best investment opportunities I’ve participated in. A broad consensus that something’s too hot to handle is almost always wrong. Usually, it’s the opposite that’s true.
When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all. And, of course, as demonstrated by the experience of Nifty Fifty investors, when everyone believes something embodies no risk, they usually bid it up to the point where it’s enormously risky.

Controlling risk
Consider the investors who are recognized for doing a great job, people such as Warren Buffet, Peter Lynch, Bill Miller, and Julian Robertson. In general their records are remarkable because of their decades of consistency and absence of disasters, not just their high returns.
Risk is the potential for loss if things go wrong. As long as things go well, loss does not arise. Risk gives rise to loss only when negative events occur in the environment.
A good builder is able to avoid construction flaws, while a poor builder incorporates construction flaws. When there are no earthquakes, you can’t tell the difference.

Being attentive to cycles
Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.
The worst loans are made at the best of times.
There have been numerous recent examples where loose credit contributed to booms that where followed by famous collapses; real estate in 1989-92, emerging markets in 1994-98, LTCM in 1998, the movie exhibition industry in 1999-2000, telco companies in 2000-01. In each case, lenders and investors provided too much cheap money and the result was overexpansion and dramatic losses.
Investors will overvalue companies when they’re doing well and undervalue them when things get difficult.
“This time is different.” These four words should strike fear – and perhaps suggest an opportunity for profit – for anyone who understands the past and knows it repeats.

Awareness of the pendulum
The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum “on average”, it actually spends very little of its time there.
When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell. And it will ever be so.
“What the wise man does in the beginning, the fool does in the end.” In the late stages of the great bull markets, people become willing to pay prices for stocks that assume the good times will go in ad infinitum.

Combating negative influences
Inefficiencies – mispricing, misperceptions, mistakes that other people make – provide potential opportunities for superior performance. Exploiting them is, in fact, the only road to consistent outperformance. To distinguish yourself from the others, you need to on the right side of those mistakes.
The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological. Greed drives investors to throw in their lot with the crowd in pursuit of profit, and eventually they pay the price.
The belief that some fundamental limiter is no longer valid – and thus historic notions of fair value no longer matter – is invariably at the core of every bubble and consequent crash.
There can be few fields of human endeavor in which history counts for so little as in the world of finance. Past experience, to the extent that it is part of memory at all, is dismissed as the primitive refuge of those who do not have the insight to appreciate the incredible wonders of the present.
Another psychological contributor to investor error is the tendency to conform to the view of the herd rather than resist – even when the herd’s view is clearly cockeyed. Time and time again, the combination of pressure to conform and the desire to get rich causes people to drop their independence and skepticism, overcome their innate risk aversion and believe things that don’t make sense.
Another contributor is envy. In the world of investing, most people find it terribly hard to sit by and watch while others make more money than they do.
The guy next to you in the office tells you about an IPO he’s buying. You ask what the company does. He says he doesn’t know, but his broker told him it’s going to double on the day of the issue. So you say that’s ridiculous. A week later he tells you it didn’t double, it tripled. And he still doesn’t know what the company does. After a few more of these, it gets hard to resist. You know it doesn’t make sense, but you want protection against continuing to feel like an idiot. So, in a prime example of capitulation, you put in for a few hundred shares of the next IPO.
Aviation is a huge and valuable innovation. That’s not the same thing as saying it’s a good business.
To avoid losing money in bubbles, the key lies in refusing to join in when greed and human error cause positives to be wildly overrated and negatives to be ignored. Doing these things isn’t easy, and thus few people are able to abstain.

Contrarianism
There is only one way to describe most investors: Trend followers. Superior investors are the exact opposite. “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.”
“Overpriced” is incredibly different from “going down tomorrow”. Markets can stay or become even more over-or underpriced for years.
You must do things not just because they’re the opposite of what the crowd is doing, but because you know why the crowd is wrong.
If everyone likes it, it’s likely the price has risen to reflect a level of adulation from which relatively little further appreciation is likely. Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates.
Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.

Finding bargains
A high-quality asset can constitute a good or bad buy, and a low-quality asset can constitute a good or bad buy.
Since the efficient-market process of setting fair prices requires the involvement of people who are analytical and objective, bargains usually are based on irrationality or incomplete understanding. Thus, bargains are often created when investors either fail to consider an asset fairly, or fail to look beneath the surface to understand it thoroughly, or fail to overcome some non-value-based tradition, bias or stricture.
Characteristics of underpriced assets:
• Little known and not fully understood
• Fundamentally questionable on the surface
• Controversial, unseemly or scary
• Deemed inappropriate for “respectable” portfolios
• Unappreciated, unpopular and unloved
• Trailing a record of poor returns
• Recently the subject of disinvestment, not accumulation
Marks sees a necessary condition for the existence of bargains in that perception has to be considerably worse than reality. While bargains aren’t the rule, the forces that are supposed to eliminate them often fail to do so.

Patient opportunism
Many investors confuse action for adding value when, in fact, all of the studies suggest that most investors overtrade their portfolio.
Staunch reliance on value, little or no use of leverage, long-term capital and a strong stomach. Patient opportunism, buttressed by a contrarian attitude and a strong balance sheet, can yield amazing profits during meltdowns.
Knowing what you don’t know
It’s hard to know what the macro future holds and few people possess superior knowledge of these matters that can regularly be turned into an investing advantage. Of all the economists and strategists you follow, are any correct most of the time? It’s possible to be right about the macro-future once in a while, but not on a regular basis.
On balance, forecasts are of very little value.

Having a sense for where we stand
I don’t mean to suggest that if we can figure out where we stand in a cycle we’ll know precisely what’s coming next.

Appreciating the role of luck
Much in investing is ruled by luck. Every once in a while, someone makes a risky bet on an improbably or uncertain outcome and ends up looking like a genius. But we should recognize that it happened because of luck and boldness, not skill.
The keys to profit are aggressiveness, timing and skill, and someone who has enough aggressiveness at the right time doesn’t need much skill.
Randomness alone can produce just about any outcome in the short run. In portfolios that are allowed to reflect them fully, market movements can easily swamp the skillfulness of the manager (or lack thereof).
The best-performing mutual fund for the decade of the 2000s made 18% percent per year. The average (dollar-weighted) investor in the fund lost 8 percent per year during this same period. Investment inflows followed “up” (out-)performance and outflows followed underperformance (financial crisis losses in this case).
It is more important to ensure survival under negative outcomes than it is to guarantee maximum returns under favorable ones.

Investing defensively
The prudent lender’s reward comes only in bad times, in the form of reduced credit losses. The lender who insists on margin for error won’t enjoy the highest highs but will also avoid the lowest lows.
Of the two ways to perform as an investor – racking up exceptional gains and avoiding losses – I believe the latter is the more dependable.
One of the most striking things I’ve noted over the last thirty-five years is how brief most outstanding investment careers are.
I believe that in many cases the avoidance of losses and terrible years is more easily achieved than repeated greatness, and this risk control is more likely to create a solid foundation for a superior long-term track record.

Avoiding pitfalls
Most investors extrapolate the past into the future – and, in particular, the recent past. First, many important financial phenomena follow long cycles, meaning those who experience an extreme event often retire or die off before the next recurrence. Second, the financial memory tends to be extremely short. Third, any chance of remembering tends to be erased by the promise of easy money that’s inevitably a part of the latest investment fad.
Relying to excess on the fact that something “should happen” can kill you when it doesn’t.
The success of your investment actions shouldn’t be highly dependent on normal outcomes prevailing, instead, you must allow for outliers.
When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.
Adding value
Here is how I describe Oaktree’s performance aspirations: In good years in the market, it’s good enough to be average. There is a time, however, when we consider it essential to beat the market, and that’s in the bad years.

Reasonable expectations
“The perfect is the enemy of the good.” This is especially applicable to investing, where insisting on participating only when conditions are perfect – for example, buying only at the bottom – can cause you to miss out on a lot.
We give up on trying to attain perfection or ascertain when the bottom has been reached. Rather, if we think something is cheap, we buy. If it gets cheaper, we buy more.

Pulling it all together
Only a strong sense of value will give you the discipline needed to take profits on a highly appreciated asset that everyone thinks will rise nonstop, or the guts to hold and average down in a crisis even as prices go lower every day.
The psychology of the investing herd moves in a regular, pendulum-like pattern – from optimism to pessimism, from eagerness to buy to urgency to sell.

[Xinyu Tan · Rating 4 out of 5]

A must-read for newbie investors. Not a technical book but more on investing mindset and philosophy.

Wish I had read this book earlier this year.

[Gauri · Rating 4 out of 5]

A good summary of some of Howard Marks most remarkable , prescient memos at Oaktree

Highlights -
* One cannot develop an effective philosophy without having been exposed to life’s lessons. You must be aware of what’s taking place in the world and of what results those events lead to. Only in this way can you put the lessons to work when similar circumstances materialize again. Failing to do this—more than anything else—is what dooms most investors to being victimized repeatedly by cycles of boom and bust
* In basketball they say, “You can’t coach height,” meaning all the coaching in the world won’t make a player taller. It’s almost as hard to teach insight. As with any other art form, some people just understand investing better than others
* Second order Thinking - the prevalence of first-level thinkers increases the returns available to second-level thinkers, they see the world Different and better
* Markets are efficient in the sense of “speedy, quick to incorporate information,” not “right’’. Asset prices immediately reflect the consensus view of the information’s significance, not that the consensus view is necessarily correct
* Myth of higher yielding risky instruments - Once in a while we experience periods when everything goes well and riskier investments deliver the higher returns they seem to promise. Those halcyon periods lull people into believing that to get higher returns, all they have to do is make riskier investments. But they ignore something that is easily forgotten in good times: this can’t be true, because if riskier investments could be counted on to produce higher returns, they wouldn’t be riskier. The correct formulation is that in order to attract capital, riskier investments have to offer the prospect of higher returns or higher promised returns, or higher expected returns. But there’s absolutely nothing to say those higher prospective returns have to materialize. When priced fairly, riskier investments should entail: higher expected returns, the possibility of lower returns, and in some cases the possibility of losses
* Many of the best bargains at any point in time are found among the things other investors can’t or won’t do. Let others believe markets can never be beat. Abstention on the part of those who won’t venture in creates opportunities for those who will. No asset class or investment has the birthright of a high return. It’s only attractive if it’s priced right. At Oaktree , “Well bought is half sold.”
* For investing the discipline that is most 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. At that point, all favorable facts and opinions are already factored into its price, and no new buyers are left to emerge. 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
* Risk is simply the possibility of loss . knowingly or unknowingly—academicians settled on volatility as the proxy for risk as a matter of convenience. They needed a number for their calculations that was objective and could be ascertained historically and extrapolated into the future. Volatility fits the bill, and most of the other types of risk do not. ‘’ I need more upside potential because I’m afraid I could lose money” makes an awful lot more sense than “I need more upside potential because I’m afraid the price may fluctuate.” No, “risk” is— first and foremost— the likelihood of losing money
* if all the investors involved met in a room and showed their cards, they’d never agree on a single number representing an investment’s riskiness. And even if they could, that number wouldn’t likely be capable of being compared against another number, set by another group of investors, for another investment. This is one of the reasons why risk and the risk/return decision aren’t “machinable,” or capable of being turned over to a computer. the second edition of Security Analysis, the bible of value investors: “the relation between different kinds of investments and the risk of loss is entirely too indefinite, and too variable with changing conditions, to permit of sound mathematical formulation.”
* There’s a big difference between probability and outcome. Probable things fail to happen— and improbable things happen— all the time
* investing has become so reliant on higher math, we have to be on the lookout for occasions when people wrongly apply simplifying assumptions to a complex world. Quantification often lends excessive authority to statements that should be taken with a grain of salt.
* The received wisdom is that risk increases in the recessions and falls in booms. In contrast, it may be more helpful to think of risk as increasing during upswings, as financial imbalances build up, and materializing in recessions.
* Pendulum of risk - At the extreme of the pendulum’s upswing, the belief that risk is low and that the investment in question is sure to produce profits intoxicates the herd and causes its members to forget caution, worry and fear of loss, and instead to obsess about the risk of missing opportunity. Somehow, in that alchemy unique to investor psychology, “I wouldn’t touch it at any price” had morphed into “looks like a solid investment to me’’. Thus, the market is not a static arena in which investors operate. It is responsive, shaped by investors’ own behavior. Their increasing confidence creates more that they should worry about, just as their rising fear and risk aversion combine to widen risk premiums at the same time as they reduce risk. I call this the “perversity of risk.”
* Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one. The basic reason for the cyclicality in our world is the involvement of humans. Mechanical things can go in a straight line. Time moves ahead continuously. So can a machine when it’s adequately powered. But processes in fields like history and economics involve people, and when people are involved, the results are variable and cyclical . Any belief that cyclicality has been ended exemplifies a way of thinking based on the dangerous premise that “this time it’s different.”
* 3 stages of a bull market. The first, when a few forward-looking people begin to believe things will get better The second, when most investors realize improvement is actually taking place The third, when everyone concludes things will get better forever . What the wise man does in the beginning, the fool does in the end.
* 3 stages of bear market - The first, when just a few thoughtful investors recognize that, despite the prevailing bullishness, things won’t always be rosy . The second, when most investors recognize things are deteriorating. The third, when everyone’s convinced things can only get worse- there we’re likely to encounter the investment opportunities of a lifetime. Major bottoms occur when everyone forgets that the tide also comes in
* it’s usually more correct to attribute a bust to the excesses of the preceding boom than to the specific event that sets off the correction.
* In short, the process of investing requires a strong dose of disbelief. . . . Inadequate skepticism contributes to investment losses. Time and time again, the postmortems of financial debacles include two classic phrases: “It was too good to be true” and “What were they thinking?”Extreme brevity of the financial memory,” to use John Kenneth Galbraith’s wonderful phrase keeps market participants from recognizing the recurring nature of these patterns, and thus their inevitability
* The biggest investing errors come not from factors that are informational or analytical, but psychological
* People who might be perfectly happy with their lot in isolation become miserable when they see others do better. In the world of investing, most people find it terribly hard to sit by and watch while others make more money than they do. Investors hold to their convictions as long as they can, but when the economic and psychological pressures become irresistible, they surrender and jump on the bandwagon
* investing demands uninstitutional behavior from institutions, creating a paradox that few can unravel. Establishing and maintaining an unconventional investment profile requires accep tance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom
* A contrarian must catch the falling knife - by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there’ll be no great bargains left. When buying something has become comfortable again, its price will no longer be so low that it’s a great bargain. Thus, a hugely profitable investment that doesn’t begin with discomfort is usually an oxymoron
* Patient opportunism—waiting for bargains—is often your best strategy
* Sometimes markets are neither over nor underpriced, most things may seem roughly fairly priced. In that case, there may not be great bargains to buy or compelling sales to make. It’s essential for investment success that we recognize the condition of the market and decide on our actions accordingly. The other possibilities are (a) acting without recognizing the market’s status, (b) acting with indifference to its status and (c) believing we can somehow change its status. These are most unwise
* We may never know where we’re going, but we’d better have a good idea where we are. It is essential that we strive to ascertain where we stand in cyclical terms and act accordingly to (a) stay alert for occasions when a market has reached an extreme, (b) adjust our behavior in response and, (c) most important, refuse to fall into line with the herd behavior
* Are investors optimistic or pessimistic? Do the media talking heads say the markets should be piled into or avoided? Are novel investment schemes readily accepted or dismissed out of hand? Are securities offerings and fund openings being treated as opportunities to get rich or possible pitfalls? Has the credit cycle rendered capital readily available or impossible to obtain? Are price/earnings ratios high or low in the context of history, and are yield spreads tight or generous? All of these things are important, and yet none of them entails forecasting. We can make excellent investment decisions on the basis of present observations, with no need to make guesses about the future
* There are old investors, and there are bold investors, but there are no old bold investors
* Because 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
* There’s always a rational— perhaps even a sophisticated—explanation of why some eighth wonder of the world will work in the investor’s favor. However, the explainer usually forgets to mention that (a) the new phenomenon would represent a departure from history, (b) it requires things to go right, (c) many other things could happen instead and (d) many of those might be disastrous.
* If asset prices are fair relative to value. In that case there may be no compelling action, and it’s important to know that, too. When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever

[James Ford · Rating 4 out of 5]

Great book, very insightful. Howard Marks also gives very good talks which are worth watching. One of the best books about investing I have read.

Some highlighted passages I will be referring back to:

"Heaven for me would be seven little words: 'I never thought of it that way'."

"being right may be a necessary condition for investment success, but it won't be sufficient. You must be more right than others...which by definition means your thinking has to be different."

"I agree that because investors work hard to evaluate every new piece of information, asset prices immediately reflect the consensus view of the information's significance. I do not, however, believe the consensus is necessarily correct. In January 2000, Yahoo sold at $237. In April 2001 it was $11. Anyone who argues that the market was right both times has his or her head in the clouds; it has to have been wrong on at least one of those occasions."

"Most professionals are assigned to particular market niches, as in "I work in equities" or "I'm a bond manager". And the percentage of investors who ever sell short is truly tiny. Who, then, makes and implements the decisions that would drive out relative mispricings between asset classes?"

"We can buy fifty correlated securities and mistakenly thin we've diversified."

"It seems to me the choice isn't between value and growth, but between value today and value tomorrow. Growth investing represents a bet on company performance that may or may not materialize in the future, while value investing is based primarily on analysis of a company's current value."

"In general, the upside potential for being right about growth is more dramatic, and the upside potential for being right about value is more consistent. In my book, consistency trumps drama."

"[quoting others] Being too far ahead of your time is indistinguishable from being wrong."

"In the world of investing, many people tend to fall further in love with the thing they've bought as its price rises, since they feel validated, and they like it less as the price falls, when they begin to doubt their decision to buy. If you liked it at 60, you should like it more at 50, and much more at 40 and 30."

"An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse."

"There are two essential ingredients for profit in a declining market: 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 a third: you have to be right."

"When people say flatly 'we only buy A' or 'A is a superior asset class' that sounds a lot like 'we'd buy A at any price, and we'd buy it before B,C, or D at any price.'. That just has to be a mistake. No asset class or investment has the birthright of a high return. It's only attractive if it's priced right."

"What goes into the price? What should a prospective buyer be looking at to be sure the price is right? Underlying fundamental value of course, but most of the time a security's price will be affected at least as much - and its short term fluctuations determined primarily - by two other factors: psychology and technicals."

"Since buyer from a forced seller is the best thing in our world, being a forced seller is the worst. That means it's essential to arrange your affairs so you'll be able to hold on - and not sell - at the worst of times. This requires both long-term capital and a strong psychological resources."

"A top in a stock group or market occurs when the last holdout who will become a buyer does so. The timing is often unrelated to fundamental developments"

"'Prices are too high' is far from synonymous with 'the next move will be downward'"

"To me, 'I need more upside potential because I'm afraid I could lose money' makes an awful lot more sense than 'I need more upside potential because I'm afraid the price may fluctuate'" (re: volatility as the definition of risk)

"Much of the time, the greatest risk in [value stocks] lies in the possibility of underperforming in heated bull markets. That's something the risk-conscious value investor is willing to live with."

"It's hard to be definitive about risk, even after the fact. You can see that one investor lost less than another in bad times and conclude that that investor took less risk. Or you can note that one investment declined more than another in a given environment and thus say it was riskier. Are these statements necessarily accurate?"

"Return alone - especially over short periods - says very little about the quality of investment decisions. Return has to be evaluated relative to the amount of risk taken to achieve it."

"When everybody believes something is risky, their unwillingness to buy usually reduces its price to the point where its not risky at all. When everyone believes something embodies no risk, they usually bid it up to the point where it's enormously risky. This paradox exists because investors think quality, as opposed to price, is the determinant of whether something's risky. Elevated popular opinion, then, isn't just the source of low return potential, but also of high risk."

"Loss is what happens when risk meets adversity. Risk is the potential for loss if things go wrong. As long as things go well, loss does not arise. Risk gives rise to loss only when negative events occur in the environment."

"Trees don't grow to the sky and few things go to zero."

"Once in a lifetime market extremes seem to occur once every decade or so - not often enough for an investor to build a career around capitalizing on them. But attempting to do so should be an important component of any investor's approach."

"Skepticism and pessimism aren't synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive."

"The process of intelligently building a portfolio consists of buying the best investments, making room for them by selling lesser ones, and staying clear of the worst. The raw materials for the process consist of a) a list of potential investments, b) estimates of their intrinsic value, c) a sense for how their prices compare with their intrinsic value, and d) an understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled."

"superior results in investing come from knowing more than other, and it hasn't been demonstrated to my satisfaction that a lot of people know more than the consensus about the time and extent of future cycles."

"The keys to profit are aggressiveness, timing and skill"

"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 losers, the winners will take care of themselves."

"Investing scared, requiring good value and a substantial margin for error, and being conscious of what you don't know and can't control are hallmarks of the best investors I know."

"There is a big difference between probability and outcome. Things that aren't supposed to happen do happen."

"failure of imagination consists in the first instance of not anticipating the possible extremeness of future events, an in the second instance of failing to understand the knock-on consequences of extreme events."

"Bidding more for something is the same as saying you'll take less for our money. Thus, the bids for investments can be viewed as a statements of how little return investors demand and how much risk they're willing to accept."

"A portfolio may appear to be diversified as to asset class, industry and geography, but in tough times, nonfundamental factors such as margin calls, frozen markets and a general rise in risk aversion can become dominant, affecting everything similarly."

"What could investors have done [during market bubbles]? 1) take note of the carefree, incautious behavior of others, 2) prepare psychologically for a downturn, 3) sell more risk-prone assets, 4) reduce leverage, 5) raise cash, 6) tilt portfolios toward increased defensiveness"

"In periods that are relatively loss free, people tend to think of risk as volatility and become convinced they can live with it. If that were true, they would experience markdowns, invest more at the lows and go on to enjoy the recovery, coming out ahead in the long run."

"Loss of confidence and resolve can cause investors to sell at the bottom, converting downward fluctuations into permanent losses and preventing them from participating fully in the subsequent recovery. This is the greatest error in investing - the most unfortunate aspect of pro-cyclical behaviour - because of its permanence and because it tends to affect large portions of portfolios."

"While its true that you can;t spend relative outperformance, human nature causes defensive investors and their less traumatized clients to derive comfort in down markets when they lose less than others. This has two very important effects. First, it enables them to maintain their equanimity and resist the psychological pressures that often make people sell at lows. Second, being in a better frame of mind and better financial condition, they are more able to profit from the carnage by buying at lows. Thus, they generally do better in recoveries."

"It is important to bear in mind that in addition to times when the errors are of commission and time when they are of omission, there are times when there's no glaring error. When investor psychology is at equilibrium and fear and greed are balanced, asset prices are likely to be fair relative to value. In that case there may be no compelling action, and its important to know that, too. When there's nothing particularly clever to do, the potential pitfall lies in insisting on being clever."

"Aggressive investors can increase their portfolios' market sensitivity by overweighting high Beta assets or by utilizing leverage. Doing these things will increase the "systematic" riskiness of a portfolio (it's Beta). However, theory says that while this may increase a portfolio's return, the return differential will be fully explained by the increase in systematic risk borne. Thus doing these things won't improve the portfolio's risk adjusted return."

"A single year says almost nothing about skill, especially when the results are in line with what would be expected on the basis of the investor's style. It means relatively little that a risk taker achieves a high return in a rising market, or that a conservative investor is able to minimize losses in a decline. The real question is how they do in the long run and n climates for which their style is ill suited."

"The performance of investors who add value is asymmetrical. The percentage of the market's gain they capture is higher than the percentage of loss they suffer. Aggressive investors with skill do well in bull markets but don't give it all back in corresponding bear markets, while defensive investors with skill lose relatively little in bear markets but participate reasonably in bull markets."

"Everything in investing is a two-edged sword and operates symmetrically, with the exception of superior skill."

"Asymmetry - better performance on the upside than on the downside relative to what your style alone would produce - should be every investor's goal."

"To achieve superior results, your insight into value has to be superior. Thus you must learn things others don't, see things differently or do a better job of analyzing them - ideally, all three."

"The superior investor never forgets that the goal is to find good buys, not good assets."