What Investors Can Learn from The Most Important Thing: Uncommon Sense For The Thoughtful Investor


in Memos & Musings · 6 min read

What is the book about?

“The Most Important Thing: Uncommon Sense for the Thoughtful Investor” is a highly regarded book written by Howard Marks, co-founder of Oaktree Capital Management. The book offers a collection of investment wisdom accumulated over his four decades of experience in the investment industry. The author has been widely recognized for his successful investment approach, and in this book, he shares his unique insights and timeless perspectives on investing. Marks highlights the importance of thinking differently from the crowd, and understanding the importance of risk management in the investment process. 

The book is a comprehensive guide that is relevant to investors of all levels and provides valuable insights for anyone looking to build a successful investment portfolio. Overall, “The Most Important Thing” is a must-read for investors seeking to develop a thoughtful and disciplined approach to investing, based on uncommon sense and practical insights.

Here are some takeaways and possible learning points:

Takeaway #1

The importance of second-level thinking: Marks emphasizes the need for investors to think beyond the obvious and consider how others are thinking about a particular investment. He encourages investors to engage in second-level thinking, which involves thinking about how others think and how those opinions are likely to change.

Second-level thinking is a way of thinking that goes beyond surface-level analysis and seeks to understand the potential impacts of other investors’ behavior and their thought processes on an investment opportunity. 

Investors can engage in second-level thinking by evaluating the potential for change. Investors can consider how the prevailing opinion is likely to change and evaluate the potential for a shift in sentiment. They can do this by analyzing changes in economic indicators, company news, and other relevant factors that could influence the market’s perception of an investment. 

Overall, engaging in second-level thinking requires a willingness to challenge the consensus, question assumptions, and think independently about investment opportunities. By doing so, investors can gain a deeper understanding of the investment landscape and develop a more nuanced perspective on potential risks and opportunities.

Takeaway #2

The value of contrarian thinking: Marks advocates for contrarian thinking, where investors go against the crowd and invest in good assets that are currently unloved. He argues that this approach can lead to superior investment returns over time.

Thinking contrarian is a mindset that goes against the prevailing consensus and involves looking for investment opportunities that are currently undervalued or underappreciated by the market. 

One way to think contrarian is to look for investment opportunities in sectors or industries that are currently out of favor. Such companies may have strong fundamentals but are facing short-term challenges that have led to a decline in their stock prices. By investing in such companies, investors can potentially benefit from the eventual recovery of the sector.

A contrarian investor should also focus on long-term value instead of short-term market trends. They should look for investments that have the potential to create long-term value, even if the market is currently overlooking them.

One such example would be META which had its stock plummeting toward the lowest prices in six years after they announced that their earnings were cut by half late last year. The slow down in ad sales, changes to Apple in its operation system, the war in Ukraine and increased competition from TikTok resulted in the perfect storm for the huge selloff. However the fundamentals of the company are still hugely intact (active users were increasing, ad revenue and income grew by more than 30% and some of these problems are also faced by its competitor such as Google which also saw a deepening pullback in ad sales. The operating income was also affected by investments in Reality Labs which is expected to slow down beyond 2023. These are signs that should give us confidence but the majority of the investors often read the headlines and sell in panic. META is one stock that in our opinion has one of the highest potential upside going forth.

A contrarian investor should be willing to go against the crowd and have the conviction to hold onto investments that may not be popular in the short term. They should be willing to withstand short-term volatility and have a long-term investment horizon.

Overall, thinking contrarian requires a willingness to challenge the consensus, think independently, and look for investment opportunities that others may have overlooked or undervalued. By doing so, investors can potentially benefit from undervalued assets and generate superior investment returns over time.


Takeaway #3

The dangers of market timing: Marks cautions against trying to time the market, as it is notoriously difficult to do so successfully. Instead, he advises investors to focus on buying assets that are currently undervalued, regardless of the current market conditions.

Market timing involves attempting to predict future movements in the stock market and adjusting one’s portfolio accordingly. Mark emphasizes the challenge of predicting market behavior due to its inherent unpredictability, leading to missed opportunities and suboptimal returns for those attempting to time the market. This practice often relies on emotional decision-making rather than objective analysis, resulting in impulsive choices that can negatively impact an investor’s portfolio. 

Generally, executing successful market timing proves difficult for most investors. Instead, a more prudent approach involves focusing on constructing a well-diversified portfolio with a long-term investment horizon, allowing investors to potentially benefit from the stock market’s long-term growth. 

The exception lies with investors or traders who have found success with technical analysis, managing to size their trades in a way that consistently offers favorable risk-to-reward setups.

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Takeaway #4

The role of risk management: Marks highlights the importance of risk management in investing, arguing that successful investors are those who are able to minimize their downside risk while maximizing their potential upside. He suggests that investors should focus on understanding the risks associated with each investment and creating a diversified portfolio.

Risk management is crucial for investors, as it helps them to identify, measure, and manage the risks associated with their investments. Here are some reasons why risk management is important in investing:

Minimizing losses: Risk management helps investors to minimize losses by identifying potential risks and implementing strategies to mitigate them. This helps to protect investors’ portfolios during market downturns or unexpected events that could negatively impact their investments.

Preserving capital: By managing risk, investors can preserve their capital and ensure that they have sufficient resources to meet their long-term investment goals.

Maximizing returns: Risk management is not just about minimizing losses. It is also about identifying opportunities that offer a favorable risk-to-reward ratio, and investing in them. By doing so, investors can potentially maximize their returns over the long term.

Reducing emotional bias: Risk management strategies can help investors to reduce the impact of emotional biases, such as fear and greed, which can lead to impulsive and irrational investment decisions.

Ensuring long-term success: Successful investing requires a long-term perspective. Risk management is an important part of this, as it helps investors to build a sustainable investment strategy that can weather short-term market volatility and deliver consistent returns over the long term.

Overall, risk management is a critical component of successful investing. It helps investors to identify potential risks and opportunities, manage their portfolio effectively, and achieve their long-term investment goals. By adopting a disciplined and systematic approach to risk management, investors can potentially benefit from the long-term growth of the stock market while minimizing the impact of short-term market volatility.

Takeaway #5

The need for humility: Marks emphasizes the importance of humility in investing, noting that no investor can predict the future with certainty. He encourages investors to acknowledge their limitations and to remain open to changing their views based on new information or developments in the market.

Acknowledging one’s limitations and remaining open to changing one’s views based on new information is critical for successful investing. Here are some ways that investors can do this:

Investors should continually seek out new information about the markets and the companies they are invested in. By staying up-to-date with market trends and company developments, they can adjust their views as needed.

In the case of Google for example, while we stay invested in the company despite the negativity ongoing for the AI search wars, we will continue to take in new information that can be material to its future earnings and will be open to make any changes if necessary. So while at this current juncture where the odds that Microsoft or any other company is going to eat Google’s lunch is still remote, we remain open to new developments.

Investing is a probability game. There are known unknowns and unknown unknowns. We never say never in the markets. In the end how well we do boils down to prudent risk management such that when we make, we make quite a fair bit and when we lose, we lose a little. It is a game where you don’t have to be right all the time and still succeed as long as you are disciplined.

Overall, by acknowledging their limitations and remaining open to changing their views based on new information or developments in the market, investors can potentially benefit from the long-term growth of the stock market while minimizing the impact of short-term market volatility. By adopting a disciplined and systematic approach to investing, they can achieve their long-term investment goals and manage risk effectively.

In summary, we also have some actionable advice that we believe investors may benefit from:

Position ahead because the market is forward looking

Be aware that adopting a contrarian mindset means going against the prevailing consensus and actively seeking investment opportunities that are presently undervalued by the market but have the potential to unfold positively over time.

During the Circuit Breaker in Singapore, it was evident that the economy would eventually reopen and return to normal. However, executing on such obvious insights can be challenging. Similarly, before China announced a shift in its COVID-zero plans, not every investor was willing to invest in China, considering uncertainties related to regulatory reforms. Successful investors must extend their perspective beyond immediate quarters to capitalize on opportunities when prices are depressed. Waiting for the “all-clear” signal often means missing the window of opportunity.

Investors should look beyond the obvious and consider factors not widely discussed in the market. While it might be tempting to follow the crowd, such as selling Google to buy Microsoft during the ChatGPT hype, the obvious and easy choices are seldom the most profitable. Buying at the right price requires looking beyond market sentiment; you can’t buy something cheap when it’s in high demand, nor can you sell something at a high price when no one wants it.

Recent examples highlight the importance of foresight. Investors who accumulated REITs aggressively before a clearer signal from the FED in the last quarter of 2023 likely experienced healthy gains after the FED announced upcoming cuts in 2024. Conversely, those who bought in after the news may now face paper losses.

This approach also demands the conviction to hold onto investments that may be unpopular in the short to mid-term. If the investment thesis remains valid, investors should withstand short-term volatility and maintain a long-term investment horizon.

Stay humble and don’t aim for one-hit wonders

Without naming specific instances, we frequently observe investors achieving outsized gains that garner attention on social media. Truth be told, for every success story, there are numerous others who have experienced substantial losses.

Investing is not solely about pursuing the highest returns; rather, it’s about attaining sustainable gains in the long term that enable us to reach our financial goals without risking financial ruin.

One can dedicate extensive time studying a company, creating numerous videos and interviews, but unforeseen challenges or events can still arise. Ultimately, prudent risk management remains the name of the game in investing.

Joyful Reviews is a series by The Joyful Investors where we will be sharing our thoughts and insights on books or films that focus on personal development and investing knowledge to help everyone become a more confident and thoughtful investor. We believe that continuous education and self-improvement are key to success in any area of life, and especially in the world of investing.

About Kathy

Co-Founder of The Joyful Investors and Manager of The Moneyball Portfolio. I graduated with a degree in Economics in National University of Singapore (NUS). My previous experience with traders at the Merrill Lynch enable me to realize many counter-intuitive truths about how the financial markets work and to uncover the challenges faced by many new investors. We believe that investing can be astoundingly simple and want to make financial education understandable for everyone.

Important Information

This document is for information only and does not constitute an offer or solicitation nor be construed as a recommendation to buy or sell any of the investments mentioned. Neither The Joyful Investors Pte. Ltd. (“The Joyful Investors”) nor any of its officers or employees accepts any liability whatsoever for any loss arising from any use of this publication or its contents. The views expressed are solely the opinions of the author as of the date of this document and are subject to change based on market and other conditions. 

The information provided regarding any individual securities is not intended to be used to form any basis upon which an investment decision is to be made. The information contained in this document, including any data, projections and underlying assumptions are based upon certain assumptions and analysis of information available as at the date of this document and reflects prevailing conditions, all of which are accordingly subject to change at any time without notice and The Joyful Investors is under no obligation to notify you of any of these changes.

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