The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor by Howard Marks
I was hoping to find a book this past month that could help improve my decision-making process when selecting investments. Howard Marks, co-founder of Oaktree Capital Management, delivered with his 2011 book for the “thoughtful investor.” In 20 succinct chapters, Marks covers what he deems to be the 20 most important things to consider as an investor.
While Marks continually mentions value in understanding numbers and metrics for investments, this book does not contain any such numbers. The book emphasizes how psychology is intertwined with money and market decisions. Marks takes pains to convince the reader that investing is in fact complex. The goal of this book is certainly not to provide a how-to model to create your portfolio. Rather, it’s to highlight how many factors a savvy investor needs to consider before making investment decisions. I found a few ideas to be particularly impressionable:
Second Level Thinking:
Also described as ‘contrarian’ thinking, Marks argues that as an investor, you should essentially go against the grain. He provides the following examples:
- “The first level thinker sees unfavorable circumstances and decides to sell. The second level thinker sees that investors have panicked and driven the price to bargain levels and buys.”
- “First-level thinking says, ‘I think the company’s earnings will fall; sell.’ Second-level thinking says, ‘I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.’”
Marks argues that a truly savvy investor constantly practices second-level thinking. As a fairly novice investor, I will try to incorporate this thinking into my decision-making processes before making any investment. It’s important to try to understand why the market is moving as it is. A second-level thinker considers: a range of potential outcomes, which outcome they think will occur, what the consensus thinks, and the probably that they are right. This seems like a lot of hypotheticals and computations, and that is exactly Marks’ point here. To be an investor intent on consistently beating the market, it requires a great amount of understanding both fundamentals and psychology.
Marks spends three full chapters on the topic of risk, and I would be doing his book a disservice to try to distill his explanations into a few sentences. A good start-point on understanding risk is to consider it as the possibility of loss. Marks bemoans the fact that the English language doesn’t quite have the right word to describe the volatility/risk associated with investing. The most interesting point I think Marks made in these chapters is that you cannot measure the riskiness of a trade you undertook based on the outcome. You have to gauge it based on what could have happened. Just because you made a tremendous sum of money over a few years on a particular stock doesn’t mean that it was a wise decision, or that you should continue with that particular investment. Similarly, just because you won the lottery doesn’t mean that it was a wise decision to put $20 down for tickets in the first place.
I really found this book to be insightful, particularly because of my Psychology background. If you go into this book expecting a how-to on creating your portfolio, you’ll be disappointed. But there are excellent tidbits of information to consider before making any investment decision. I would consider this a solid reference for the future before making any large investment decisions.
I would recommend this book for a more seasoned investor, one who already understands market fundamentals and who has an established portfolio. The one drawback from this book was the commentary provided in the version I selected. Several professors and market managers added their own analysis to Marks’ in text boxes throughout the book, which made for a disjointed read at times. If you’re planning on getting this book, go for the version without the added commentary.
Star Rating: 2.5/3 stars
Where I’ll go from here:
I’ve already selected The 2% Rule to Get Debt Free Fast for next month’s review. Debt is something that affects millions of Americans, so I’m hopeful there will be some helpful hints for people with debt to utilize to reduce this burden. I’ll also provide a summary of my own changes to my financial habits and decisions as a direct result of reading the books I’ve selected thus far.
I’d love to hear your thoughts in the comments section! What does your decision-making process look like before making an investment?