Monday, May 2, 2011

Marks, The Most Important Thing

Pre-publication, publishers scramble to collect favorable comments, preferably from people whose names are recognizable to potential readers. Normally these puffs of critical praise are printed on the back panel of the dust jacket. But occasionally the publisher recognizes that it has hit the mother lode and displays the critical quotation on the dust jacket’s front panel. Columbia Business School Publishing did just that with The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks, chairman and cofounder of Oaktree Capital Management. The ultimate praise: “This is that rarity, a useful book”—Warren Buffett. As I start this review, a day before the official publication date, the book is already #197 on the Amazon sales list (and as I’m about to put up the post it’s #160). I’m more accustomed to seeing numbers like 149,328.

Is Buffett’s praise—and I should add Joel Greenblatt, Jeremy Grantham, Seth Klarman, and John Bogle to the list of red-carpet fans—warranted? It all depends on whether you want good old-fashioned investing wisdom or you’re looking for a how-to book or, in Marks’s terms, whether you want to read second-level thinking or first-level thinking. Second-level thinking is “different and better.” (p. 6)

Marks is a value investor who is keenly aware of risk control (not avoidance) and who seeks to exploit market cycles. He prefers judgment to robotic quantification, agnosticism to the self-confident “knowledge” exhibited by forecasters. He makes lists, doesn’t draw charts.

To give a sense of the book, let me quote a few passages.

“There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite.” (p. 91)

[S]kepticism and pessimism aren’t synonymous. Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.” (p. 98)

“[T]he real goal of active investment management is to buy things for less than they’re worth. This is what the efficient market hypothesis says we can’t do.” (p. 114)

“In the world of investing, … nothing is as dependable as cycles. … If we can’t know in advance how and when the turns will occur, how can we cope? On this, I am dogmatic. We may never know where we’re going, but we’d better have a good idea where we are. That is, even if we can’t predict the timing and extent of cyclical fluctuations, it’s essential that we strive to ascertain where we stand in cyclical terms and act accordingly.” (p. 125)

“I learned a lot from my favorite fortune cookie: The cautious seldom err or write great poetry. It cuts both ways, which makes it thought provoking. Caution can help us avoid mistakes, but it can also keep us from great accomplishments. Personally, I like caution in money managers. I believe that in many cases, the avoidance of losses and terrible years is more easily achieved than repeated greatness, and thus risk control is more likely to create a solid foundation for a superior long-term track record. 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.” (p. 151)

The Most Important Thing blends excerpts from client memos—most from the last ten years—with Marks’s current reflections on intelligent active investing. For those who assume that the key to successful investing, the holy grail if you will, is one single most important thing, Marks will disappoint you. The book describes twenty “most important things,” all of which are essential ingredients in achieving (or trying to achieve) above-market risk-adjusted returns.

The book is written in a way that both seasoned investors and novices should appreciate. Reading it probably won’t be “the most important thing” an investor will do, but it might make a top twenty list.

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