The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing)
“The model that Mr. Marks presents for market assessment alone is worth the price of the book.”
In an instructive scene in Max Dugan Returns—the 1983 movie about a long absent man (played by Jason Robards) visiting his daughter (played by Marcia Mason) and grandson (played by Mathew Broderick) before circumstances mandate that he leave the country—one question leads to another question, whose answer contains much wisdom.
“What was your major in college?” the Mathew Broderick character inquires of Max Dugan, his grandfather.
“Is there any money in philosophy?” the grandson wants to know.
“There is, if you have the right one,” his grandfather tells him.
The right investment philosophy can make all the difference, proving guidance on decisions about doing the right thing, as contrasted to doing the thing right, which latter orientation is the province of most investment technique. Howard Marks is the investment world’s philosopher king in The Most Important Thing, an engaging meditation on big issues that are too seldom thoughtfully explored.
What we do in life, business, and investing ultimately is informed by, even anchored in, philosophy. While the Greeks advocated the intersection of deep thinking and leadership in the form of the philosopher kings, in contemporary times action and deep thinking do not always coincide. In a soundbyte culture, few seem to take the time to inquire about, articulate, and/or assess a philosophy regardless of the enterprise they may be pursuing.
In the investing realm, philosophy matters. Many a savvy investment manager has been amazed by people trusting large sums of money to a manager without inquiring as to the manager’s philosophy of investing. This disinclination to consider investing philosophy applies not only to individual investing level but also at the institutional level. As important as is an investor’s philosophy, seldom will you find that topic on the RFQ/RFP forms prepared by investment consultants to assess prospective investment managers. Why is this?
The vast majority of investing books are concerned with technique and tactics, and are fundamentally naive about investing philosophy. Indeed, the esteemed management philosopher Peter Drucker proclaimed that effectiveness (the right thing) was far more important than efficiency (doing the thing right). If relatively few investing treatises address policy and strategy—which research has shown exerts much more influence on investing outcomes than does the analysis of a particular investment—then very few delve into investment philosophy, which arguably can be considered the foundation of policy and strategy.
A book by a widely respected, highly successful authority that reveals The Most Important Thing is hard to resist. In the engaging Just One Thing, John Mauldin collected the single most useful insight from a dozen esteemed investing masters. But the title of The Most Important Thing is a paradox—a subtle rebuke to those who advocate the one, best, only thing you ever need to know to beat the market and make a fortune—the approach of so much of the investment books, newsletters, and guru trainings. In fact, once you open this book, you’ll discover there is not one Most Important Thing but there are really 19.
The first that Mr. Marks addresses is second-level thinking, which in application is deep, complex, and convoluted. Second-level thinking involves delving below the surface, examining critically what many take for granted, questioning what others accept as given. Mr. Marks writes, “The difference in workload between first-level and second-level thinking clearly is massive, and the number of people capable of the latter is tiny compared to the number capable of the former.”
Necessarily, second-level thinking is contrarian, unconventional, and rigorous, recognizing the reality that you cannot do what everybody else does and still expect to outperform them. Superior investing performance involves being more right than the rest. This results from being different and better, which leads to the second most important thing: “understanding market efficiency (and its limitations).” Mr. Marks astutely observes that the propensity of the efficient market quickly to incorporate information in prices does not mean that those prices are right. Author Marks cogently points out flaws in conventional efficient market theory, noting the importance of wide exposure to different markets to be effective, while noting that the vast majority of investing market participants operates with a narrow, limited orientation to capital markets.
Mr. Marks most appropriately notes that the central premise of the efficient market—prices reflecting the collective wisdom of the aggregate of investors—in fact is the composite of numerous individuals’ decisions, based on assessments and calculations that all too often reflect miscalculations and mistakes. Indeed, the author advances the proposition that the key to successful investing is avoiding major mistakes.
While the study of mistakes and how to avoid them would logically be prioritized by investors and entrepreneurs seeking superior performance, very few explicitly pursue such a course of study. As a consequence, those few who do gain a meaningful advantage over the majority.
If one were to apply Mr. Marks’s philosophy about the advantages of broad market exposure to real estate, an effective strategy would consider:
• All geographies—not just one metro or country;
• All property goods and services business models—i.e., owning all property types, developments, and buildings, providing services, using and owning property in business, and place strategy substitutes for property;
• All financial structures including all cash and leveraged, direct and securities, debt and equity, funds and specialized interests, options and structured vehicles;
• Long and short positions.
In practice, all too few investors and the professionals with whom they work think this way.
Among the other Most Important Things explored are risk, value, bargains, psychology, investing defensively, patient opportunism, role of luck, among others. The section on risk is especially salient and should be required reading for every investor and financial service professional. The model that Mr. Marks presents for market assessment alone is worth the price of the book.
The author’s fundamental value credo was certainly influenced by his starting out in bonds, where there is a margin of safety to assure expected performance—regardless of what may happen to the economy, markets, company, or management. He points out that an even better investment than buying at 90 what you think is worth 100 is buying that same investment at 70—for the even lower price protects the downside and enhances the upside.
Reflecting the authority of the author’s four-plus decades of investment experience and the confidence of discerning investors trusting $80 billion to the firm he leads, The Most Important Thing is effusively praised by some of the world’s most admired and respected investors. Among the testimonials by such leading lights as John Bogle, Warren Buffett, Jeremy Grantham, Joel Greenblatt, and Seth Klarman are statements that the book contains essential truths, historical perspectives, deep thinking, and unique insights.
As admirable and impressive as this volume is, the presentation would be enhanced by more explicit treatment of the consequences of changing economic systems, industry structures, and business models. No small number of value investors, failing to appreciate the implications and ramifications of these change forces, has invested at what they thought were great prices, only to discover that fundamental value migration caused great losses. While this idea is implicit in second-level thinking, and Mr. Marks’s admonition to distinguish value from price—a more explicit, focused treatment of this powerful force—is warranted.
Howard Marks writes that most trends become overdone, rewarding those recognizing them early and penalizing those late to join. This consideration is the basis for his number one investment adage: “What the wise man does at the beginning, the fool does in the end.” Conversely, his second investment adage reflects the opposite perspective: “Being too far ahead of your time is indistinguishable from being wrong.” His third favorite adage is: “Never forget the six-foot-tall-man who drowned crossing the stream that was five feet deep on average.” Finally, he observes that successful investing is “based on understanding the range of possible gains and the risks of untoward developments,” which concept is phenomenally daunting to achieve.
Every investor and investment professional would benefit from reading and reflecting on this book, not once but regularly. Doing so can equip the thoughtful investor with the uncommon sense to navigate not just safely but profitably on what the author describes as “a challenging, exciting and thought-provoking journey.” If Benjamin Graham’s and David Dodd’s Securities Analysis was the essential, must have investment book of the end of the 20th century, then Howard Marks’s The Most Important Thing is a serious contender for parallel status in the 21st century.