Gordon Wintrob

The Most Important Thing

Howard Marks, co-chairman of Oaktree Capital, is a renowned value investor. Over the past 25 years, he's written memos to Oaktree's clients to update them on his views on investing and the markets. Here's what Warren Buffet had to say about Marks' recent book The Most Important Thing Illuminated:

When I see memos from Howard Marks in my mail, they're the first thing I open and read. I always learn something, and that goes double for his book.

Instead of writing a "how-to" manual, Marks presents a nuanced investing philosophy. The ultimate lesson is that investing is a complex mix of human psychology, economics, and luck. I took notes on all 20 chapters and here are some of the ideas that I found most important and thought-provoking.

Second-Level Thinking

First-level thinking oversimplifies a situation. At best, you'll meet expectations; at worst, you'll run off a cliff like a lemming. To outperform, you need to have non-consensus views about value and risk and these views need to be correct.

You must be more right than others...which by definition means your thinking has to be different.


Value investors calculate the intrinsic value of a company based on all available information. The calculation must incorporate value tomorrow (i.e. a company's growth). This enables the investor to buy low and sell high independent of market fluctuations.

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

Understanding Risk

Investors make predictions about an uncertain future. Understanding risk means coming up with a range of possible futures and applying a probability to each one. This process can't be perfectly quantified, even in hindsight.

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


Because markets are made of people, nothing lasts forever and what goes up must come down. Some markets, like credit, lead to inevitable booms and busts. Smart investors know to look for cycles and be wary of claims that a cycle no longer exists.

People are emotional and inconsistent, not steady and clinical.


The best time to sell is when the herd is buying irrationally and the best time to buy is when the herd is selling irrationally. In other words, you need to be skeptical of excessive optimism or pessimism and have an independent view of correct prices.

Not only should the lonely and uncomfortable position be tolerated, it should be celebrated.

Patient Opportunism

Successful investments come from understanding market conditions that determine current prices. Marks preaches "mujo", Japanese for "turning of the wheel of the law", and Buffett gives the example of Ted "Splendid Splinter" Williams who learned to only swing at pitches in his personal sweet spot. These two concepts emphasize that investors must wait carefully until the time is right. The greatest gains come from waiting until there are forced sellers or other irrational situations.

When prices are high, it's inescapable that prospective returns are low (and risks are high).

Having a Sense of Where We Stand

Marks presents three possible reactions to cycles: 1) redouble our efforts to predict future market timing, 2) ignore cycles and adopt a "buy and hold" strategy, or 3) figure out where we stand in the current cycle and let that drive future decision making. He presents some simple heuristics to take the temperature of market prices.

The seven scariest words in the world for the thoughtful investor — too much money chasing too few deals.

Appreciating the Role of Luck

Luck is an important part of investing. Every outcome is one "visible history" that occurred out of many possible "alternative histories" according to Nassim Taleb. Don't mistake getting lucky for skill. Unfortunately, this plays on our fear of looking wrong, but the prudent decision is to analyze the probability distribution of outcomes and only act when the time is right.

Given the highly indeterminate nature of outcomes, we must view strategies and their results—both good and bad—with suspicion until proved out over a large number of trials.

Investing Defensively

Strong tennis players can consistently hit almost any shot and the match goes to well-placed "winners" that the opponent can't return. In contrast, trying to make aggressive, offensive bets can be catastrophic for investors. To outperform, investors should aim to do average in good times and minimize losses in bad times.

Invest scared!

I highly recommend you read the book — the 200 pages fly by. I'm always interested in learning more about investing and markets. What books have shaped your thinking on the most important thing in investing?