“Investing consists of exactly one thing: dealing with the future”~Howard Marks

Howard Marks

In The Most Important Thing Illuminated, author Howard Marks explains and expounds upon a collection of his client memos that provide the basis for his entire investment philosophy. Additionally, four prominent investors, Christopher C. Davis, Joel Greenblatt, Paul Johnson, and Seth A. Klarman, write thoughtful annotations throughout Marks’ book that help reinforce these powerful messages.

Although the title might lead a reader to believe that there is one magic strategy, investment, or concept that will completely revolutionize his investment strategy, Marks actually includes 20 different “Most Important Things,” which each demand consideration.

  1. Second-Level Thinking
  2. Understanding Market Efficiency (And It’s Limitations)
  3. Value
  4. The Relationship Between Price and Value
  5. Understanding Risk
  6. Recognizing Risk
  7. Controlling Risk
  8. Being Attentive to Cycles
  9. Awareness of the Pendulum
  10. Combating Negative Influences
  11. Contrarianism
  12. Finding Bargains
  13. Patient Opportunism
  14. Knowing What You Don’t Know
  15. Having a Sense for Where We Stand
  16. Appreciating the Role of Luck
  17. Investing Defensively
  18. Avoiding Pitfalls
  19. Adding Value
  20. Reasonable Expectations

The crux of Marks’ philosophy is that in order to outdo the competition and passive index funds, a successful investor must possess superior skill, insight or intuition and stick to a particular investment strategy despite market fluctuations.

Marks Discusses The Counter-Intuitive, Unglamorous Life Of Second-Level Thinkers

In other words, second-level thinkers, as he calls them, remain successful because they think in way that is inherently different from the typical investors, those so-called first-level thinkers. This “herd” of investors all think about the same assets in the same ways and fall victim to the same fundamental human errors over and over and over.

With this in mind, Marks continually stresses contrarianism, buying the cheap assets near the bottom of a market crash (when everyone is trying to selling everything possible at any price) and selling overpriced assets near the peak of a bubble (when people will buy everything possible at any price). He admits the inherent difficulty of this method because it’s (a) unpopular by definition; (b) counter-intuitive; (c) potentially unglamorous; and (d) only a good strategy for the investor with superior skill and patience.

Indeed, Marks emphasizes throughout the book how any fool can simply swim against the stream or make one single amazing investment that garners headlines. The irony is that, in the investment world, one success or failure in no way affects the outcome of the next investment. Consequently, the investor who received a windfall one day could go bankrupt on the next since he is almost certainly choosing only high-risk high-reward investments.

Marks Discusses Growth Vs. Value Investing

On the other hand, Marks considers himself a value investor: someone “who [aims] to come up with a security’s current intrinsic value and buy when the price is lower.” He contrasts this strategy with that of a growth investor, who “[tries] to find securities who value will increase rapidly in the future.” In this way, Marks’ investment strategy deals with all of the information he can gather in the present, rather than projections or intuitions about the future. He considers this more reliable and consistent over the long-term.

Ultimately, Marks believes that it’s not enough for an investor to make the right investment. He must make the right investment for the right reasons, as well. Otherwise, his successes are random and largely attributable to luck.

Marks’ Book Is Well Organized, Includes Funny Stories

The best part of Marks’ book is the logical flow of his presented information. For example, the three chapters on risk are placed in a perfect order. An investor can’t hope to recognize risk without first understanding what it is. And he can’t hope to control that risk if he doesn’t know it’s there, either.

More broadly, even though these topics might seem disconnected to some degree, Marks draws clear parallels between various concepts using empirical examples of market bubbles and crashes. He fluidly draws the reader from one part of his philosophy to the next with clear explanations, funny jokes/stories, and bulleted examples rather than large bodies of text.

His style and tone make this educational book both compelling and easy to read. On top of that, his advice is well-respected by some of the best investors in the world, including Warren Buffett, who commented “this is that rarity, a useful book.”

In total, Marks’ book provides both amateur and professional investors alike a thorough investigation into the world of investing. Marks not only teaches you what to think about when investing, but also gives an amazingly convincing case for why his method is far superior over the long-term.

Link to full book on Amazon.com here The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing)