The Most Important Thing - Uncommon Sense for the Thoughtful Investor by Howard Marks
Comments by Lalit Nambiar
January 2019

“Investing consists of exactly one thing: dealing with the future. And because none of us can know the future with certainty, risk is inescapable.” For those of a literary disposition this book could easily be the financial market equivalent of the Rudyard Kipling poem ‘If’‡. (High school refresher: the poem goes — “If you can keep your head when all about you are losing theirs…”) Amidst that huge din that is generated daily by the markets, I found the book to be a firm railing to hold onto, on the wobbly, steep, stairway that is the market. Something which guides me, allows me to peer over and yet keeps me from slipping over the edge. It helped me crystallise my own thoughts around the potential bounties of a particular course of action and its pitfalls. While the risk-return trade-off will always remain a market conundrum, the book, I dare say, helped me unravel some parts of this mystery. “When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.”

It provides perhaps what is one of the most detailed and exhaustive of understandings on investor risk versus the potential for return, key word here being potential. For in Mr. Marks’ own words “…if riskier investments could be counted on to produce higher returns, they wouldn’t be riskier.” He expounds on why an investment idea cannot be seen as good or bad without considering its price. He also explains that in booming markets, the largest rewards go to big risk takers. (“…the choice isn’t really between value and growth but between value today and value tomorrow.”) But in his view these risk takers were probably just inherently aggressive sorts who experienced a windfall. “Trying to buy below value isn’t infallible, but it’s the best chance we have”. According to him to enjoy the full gain in up-markets and outperform in down-markets, one has to try to capture up-market gain while bearing below-market risk. Much like prudent homeowners who take insurance and feel good about the protection even when there’s no fire. “Specifically, in crazy times, disciplined investors willingly accept the risk of not taking enough risk to keep up.”

It has strengthened my view that being wary of popular opinion can provide an edge as such opinion is usually a source of low return potential as well of high risk. The book underlines the unpredictability of the market, which can cause a security to be sharply mispriced in the short run. As advocated by Mr. Marks, I try to be equally sceptical of heightened optimism when it looks like we are near a top, as of the acute pessimism nearer a bottom. I believe some of the author’s line of thought has influenced my process of buying and retaining what I expect are the investments with the “…most potential for their price, making room for them by selling lesser ones, and staying clear of the worst.”