Howard Marks is an American investor and writer born in 1946. He is the co-founder of Oaktree capital management. He is one of the world’s leading value investors. His book, the Most important thing was published in May 2011 inspired many investors. The book explains principals for successful investment. Marks explains some concepts related to price/value relationship, defensive investing and second level thinking
Marks believes that one should have second –level thinking. Others may only go for average returns, but for being a successful investor, you should be adaptive and intuitive to gain profit from market fluctuations. As there’s no perfect guide or steps for successful investing, your second level thinking is what’s going to help, says Howard. Physcology plays a very important role in markets. Mark talks about inefficient markets. You should have quite a good knowledge about market operations and its efficiency. What is the most vulnerable mistake investors do? They allow greed, emotions, fear to defeat their objectivity. Mark says that you must analyse market opportunities and understand efficiencies to exploit profits.
Howard throws light on the most important thing, as the title of the book suggests. Value! Value is the most important thing according to Marks. The best value is when you can buy growth at a value price.
What’s the best time to buy an investment?
What’s the best time to buy an investment? The answer may be deceiving for some of you, but that’s what I have learnt from reading this book. The best time to buy an investment is when no one wants it. At that time, all the bad data and assumptions would be the basis for price. Here psychology comes into the picture. Psychology of the investors sometimes causes the price of a stock to misprice. There should be a good relationship between the fundamentals, value and the price.
Risk is the possibility of loss, it cannot be measured. How can risk be avoided? Firstly you need to make quality decisions based on price value relationship. You should prepare yourself for the unforeseen circumstances of future. Analysis of real value of your investment is very essential. Mark says that if you are taking up risk, first ensure that it is a worthy one. Recognizing and controlling risk is very important for an investor to succeed. When is the risk highest? It is highest when everyone assumes it to be low. One should bear the risk intelligently and try to prevent it.
How to be a successful investor?
Markets are always fluctuating. Since trends do not continue forever, one should be aware of the major turning points. Howard says that it’s not possible to predict things, but at least one should be prepared to control the loss or damage. The author believes that for being a successful investor, one needs to be attentive to cycles. Psychological forces greatly affect investment decisions. Greed, fear, envy, ego. These are universal forces which prove true at market conditions and can seriously damage personal returns. Intrinsic value and margin of safety should be known to all investors to stay positive in the investing environment.
Sir John Templeton said that “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”
Howard again highlights the second level thinking concept. He says that do not follow the trend. A successful investor is one who doesn’t follow the crowd. The key to success sometimes lies when you just do the opposite. One should first make a list of investment options and then choose the best bargains.
You always won’t get the best deal, Howard says. You should be patient enough and wait for good things to come in your way. Haste makes waste. I like the tip which Howard gives. He said that select from a list of things which sellers are motivated to sell. When it comes to investing, knowledge is the first thing, which an investor should possess. He also says that forecasts made by experts do not always prove to be right. So do not rely completely on them. Instead of the forecasting the unknowable, it is better to pay attention to balance sheets, income statements etc.
All the investors should be aware of the current market conditions and the environment. The condition of the capital market – is it loose or tight? Cycles influence the investor’s performance. An investor should know where he or she stands. Investing defensively is the key to successful investing. Once again Howard highlights that one should try to avoid the loss. Risks are very critical and one should try to understand the risks in order to prevent making mistakes. Thinking defensively will surely help an investor to invest well.
Taking a step further and outperforming the markets should be the prime role of investors. If your price and value relationship is right and if you have a basic understanding of value then would be able to take sound investment decisions. For being a successful investor, Howard says that you should have the strength to overcome negative psychological influences.