92 Quotes From The Most Important Thing by Howard Marks

by | Portfolio Management

Howard Mark’s book  The Most Important Thing: Uncommon Sense for the Thoughtful Investor (Amazon Link), is full of wisdom and thoughtful insight into how a value investor should approach portfolio management. I highly recommend reading the entire book and/or my review and summary .

92 Quotes From The Most Important Thing

“Successful investing requires thoughtful attention to many separate aspects, all at the same time. Omit any one and the result is likely to be less than satisfactory. (ix)

To me, risk is the most interesting, challenging and essential aspect of investing. (x)

No rule always works, the environment isn’t controllable, and circumstances rarely repeat exactly. Psychology plays a major role in markets, and because it’s highly variable, cause-and-effect relationships aren’t reliable. (1)

First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple. (4)

You can’t do the same things others do and expect to outperform. (5)

Most people are driven by greed, fear, envy, and other emotions that render objectivity impossible and open the door for significant mistakes. (12)

Inefficient markets do not necessarily give the participants generous returns. Rather, in my view that they provide the raw materials — mispricings — that can allow some people to win and others to lose on the basis of differential skill. (13)

Let others believe markets can never be beat. Abstention on the part of those who won’t venture in creates opportunities for those who will. (14)

The choice isn’t really between value and growth, but between value today and value tomorrow. Growth investing represents a bet on company performance that may or may not materialize in the future, while value investing is based primarily on analysis of a company’s current wealth. (19-20)

Investors with no knowledge of (or concern for) profits, dividends, valuation, or the conduct of business simply cannot possess the resolve needed to do the right thing at the right time. (22)

Establishing a healthy relationship between fundamentals — value — and price is at the core of successful investing. (24)

Bottom Line: there’s no such thing as a good or bad idea regardless of price! (25)

Investor psychology can cause a security to be priced just about anywhere in the short run, regardless of its fundamentals. (27)

Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity.  (27)

The safest and most potentially profitable thing is to buy something when no one likes it.  (27)

All bubbles start with some nugget of truth.  (28)

Unfortunately, the greater fool theory only works until it doesn’t. Valuation eventually comes into play, and those who are holding the bag when it does have to face the music. (28)

Risk means more things can happen than will happen. (31)

The possibility of permanent loss is the risk I worry about. (36)

Skillful investors can get a sense for the risk present in a given situation. They make that judgement based on (a) the stability and dependability of value and (b) the relationship between price and value.   (39)

Return alone—and especially return over short periods of time—says very little about the quality of investment decisions. (44)

Recognizing risk often starts with understanding when investors are paying it too little heed.  (46)

The value investor thinks of high risk and low prospective returns as nothing but two sides of the same coin, both stemming primarily from high prices. (47)

Awareness of the relationship between price and value—whether for a single security or an entire market — is an essential component of dealing successfully with risk. (47)

So a prime element in risk creation is a belief that risk is low, perhaps even gone altogether. That belief drives up prices and leads to the embrace of risky actions despite the lowness of prospective returns. (48)

The degree of risk present in a market derives from the behavior of the participants, not from securities, strategies, and institutions. (49)

The risk-is-gone myth is one of the most dangerous sources of risk, and a major contributor  to any bubble. (49)

When worry is in short supply, risky borrowers and questionable schemes will have easy access to capital, and the financial system will become precarious.  (50)

Too much money will chase the risky and the new, driving up asset prices and driving down prospective returns and safety. (50)

Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion. (50)

When everyone believes something is risky, their unwillingness to buy usually reduces the price to the point where it’s not risky. (55)

When everyone believes something embodies no risk, they usually bid it up to the point where it’s enormously risky. (56)

High quality assets can be risky, and low quality assets can be safe. It’s just a matter of the price paid for them. (56)

Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well. (65)

The road to long-term investment success runs through risk control more than through aggressiveness. (66)

Most investors’ results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners. (66)

Skillful risk control is the mark of the superior investor. (660

You can’t predict. You can Prepare. (67)

Most things prove to be cyclical. (67)

Cycles will never stop occurring. If there were such a thing as a completely efficient market, and if people really made decisions in a calculating and unemotional manner, perhaps cycles (or at least their extremes) would be banished. But that’ll never be the case. (71)

When investors in general are too risk-tolerant, security prices can embody more risk than they do return. When investors are too risk-adverse, prices can offer more return than risk. (75)

The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological. (80)

There’s only one way to describe most investors: trend followers. Superior investors are the exact opposite. (91)

The proper response lies in contrarian behavior: buy when they hate ‘em, and sell when they love ‘em.  (93)

Investment success requires sticking with position made uncomfortable by their variance with popular opinion. (94)

The ultimately most profitable investment actions are by definition contrarian: you’re buying when everyone else is selling (and the price is thus low) or you’re selling when everyone else is buying (and price is high).  (95)

The thing I find most interesting about investing is how paradoxical it is: how often the things that seem most obvious—on which everyone agrees—turn out not to be true. (95)

What’s clear to the broad consensus of investors is almost always wrong. (95)

The very coalescing of popular opinion behind an investment tends to eliminate its profit potential. (95)

If everyone likes it, there’s significant risk that prices will fall if the crowd changes its collective mind and moves for the exit. (96)

Large amounts of money aren’t made by buying what everybody likes. They’re made by buying what everybody underestimates. (96)

In dealing with the future, we must think about two things: (a) what might happen and (b) the probability that it will happen. (97)

Following the beliefs of the herd will give you average performance in the long run and can get you killed at the extremes. (97)

The error is clear. The herd applies optimism at the top and pessimism at the bottom. (98)

It’s not what you buy; it’s what you pay for it. (102)

A high quality asset can constitute a good or bad buy, and a low quality asset can constitute a good or bad buy. (102)

The necessary condition for the existence of bargains is that perception has to be considerably worse that reality. (105)

It’s essential for investment success that we recognize the condition of the market and decide on our actions accordingly. (108)

One way to be selective is by making every effort to ascertain whether we’re in a low return environment or a high-return environment. (110)

When prices are high, it’s inescapable that prospective returns are low (and risks are high).  (111)

You want to take risk when others are fleeing from it, not when they’re competing with you to do so. (113)

High-return environments offer opportunities for generous returns through purchases at low prices, and typically these can be earned with low risk. (113)

Patient opportunism, buttressed by a contrarian attitude and strong balance sheet, can yield amazing profits during meltdowns. (115)

There are two kinds of people who lose money: those who know nothing and those who know everything. (116)

We  may never know where we’re going, but we’d better have a good idea where we are…..and act accordingly. (125)

Randomness contributes to (or wrecks) investment records to a degree that few people appreciate fully. As a result, the dangers that lurk in thus-far-successful strategies often are underrated. (135)

The correctness of a decision can’t be judged from the outcome. (136)

Several things go together for those who view the world as an uncertain place: healthy respect for risk; awareness that we don’t know what the future holds; an understanding that the best we can do is view the future as a probability distribution and invest accordingly; insistence on defensive investing; and emphasis on avoiding pitfalls. To me that is what thoughtful investing is all about.  (140)

You can’t simultaneously go all out for both profit making and loss avoidance. Each investor has to take a position regarding these goals, and usually that requires striking a reasonable balance.  (141)

The bottom line is that even highly skilled investors can be guilty of mis-hits, and the overaggressive shot can easily lose them the match. Thus, defense — significant emphasis on keeping things from going wrong — is an important part of every investor’s game. (143)

Defense actually can be seen as an attempt at higher returns, but more through the avoidance of minuses than through the inclusion of pluses, and more through consistent but perhaps moderate progress than through occasional flashes of brilliance. (145)

There are two principal elements in investment defense. The first is the exclusion of losers from portfolios. The second element is the avoidance of poor years and, especially, exposure to meltdown in crashes. (145)

Investment defense requires thoughtful diversification, limits on the overall riskiness borne, and a general tilt toward safety. (146)

Low price is the ultimate source of margin for error. (147)

I believe in many cases, the avoidance of losses and terrible years is more easily achieved than repeated greatness, and thus risk control is more likely to create a solid foundation for a superior long-term track record. (151)

Investing scared, requiring good value and a substantial margin for error, and being conscious of what you don’t know and can’t control are hallmarks of the best investors I know. (151)

A portfolio that contains too little risk can make you underperform in a bull market, but no one ever went bust from that; there are far worse fates. (153)

This book is more about philosophy and mind-set than it is about analytical processes. (154)

Extremes in cycles and trends don’t occur often, and thus they’re not a frequent source of error, but they give rise to the largest errors. (154)

The power of herd psychology to compel conformity and capitulation is nearly irresistible, making it essential that investors resist them. (154)

At important turning points, when the future stops, being like the past, extrapolation fails and large amounts of money are either lost or not made. (155)

Understanding and anticipating the power of correlation — and thus the limitations of diversification — is a principal aspect of risk control and portfolio management. (156)

The failure to correctly anticipate co-movement within a portfolio is a critical source of investment error.

When capital is in oversupply investors compete for deals by accepting low returns and a slender margin of error. (159)

Bidding more for something is the same as saying you’ll take less for your money. (160)

The best defense against loss is thorough, insightful analysis and insistence on what Warren Buffett calls “margin for error”. (160)

Leverage magnifies outcomes but doesn’t add value. (161)

Asymmetry — better performance on the upside than on the downside relative to what your style alone would produce — should be every investor’s goal. (172)

To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don’t, see things differently or do a better job of analyzing them — ideally, all three. (173)

The relationship between price and value hold the ultimate key to investment success. (174)

Because of differences in correlation, individual investments of the same absolute riskiness can be combined in different ways to form portfolios with widely varying total risk levels. (177)

A diversified portfolio of investments, each of which  is unlikely to produce significant loss, is a good start toward investment success.” (177)

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