Saturday, July 16, 2011

The Most Important Thing: Chapters 11 and 12


Value investor Howard Marks shares his investment philosophy in his book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor. "This is that rarity, a useful book," according to Warren Buffett. Marks' estimated net worth is over $1 billion and his firm, Oaktree Capital, manages $80 billion.

Investing with the crowd is a sure way to lose money. If everyone thinks an investment is a bargain, then recent buying has been built into the price, in effect borrowing returns from the future. Investing with the crowd can thus generate returns for a while, but at the extremes (market highs and market lows) it will cost the investor. To be successful, investors must be contrarians.

Simply investing against the crowd does not guarantee success, however. For one thing, just because something is overpriced does not mean it is going down tomorrow. Investors must be prepared to be wrong for years. To do that, they need a strong sense of the intrinsic value of the security in question. Anything less will result in a sale when the price moves further against them. Casual commitments to securities invites casual reversal when the psychological pressure is on.

To find bargains, therefore, investors must be willing to go where others don't want to. Examples Marks gives include securities that are:

- not fully understood
- fundamentally questionable on the surface
- controversial, unseemly or scary
- deemed inappropriate for respectable portfolios
- unpopular and unloved
- have a record of poor returns
- recently the subject of disinvestment

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