Sunday, July 17, 2011

The Most Important Thing: Chapters 13 and 14

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.

Patience is a virtue that will make you money in the market, according to Marks. He suggests avoiding having buy lists and chasing stocks or securities you would like to own. Just because you have a lot of cash does not mean you can create opportunities where there are none; doing this results in a race to chase yield, where investors bid up prices to such an extent that risk is too high.

Instead, investors should let their buys come to them in the form of opportunities where sellers are dumping securities. Sellers can be dumping for all sorts of reasons. They can be down on a stock, they could be experiencing redemptions/withdrawals from clients, or they could be facing margin calls for securities they own that have fallen in price. Investors can find very attractive prices in such situations.

Marks also advises that investors know what they don't know. It's not what you don't know that will get you in trouble, but what you think you know but don't. A big part of this has to do with the macroeconomic environment. Marks argues that no one can predict it consistently, and so investors should focus their time on things they can know better, like individual companies.

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