Monday 2016-09-19

The Most Important Thing by Howard Marks

“You Can’t Predict. You Can Prepare.” sums up Howard Marks' views on investing in this book: the goal is to avoid errors, and have a plan in place for all the futures that may arrive.

It’s hard to consistently do the right thing as an investor. But it’s impos- sible to consistently do the right thing at the right time. The most we value investors can hope for is to be right about an asset’s value and buy when it’s available for less. But doing so today certainly doesn’t mean you’re going to start making money tomorrow. A firmly held view on value can help you cope with this disconnect.
-- Value
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.
-- Robert Shiller - Irrational Exuberance
Value investors score their biggest gains when they buy an underpriced asset, average down unfailingly and have their analysis proved out. Thus, there are two essential ingredients for profit in a declining market: you have to have a view on intrinsic value, and you have to hold that view strongly enough to be able to hang in and buy even as price declines suggest that you’re wrong. Oh yes, there’s a third: you have to be right.
-- Value
Charley Ellis took Ramo’s idea a step further, applying it to invest- ments. His views on market efficiency and the high cost of trading led him to conclude that the pursuit of winners in the mainstream stock markets is unlikely to pay off for the investor. Instead, you should try to avoid hitting losers.
-- Investing Defensively
There are two principal elements in investment defense. The first is the exclusion of losers from portfolios. This is best accomplished by con- ducting extensive due diligence, applying high standards, demanding a low price and generous margin for error (see later in this chapter) and being less willing to bet on continued prosperity, rosy forecasts and develop- ments that may be uncertain.

The second element is the avoidance of poor years and, especially, exposure to meltdown in crashes. In addition to the ingredients described previously that help keep individual losing investments from the portfolio, this aspect of investment defense requires thoughtful portfolio diversifica- tion, limits on the overall riskiness borne, and a general tilt toward safety.

-- Investing Defensively
What We Learn from a Crisis—or Ought To
Too much capital availability makes money flow to the wrong places.
When capital goes where it shouldn’t, bad things happen.
When capital is in oversupply, investors compete for deals by ac- cepting low returns and a slender margin for error.
Widespread disregard for risk creates great risk.
Inadequate due diligence leads to investment losses.
In heady times, capital is devoted to innovative investments, many of which fail the test of time.
Hidden fault lines running through portfolios can make the prices of seemingly unrelated assets move in tandem.
Psychological and technical factors can swamp fundamentals.
Markets change, invalidating models.
Leverage magnifies outcomes but doesn’t add value.
Excesses correct.
-- Avoiding Pitfalls