The most important thing (Howard Marks)

• There's no one "most important thing" in investment. All aspects are important and neglecting any of them can mess up your returns.
  • Second level thinking: we don't want to find great companies, we want to find companies that are underappreciated by other market participants.
    • Also think in possible scenarios and probabilities, not binary.
  • Efficient market hypothesis is right in a statistical sense, on average. People who can find investments that market is mispricing are the reason the market moves toward the truth and they are compensated for their insight with above average returns.
  • Day trading and technical analysis is like astrology, it mostly doesn't work. Value investment works, but you have to judge the value of a company better than the market, which is hard. Growth investment is also value investment, just based on projected tomorrow's value. Judging that is harder.
  • The most reliable approach to value and growth investment is buying for less than the intrinsic worth.
  • Risk is complicated. There are some fancy statistical models to quantify it, but it's not clear if they are better than just buying companies for less than they are worth. See Taleb.
    • It's hard to quantify risk but it's important to recognize its sources.
    • If you learn from a bull market, you tend to underestimate the risk.
  • Market cycles:
    • Credit cycle: prosperity -> high availability of credit -> too much leverage -> defaults -> less credit -> contraction -> ...
  • Pendulum: between too much optimism and too much pessimism, overpriced and underpriced, too risky and too conservative.
  • Emotions: greed, fear, ego, pride, excitement, boredom, etc. Notice them and don't let them affect your judgement.
  • Contrarianism: notice herd behavior, base your judgement primarily on the fundamentals.
    • Can be hard to anticipate how far the pendulum will swing before catching up with the true value. Or maybe you're wrong...
    • Overpriced != going down tomorrow.
    • Waiting to "until the dust settles" usually means avoiding the uncertainty but also foregoing the returns associated with it.
  • Patient opportunism is better than active looking for bargains. It puts you in a better frame of mind too.
    • Warren Buffett's baseball analogy.
  • Know what you don't know. Useful to have a model of your own ignorance.
    • Quantifying confidence is hard since you might be right many times and still have a poor model.
  • It's hard to predict the future, but we should at least make sure we understand wehere we are today: in the market cycles, sentiment, valuations, etc.
  • Invest defensively: keep up with the indexes in the good times, avoid drops in the bad times. However, it's all about the balance.
  • Think about the worst case, quantify it, figure out the probabilities.
• The most important thing is to remember all the items in the list and view investment holistically.