Finance · 12

The Most Important Thing

Howard Marks

The price you pay decides the risk you take, and markets are riskiest when everyone feels safe.

One tide in a small harbor. Five questions, each answered in a short piece to read or hear.

The five questions

In the order the book argues them.

The five questions

In the order the book argues them.

High water

What it is, and what it costs

An excellent company can be a disappointing investment when its buyers have already paid for even more success. Marks asks what the price already assumes.

Above, the surface shows the sky. Below, every hull shows how it sits.

In a market full of informed competitors, what makes a genuine bargain, and why can a great business still be a bad buy?What makes a bargain worth believingHoward Marks explains why an attractive price needs sound valuation and a reason the discount has survived informed competition.7 min listen

The top of the tide

More dangerous while it feels safer

When confidence pushes prices up and standards down, investors give up the protections that made earlier investments safer.

Full water hides the ledge a hand's width under the keel.

Without predicting the next crash, how can you tell when everyone feeling safe is making a market dangerous?When confidence starts making markets dangerousHoward Marks looks at prices, lending terms and investor behavior for warnings that do not require a forecast of the next crash.7 min listen

The ebb

Room for an imperfect judgment

A strategy can run out of capital in a bad run, before its long-run average is any use. Marks starts with the loss you could bear.

One boat stands on its legs. The other lies over.

If the future can break your model, how much risk can you take without losing the ability to keep investing?How much uncertainty can you afford?Howard Marks puts the consequences of being wrong at the center of risk, then asks what protection is worth giving up.7 min listen

Low water

Who has to sell

In late 2008, loans bought with borrowed money needed more collateral below 85 cents. Owners who could not pay were sold out, and the next year much of that paper rose sharply.

Tied short, one boat hangs from its lines. On slack lines, its neighbor waits.

With limited capital and no perfect moment to buy, how do you choose suitable investments without chasing returns, or waiting forever?Buying before certainty arrivesGood opportunities rarely arrive with perfect timing. Howard Marks explains how to choose among them without exhausting your money or your patience.7 min listen

Still low water

Even steadiness needs an explanation

Madoff claimed about ten percent a year with remarkably few losing months. Real markets reach a similar average through bad years too.

One boat never moved with the water. It stands on a post.

The flood

Subtract the market's contribution

If the market gains fifteen percent, a portfolio with a beta of 1.2 should gain eighteen. The extra three points need not show any judgment.

The flood lifts both boats alike, however they were tied.

If a bad decision can make money, how can you tell skill from luck before trusting the next winning record?What a winning record leaves outHoward Marks separates sound decisions from lucky outcomes, then asks what evidence would make a manager's success worth trusting again.8 min listen

High water again

The calm is back

Present conditions can justify caution without revealing when a market will turn.

Start with question oneBuy the book

The Most Important Thing by Howard Marks, cover

Published by Columbia Business School Publishing. Cover shown to identify the book. Howard Marks drawn as an editorial caricature.