The Most Important Thing by Howard Marks [Book Summary – Review]


In this book summary, you will see the way to comprehend the present market so as to make great economic decisions and evade typical traps that capture innumerable investors. Instead of giving a standard with level-by-level guidelines, The Most Important Thing presents interesting and sometimes contentious investment philosophy.


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Chapter 1 – Because chances of earning far bigger investment returns seldom occur, strong investment necessitates a different viewpoint.


When you are determined to be a thriving investor, it is necessary to have a stable grounding in the basics.

Then, we’ll begin with an easy description: investing involves depositing money into assets and anticipating a rise in value.

If we go further, thriving investing involves purchasing lower-than-actual-priced assets (their pricing is very low), selling them after there is an increase in their value, and making a profit.

You might think this is very easy, however, we rarely encounter such low prices. What is the reason for this? It is due to the fact that virtually always we can see a myriad of people who actively take part and collect information regarding different assets and assess them thoroughly. If this meticulous evaluation is really the case, there isn’t much difference between an asset’s value and its intrinsic value – which amounts to the value the asset really has.

Moreover, if an asset has a proper price, which usually happens, you won’t be able to easily earn profit from it.

However, mispricings continue to take place in real life. To illustrate, examine the shares of Yahoo that were sold at $237 each in January 2000. However, until April, share value had declined to $11. Had you bought shares from Yahoo, you’d have lost a lot of money because of that investment. Moreover, what is the way of explaining this considerably high fluctuation? The explanation is that the assets must have had mispricing on at a minimum one of these occurrences.

Usually, mispricings can potentially yield either profits or losses in a huge way. However, as has been discussed, identifying whether there is mispricing is very hard.



Thus, when you aim to beat the market through your investments, it is necessary for you to adopt a different perspective and more useful than that of other people.

This is known as second-level thinking, which functions in this way: first-level thinking states, “It’s a great firm; we should purchase some assets.” Second-level thinking works very distinctly from traditional knowledge by stating, “It’s a great firm, however, this is what all other people think as well; thus, the stock is most likely overvalued and has mispricing; we should sell.”

It is such a powerful perspective due to the fact that it accepts the reality that every investor collectively form the market really. Second-level thinking considers this factor carefully so as to make higher-than-average returns, not just submit to it.


Chapter 2 – Comprehending the link of value and price is the foundation of thriving investing.


The most traditional principle in investments is the easiest as well: “Purchase low, sell high.” You may think this doesn’t even hard to figure out until you attempt to implement this principle. After this, you begin to ask yourself, what’s low and what’s high? In order to respond that, some unbiased criterion should exist. So, for your goals, the most suitable criterion is the intrinsic value of the stock.

Actually, thinking about a precise calculation of intrinsic value is the perfect vantage point for thriving investing. Estimating intrinsic value can be undertaken through an analysis of a firm’s usual features, known as fundamentals. Fundamentals analysis involves posing questions about the firm’s financial situation — like, is the business making a profit? Has it the capacity to reimburse its debts?

Undertaking this sort of precise estimate of intrinsic value constitutes the backbone of thriving investing since you’ll be able to recognize (and purchase) assets if the present price is below their intrinsic value.

The link between the present price and intrinsic value is vital, and still, most people neglect it. There are those who say, “We solely purchase asset A,” or “A makes up an excellent asset class.” These remarks seem very much like, “We’d purchase this asset no matter what its price is.”



However, it is not a clever technique to use while reaching economic decisions. Put differently, were a person to make an offer about selling you their vehicle, you’d try to learn about the price prior to the purchase. The same process goes for assets.

Thus, in order to be certain that the price is reasonable taking into consideration the asset’s value, someone who plans to buy it should take into account two different factors as well: psychology and technicals.

Technicals don’t affect value. They come about, for instance, if a market crashes and, so as to dodge complete bankruptcy, investors sell their assets no matter what their price is.

Psychological agents, such as avarice or worry, also have a potent effect on price. Think about the common worry of purchasing, which happens occasionally in times of economic volatility; because no person purchases it, the asset’s price remains too low when compared to its intrinsic value.


Chapter 3 – Tackling risk constitutes a vital facet of investing.


Investing necessitates people to tackle the future. However, because it is impossible to tell the events of the future with any genuine assurance, there will always be the risk.

Investment risk never goes away, even if an investment seems safe. This holds particularly right if prices are high because it is probable for them to go down. High prices follow from very high optimism and inadequate doubt that prices will continue to be high. Thus, maybe paradoxically, the principal component of risk formation is the confidence that risk isn’t high – perhaps there is no risk at all.

However, this is far from reality. Actually, if we continue to talk about the possibility of prices declining, it means the risk is still there. Moreover, as aforementioned, in some way risk begins to be even more hazardous in great times, if the likelihood of loss is barely taken into consideration.

Consider this: it’s difficult to actually calculate the risk of purchasing a house in California. There might be construction flaws in the house that would lead to its collapse because of an earthquake. Is it possible to recognize this when this happens? You’ll just have to expect to see an earthquake and see whether the house demolishes or not.



This example shows a common principle: Risk is solely truly obvious if negative incidents cause huge losses.

However, as has been talked about, the risk constitutes an inevitable facet of investing. Therefore, earnest risk evaluation is important to make smart investment decisions.

Because many people are inherently disinclined toward risk, when they are considering investing in a company, it is necessary for them to think about if it gives a valid reason for the risk or not.

Risk evaluation is particularly crucial since eventually, how much you earn or lose after a certain investment doesn’t tell anything regarding the level of risk involved at the beginning. This is the reason for the necessity of the risk to be evaluated on its own – not including the investment’s intrinsic value or other agents.


Chapter 4 – Entering in at the lowest level of a market cycle presents the best chances for making profits.


Even if what we can be certain of is very few, while talking about investments, it is possible to come down to two rules.

The first rule says that many things work in a cycle, because of how human nature is. Mechanical things follow a one-way line, however, we can’t say the same thing for humans. We have emotions, act in a contradictory way, and are inclined to change. Moreover, more particularly, if investors begin to act emotionally, it leads to cyclical patterns in markets.

Think about the credit cycle – referring to the rise and drop of access to credit through time. At the time of economic affluence, if there is hardly any negative news, risk awareness downright vanishes. Consequently, banks provide access to credit by having extremely few standards that prevent people from getting it. In radical cases, banks can even fund borrowers who are financially not in a good position to be funded.

After this, if they lose money, banks begin to be deterred. Risk awareness increases and credit restrictions accompany it. In destitute of money and finding not enough credit, several firms go bust.

After this happens, the process changes: due to having just several rivals giving clients lines of credit, banks have the potential to get big percentage gains and more excellent creditworthiness. Through time, more appropriate standards bring about affluence, and this process keeps repeating itself eternally. This example illustrates the reason behind the fact that processes including humans are inclined to be cyclical.

Now, we can move on to the second rule: Several of the best chances for making profits and losing money issue if others don’t remember the first rule.



Overlooking the cyclical process of markets and extrapolating trends pose a threat from an investment viewpoint. Moreover, this sort of reasoning actually is exactly the reason behind bubbles: Purchasers have no concerns with regard to whether a stock’s price is more than its intrinsic value since they have such a certainty that another one will purchase it from them.

However, ultimately, the cyclical process changes, and the market crash happens. If this takes place, purchasers may be compelled to sell no matter what price is so as to dodge insolvency.

As for an investor, this constitutes the most excellent timing of chance: You cannot find any more appropriate investment than purchasing from another person who is forced to sell, no matter what price is, at the time of a crash.


Chapter 5 – When you are desirous of making thriving investments, go in the opposite direction of the vogue, and look for unusual deals.


Many investors are inclined to keep abreast of the trends. In contrast, those who excel do totally the opposite.

Actually, not following what everyone else is doing is vital to a thriving investment, since crowds commit mistakes with nearly in a mathematically systematic way, generating incredible market turbulence.

Markets oscillate from highly-priced to lowly-priced always: If the number of people who want to purchase exceeds that of people who want to sell, the market climbs; if the market climbs, then the number of buyers go up, causing the market to further climb. The value of the stock hasn’t altered, however, the cost has increased substantially.

Metaphorically, the zenith of the market happens after the last buyer purchases the stock. From there, it is unlikely for the market goes up further, thus, it starts to go down as shortly as one of those who bought the stock decides to sell their stock.

What is the reason behind these cray extremes? The so-called intelligence of the crowd, causing (and increasing) these higher-than-average- or lower-than-average-priced stock.

Because of this, the most lucrative investment choices are intrinsically the ones that buck the trend: Purchase while all other people sell and do the reverse if everyone starts buying.



We can liken bargains to holy grails and because, as aforementioned, they generally rely on unreasonableness or a fragmentary comprehension of the market, a great place to begin searching them is among questionable or frightening, unusual or unknown stocks.

Your objective should be to detect lower-than-average-priced stocks thought to be sizeably more dangerous than those stocks actually are.

Put differently, when no one owns something, people who want to buy it can solely increase in number. So, should the stock goes from zero to even merely tolerated, you’ll be still profiting well from that stock.

Even if you may not feel relaxed at the beginning, the perfect chances are there where many couldn’t risk going.


Chapter 6 – Because market projections are usually fruitless, investors should possess a solid comprehension of the current economic state.


Do you look at market projections? You are aware then that these investing means have the capacity to occasionally come true.

But, the important question isn’t whether their projections occasionally reflect the reality, but whether projections present actionable and invaluable information in a steady manner.

To be honest, the response to this question is negative – market projections have almost no value at all.

It may be obvious to you that from time to time if someone makes a prediction regarding the future, their predictions sound like recent past. This doesn’t indicate their prediction is flawed; actually, the future usually recurs the past.

However, there are times when things end up far distinctly. Projections concerning market changes are most valuable if they accurately expect genuine change because it’s solely at these times that people have a high likelihood of either losing money or making huge gains. However, sadly, projections are very unlikely to accurately foretell genuine market change.

Think about the truth that just several projections accurately foretold the worldwide credit crisis and the immense economic collapse of 2008. One year after this, forecasters were equally perplexed by the early indications of economic improvement.



Thus, because projections have barely any worth, investors have to possess a perfect understanding of the current market situation. Nobody has the ability to see the future, however, clever investors will make efforts to comprehend the given moment when it comes to market cycles.

Understanding during which cycle of a market we are presents us worthy insight into what the future will bring, however, you shouldn’t infer from that it is always possible to know precisely what will happen. We can never tell what the future will bring, however, comprehending the current time is not that difficult.

The sole thing to do for us is to “take the market’s temperature,” metaphorically speaking. Perhaps it is possible to ask: do investors have a positive or negative standpoint? Does the media recommend us to buy stock, or evade the market completely? These vital questions will assist you to figure out a clever course of action.


Chapter 7 – So as to be successful in investing, do not get into any analytical and psychological causes of mistake.


While making an analysis concerning the economic market, a great many of us will have alike lines of thinking and get alike conclusions. Despite this, those who reach precisely the same conclusion usually act separately. The reason for this follows from the fact that psychological factors don’t affect people in the same manner.

Actually, several of the most disastrous investment blunders arise due to these psychological factors, such as greed, fear, ego, and jealousy. These factors have the capacity to push us to go for high returns by taking great levels of risk.

Maybe, greed is the most influential of these psychological factors. It has such a power that it can destroy our reluctance to risk, prudence, and other things that generally help us stay out of danger economically.

In the same way as greed, fear has the potential to behave in an effective manner, leading us to commit grave investment mistakes. Even if it may make you think that fear leads to risk reluctance, actually, the emotion has the capacity to arise as panic, hindering us from taking useful and essential steps when it is very important to do it.

Aside from these psychological causes of mistake, investors have the potential to commit analytical errors. These errors are easier to see, takin place unless we have sufficient data, using the flawed analytical methods, committing computational mistakes, or inadvertently excluding something relevant.



Analytical errors are comparatively straightforward to dodge — all you need to do is to be prudent. Moreover, so as to be successful in investing, it is necessary to evade committing the sorts of psychological mistakes mentioned above.

What is the reason for these emotional forces to be so adhesive? Investment generally means great levels of risk, particularly when we’re aiming to make great profits. So, endeavoring for a huge achievement like this occasionally ends up as a failure, potentially being crippling.

However, making efforts to dodge losses by adopting less risk may not yield astonishing profits, yet you won’t go belly up as well. And eventually, should you be attentive to keeping your money secure, attempting to dodge losses is better than aiming for extraordinary outcomes.


Chapter 8 – Investment results usually depend on random occasions, thus, look for an investment strategy that expects diverse situations.


Sometimes, a person ventures into a dangerous investment that yields positive returns. Even if it feels perfect to be the one who makes positive returns in such an example, you should keep in mind that being successful in a gamble follows from luck and courage, not talent.

Really, luck constitutes a significant element in the investment. In the markets, a huge amount of success involves being fortunate to have good timing while investing. Furthermore, it is possible for success to require being in the right place for flawed reasons. Actually, results usually rely on completely random events.



For instance, if a person purchases a stock, they anticipate a particular increase; that increase is not realized, however, the assets are doing well nevertheless – which gives the impression to the investor that he is highly insightful, although it was simply pure luck.

It should be obvious for you that it’s essential to form an investment strategy that takes into account random events – be it lucky or unfortunate. This explains the reason that investors should stick to a plan that is of assistance to them by means of a variety of scenarios.

This involves seeking the appropriate equilibrium between offensive and defensive tactics in investing. An offensive tactic involves acknowledging great levels of risk in order to get great returns; In contrast, defensive tactics rely on evading losses, instead of the risk for gains.

Because just several people possess the talent to change tactics to suit market situations on a timely basis, a blend of these two tactics is the thing that will be of great assistance to you through diverse kinds of scenarios.


The Most Important Thing: Uncommon Sense for the Thoughtful Investor by Howard Marks Book Review


Investment success entails a profound comprehension of both the technical and psychological factors that produce a cyclical market. A lot of things take part in this, involving a plethora of risks; therefore, tackling risk makes up a vital element in the investment process. Finally, investment success needs us to identify and bypass general pitfalls.  

Prior to reaching any investment decision, begin by understanding how the situation in the market is.


After reading this, when you have your financial portfolio in front of you, pose yourself fundamental questions to grasp the present time in the market.

The questions can be as follows: Do investors approach positively or negatively? Does the media suggest us to purchase many stocks, or evade the market completely?

Such questions like these will present you insight into the market’s likely future course – when the market goes up this time, then it is highly possible that it’ll go down, and then the process will reverse and start again. Comprehending this should assist you to decide on a clever course of action concerning your investments.



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Savaş Ateş

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