Wednesday, October 2, 2013

The Most Important Thing Illuminated, by Howard Marks

This is a book about investing.   It is a version of an earlier book by Mr. Marks, titled simply, "The most important thing" (i.e., not "illuminated), the difference being that this version is annotated by four well thought of investment gurus:  Christopher Davis, Joel Greenblatt, Paul Johnson, and Seth Klarman.   As for those annotations, I could take them or leave them.  But the text itself, now that's worth something.

The book cover includes the tag line, "uncommon sense for the thoughtful investor."  In fact my son pointed out that while everything he read made sense to him, it was really just common sense.  Ah, but as Voltaire pointed out, common sense is not so common!  And that is especially true in the stock market, where emotions outweigh analytical decision making.

The author is not just an armchair observer of the market; as the chair and co-founder of Oaktree Capital Management (with $75B under management), he presumably puts his money where his mouth is.

It is important to note that Mr. Marks follows a value investment model.  In his words:
"Value investors buy stocks (even those whose intrinsic value may show little growth in the future) out of conviction that the current value is high relative to the current price.
"Growth investors buy stocks (even those whose current value is low relative to their current price) because they believe the value will grow fast enough in the future to produce substantial appreciation."  [pages 22-23]
Restated, value investors hope to make their profit by buying a bargain today, and growth investors buy stocks hoping their performance will cause future profits.

One of my favorite sections of the book is about risk, and these two graphs made quite an impression on me. [pages 73-74]

In this first graph, a good portfolio manager achieves higher returns compared to a benchmark, and at a given level of risk.

In this second graph, the skilled manager achieves benchmark returns while subjecting the portfolio to less risk.  "Here the manager's value added comes not through higher return at a given risk, but through reduced risk at a given return.  This, too, is a good job -- maybe even a better one."

Sure, this might be semantics, but so much of investing relies on the way one looks at things.  This is an excellent book for value investors who seek ideas for improvement -- or confirmation of their sanity (because the lot of a value investor is to be a contrarian; this demands both think skin and good bourbon).

The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor (Columbia Business School Publishing)

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