top of page
  • Writer's pictureShekhar Yadav

Learning from the book “The Most Important Thing” by Howard Marks {Part 2}

Updated: Oct 18, 2021

The author ‘Howard Marks’ is one of the best practical thinkers in the investing world. He has written two books. I already have covered one other book in the blog Learning from the book “Mastering the Market Cycle”  .I will be covering the other book ‘ Learning from the book “The Most Important Thing” by Howard Marks” in two parts. The first one is about Risk and the other one is about cycles. I will be covering the second part in this blog ‘ Learning from the book “The Most Important Thing” by Howard Marks {Part 2} ‘


Learning from the book “The Most Important Thing” by Howard Marks

In the introduction itself, Howard Marks says ‘Those who try to simplify investing do their audience a great disservice‘. When things are good, we think it is quite easy to make money but it is more important to retain that money which can be learned only in the bear market. And then there are several phases in between.

Successful investing involves thoughtful attention to many areas simultaneously. Howard marks consider risk as the most interesting, challenging and essential aspect of investing. Risks, I have covered in a different blog.

To outperform the average investor, you have to outthink the consensus. The book focuses mostly on one aspect of investing which is ” Buying Cheap”. If you have bought something much cheaper than the value of the company, the only direction left for the share price is to move upwards.  But I think there a flaw with this aspect. On doubt buying cheap is the most reliable strategy but it should be with good companies. One should be able to clearly understand why is it cheap, is it due to company/industry related issues or is it due to falling market conditions. 


Learning from the book “The Most Important Thing” by Howard Marks

Second-Level Thinking

Investors are smart, well-informed and highly computerized, one must fins an edge that these investors dont have. You must think of something they have not thought of, see things they miss or bring insight they dont possess. You have to react differently and behave differently.

To think differently, he urges to have second level thinking.

What is second-level thinking?

First-level thinking says “The outlook calls for low growth and rising inflation. Let us dump our stocks”

Second-level thinking says “The outlook stinks, but everyone else is selling in panic. Buy!”

First level thinking is simplistic and superficial, and just about everyone can do it whereas Second level thinking is deep, complex and convulated.

Second-level thinking should take into account :                                                                                         1. What is the range of likely future outcomes?

2. Which outcome do I think will occur?

3. What is the probability I am right?

4. What does the consensus think?

 5. How does my expectation differ from the consensus?

6. How does the current price for the asset comport with the consensus view of the future, and with mine

7. Is the consensus psychology that is incorporated in the price too bullish or bearish

8. What will happen if the asset’s price if the consensus turns out to be right and what if I am right


Learning from the book “The Most Important Thing” by Howard Marks


The author disagrees with the consensus view as well as the efficient-market hypothesis(information is the same access to all investors, they are intelligent, objective, highly motivated and hardworking, they are quick to take action based on information).

To give an example, In January 2000, Yahoo sold at ₹237. By April 2001, it was selling for ₹11. The point here is business remains the same but the consensus has changed so much so soon. If we think that the consensus is right, one is for a rude shock that consensus changes so fast.


All bubbles have some sort of newly found wisdom:

  1. Tulips are beautiful and rare(In 17th century Holland)

  2.  The internet is going to change the world

  3. Real estate can keep up with the inflation                                                                               

Momentum investing might enable you to participate in a bull market that continues upward, but I see a lot of drawbacks. “If something can not go on forever, it will stop.”

What happens to momentum investors then?


Learning from the book “The Most Important Thing” by Howard Marks​

School of Investing principles

Howard Marks differentiate the two primary school of investing principles as below: 1. Value investing: Buy stocks out of the conviction that the current value is high relative to the current price.

2.Growth investing: Buy stocks whose value will grow fast enough in the future to produce substantial appreciation.

A very important and interesting point the author makes about demand and price.  “We learn in Microeconomics that as the prices of something goes up, the quantity demanded goes down. In other words, people want less of something at higher prices and more of it at lower prices. Makes sense, that is why stores do more business when goods go on sale.”

I think the concept is more applicable to bigger and rational investors. But when you look at the retail investors, it is exactly the opposite. They will buy mostly at higher prices.

Well Bought is half sold

Investing is a popularity contest, the most dangerous thing is to buy something at the peak of its popularity. At that point, all favorable facts and opinions are already factored into the price, and no new buyers are left to emerge.

Here, people expect the greater fool theory to work which works till it doesn’t.

The safest and most potentially profitable thing is to buy something when no one likes it. Given time, its popularity and thus its price can only go one way: up.

I have learned this by investing in HEG and BEPL which were hot in 2017 because of their fundamentals. But I failed to understand if the fundamentals are to continue in the future. To be honest in order to understand the market, one needs to go through/ experience at least one bear market completely. 

Buying something hot vs something not. Theorist thinks return and risk are two separate things, albeit correlated. Value investor thinks of high risk and low prospective returns as nothing but two sides of the same coin, both stemming primarily from high prices.

The investors should make an effort to figure out where they stand at a moment in terms of cycles. Predictions are most useful when they correctly anticipate change. If you predict that something won’t change and it doesn’t change, that predictions are unlikely to earn you much money. But accurately predicting change can be very profitable. Most of the forecasts consisted of extrapolation.

The maximum profits can be made when we can anticipate a change in the business scenario or at least catch them early on.

In investing, as in life, there are very few sure things. The author believes in 2 concepts:

  1. Rule number one: most things will prove to be cyclical

  2. Some of the greatest opportunities for gain and loss come when other people forget rule number one.          The basic reason for the cyclicality in our world is the involvement of humans and when people are involved, emotions play a significant role and hence the results are variable and cyclical.   

Ignoring cycles and extrapolating trends is one of the most dangerous things an investor can do.

The combination of greed and optimism repeatedly leads people to pursue strategies they hope will produce high returns without high risks, pay elevated prices and hold they after they have become highly priced. Hindsight shows everyone what went wrong, that expectations were unrealistic and risks were ignored.


Learning from the book “The Most Important Thing” by Howard Marks​

Stages of a bull market

There are 3 stages of a bull market:

  1. The first, when a few forward-looking people begin to believe things will get better.

  2. The second, when most investors realize improvement is actually taking place.

  3. The third, when everyone concludes things will get better forever.                                                             “What the wise man does in the beginning, the fool does in the end”.

64 views0 comments


bottom of page