The Most Important Thing by Howard Marks
Module Units
- 1. Introduction
- 2. Second-Level Thinking
- 3. Understanding Market Efficiency
- 4. Value
- 5. The Relationship Between Price And Value
- 6. Understanding Risk
- 7. Recognizing Risk
- 8. Controlling Risk
- 9. Being Attentive To Cycles
- 10. Awareness Of The Pendulum
- 11. Combating Negative Influences
- 12. Contrarianism
- 13. Finding Bargains
- 14. Patient Opportunism
- 15. Knowing What You Don’t Know
- 16. Having A Sense For Where We Stand
- 17. Appreciating The Role Of Luck
- 18. Investing Defensively
- 19. Avoiding Pitfalls
- 20. Adding Value
- 21. Pulling It All together
The Relationship Between Price And Value
Price has to be the starting point for a value investor. No asset is so good that it can’t become a bad investment if bought at too high a price. There are few assets so bad that they can’t become a good investment if bought cheap enough.
It takes a lot of hard work or luck to turn something bought at too high of a price into a successful investment.
In the era of the "Nifty Fifty Investing", many of those companies traded at a price-to-earnings (P/E) ratio between 80 and 90. By comparison, the post-war average P/E ratio of stocks, in general, has been in the mid-teens. Well, if you are unaware of the Nifty-Fifty style of investing, the author explains that its goal was to identify the companies with the brightest outlook for earnings growth over the long term.
What goes into the price?
The underlying fundamental value of course.
Most of the time, the short-term fluctuation of a security’s price will be determined by two other factors:
1.Psychology
2.Technicals
Most investors know little about technicals.
Technicals are non-fundamental factors (things unrelated to value) that affect the supply and demand for securities.
Two examples of technicals:
1.The forced selling that takes place when market crashes cause levered investors to receive margin calls and be sold out.
2.The inflows of cash to mutual funds that require portfolio managers to buy.
Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity.
The safest and most potentially profitable thing is to buy something when no one likes it.
You must invest the time and energy to understand market psychology. The fundamental value will be only one of the factors determining a security’s price on the day you buy it.
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Jeremy Silva
Jeremy Silva lives near San Francisco with his wife and son. He is a writer, blogger, and personal investor. He is passionate about education, personal development, project management, and investing. His blog has over 100 book summaries on many topics including investing, self-help, and business. You can click on the link to read some interesting book summaries on Jeremy’s website (https://jsilva.blog/book-summaries/).
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