The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor PDF
Preview The Most Important Thing Illuminated: Uncommon Sense for the Thoughtful Investor
THE MOST IMPORTANT THING ILLUMINATED Columbia University Press Publishers Since 1893 New York Chichester, West Sussex cup.columbia.edu Copyright © 2013 Howard Marks All rights reserved E-ISBN 978-0-231-53079-8 The original impression of this e-book was produced with http://pressbooks.com. Library of Congress Cataloging-in-Publication Data Marks, Howard, 1946- The most important thing illuminated : uncommon sense for the thoughtful investor / Howard Marks. p. cm. Includes bibliographical references. ISBN 978–0-231–16284–5 (cloth : alk. paper)—ISBN 978–0-231–53079–8 (e-book) 1. Investments. 2. Portfolio management. 3. Investment analysis. 4. Risk management. I. Title. HG4521.M3215 2012 332.6—dc23 2012003076 A Columbia University Press E-book. CUP would be pleased to hear about your reading experience with this e-book at cup- [email protected]. References to Internet Web sites (URLs) were accurate at the time of writing. Neither the author nor Columbia University Press is responsible for URLs that may have expired or changed since the manuscript was prepared. For Nancy, Jane, and Andrew With All My Love Contents Foreword by Bruce C. Greenwald Introduction THE MOST IMPORTANT THING IS … 1 Second-Level Thinking 2 Understanding Market Efficiency (and Its Limitations) 3 Value 4 The Relationship Between Price and Value 5 Understanding Risk 6 Recognizing Risk 7 Controlling Risk 8 Being Attentive to Cycles 9 Awareness of the Pendulum 10 Combating Negative Influences 11 Contrarianism 12 Finding Bargains 13 Patient Opportunism 14 Knowing What You Don’t Know 15 Having a Sense for Where We Stand 16 Appreciating the Role of Luck 17 Investing Defensively 18 Avoiding Pitfalls 19 Adding Value 20 Reasonable Expectations 21 Pulling It All Together About the Contributors Foreword For twenty years Howard Marks has been educating investors with his “Memos from the Chairman,” and in writing The Most Important Thing, Marks drew from these memos to compile the most important lessons he has learned as an investor. That he is an outstanding investor goes without saying; he is also a great teacher and a thoughtful author, and The Most Important Thing is a generous gift to all investors. In The Most Important Thing Illuminated, readers will benefit not only from Marks’s hard-earned wisdom, but also from the insights of three seasoned investors—Christopher Davis, Joel Greenblatt, and Seth Klarman—and a Columbia Business School adjunct professor, Paul Johnson. Each annotator in this impressive group brings a unique perspective to Marks’s work, and an investment style that colors their reaction to Marks’s text. For Davis, superior investment ability seems to be innate, and his success is amplified by his commitment to a value approach and his disciplined industry focus. Greenblatt—himself the author of the bestselling investment book The Little Book That Beats the Market—has gained tremendous success through his keen eye for irrational institutional behavior. His initial insight into corporate spin-offs has been followed up by his more recent focus on overall market anomalies. Klarman has produced almost three decades of extraordinary results while being aggressively risk adverse—and his performance is even more remarkable when one learns of his near obsession with down- side protection. Finally, Johnson brings his almost thirty years as an investment professional and twenty years as an adjunct professor to reveal how he has begun to incorporate Marks’s wisdom into his courses on security analysis and value investing. Their annotations on the original text add depth and dimension to Marks’s argument, as these four thinkers discuss how Marks’s philosophy resonates with, refines, or occasionally differs from their own. Marks even adds his own commentary throughout the text, bringing to light some of the underlying themes that run through the book and articulating the top priorities among his recommended actions. In addition, he offers one extra lesson not covered in the original book, on the importance of reasonable expectations. I like to think of The Most Important Thing Illuminated as a surrogate book group with five of the best investment thinkers alive. Most important, this new project joins The Most Important Thing as an invaluable contribution to the value investing canon. Value investing began at Columbia with the publication of Benjamin Graham and David Dodd’s Security Analysis in 1936. In 2001, the Heilbrunn Center for Graham and Dodd Investing was established at Columbia Business School It has since emerged as the academic home of value investing. I find it fitting and gratifying that the center played a role in the book’s formation. The Most Important Thing was initially conceived at CSIMA (the Columbia Student Investment Management Association), Heilbrunn’s annual investment conference. After hearing Marks give a presentation at the conference, Myles Thompson, founder of Columbia Business School Publishing, approached him about doing a book based on his memos and his investment philosophy. Marks was enthusiastic about publishing his investment wisdom at the birthplace of value investing and knew his ideas would be embraced by the Heilbrunn community. The Most Important Thing was launched a year later at the same event; The Most Important Thing Illuminated launched at the 2012 CSIMA meeting. The Most Important Thing Illuminated continues the value investing community’s tradition of generously sharing its ideas, insights, and investment wisdom. The Heilbrunn Center is delighted to be associated with this innovative publication and truly illuminating new contribution. BRUCE C. GREENWALD Director, Heilbrunn Center for Graham and Dodd Investing Robert Heilbrunn Professor of Finance and Asset Management
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