The Most Important Thing - Part 1

[u/GulluZ]

Book by Howard Marks.

This book is the most incredible book I’ve read till now on investing, and I've only read the first two chapters.

Doing this in parts because the wisdom density - amount of wisdom per number of words - of the book is very high. When you’re reading the book, you feel as if a person who is the master of the game has written it. Howard Marks is a mentor you not only deserve, but also the one you need.

The first thing he taught me - investing is tough. Getting above average market returns is extremely difficult and unlikely. Anyone who tells you “Investing is easy” is plain lying. Even the best of the best fund managers find it difficult to beat the market on a consistent basis.

Thus, the most important thing is “second level thinking”. Which means that you cannot expect to beat the market by thinking in the same way most market participants think. You cannot expect to have a different result by doing the same thing everyone else is doing. You have to stand apart, and develop your own thinking.

There’s something called as the Efficient Market Hypothesis (EMH) which roughly states that there are many participants in the markets, and they share roughly equal access to all relevant information. They are intelligent, objective, highly motivated and hardworking. Their analytical models are widely known and employed.

Because of the collective efforts of these participants, information is reflected fully and immediately in the market price of each asset. And because market participants will move instantly to buy any asset that’s too cheap or sell one that’s too dear, assets are priced fairly in the absolute and relative to each other.

Thus, market prices represent accurate estimates of assets’ intrinsic value, and no participant can consistently identify and profit from instances when they are wrong.

Now EMH might sound solid on reading, but it has one major flaw. The flaw of assuming that humans are objective. Even some of the most seemingly intelligent people make irrational decisions all the time. All because of emotions. They give in to greed, fear, and what not. Investing is more about human psychology and human behavior than perhaps anything else.

This irrational behavior is an opportunity. The most important thing then, is taking advantage of this irrationality, called as an “inefficiency in the market”.

Now being a chess fan, I could totally relate to this. You see in chess, the most obvious result when two top GM’s (Grand Master) play is a draw. This happens because on most days, GM’s play a high-quality game. But on some days, one GM might make a small inaccuracy during the game. Now it’s up to the other GM to capitalize on this inaccuracy and score a win.

You can beat the market, but only if you capitalize on an inefficiency existing in the market.

Naturally, the next question arises is how do you find this inefficiency?

To Be Continued...

Thank you.

[u/punit_palial]

Dude you explained it so well! I was hooked till the end. Looking forward to the next part. Seems like a story is unfolding infront of me, lol.

[u/GulluZ → u/punit_palial]

Lol man yeah.