The Most Important Thing

It’s a compelling recommendation when Warren Buffett says “This is that rarity, a useful book.” He said this about The Most Important Thing: Uncommon Sense for the Thoughtful Investor, by cofounder of Oaktree Capital Management, Howard Marks. It turns out that “investor” in this book means active investor. The lessons on risk management and other topics are top-notch for those trying to beat the market, but passive investors won’t get much out of it.

One lesson for active investors is to seek out inefficient markets and be better than others at assessing value. This makes the S&P 500 a poor place to look for undervalued stocks.

Another lesson is that risk is the possibility of losing money, which is different from volatility. Risk comes mainly from high prices. Markets always seem riskier after they decline, but in reality, stocks are riskiest when their prices are highest.

To be a successful investor, it’s necessary to be skeptical. This means being skeptical of both too much optimism and too much pessimism.

While I don’t recommend active investing to anyone because very few investors have sufficient skill to expect to beat the market, anyone planning to pursue this path should learn the lessons taught by Marks in this book.