# The Most Important Thing **Howard Marks** | [[Prediction]]  --- > "Investment success doesn't come from 'buying good things,' but rather from 'buying things well.'" No asset class has the birthright of high returns—it's only attractive if it's priced right. Price, not quality, determines whether something is a good investment. > "Risk is not observable. What is observable is loss." Risk only manifests when it collides with negative events. This distinction matters because it means you can't judge risk control by looking at returns in good times—you can only judge it when things go wrong. > "The quality of a decision is not determined by the outcome." Events that follow are often beyond anticipating. This distinction between [[Process vs Outcome]] is essential to learning what actually works rather than what got lucky. Investing is fundamentally about navigating uncertainty, not eliminating it. The goal isn't to avoid risk, but to bear it when you're well paid to do so—especially when others are averse. --- ## Core Frameworks ### [[Second-Level Thinking]] – Going beyond the obvious First-level thinking is simplistic and superficial: "It's a good company; let's buy the stock." Second-level thinking is deep, complex and convoluted: "It's a good company, but everyone thinks so. The stock is overrated and overpriced. I'll sell." Your thinking has to be better than that of others—both more powerful and at a higher level. What the wise do in the beginning, fools do in the end. Being correct about something isn't synonymous with being proved correct right away. "Being too far ahead of your time is indistinguishable from being wrong." ### [[Value vs Price]] – The central distinction The discipline that matters most isn't accounting or economics, but psychology. The key is who likes the investment now and who doesn't. Investing is a popularity contest, and the most dangerous thing is to buy something at the peak of its popularity. Skillful investors judge risk primarily on the stability and dependability of value, and the relationship between price and value. **"Well bought is half sold."** An accurate opinion on valuation, loosely held, will be of limited help. An incorrect opinion on valuation, strongly held, is far worse. ### [[Risk and Uncertainty]] – The unobservable hazard **Risk is largely a matter of opinion.** Risk can be judged only by sophisticated, experienced second-level thinkers. "There's a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time." The future you get may be beneficial or harmful, and that may be attributable to foresight, prudence or luck. **High risk comes primarily with high prices.** The paradox: high quality assets can be risky, and low quality assets can be safe. It's just a matter of the price paid for them. Two main risks in investing: the risk of losing money and the risk of missing opportunity. **It's possible to largely eliminate either one, but not both.** --- ## Key Insights **Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.** It's by bearing risk when we're well paid to do so—and especially by taking risks toward which others are averse in the extreme—that we strive to add value. Loss is what happens when risk meets adversity. Risk is the potential for loss if things go wrong. As long as things go well, loss does not arise. The key during a crisis is to be (a) insulated from the forces that require selling and (b) positioned to be a buyer instead. You need: staunch reliance on value, little or no use of leverage, long-term capital and a strong stomach. **Rule number one: most things will prove to be cyclical. Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one.** The more time you spend in investing, the more you appreciate the underlying cyclicality of things. In the world of investing, nothing is as dependable as cycles. It takes only a small fluctuation in the economy to produce a large fluctuation in the availability of credit, with great impact on asset prices and back on the economy itself. **Buy when they hate 'em, and sell when they love 'em.** Broadly negative opinion can make something the least risky thing, since all optimism has been driven out of its price. A broad consensus that something's too hot to handle is almost always wrong. Our goal is to find underpriced assets. A good place to start is among things that are little known and not fully understood, fundamentally questionable on the surface, controversial, unseemly or scary, deemed inappropriate for "respectable" portfolios, unappreciated, unpopular and unloved, trailing a record of poor returns, or recently the subject of disinvestment, not accumulation. **The necessary condition for the existence of bargains is that perception has to be considerably worse than reality.** **A good decision is one that's optimal at the time it's made, when the future is by definition unknown.** Thus, correct decisions are often unsuccessful, and vice versa. Short-term gains and losses are potential impostors, as neither is necessarily indicative of real investment ability (or the lack thereof). Every once in a while, someone makes a risky bet on an improbable outcome and ends up looking like a genius. But that happened because of luck and boldness, not skill. I always say the keys to profit are aggressiveness, timing and skill, and someone who has enough aggressiveness at the right time doesn't need much skill. (But you can't count on being in that position.) **In good years in the market, average is good enough. There is a time, however, when it's essential to beat the market, and that's in the bad years.** Low price is the ultimate source of margin for error. Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom. --- ## Connects To - [[Playing to Win]] – both emphasise that strategy isn't about choosing good things, but making good choices given constraints - [[Dead Companies Walking]] – complements this by showing what happens when people ignore cycles and risk - [[7 Powers]] – the concept of [[Barriers to Entry]] relates to "dependability of value" - [[Algorithms to Live By]] – shares the insight about [[Explore vs Exploit]] tradeoffs in uncertainty - [[Everything Is Predictable]] – both grapple with probability vs outcome and [[Base Rates]] - [[How Finance Works]] – this provides the philosophical foundation for what finance is actually measuring --- ## Final Thought *The Most Important Thing* grants permission to be boringly right rather than excitingly wrong. Most investors obsess over finding the next big thing—the hot stock, the brilliant insight, the perfect market timing. Marks says that's the wrong game. The real skill is in paying the right price for ordinary things and keeping your head when others lose theirs. It's less glamorous than swinging for the fences, but it's also what actually compounds over decades. The formula: thoughtful investors toil in obscurity, achieving solid gains in good years and losing less than others in bad. They avoid the riskiest behaviour because they're aware of how much they don't know and because they have their egos in check. This is more than just an investing book—it's a frame for thinking about decisions under uncertainty. The distinction between risk (potential for loss) and loss (actual outcome) applies everywhere. So does the insight that decision quality must be judged by the process, not the result. And the reminder that cycles are inevitable—what goes up comes down, and what's out of favour eventually comes back. The hardest part is actually doing it. Because contrarian behaviour requires accepting uncomfortably idiosyncratic positions that look imprudent to everyone else. And that takes what Marks calls "the most valuable lessons"—the ones learned in tough times, when you didn't get what you wanted.