The Most Important Thing

Howard Marks is the Co-Chairman of Oaktree Capital Management a leading global investment management firm.  Mr. Marks is regarded as a leader within the investment management industry.  His breadth of knowledge is often highlighted within his memos that are published on a regular basis and his book, The Most Important Thing.

Mr. Marks and I share many of the same investment and wealth planning principles.  I wanted to share with you specifically four core themes and subsequent insights from his book that lay the groundwork of a solid investment process.  Many of which are key tenants to my own investment practices and processes that I utilize at TAMMA.  (All of the bullet points below come directly from Marks’ book, The Most Important Thing)

First & Second Level Thinking

  • To be right, your thinking has to be different in order to beat those whose thinking is the same.
  • Investment approach be intuitive and adaptive rather than be fixed and mechanistic.
  • First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple.
  • Different and better: that’s a pretty good description of second-level thinking.

Understanding Risk

  • “Risk” is—first and foremost—the likelihood of losing money.
  • Much of risk is subjective, hidden and unquantifiable.
  • In regard to risk, “the first step consists of understanding it. The second step is recognizing when it’s high. The critical final step is controlling it.”
  • “There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.” That’s one of the most important things you can know about investment risk.
  • Bottom line: risk control is invisible in good times but still essential, since good times can so easily turn into bad times.  Risk control is the best route to loss avoidance. Risk avoidance, on the other hand, is likely to lead to return avoidance as well.
  • Several things go together for those who view the world as an uncertain place: healthy respect for risk; awareness that we don’t know what the future holds; an understanding that the best we can do is view the future as a probability distribution and invest accordingly; insistence on defensive investing; and emphasis on avoiding pitfalls.

Impact of Psychology

  • The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological.
  • Many people possess the intellect needed to analyze data, but far fewer are able to look more deeply into things and withstand the powerful influence of psychology.
  • What, in the end, are investors to do about these psychological urges that push them toward doing foolish things? Learn to see them for what they are; that’s the first step toward gaining the courage to resist. And be realistic. Investors who believe they’re immune to the forces described in this chapter do so at their own peril. If they influence others enough to move whole markets, why shouldn’t they affect you, too?
  • The desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing—these factors are near universal. Thus they have a profound collective impact on most investors and most markets. The result is mistakes, and those mistakes are frequent, widespread and recurring.

Investment Philosophy

  • There’s no simple solution: no formula that will tell you when the market has gone to an irrational extreme, no foolproof tool that will keep you on the right side of these decisions, no magic pill that will protect you against destructive emotions. As Charlie Munger says, “It’s not supposed to be easy.”
  • Establishing and maintaining an unconventional investment profile requires acceptance of uncomfortably idiosyncratic portfolios, which frequently appear downright imprudent in the eyes of conventional wisdom.
  • First, the process of investing has to be rigorous and disciplined. Second, it is by necessity comparative. Since we can’t change the market, if we want to participate, our only option is to select the best from the possibilities that exist. These are relative decisions.
  • Simply put, we must strive to understand the implications of what’s going on around us. When others are recklessly confident and buying aggressively, we should be highly cautious; when others are frightened into inaction or panic selling, we should become aggressive.
  • Without enough time to ride out the extremes while waiting for reason to prevail, you’ll become that most typical of market victims: the six-foot-tall man who drowned crossing the stream that was five feet deep on average
  • Short-term gains and short-term losses are potential impostors, as neither is necessarily indicative of real investment ability (or the lack thereof). Surprisingly good returns are often just the flip side of surprisingly bad returns. One year with a great return can overstate the manager’s skill and obscure the risk he or she took.

Just like in football, there is an offense and a defense.  Investors need to decide what type of investor that they are and the associated investment process that comes along with that decision.  You can be aggressive, defensive, or take a balanced approach of the two but you cannot be all three.  The danger lies in trying to go between these three styles rather than committing to one approach and developing a strategy for the long run.

Be aware that whatever approach or style that you choose, there will be times when one approach will be in favor with the markets while your approach is out of favor.  And while it may be tempting to change your approach, you do so at the risk of blowing up your entire game plan.

It takes time, focus, and knowledge to manage investment assets.  If you don’t feel comfortable handling this important responsibility on your own, then you should seek out an expert advisor.

What I am Reading

  • The Cost of Holding On (NYT)
  • How to Finance a Vacation Home That’s Also a Short-Term Rental (WSJ)
  • Disrupting Your Own Happiness (A Wealth of Common Sense)
  • How to pick a financial adviser, could be the most lucrative decision you ever make (Washington Post)
  • The More Cash People Have, the Happier They Are (WSJ)

Optimize Your Spending

What if you could increase your level of happiness by what you buy?  You may think that is an easy question to answer by saying, “yes, if I could buy anything I wanted I would be happier.”  However, what if research showed that once you obtained a certain income level, say $75,000 your level of happiness would not change that much because of what you already owned or by what you could buy?

You have likely heard the expression, spend money on experiences and not things. As more research is done on the correlation between what we buy and how happy it makes us, the data points to this statement being very factual.

I see this often as my 5 and 3-year-old children play with their toys.  Within the first 30 minutes of playing with something new, they are ready to move onto something else.  What is really interesting is when we are about ready to donate toys is when at least one kid suddenly takes an interest in it again.  I don’t think that adults are that much different when it comes to this aspect of ownership.

There is a romance of ownership that is likely higher than actually owning the item itself.  The new house, car, or clothes lose their luster sometimes within 3 to 6 months of ownership.  For a new house or car that can be a very expensive feeling.


To take this spending conversation further, what if I told you that you were a millionaire but that you lived around people who had many more millions than you did.  How do you believe that would affect your spending patterns and habits?  In absolute terms you would be in the top 1% but in relative terms you may feel like you are in the bottom 1%. This could lead you into the classic “keeping up with the Jones’ effect”.   Thus driving bad spending habits as you acquire the newest goods but become less happy in the process.

So how can we optimize our spending to help us increase our happiness? 

  • Don’t just spend your money on things or experiences, but instead spend your money on what creates or helps support what you personally value most in your life.  This could mean spending it on people, causes or charities, or building something that you want in your life for a long period of time.
  • Money can help you design the life that you want.  Setting aside quality time to give real thought to what you want your life to be is actually a critical step in someone’s spending habits.  Having life goals whether they are financial or not, can help you resist those spontaneous purchases that can act as a quick adrenaline rush but will likely make you unhappier in the long run.
  • Fight the “keeping up with the Jones’ effect” by…. you guessed it, maintaining a meaningful life and financial plan that is customized for what you what to achieve.  Again this has a direct correlation between taking the time to really derive what brings purpose and meaning within your life and what you spend your money on.

When we mismanage our money and/or our spending patterns go awry, we can generally feel sick and broke. How you spend your money, the money you have already accumulated, and your actual health all intersect with each other.  When you spend money in a way that serves the purposes that you intend it for, that can create happiness which in turn can have lasting positive health impacts not to mention financial stability.

The Ability to be Adaptable and Flexible

One of the traits that helped me during my corporate finance career was learning how to be adaptable and flexible.  Over the course of my Corporate career I faced some fairly challenging experiences:

  • Took part in the closing of 2 MFG facilities;
  • Involved in the movement of product which eventually resulted in the closure of 4 MFG facilities;
  • Went through a chapter 11 bankruptcy;
  • And was part of an organization that talked about change but at the end of the day wasn’t ready for the kind of change that I was trying to bring.

Sadly, after presenting my background to people they often wanted to run in the opposite direction or have me walk back out the door that I just came through.  But being in these rather difficult situations allowed me see the perspectives of one situation from many different angles.

To the companies I was working with, these changes were merely business decisions that had to be made for the betterment of the overall company and its shareholders.  From the employees’ perspective that were losing their positons, this wasn’t a business decision it was all personal.  Then there was my perspective.

I could see both sides of the situation as I was often in the middle between the two groups.  In some situations, my position was eliminated just like most if not all employees.  While other times, I had another position to go to, often in a similar role with another difficult situation to deal with.

In some situations, poor decisions that were previously made by companies had unintentional consequences upon its employees.  While other situations were a result of bad decisions made by the employees often due to their lack of flexibility and the ability to adapt to changing business conditions.

It’s this perspective that has also helped me in my investment career.

When considering any investment thesis, I try to find just as much data that opposes my viewpoint than agrees with it.  There is a plethora of smart people within the asset management that may have an opposing view to my analysis which must be respected.  In baseball you are considered a legend if you bat above .300.  In the investment arena, world class is batting anywhere between .500 and .600.  Thus, you have just as good a chance of being wrong than you do in being right.

Having an open mind within my investment process requires me to be both adaptable and flexible.  Just like a good hitter in baseball can adjust to a good pitcher, so to must an investor adjust to not only the changing business landscape but also to changes in trends, and more importantly investor psychology.

What I Am Reading This Week

Economics is Largely the Study of Making Choices

Economics is largely the study of making choices.  I wish that I would have stressed this point more to my economic students last semester.  There aren’t absolute laws in economics like there are in other hard and physical sciences such as chemistry and physics.  However, there are some established tendencies and limits to economics such as the law of supply and demand when it does come to economics. 

Typically, when the price of an item goes up, the demand goes down.  There is an inverse relationship between price and the demand of goods.   I say typically because sometime this does not occur in the short-run but over longer periods of time, this law or principle does hold true.  I would refer to economics as a social science.  And because of this social nature and the involvement of humans, we don’t always make the best economic decisions.

I often tell my wife, “here are our choices we can only do one of these three things let’s decide what our best option is.”  In most cases, the decision comes down to the option that creates the least amount of pain.  It is important to realize that with every economic decision, our decisions and actions have consequences.  For example, spending can provide us with enjoyment (albeit mostly temporary), but it will also make us poorer.

In the animated video below, legendary economist Ha-Joon Chang, emphasizes that “Economics is for everyone.”  As I often tell people who are trying to take the first step in the wealth planning process, don’t be paralyzed by the fear of the unknown.  Similarly, economics and Wall Street jargon fit into that same category when it comes to having an impact on our decisions and actions.  Don’t just believe what you hear or take things at face value.  Take part in this self-educating world that we live in.

What I am Reading

  • Zen and the Art of 401(k) Maintenance (NYT)
  • This Bull Market Is Powered by Your Indifference (Bloomberg)
  • The Internet of “Stuff Your Mom Won’t Do for You Anymore” (HBR)
  • More Money, More Success, More Stuff? Don’t Count on More Happiness (NYT)

Two Charts that Speak to a Consistent & Disciplined Investment Approach

An American President usually gets too much blame and too much credit for economic and stock market performance over the course of their presidency.  There is the element of timing and uncontrollable events that can have a large impact on the figures below.  Consider the Bush II era which began during the Tech bust but also included the 911 terrorist attacks, housing boom, and beginning of the subsequent housing bust which Obama partially inherited.

There is no shortage of articles that will tell you what impact a Clinton or Trump presidency will have upon the equity markets which is basic non-sense because no one knows.  The best decision when it comes to politics is too keep it out of your portfolio decisions.

With that said, there is never going to be an absolute perfect time to invest in the equity markets.  Market timing has been proven to be a risky and in most cases an unprofitable investment strategy in the long-run.  I try to instill in both current and potential clients that having a consistent investment approach with an overarching layer of discipline should prove to profitable over the long-term.  And when I say long-term I mean greater than 5 years.  

Andrew Adams, an analyst at Raymond James who put together the chart below writes, "For most people, it can be a tough psychological battle to buy when the market is making new all-time highs since no one wants to risk getting in right before a major market top.  Yet, history has shown us that you don't have to time it perfectly to make money in stocks in the long run."

I believe that these two charts demonstrate that no matter who may be in the oval office or at what level the equity markets may be trading at, a discipline and consistent investment strategy will likely provide a higher probability of investment success in order to achieve your financial and life goals.

What I am Reading