I started catching up on the financial independence reading and Howard Marks wrote the first book I would like to recommend to you, as worth reading. Howard is current chairman and co-founder of Oaktree Capital Management.
Admittedly, as many other books on financial topics the book is about philosophy and mindset rather than analytical process. There is no surefire recipe for investment success or step-by-step instructions.
The book helps to understand an investor concept of the risk and tolerance to it. I have to confess that prior reading it I never thought of it that way.
As an example, I liked an analogy an analogy about professional tennis, as a “winner’s game”, in which match goes to the player who’s able to hit most winners: fast-paced, well-placed shots that an opponent can’t return. Given anything other than an outright winner by an opponent, professional tennis players can make the shot they want almost all the time: hard or soft, deep or short, left or right, flat or with spin. Professional players aren’t troubled by the things that make the game challenging for amateurs: bad bounces; wind; sun in the eyes, limitations on speed, stamina and skill; or an opponent’s efforts to put the ball beyond reach. The pros can get to most shots their opponents hit and do what they want with the ball almost all the time.
The tennis the rest of us play is a “loser’s game”, with the match going to the player who hits the fewest losers. The winner just keeps the ball in play until the loser hits it into the net or off the court. In other words, in amateur tennis, points are not won; they lost.
The same goes with the investing – we could not possibly predict future but need to cater for various scenarios and avoid losing money in the bad times. Controlling the risk in your portfolio is a very important and worth-while pursuit. The fruits, however, come only in the form of losses that don’t happen.
Success if your investment actions should not be highly dependent on normal outcomes prevailing; instead, you must allow for outliers.
An insight what investors should have learned from the financial crisis and retain, in spite of short corporate financial memory:
- - Too much capital availability makes money flow to the wrong places.
- - When capital goes where it shouldn’t, bad things happen.
- - When capital is in oversupply,investors compete for deals by accepting low returns and a slender margin for error.
- - Widespread disregard for risk creates great risk.
- - Inadequate due diligence leads to investment loses.
- - In heady times, capital is devoted to innovative investments, many of which fail the test of time. Eagerness takes over from prudence.
- - Hidden fault lines running through portfolios can make the prices of seemingly unrelated assets move in tandem.
- - Psychological and technical factors can swamp fundamentals.
One of the most appealing ideas in the book is call to return to the basics. Think and assess prospective company value, go into the details and analyze it. Stop dwelling about the future, nobody knows reliably what it holds for us. There is simply to many unknowns in macro economy.
I could quote Warren Buffett or founder of Vanguard recommendations on the book, but I simply advise you to read it and enjoy it – “The most important thing” by Howard Marks.