The Most Important Thing Illuminated

public.icon

投資について語る本。

サマリを引用。

You can’t do the same things others do and expect to outperform. The most dependable way to outperform the market is to buy something for less than its value. It is price, not quality that determines value: high-quality assets can be risky, and low-quality assets can be safe.

This is my book summary of The Most Important Thing by Howard Marks. My notes are informal and often contain quotes from the book as well as my own thoughts. This summary includes key lessons and important passages from the book.

Successful investing requires thoughtful attention to many separate aspects, all at the same time. Omit any one and the result is likely to be less than satisfactory.

You have to follow a disciplined thought process in order to be successful, but it doesn’t have to be mine.

“Experience is what you got when you didn’t get what you wanted.”

Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk.

No idea can be any better than the action taken on it.

Second-level thinking is deep, complex and convoluted. The second-level thinker takes a great many things into account: • What is the range of likely future outcomes? • Which outcome do I think will occur? • What’s the probability I’m right? • What does the consensus think? • How does my expectation differ from the consensus? • How does the current price for the asset comport with the consensus view of the future, and with mine? • Is the consensus psychology that’s incorporated in the price too bullish or bearish? • What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple

Extraordinary performance comes only from correct nonconsensus forecasts, but nonconsensus forecasts are hard to make, hard to make correctly and hard to act on.

You can’t do the same things others do and expect to outperform.

If your behavior is conventional, you’re likely to get conventional results—either good or bad.

In theory there’s no difference between theory and practice, but in practice there is. YOGI BERRA

To beat the market you must hold an idiosyncratic, or nonconsensus, view.

CHRISTOPHER DAVIS: It is also critical to spend time trying to fully understand the incentives at work in any given situation. Flawed incentives can often explain irrational, destructive, or counterintuitive behaviors or outcomes.

Most people are driven by greed, fear, envy and other emotions that render objectivity impossible and open the door for significant mistakes.

SETH KLARMAN: Silos are a double-edged sword. A narrow focus leads to potentially superior knowledge. But concentration of effort within rigid boundaries leaves a strong possibility of mispricings outside those borders. Also, if others’ silos are similar to your own, competitive forces will likely drive down returns in spite of superior knowledge within such silos.

The image here is of the efficient-market-believing finance professor who takes a walk with a student. “Isn’t that a $10 bill lying on the ground?” asks the student. “No, it can’t be a $10 bill,” answers the professor. “If it were, someone would have picked it up by now.” The professor walks away, and the student picks it up and has a beer.

“Being too far ahead of your time is indistinguishable from being wrong.”

People should like something less when its price rises, but in investing they often like it more.

The positives behind stocks can be genuine and still produce losses if you overpay for them.

Buying something for less than its value. In my opinion, this is what it’s all about—the most dependable way to make money. Buying at a discount from intrinsic value and having the asset’s price move toward its value doesn’t require serendipity; it just requires that market participants wake up to reality. When the market’s functioning properly, value exerts a magnetic pull on price.

Of all the possible routes to investment profit, buying cheap is clearly the most reliable.

The most dangerous investment conditions generally stem from psychology that’s too positive.

Investors who want some objective measure of risk-adjusted return—and they are many—can only look to the so-called Sharpe ratio.

“There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.”

Quantification often lends excessive authority to statements that should be taken with a grain of salt.

Many futures are possible, to paraphrase Dimson, but only one future occurs.

People usually expect the future to be like the past and underestimate the potential for change.

We hear a lot about “worst-case” projections, but they often turn out not to be negative enough. I tell my father’s story of the gambler who lost regularly. One day he heard about a race with only one horse in it, so he bet the rent money. Halfway around the track, the horse jumped over the fence and ran away. Invariably things can get worse than people expect.

Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.

High risk, in other words, comes primarily with high prices.

The greatest risk doesn’t come from low quality or high volatility. It comes from paying prices that are too high.

There are few things as risky as the widespread belief that there’s no risk.

I’m firmly convinced that investment risk resides most where it is least perceived.

Most investors think quality, as opposed to price, is the determinant of whether something’s risky.

High quality assets can be risky, and low quality assets can be safe.

Quite often “high-quality” companies sell for high prices, making them poor investments.

Over a full career, most investors’ results will be determined more by how many losers they have, and how bad they are, than by the greatness of their winners.

JOEL GREENBLATT: The math behind the compounding of negative returns helps ensure this outcome (e.g., a 40 percent loss in one year requires a return of 67 percent to fully recover).

There is a right time to argue that things will be better, and that’s when the market is on its backside and everyone else is selling things at giveaway prices.

When things are going well and prices are high, investors rush to buy, forgetting all prudence. Then, when there’s chaos all around and assets are on the bargain counter, they lose all willingness to bear risk and rush to sell.

Stocks are cheapest when everything looks grim.

“What the wise man does in the beginning, the fool does in the end.”

Busts are the product of booms, and I’m convinced it’s usually more correct to attribute a bust to the excesses of the preceding boom than to the specific event that sets off the correction.

Demosthenes: “Nothing is easier than self-deceit. For what each man wishes, that he also believes to be true.”

People who might be perfectly happy with their lot in isolation become miserable when they see others do better.

High returns can be unsatisfying if others do better, while low returns are often enough if others do worse.

Bubbles are capable of arising on their own and need not be preceded by crashes, whereas crashes are invariably preceded by bubbles.

Market excesses are ultimately punished, not rewarded.

Superior investing, as I hope I’ve convinced you by now, requires second-level thinking—a way of thinking that’s different from that of others, more complex and more insightful.

Certainly the markets, and investor attitudes and behavior, spend only a small portion of the time at “the happy medium.”

“Once-in-a-lifetime” market extremes seem to occur once every decade or so—not often enough for an investor to build a career around capitalizing on them. But attempting to do so should be an important component of any investor’s approach.

In the long run, the market gets it right. But you have to survive over the short run, to get to the long run.

SETH KLARMAN: This is where it is particularly important to remember the teachings of Graham and Dodd. If you look to the markets for a report card, owning a stock that declines every day will make you feel like a failure. But if you remember that you own a fractional interest in a business and that every day you are able to buy in at a greater discount to underlying value, you might just be able to maintain a cheerful disposition. This is exactly how Warren Buffett describes bargain hunting amid the ravages of the 1973 to 1974 bear market.

Most people seem to think outstanding performance to date presages outstanding future performance. Actually, it’s more likely that outstanding performance to date has borrowed from the future and thus presages subpar performance from here on out.

In dealing with the future, we must think about two things: (a) what might happen and (b) the probability that it will happen.

The herd applies optimism at the top and pessimism at the bottom. Thus, to benefit, we must be skeptical of the optimism that thrives at the top, and skeptical of the pessimism that prevails at the bottom.

The best opportunities are usually found among things most others won’t do.

The raw materials for the process consist of (a) a list of potential investments, (b) estimates of their intrinsic value, (c) a sense for how their prices compare with their intrinsic value, and (d) an understanding of the risks involved in each, and of the effect their inclusion would have on the portfolio being assembled.

There aren’t always great things to do, and sometimes we maximize our contribution by being discerning and relatively inactive. Patient opportunism—waiting for bargains—is often your best strategy.

You’ll do better if you wait for investments to come to you rather than go chasing after them. You tend to get better buys if you select from the list of things sellers are motivated to sell rather than start with a fixed notion as to what you want to own. An opportunist buys things because they’re offered at bargain prices. There’s nothing special about buying when prices aren’t low.

JOEL GREENBLATT: This is one of the hardest things to master for professional investors: coming in each day for work and doing nothing.

What’s past is past and can’t be undone. It has led to the circumstances we now face. All we can do is recognize our circumstances for what they are and make the best decisions we can, given the givens.

One of the great things about investing is that the only real penalty is for making losing investments. There’s no penalty for omitting losing investments, of course, just rewards. And even for missing a few winners, the penalty is bearable.

Missing a profitable opportunity is of less significance than investing in a loser.

You simply cannot create investment opportunities when they’re not there. The dumbest thing you can do is to insist on perpetuating high returns—and give back your profits in the process. If it’s not there, hoping won’t make it so.

When prices are high, it’s inescapable that prospective returns are low (and risks are high).

We have two classes of forecasters: Those who don’t know—and those who don’t know they don’t know. JOHN KENNETH GALBRAITH

It’s frightening to think that you might not know something, but more frightening to think that, by and large, the world is run by people who have faith that they know exactly what’s going on. AMOS TVERSKY

The more we concentrate on smaller-picture things, the more it’s possible to gain a knowledge advantage.

Whatever limitations are imposed on us in the investment world, it’s a heck of a lot better to acknowledge them and accommodate than to deny them and forge ahead.

In the world of investing, … nothing is as dependable as cycles. Fundamentals, psychology, prices and returns will rise and fall, presenting opportunities to make mistakes or to profit from the mistakes of others. They are the givens.

We may never know where we’re going, but we’d better have a good idea where we are.

The truth is, much in investing is ruled by luck.

SETH KLARMAN: This is why it is all-important to look not at investors’ track records but at what they are doing to achieve those records. Does it make sense? Does it appear replicable? Why haven’t competitive forces priced away any apparent market inefficiencies that enabled this investment success?

The correctness of a decision can’t be judged from the outcome. Nevertheless, that’s how people assess it. 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.

Randomness alone can produce just about any outcome in the short run.

The things that happened are only a small subset of the things that could have happened. Thus, the fact that a stratagem or action worked—under the circumstances that unfolded—doesn’t necessarily prove the decision behind it was wise.

A good decision is one that a logical, intelligent and informed person would have made under the circumstances as they appeared at the time, before the outcome was known.

One year with a great return can overstate the manager’s skill and obscure the risk he or she took. Yet people are surprised when that great year is followed by a terrible year. Investors invariably lose track of the fact that both short-term gains and short-term losses can be impostors, and of the importance of digging deep to understand what underlies them.

Investment performance is what happens to a portfolio when events unfold.

Professional tennis is a “winner’s game,” in which the match goes to the player who’s able to hit the most winners: fast-paced, well-placed shots that an opponent can’t return.

But 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 aren’t won; they’re lost.

So much is within the control of professional tennis players that they really should go for winners. And they’d better, since if they serve up easy balls, their opponents will hit winners of their own and take points. In contrast, investment results are only partly within the investors’ control, and investors can make good money—and outlast their opponents—without trying tough shots.

Oaktree portfolios are set up to outperform in bad times, and that’s when we think outperformance is essential.

“Because ensuring the ability to survive under adverse circumstances is incompatible with maximizing returns in the good times, investors must choose between the two.”

If you minimize the chance of loss in an investment, most of the other alternatives are good.

One of the most striking things I’ve noted over the last thirty-five years is how brief most outstanding investment careers are.

We believe firmly that “if we avoid the losers, the winners will take care of themselves.”

The more challenging and potentially lucrative the waters you fish in, the more likely they are to have attracted skilled fishermen.

The cautious seldom err or write great poetry.

Caution can help us avoid mistakes, but it can also keep us from great accomplishments.

Worry about the possibility of loss. Worry that there’s something you don’t know. Worry that you can make high-quality decisions but still be hit by bad luck or surprise events.

An investor needs do very few things right as long as he avoids big mistakes. WARREN BUFFETT

A portfolio that contains too little risk can make you underperform in a bull market, but no one ever went bust from that; there are far worse fates.

The success of your investment actions shouldn’t be highly dependent on normal outcomes prevailing; instead, you must allow for outliers.

The financial crisis occurred largely because never-before-seen events collided with risky, levered structures that weren’t engineered to withstand them.

It’s worth noting that the assumption that something can’t happen has the potential to make it happen, since people who believe it can’t happen will engage in risky behavior and thus alter the environment.

Understanding and anticipating the power of correlation—and thus the limitations of diversification—is a principal aspect of risk control and portfolio management, but it’s very hard to accomplish. The failure to correctly anticipate co-movement within a portfolio is a critical source of investment error.

If the desire to make money causes you to buy even though price is too high, in the hope that the asset will continue appreciating or the tactic will keep working, you’re setting yourself up for disappointment.

The essential first step in avoiding pitfalls consists of being on the lookout for them.

Leverage magnifies outcomes but doesn’t add value. It can make great sense to use leverage to increase your investment in assets at bargain prices offering high promised returns or generous risk premiums. But it can be dangerous to use leverage to buy more of assets that offer low returns or narrow risk spreads—in other words, assets that are fully priced or overpriced. It makes little sense to use leverage to try to turn inadequate returns into adequate returns.

One way to improve investment results—which we try hard to apply at Oaktree—is to think about what “today’s mistake” might be and try to avoid it.

When there’s nothing particularly clever to do, the potential pitfall lies in insisting on being clever.