Howard Marks book “The most important thing” shares his wisdom from decades of successful value investing. Rather than looking for a single magic formula, he outlines multiple essential elements that must be considered simultaneously to achieve superior market returns.
A central theme is the necessity of second-level thinking. Ordinary investors see the obvious, but exceptional investors look further, questioning consensus estimates and anticipating how others will react.
He emphasizes the proper assessment of risk and suggests that high returns mean nothing if achieved by taking excessive chances. Managing downside volatility is the absolute key to surviving difficult periods.
Furthermore, investors must understand the pendulum swing of market cycles and investor psychology, moving cautiously when others are greedy and acting aggressively when panic sets in.
By combining defensive strategies with independent analysis, we can learn how to navigate financial markets thoughtfully and avoid the common psychological traps that destroy wealth.
Investing resists reduction to a set of universal rules. No formula applies in all market conditions, and no approach remains effective indefinitely. Strategies that produce strong results for a period will eventually encounter changing conditions that render them obsolete, or attract so many followers that their own popularity erodes their edge.
There is a simple truth: average performance are accessible to anyone. Buying a low-cost index fund delivers market returns with minimal fees and negligible effort.
The real challenge begins when we aim for something better than average, because so does everyone else. Outperforming the market is genuinely difficult, and it demands a proportional investment of time, attention, and intellectual honesty.
What separates investors who consistently achieve superior results is not access to better data or faster execution, it is a fundamentally different mode of thinking. This is what we can call second-level thinking.
Where first-level thinkers seek simple formulas and satisfying answers, second-level thinkers recognize that markets are complex adaptive systems shaped by the behavior of countless participants, each with their own assumptions and biases.
A first-level response to bad news might be to sell; a second-level response asks what the market has already priced in, whether the consensus is overreacting, and what the situation will look like in two or three years.
Second-level thinking means looking past the immediate and visible outcome to consider what follows from it. A poor result today can set the conditions for a strong outcome tomorrow; an apparently favorable situation can conceal fragility that compounds quietly over time.
There is also an important social dimension to this. Conventional thinking, however carefully applied, produces conventional results.
If we reason the same way as the majority of market participants, we will arrive at the same conclusions, take the same positions, and earn the same returns. To achieve outcomes that differ meaningfully from the crowd, our thinking must also differ, and it must differ in a way that turns out to be correct.
Unconventional alone is not enough; the judgment behind it has to be sound. That combination, independent thinking and accurate judgment, is precisely what makes consistently superior investing so rare.
In the 1960s, economists at the University of Chicago developed the efficient market hypothesis, a theory that would reshape how the investment world thinks about returns and risk. Its core propositions are:
One of the most practical outcomes of this theory has been the rise of index funds. If prices already reflect all available information and skill, or alpha, cannot systematically exist, then the rational response is to stop trying to beat the market and simply track it at the lowest possible cost. For many investors, this remains a perfectly sensible strategy.
Yet the hypothesis rests on an assumption that deserves scrutiny: objectivity. Markets are not populated by calculating machines. They are made up of people, and people bring emotion, bias, incomplete reasoning, and inconsistent time horizons to every decision they make.
As a result, prices regularly diverge from intrinsic value, sometimes trading well below it, sometimes well above it, creating pockets where risk-adjusted returns are either too low or too high relative to what a dispassionate analysis would suggest.
This is where the picture becomes more nuanced. Rather than treating efficiency as an absolute condition, it is more accurate to think of markets as discretely efficient: broadly rational in aggregate, but uneven.
Some segments are heavily scrutinized and therefore genuinely difficult to exploit; others receive less attention and leave more room for a rigorous, independent analysis to add value.
The question we should ask ourselves is not whether markets are efficient in theory, but whether specific inefficiencies exist right now, and whether we are positioned to take advantage of them.
Finding an inconsistency is only the first step. Once identified, these situations require patience, because the market does not always correct on a convenient schedule. As the well-worn observation reminds us, markets can remain irrational longer than we can remain solvent. Identifying the gap between price and value is one skill; having the staying power to wait for that gap to close is another entirely.
This is why a subset of investors can, over time, consistently outperform, not because the market is broken, but because differential skill, patience, and the willingness to act on independent judgment remain genuinely rare.
Approaches to investing in securities generally fall into two broad camps: those based on a company’s fundamental attributes, and technical analysis, which concerns itself with the behavior of stock prices over time.
Technical analysis studies historical price movements, applying various formulas and pattern recognition techniques to anticipate where prices might go next. Its influence among serious long-term investors has diminished considerably, though price patterns are still sometimes used to supplement fundamental decisions.
In short-term trading, and particularly intraday activity, price movements can be almost entirely disconnected from the underlying business, which gives technical methods some practical relevance in that narrow context.
A related practice, momentum investing, operates on the premise that assets rising in price will continue to rise, and those falling will continue to fall. Both approaches share a common limitation: neither treats a stock as a proportional ownership stake in a real business.
The two frameworks that do engage with a company’s underlying characteristics are value investing and growth investing.
Value investing focuses on the measurable factors that drive earnings and cash flow, with the goal of estimating a company’s intrinsic value. Intangible qualities such as talent pipelines or long-run growth potential receive less weight. The discipline is fundamentally one of seeking cheapness: using financial metrics to identify businesses trading for less than what they are worth today.
Growth investing, by contrast, directs attention toward what a company might become. Growth investors are willing to pay a price that appears high relative to current financials because they expect the business to expand substantially, making today’s price look modest in retrospect.
Both approaches are ultimately oriented toward value; the distinction lies in the time horizon. Value investors anchor to what a business is worth now; growth investors are making a bet on what it will be worth later. It is worth noting that even value investing requires some view of the future, since any estimate of intrinsic value depends on assumptions about how the business will evolve and what macroeconomic conditions will prevail. In general, growth investing offers a larger upside when the bet is correct, while value investing tends to produce more consistent outcomes.
Value investing demands three things that are harder to sustain than they first appear:
It is entirely common, once a cheap asset has been identified and purchased, for it to continue declining before it recovers. This connects to a feature of investor psychology.
In most markets, demand falls as prices rise; in financial markets, the opposite often holds. We tend to grow more confident in a position as it appreciates and more doubtful as it falls, which is precisely the wrong instinct if the original analysis was sound.
Averaging down into a falling position, when the thesis remains intact, should be “straightforward” but psychologically demanding.
Once intrinsic value has been estimated, it must be weighed against the current price. Value has no meaning in isolation.
There are very few assets so fundamentally impaired that they cannot represent a reasonable investment at a low enough price, and equally, there are no businesses so exceptional that they cannot disappoint if purchased at too high a price.
The “Nifty Fifty” of the early 1970s included genuinely excellent companies, as did the technology sector in the late 1990s. The problem was never the businesses; it was the price. A stock purchased cheaply enough creates its own margin of safety, and the upside tends to follow.
Over the long run, price converges toward intrinsic value. In the short run, however, price is shaped by two additional forces: psychology and technical factors.
When markets suddenly declines, levered investors facing margin calls may be forced to sell regardless of their view on value; mutual funds receiving redemptions face the same obligation.
These forced-selling events are relatively rare, but they cluster around crises and the unwinding of bubbles. They also serve as a reminder of why leverage, and short selling, introduce risks that can override even a sound investment thesis. Being forced into liquidation at the worst possible moment is not a risk worth taking.
Underlying all of this is psychology. No investor is fully immune from it. The relationship between price and value is, to a significant degree, a contest between analysis and emotion, and understanding that tension is as important as any financial model we might build.
MARKS, Howard, 2018. The Most Important Thing. Columbia Business School Publishing. ISBN 978-0-231-15368-3.