Howard Marks is an American investor and writer born in 1946. He is the co-founder of Oaktree capital management. He is one of the world’s leading value investors. His book, the Most important thing was published in May 2011 inspired many investors. The book explains principals for successful investment. Marks explains some concepts related to price/value relationship, defensive investing and second level thinking
Marks believes that one should have second –level thinking. Others may only go for average returns, but for being a successful investor, you should be adaptive and intuitive to gain profit from market fluctuations. As there’s no perfect guide or steps for successful investing, your second level thinking is what’s going to help, says Howard. Physcology plays a very important role in markets. Mark talks about inefficient markets. You should have quite a good knowledge about market operations and its efficiency. What is the most vulnerable mistake investors do? They allow greed, emotions, fear to defeat their objectivity. Mark says that you must analyse market opportunities and understand efficiencies to exploit profits.
Howard throws light on the most important thing, as the title of the book suggests. Value! Value is the most important thing according to Marks. The best value is when you can buy growth at a value price.
What’s the best time to buy an investment? The answer may be deceiving for some of you, but that’s what I have learnt from reading this book. The best time to buy an investment is when no one wants it. At that time, all the bad data and assumptions would be the basis for price. Here psychology comes into the picture. Psychology of the investors sometimes causes the price of a stock to misprice. There should be a good relationship between the fundamentals, value and the price.
Risk is the possibility of loss, it cannot be measured. How can risk be avoided? Firstly you need to make quality decisions based on price value relationship. You should prepare yourself for the unforeseen circumstances of future. Analysis of real value of your investment is very essential. Mark says that if you are taking up risk, first ensure that it is a worthy one. Recognizing and controlling risk is very important for an investor to succeed. When is the risk highest? It is highest when everyone assumes it to be low. One should bear the risk intelligently and try to prevent it.
Markets are always fluctuating. Since trends do not continue forever, one should be aware of the major turning points. Howard says that it’s not possible to predict things, but at least one should be prepared to control the loss or damage. The author believes that for being a successful investor, one needs to be attentive to cycles. Psychological forces greatly affect investment decisions. Greed, fear, envy, ego. These are universal forces which prove true at market conditions and can seriously damage personal returns. Intrinsic value and margin of safety should be known to all investors to stay positive in the investing environment.
Sir John Templeton said that “To buy when others are despondently selling and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.”
Howard again highlights the second level thinking concept. He says that do not follow the trend. A successful investor is one who doesn’t follow the crowd. The key to success sometimes lies when you just do the opposite. One should first make a list of investment options and then choose the best bargains.
You always won’t get the best deal, Howard says. You should be patient enough and wait for good things to come in your way. Haste makes waste. I like the tip which Howard gives. He said that select from a list of things which sellers are motivated to sell. When it comes to investing, knowledge is the first thing, which an investor should possess. He also says that forecasts made by experts do not always prove to be right. So do not rely completely on them. Instead of the forecasting the unknowable, it is better to pay attention to balance sheets, income statements etc.
All the investors should be aware of the current market conditions and the environment. The condition of the capital market – is it loose or tight? Cycles influence the investor’s performance. An investor should know where he or she stands. Investing defensively is the key to successful investing. Once again Howard highlights that one should try to avoid the loss. Risks are very critical and one should try to understand the risks in order to prevent making mistakes. Thinking defensively will surely help an investor to invest well.
Taking a step further and outperforming the markets should be the prime role of investors. If your price and value relationship is right and if you have a basic understanding of value then would be able to take sound investment decisions. For being a successful investor, Howard says that you should have the strength to overcome negative psychological influences.
Philip Fisher was an American investor born in 1907. He is one of the most influential investors. His book ‘Common stock for Uncommon Profits’ published in 1958 is a guide to successful investing. He has described the growth opportunities which most of the investors overlook. The book has explained what to buy, when to buy. In addition to this it said 15 principals of successful investing. Further it says 10 don’ts of an investor, and 5 powerful forces and about growth stocks. He described ‘what to buy’ for high-quality stocks, where he called these stocks as ‘Scuttlebutt’. Now what does scuttlebutt include and what does it mean actually?
Furthermore, Scuttlebutt includes all the financial activities such as study of its promoters, suppliers, customers, stakeholders, employees, competitors etc. These are to know the how-about of a company. What is the main reason for everyone to enter stock markets? Fisher says generally there are two reasons to it. One is to time the market. The other one is to find the companies which are doing good and holding it. And he prefers the second one. Moreover, the book has described the famous ‘15 points to look for a common stock’ known worldwide. He has advised the investors to look upon the 15 points before purchasing stocks.
Fisher says that you should identify stocks which have the greatest profit when compared to risk. He further explains when to buy? According to him, an investor should know about the timing of buying stocks, even if the company is doing great. So for selling he said that if an investor finds a better investment. Or if the management is deteriorating one should sell it. All the investors need to forecast the market and then take up the investment decision.
1) The fluctuations in a business cycle
2) Interest rate trends.
3) What is government’s stance over business and investment?
4) Inflation.
5) Changes in existing industries and products.
Further, Philip talks about the dividends. Investors should be aware of the rate of dividends and also about its regularity. Companies reducing the rate of dividend without any reason should be avoided immediately. Investors should prefer steady dividend, which are paid out regularly. One should also measure how much of the company’s net income is paid out as dividends.
Fisher gives the investors an amazing concept which he calls,
“Conservative investors sleep well”
Smart investors seek to “conserve purchasing power at a minimum of risk.”
1) Company’s “low-cost production,” including efficiency in sales process, excellent technology and research capabilities
2) Its recognition of employees
3) “Certain inherent characteristics” that keep a firm at the top
4) Asober “appraisal” of its PE ratio.
Shortlist the most capable and potential companies to invest in. this can be done by speaking to experienced investors. After this investors should take a look at the financial statements, and analyze the sales and income statements. As mentioned earlier, one should follow the scuttlebutt method and ensure to contact as many people as one can. The final step goes with contacting the management and visiting the company. This book provides a different view on investments which can be useful to value investors. According to Fisher, success in common stock investing depends on hard work, intelligence and honesty. Investors in common stocks should focus on long-term returns and not try to buy low and sell high.