Howard Marks graduated from Wharton School of Business and co-founded American Oak Capital Management (Oaktree Capital) in 1995.

Since the 1990s, Howard has written "investment memos" for investors. In his investment memo in January 2000, he predicted the bursting of the technology stock bubble, and the "investment memo" became a must-read document on Wall Street.

In July 2003, Howard wrote a memo under the title "the most important things", listing the elements he considered essential to investment success, and then made a few adjustments. to form this book that pours 43 years of investment experience and thinking into "the most important thing to invest".

"this book is a statement of my investment philosophy. I see it as a creed, which has played a religious-like role in my investment career. "said Howard. At the same time, Buffett also highly recommended the book, saying he had read it twice.

Smart Investor read it carefully and took notes, which are too long to share with you in two periods. I hope it will help you make good decisions and, perhaps more importantly, avoid common mistakes.

First, learn the second level of thinking

Try to keep everything simple, but not too simple. Albert Einstein

Even the most outstanding investors cannot always be right, because the environment is uncontrollable. Investment, like the economy, is more like an art than a science.

One of the things I want to emphasize most isIntuitive and adaptive investment methods are more important than fixed and mechanized investment methods.

My definition of successful investment is to do better than the market and other investors. In order to achieve this goal, what you need is a sharper mind, which I call second-level thinking.You have to think about what they don't want, see what they don't see, or have insight that they don't have. Your reaction and behavior must be different.

The first level of thinking says, "this is a good company." Let's buy stocks. The second level of thinking says, "this is a good company, but everyone thinks it is a good company, so it is not a good company." The stock is overvalued and priced. Let's sell it. "

The first level of thinking says, "there will be a prospect of sluggish growth and increased inflation." Let's sell the stock. The second level of thinking said: "the outlook is terrible, but everyone is selling stocks in panic." Buy in! "

The first-level thinkers are looking for simple guidelines and simple answers. Second-level thinkers know that successful investment is a simple antithesis, and there is a huge difference in workload between the two. The good news is that the widespread existence of the former increases the available returns of the latter.

You can't expect to win when you're doing the same thing as others. Breaking the rules is not an end in itself, but it's a good way of thinking. In order to consistently achieve an excellent return on investment, you must be one of the second-tier thinkers.

Second, understand the effectiveness and limitations of the market

The efficient market hypothesis states that:

The information channels of market participants are roughly the same. Smart, objective and hard-working, they can immediately buy underpriced assets and sell overpriced assets, so market prices represent the intrinsic value of assets.

The most important conclusion of the hypothesis is "you can't beat the market", but I reserve my opinion.

In my opinion, the "effectiveness" of the efficient market hypothesis refers to the "rapid and rapid integration of information", not "correct".

Because efficient markets assume that participants are always objective and can buy, sell, and short (that is, bearish) each asset publicly. But the truth is that most people are driven by greed, fear, jealousy and other emotions that undermine objectivity. They are also not publicly exposed to any asset class (which can be held and shorted), but are only allocated to specific market segments, such as stock and bond markets. So who eliminates the relative mispricing between different asset classes?

In my opinion, the invalid market has the following characteristics:

1. Market prices are often wrong.

two。 The risk-adjusted return of one asset class may be very different from that of other asset classes.

3. Some investors have always been able to outperform.

It is important to understand the last point. The mispricing offered by an inefficient market is raw material, while some people win and some lose, depending on the technology they have. In order to achieve excellent performance, the second-level thinker must have information advantage or analytical advantage, or both.

My conclusion is thatNo market is completely efficient or ineffective, it's just a matter of degree. So I focus on the relatively ineffective market, where as long as I work hard and master the technology, I can get the best return.. The key turning point in my investment management career came when I came to this conclusion.

The following is a scene of a finance professor who believes in efficient markets walking with his students.

"is there a ten-dollar bill on the ground? "asked the student.

"No, it can't be a ten-dollar bill," the professor replied. "even if there were, it must have been picked up before. "

The professor is gone. The student picked up the bill and went for a beer.

III. Accurate estimation of value

There are two fundamental-driven investment methods: value investment and growth investment.

Value investors believe that the current value is higher than the current price, so buy stocks (even if their intrinsic value shows limited future growth).

Growth investors believe that a rapid increase in future value is enough to cause prices to rise sharply, thus buying stocks (even if their current value is lower than their current price).

So, in my opinion,The real choice does not seem to be between value and growth, but between current value and future value.Growth investment bet on the performance of a company that may or may not be realized in the future, while value investment is mainly based on the analysis of the current value of the company.

There is no clear line between the two styles: growth investment cares about the future, while value investment emphasizes the present, but inevitably faces the future.

It is more difficult to see the future than to see the present. Generally speaking, the upward profit space brought by accurate prediction of growth is greater, and the upward profit space brought by the correct judgment of value is more stable. The path I choose is value. In my investment philosophyIt is more important to earn steadily than to earn hard.

Is it easy to invest in value? No.

You should not only accurately calculate the intrinsic value of the asset, but also hold it firmly. Because in the field of investment, correctness does not mean that correctness can be proved immediately.

It is of little use to hold it correctly but not firmly. If you make a mistake in valuation but hold it firmly, the consequences will be even worse.This sentence shows how difficult it is to be just right.

IV. The relationship between price and value

Successful investment does not lie in "buying good", but in "buying well".

After correctly estimating the intrinsic value of the asset, you must also examine the price. Establishing a healthy relationship between fundamentals-value-price is the core of successful investment.

No matter how good the asset is, if the purchase price is too high, it will become a failed investment.

At Oak, we say, "A good buy is half the success of a sale," meaning that we don't spend too much time thinking about the selling price, timing, target, or path of the stock. As long as you buy it cheaply, these problems will eventually be solved.

In addition to the fundamental value, in many cases, the other two factors also affect the securities price, and these two factors are the main factors that determine the short-term price trend: one is the psychology of investors, the other is the market factor.

Market factors force people to trade without regard to price, such as the forced sale of leveraged users when they receive margin calls and are liquidated by a stock market crash, and when cash flows into funds. Fund managers need to buy.

Buying from a forced seller is the most wonderful thing in the world, and being a forced seller is the most tragic thing in the world. So it's important to make sure you hold on (not to sell) in the most difficult times.

On the other handThe key to determining value is skilled financial analysis, while the key to understanding prices, value relationships and their prospects is insight into the thinking of other investors.

Investor psychology can lead to almost any pricing of securities in the short term, regardless of their fundamentals. And the safest and most profitable investment is to buy when no one likes it.

Psychology is extremely difficult to master. Because psychology is elusive, and the psychological factors that affect the behavior of other investors will also affect you. But in order to protect yourself, you have to spend energy to understand the psychology of the market.

All in all, in my opinion,Buying at a price below value and waiting for asset prices to move closer to value is the true meaning of investment-the most reliable way to make money.Although it is not foolproof, it is our best chance.

Fifth, understand the risk

No one can predict the future for sure, so the risk is inevitable.

Only looking at the returns, it is impossible to judge whether the performance is good or bad, and investors must also have a certain understanding of the risks they bear.

It is often said, "High-risk investment brings high returns." "however,If a riskier investment does produce a higher return reliably, then it is not really high risk!

The correct statement is: in order to attract capital, riskier investments must provide higher expected returns, but it does not mean that these higher expected returns must be achieved.

What on earth is the risk? In the eyes of scholars, risk equals volatility, but I think the main reason people refuse to invest is to worry about losses or returns too low, rather than volatility. I'm sure."risk" is, first of all, the possibility of loss.. The risk of loss is mainly due to overly positive psychology and the resulting high price.

Recently, financial institutions have used computer models to measure portfolio risk. But in my opinion, they can never match the subjective judgment of the best investors. The latter is mainly based on the stability and reliability of value, as well as the relationship between price and value.

Because risk is potential, unquantifiable and subjective in nature, the risk of an investment-that is, the possibility of loss-cannot be measured beforehand or afterwards. Just because something happens doesn't mean it's bound to happen, and just because it doesn't happen doesn't mean it's impossible.

It is important to note that we often hear of "worst-case scenario" predictions, but the results often show that the prediction is not bad enough. My father is a gambler who often loses money. One day he heard that there was a race in which only one horse took part, so he gambled all the money he had to pay the rent. Halfway through the race, however, the horse jumped over the guardrail and escaped.

Things are always worse than people think. "worst-case scenario" only means "the worst we have seen in the past", but it does not mean that the future can't be worse.

People tend to overestimate their ability to judge risks and understand investment mechanisms that they have never seen before. In theory, one of the differences between humans and other species is that we don't have to experience something to know how dangerous it is. We don't need to burn ourselves to verify the fact that we shouldn't sit on a hot stove. But in a bull market, people tend to lose this ability.

Most people see risk-taking as a way to make money. Pragmatic value investors believe that when buying securities below value, high returns and low risk can be achieved at the same time.

VI. Identify risks

Risk identification is an absolute prerequisite for risk control.

High risk is mainly accompanied by high price, so insight into the relationship between price and value is an important part of successfully dealing with risk.

Generally speaking, if you want to take on new risks, you must ask for a risk premium (in which investors demand higher returns to offset greater risks). But in a bull market, people mistakenly assume that the more risks they take, the greater the returns.

When people are no longer worried about the risk, they will accept the risk without asking for compensation. The risk premium no longer exists.

It is generally believed that the absence of risk is the greatest risk in itself.This recognition pushes up prices and leads to risk-taking at low expected returns. No matter how good the fundamentals are, human greed and tendency to make mistakes will make a mess of things.

There is an appropriate analogy: "Jill Freston is a nationally recognized expert in avalanche response." She knows the moral hazard that better safety equipment may attract climbers to take more risks-and actually make them less safe. Similarly, no matter how the market structure is designed, the risk is lower only if investors behave cautiously.

I firmly believe that the greatest investment risk exists in the most imperceptible places, and vice versa:

When everyone believes that something is risky, their reluctance to buy usually lowers the price to a completely risk-free level. Widespread negativity minimizes risk because all optimism in the price is eliminated.

Of course, when everyone believes that something is risk-free, the price is usually bid up to the point where there is great risk. This may turn the best asset that people admire into the riskiest asset.

I call this phenomenon"abnormality of risk"。

The reason for this contradiction is that most investors believe that the decisive factor of risk is quality rather than price. But high-quality assets may also be risky, and low-quality assets may also be safe. The so-called quality is just a matter of the price paid for the asset.

VII. Risk control

Outstanding investors are those who take on low risks that are not commensurate with the returns they earn. They either earn medium returns with low risk, or earn high returns with medium risk. It's okay to take high risks and earn high returns-unless you can stick to it for years, in which case "high risk" is either not really high risk or well managed.

So what is the definition of "well done"?

Figure 1 the investment manager has done a good job of achieving better returns on the basis of specific risks, but I think it is a great achievement to achieve the same returns as the benchmark while taking on lower risks (figure 2). FundamentallyRisk reduction is the basis for great success of investment.。

Of course, when the market is steady or rising, there is no way to know how risky the portfolio is. Risk (the possibility of a loss) is unobservable, what can be observed is a loss, which usually results in a loss only when negative events occur in the environment. But no loss does not necessarily mean that the portfolio is safe.

This is what Warren Buffett observed:Unless the tide recedes, we can't tell who is swimming naked.。

in the final analysis,The job of investors is to take risks intelligently for the purpose of profit.. Whether this can be done or not is the difference between top investors and other investors.

Cautious risk controllers know that they do not know the future-the future may contain some negative results, but how bad the results will be and the probability of occurrence is unknown. Therefore, the biggest problem is that there is no way to know "how bad is bad", which leads to mistakes in decision-making.

In addition, I want to make clear the important difference between risk control and risk aversion: risk control is the best way to avoid losses; on the contrary, risk aversion is likely to be evaded together with benefits.

I very much disapprove of deliberately avoiding investment risks. Our clients pay us well to try to add value to them by taking risks, especially those that others hate so much. Good risk control is the hallmark of good investors.

VIII. Attention cycle

I think it's important to remember that everything has a cycle. I'm sure there aren't many things, but the following words are true:The cycle always wins at the end.. Nothing can go on forever in the same direction. Insisting on speculating about the future based on today's events is the greatest harm to the health of investors.

The longer I invest, the more I pay attention to the basic cycle of things. Investment is like life, there are very few things that are completely sure, but there are two positive concepts:

Rule number one: most things are cyclical.

Rule 2: when others forget the law for a while, some of the biggest opportunities for profit and loss will come.

Few things develop in a straight line. Things have their ups and downs, and the same is true of the economy, markets and enterprises.

The fundamental reason for the periodicity of the world is human participation. I think the main reason is that people are emotional and fickle, lack of stability and objectivity.

The cycle is self-correcting, and the reversal of the cycle does not necessarily depend on exogenous events.The development trend of the cycle itself is the cause of the reversal of the cycle, as the saying goes, misfortune is where good fortune depends, and good fortune is where misfortune lies.

Of all the cycles, I like the credit cycle best. The process is simple:

The cycle never stops. The belief that the cycle is over reflects a way of thinking based on the dangerous premise that "this time is different". These six words should frighten anyone who knows the past and knows that such mistakes are repeating-and perhaps a sign of profit opportunities. Therefore, when this kind of error occurs, the ability to identify it is very important.

IX. Pendulum consciousness

The investment market follows a pendulum swing: between excitement and frustration, overpricing and underpricing. This is very similar to the economic cycle described earlier.

My knowledge of the pendulum includes:

1. In theory, fear and greed are two extremes. Most of the time the pendulum should be between the poles, but it doesn't stay at the midpoint for long.

two。 Investor psychology is the main factor that affects the pendulum to or from the end point.

3. The pendulum cannot always swing toward an end point, or stay at the end point forever.

4. Similar to the pendulum, the investor's psychological swing toward some extreme will eventually become a force to promote the swing back in the opposite direction.

5. The swing back from the endpoint is usually faster and takes less time.

There is also a pendulum swing between risk tolerance and risk aversion. In my opinion,The cycle of greed and fear is caused by a change in attitude towards risk。

The prevalence of greed means that investors are more content with risk and the perception of taking risk for profit. On the contrary, widespread fear means a high degree of aversion to risk.

I attribute the main risk of investment to the risk of loss and the risk of missing opportunities. It is possible to eliminate either of them substantially, but both cannot be eliminated at the same time.

When the situation is good and prices are high, investors can't wait to buy, leaving all caution behind. Then, when there was chaos around and the assets were sold cheaply, they completely lost the willingness to take risks and couldn't wait to sell. Forever.

At the darkest extreme of the pendulum, people need strong analysis, objectivity, determination and even imagination to believe that everything will be better. A small number of people with these abilities can make high profits on the basis of very low risk. But at the other extreme, when everyone starts to speculate that prices will always rise at an incredible rate, the foundation for painful losses has been quietly laid.

Resist negative effects

Inefficiency-mispricing and perception and mistakes made by others-creates opportunities for excellent performance.

Why is there an error? Because human beings are controlled by psychology and emotion. The biggest investment mistakes come not from information factors or analytical factors, but from psychological factors, most of which belong to "human nature".

Greedy

The purpose of most people's investment is to make money, there is nothing wrong with trying to make money, and the danger arises when desire turns into greed.

Greed is powerful enough to overwhelm common sense, risk aversion, prudence, logic, painful memories, determination and fear of past lessons, driving investors to join the profit-seeking crowd and eventually pay the price.

Fear

The opposite of greed is fear, which, like greed, means excess; excessive anxiety prevents investors from taking the positive actions they should have taken.

A tendency to abandon logic, history, and norms.

Charlie Munger made a wonderful comment on this by quoting Demosthenes: "It is easiest to deceive yourself, because people always believe what they want.」

We need a lot of skepticism in investment.Suspicion that deficiency will lead to loss。

When a market, an individual, or an investment technology achieves high short-term returns, it usually attracts people to worship it too much. I call this method of making high profits a "silver bullet".

Investors are always looking for silver bullets, calling them the Holy Grail or a free lunch. However, silver bullets do not exist, and no strategy can lead to risk-free high returns.

Follow the crowd

The pressure of conformity and the desire to make money make people give up their independence and skepticism, forget their inherent risk aversion and believe in meaningless things.

Envy

Jealousy has more negative effects than greed and is one of the most harmful aspects of human nature. Most investors find it difficult to accept the fact that others make more money than they do.

Conceited

The best returns bring the greatest self-satisfaction, and it is a pleasure to think that you are smart and be recognized by others.

By contrast, thoughtful investors work hard in obscurity, earning steady returns in good years and lower losses in bad years. They avoid high-risk behavior because they are well aware of their shortcomings and are often introspective, humble and prudent.

compromise

This usually occurs at the end of the cycle. Investors will do their best to stick to their beliefs, but when economic and psychological pressures become irresistible, they will give up and follow suit.

All in all, the desire to get more, the fear of missing out, the tendency to compare with others, the influence of the group, and the expectation of victory are almost universal. They have a profound impact on most investors, and the result is mistakes-frequent, common, recurring mistakes.

How to deal with these psychological impulses that make people stupid to invest? First of all, know them; second, be realistic and think that you can be immune and put yourself in danger.

In addition, the effective methods for Oak Capital are:

1. Have a firm understanding of intrinsic value.

two。 When the price deviates from the value, stick to what needs to be done.

3. Know enough about past cycles.

4. Thoroughly understand the potential impact of the market on the extreme market investment process.

5. It is important to remember that when things look "too good to be true", they are usually not true.

6. When the misvaluation of the market becomes so deep that it seems to be wrong, it is willing to bear such a result.

7. Support each other with like-minded friends or colleagues.