The Most Important Thing Isn’t What You Think It Is: Howard Marks

Marks highlights the importance of understanding market efficiency and its limitations, noting that while markets quickly incorporate information, the consensus view is not always correct.

I’ve lost track of how many times I’ve referenced Howard Marks in my Substack essays. His insights have been tremendously valuable for me, particularly in uncertain markets where noise often overshadows reason (you know, that CNN headline “Market in Turmoil”). I credit him for preventing me from selling my portfolio during moments when it was down 10% in a single day; at that moment, sure enough, my brain somehow sputtered out one of his pieces of wisdom.

That’s why The Most Important Thing holds a special place on my bookshelf. It’s not just another investment book; it’s a manifesto for thoughtful investing, distilled from decades of hard-won experience.

Howard Marks. Source: Forbes

Howard Marks, the chairman and co-founder of Oaktree Capital Management, built his career on mastering the interplay of risk and opportunity. While his client memos have long been essential reading for serious investors, this book distills his investment philosophy into a cohesive framework. Importantly, it doesn’t offer a magic formula for beating the market. Instead, Marks shares a way of thinking, a disciplined, skeptical, and nuanced approach to navigating financial markets.

The book’s title comes from a 2003 memo in which Marks humorously noted how often he found himself declaring various principles to be “the most important thing.” Eventually, he identified eighteen such “most important things,” each forming a vital brick in the foundation of successful investing. The book is structured around these core ideas, providing a practical guide for anyone seeking to survive and thrive in unpredictable markets. Therefore, in this post, I’ll summarize my key takeaways from Marks’ “Most Important Thing.”

Here is some of the pearls of wisdom I found in the book, drawn from Marks' decades of experience and study:

1. Second-Level Thinking

One of the book’s foundational concepts is what Marks calls second-level thinking. To achieve superior investment results, it’s not enough to think logically or optimistically; you need to think differently and better than the crowd. First-level thinking is simplistic: “It’s a good company — let’s buy.” Second-level thinking is deeper: “It’s a good company, but everyone thinks it’s a great company, and the stock is overpriced. Let’s sell.”

Marks argues that in competitive, well-informed markets, achieving above-average returns requires differentiated insight. It’s about considering a range of possible future outcomes, assessing probabilities, comparing your view to the consensus, and evaluating how current prices reflect that consensus. This mental discipline is what separates good investors from great ones.

As he puts it:

“Being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others — which by definition means your thinking has to be different.”

“Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Thus, your thinking has to be better than that of others— both more powerful and at a higher level.”

That last quote reminds me of Buffett's statement that investors should focus on index funds if they can’t achieve above-average returns from stock picking, which I vehemently agree with.

2. Market Efficiency and Its Limits

While Marks respects the idea of market efficiency (for context, he attended the University of Chicago Booth School of Business for his MBA, where the Efficient Market Hypothesis was developed by Eugene Fama during his PhD studies at UChicago)—the notion that markets quickly incorporate available information—he is clear-eyed about its limitations. Markets can be efficient, but not perfectly so. Mispricings exist, and superior investors exploit these opportunities through sharper analysis, better information, or a willingness to act contrary to consensus.

He writes:

“Market prices are often wrong. Because access to information and the analysis thereof are imperfect, prices are often far above or far below intrinsic values.”

I appreciated how Marks emphasizes that inefficiencies don’t guarantee profits. They merely create opportunities. The key is skill — being able to distinguish when the market is wrong and having the conviction to act.

3. The Primacy of Value

At the heart of Marks’ philosophy is value investing: the idea that every asset has an intrinsic value, and the goal is to buy for less and sell for more. Sounds simple, but the challenge lies in accurately estimating that intrinsic value. Without it, you’re speculating, hoping for a “greater fool” to bail you out.

Marks reminds us that while growth investing hinges on predicting the future, value investing begins with present realities and builds forward. Being right about value may not offer dramatic upside, but it offers greater consistency — a principle Marks prefers in the long run.

He makes it plain:

“For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point.”

In other words: “Buy low, sell high” only works if you actually know what “low” and “high” mean — relative to intrinsic value, not market sentiment.

4. The Relationship Between Price and Value

A security’s market price is influenced by its underlying fundamental value — its cash flows, growth prospects, assets, and liabilities — but in the short term, price is often dominated by other forces. Howard Marks explains:

“Most of the time a security’s price will be affected at least as much—and its short-term fluctuations determined primarily—by two other factors: psychology and technicals.”

Technicals refer to non-fundamental factors that influence the supply and demand for securities, often irrespective of intrinsic value. These can include inflows of capital into funds, margin calls forcing sales, index rebalancing, or mandated institutional constraints. For example, when a market crash triggers margin calls, highly levered investors are forced to sell into a falling market, exacerbating the decline without regard to price or value. Similarly, large inflows into a mutual fund may push managers to buy securities just to remain invested, again regardless of valuation.

Psychology plays an equally powerful, often invisible, role in the short-term pricing of securities. It transforms markets into popularity contests, where investor sentiment — fear, greed, optimism, pessimism — pushes prices to extremes. Marks warns:

“It’s impossible to overstate how important this is. In fact, it’s so vital that several later chapters are devoted to discussing investor psychology and how to deal with its manifestations.”

A particularly important dynamic arises when fear forces investors to sell quality assets during market downturns. Marks observes that some of the best opportunities emerge from these episodes of forced selling, when price diverges significantly from underlying value. Conversely, buying at the height of optimism — when securities are universally popular and richly priced — is fraught with risk.

Ultimately, while sound financial analysis is the key to determining intrinsic value, insight into other investors’ minds and behaviors is essential to understanding the relationship between price and value in the marketplace. As Marks summarizes:

“The safest and most potentially profitable thing is to buy when no one likes it.”

5. Understanding, Recognizing, and Controlling Risk

Whenever I read about Marks' letter, I expect him to explain or address the issue of risk in that particular letter regarding the economic situation.

Risk is unavoidable in investing. Since the future is inherently uncertain, Marks emphasizes that risk management is not just an important part of investing—it is the central discipline.

“Investing consists of exactly one thing: dealing with the future. And because none of us can know the future with certainty, risk is inescapable. Thus, dealing with risk is an essential—I think the essential—element in investing.”

Importantly, Marks points out that risk is not limited to volatility or the simple possibility of loss. It encompasses a range of outcomes and scenarios, including those that are infrequent but severe — what some call “black swans.” Conventional financial models, overly reliant on historical data and normal distributions, often underestimate these improbable disasters.

He writes:

“Risk means more things can happen than will happen.”

This distinction underscores that risk involves a spectrum of potential futures, many of which may never materialize, but the existence of these adverse possibilities affects prudent decision-making. Marks highlights a critical observation: risk is often most dangerous when it is least perceived. The complacency bred by extended bull markets can drive assets to prices detached from fundamentals, erasing the risk premium and leaving investors exposed.

He illustrates this with the experience of the Nifty Fifty stocks in the early 1970s, which were regarded as “one-decision” investments — thought to be so safe they could be bought at any price. The subsequent collapse in their valuations proved otherwise. Marks asserts:

“When everyone believes something is risky, their unwillingness to buy usually reduces its price to the point where it’s not risky at all. Broadly negative opinion can make it the least risky thing, since all optimism has been driven out of its price.”

On the flip side:

“When everyone believes something embodies no risk, they usually bid it up to the point where it’s enormously risky.”

Thus, controlling risk is distinct from avoiding it. Avoiding all risk would mean forgoing returns above the risk-free rate. Instead, investors must seek to recognize risk accurately and ensure they are compensated for bearing it. Marks stresses the importance of considering alternative histories — the plausible scenarios that could have unfolded — when assessing risk.

6. Being Attentive to Cycles and Awareness of the Pendulum

A recurring theme in Marks’ philosophy is the cyclical nature of markets. He maintains that virtually everything in investing is cyclical, and no trend — either positive or negative — continues indefinitely.

“Cycles always prevail eventually.”

Ignoring this reality leads to dangerous extrapolation, where investors project the present into the future without accounting for inevitable reversions.

Complementing this is what Marks calls the pendulum of investor psychology — a metaphor for the constant oscillation between extremes of sentiment. This pendulum swings from fear to greed, optimism to pessimism, and credulity to skepticism. It is driven not by fundamentals but by collective human emotion, and it heavily influences asset prices.

“The second investor memo I ever wrote, back in 1991, was devoted almost entirely to a subject that I have come to think about more and more over the years: the pendulum-like oscillation of investor attitudes and behavior.”

These swings can be particularly dramatic during crises or euphoric booms. In 2008, following the bankruptcy of Lehman Brothers, pessimism reached such an extreme that even the mildest optimism was dismissed as hopelessly naive. Marks reflects on this period:

“No scenario was too negative to be credible, and any scenario incorporating an element of optimism was dismissed as Pollyannaish.”

But in moments of extreme pessimism lie the seeds of opportunity. Recognizing when the pendulum has swung too far in one direction allows disciplined investors to position themselves for future returns as markets normalize.

Marks cautions against following the herd, whose behavior is dictated by these oscillations. Aligning one’s investment strategy with the prevailing sentiment leads to average results and can be disastrous at the extremes. He writes:

“In general, following the beliefs of the herd—and swinging with the pendulum—will give you average performance in the long run and can get you killed at the extremes.”

7. Combating Negative Influences in Investing

Investing isn’t just an intellectual exercise — it’s an emotional one. Time and again, markets are shaped not by cold logic, but by powerful psychological forces that influence investors’ behavior. Greed, fear, envy, ego, the urge to conform, and the willingness to believe in too-good-to-be-true narratives have a near-universal hold over market participants. These influences generate widespread, recurring mistakes that distort asset prices and create opportunities for those able to remain detached and rational.

Mistakes occur because investing is a fundamentally human activity. While many people possess the technical skills to analyze data and draw reasonable conclusions, far fewer can manage their emotions in the heat of the moment. This divergence between cognition and behavior explains why, even when investors share the same information, they often act very differently. Emotional biases — not analytical errors — are the primary drivers of investment mistakes.

"The biggest investing errors come not from factors that are informational or analytical, but from those that are psychological."

One especially persistent influence is the tendency to follow the crowd. When markets become euphoric or despondent, investors frequently find it easier to move with the herd than to stand apart, even when it means abandoning their own judgment. Classic experiments in social psychology, like those conducted by Solomon Asch in the 1950s, demonstrate just how difficult it can be to resist group pressure. This conformity amplifies bubbles and panics, leading to price distortions that rational investors can exploit — provided they have the courage to go against prevailing sentiment.

In addition, financial markets are periodically gripped by a belief in “silver bullet” investment strategies — approaches that promise extraordinary returns with little risk. History has repeatedly shown that these do not exist, and yet the hope for an easy solution is so appealing that it resurfaces in every cycle, contributing to bubbles, manias, and subsequent collapses.

8. Contrarianism

The majority of investors are trend followers, chasing what has worked recently. In contrast, contrarian investors deliberately position themselves on the other side of the trade, questioning optimistic assumptions at market peaks and seeking value in neglected, unpopular assets at market lows.

"Unconventionality is required for superior performance. You can’t do the same things others do and expect to outperform."

Contrarianism demands not only intellectual independence but also emotional resilience. It means being skeptical of widely accepted narratives, especially during periods of extreme optimism or pessimism. As market cycles unfold, the judgments of the crowd become a force to navigate around rather than follow. Successful investors often find themselves lonely in their positions, diverging from consensus precisely when it feels most uncomfortable to do so.

9. Finding Bargains and Practicing Patient Opportunism

Opportunities for superior returns emerge from market inefficiencies — situations where perception is significantly worse than reality. Bargains typically exist in assets that are unpopular, underperforming, and recently subject to disinvestment. Because markets are often driven by psychological mistakes, patient and disciplined investors willing to look where others won’t can uncover mispriced opportunities.

However, these opportunities don’t appear on a predictable schedule. The most successful investors recognize that there are periods when the best strategy is to wait. Patient opportunism — the discipline of sitting on one’s hands until genuine bargains emerge — is a hallmark of superior investing. Rather than chasing investments to meet artificial targets or timelines, opportunistic investors wait for situations where sellers are forced to transact, creating asymmetric opportunities.

"The greatest bargains are usually found among things that are controversial, that people can barely stand to talk about."

At Oaktree Capital, this philosophy is summed up by the saying: “We don’t look for our investments; they find us.” By resisting the impulse to constantly act and remaining selective, investors improve their odds of achieving attractive risk-adjusted returns. Like a disciplined batter waiting for a pitch in the “sweet spot,” it pays to be patient in the markets. There’s no penalty for not swinging — and significant upside when the right opportunity finally comes.

10. Knowing What You Don’t Know and Appreciating Luck

Howard Marks firmly believes it’s difficult — perhaps impossible — to consistently predict the macroeconomic future. Few investors, if any, possess superior knowledge of these matters that can be reliably turned into an investing advantage.

To underscore this, he opens one chapter of The Most Important Thing with three quotes about the limits of foreknowledge. Marks writes:

"Awareness of the limited extent of our foreknowledge is an essential component of my approach to investing."

He belongs to what he calls the “I don’t know” school of investing, which focuses on making sound, risk-aware decisions precisely because the future is unknowable. This stands in contrast to the “I know” school, made up of forecasters and market timers who bet on specific outcomes and tend to be overconfident in their predictions.

Marks offers two important caveats:

1. It’s possible to know the knowable.
   By focusing on smaller, more specific areas — like individual companies, industries, or security pricing — an investor can, through hard work and discipline, gain an edge. Predicting the exact path of the global economy is another matter entirely.

2. You can assess where we are in cycles.
   While you can’t know what’s coming next, you can evaluate where we stand in terms of market cycles and investor sentiment. That insight can help investors position themselves more defensively or offensively depending on conditions, without pretending to predict precise outcomes.

Marks also stresses the role of luck and randomness in investing outcomes, a concept popularized by Nassim Taleb in Fooled by Randomness. Short-term success might look like skill, but often it’s luck in disguise. Investors should be cautious about mistaking random favorable outcomes for repeatable skill.

11. Investing Defensively and Avoiding Pitfalls

One of Marks’ most valuable lessons is drawn from Charles Ellis’s classic The Loser’s Game, which argues that investing — much like amateur tennis — is typically won by avoiding unforced errors rather than by hitting spectacular winners.

When people ask him for personal investment advice, Marks always begins with the same question:

“Which do you care about more: making money or avoiding losses?”

The instinctive answer is usually “both,” but as Marks points out, you can’t maximize both simultaneously. Investing is a trade-off between risk and return, and that balance should be chosen consciously, based on one’s risk tolerance and investment goals. 

He frames this decision through the metaphor of offense versus defense. I touched on this framework when I reviewed Marks’ letter about “How to Think About Risk” a while ago. In that post, I shared how this framework can help anyone clearly think about risk, using football versus soccer as an analogy. If you’re interested in learning more, you can find the link to my post below!

While it’s tempting to chase returns, protecting your portfolio from large, permanent losses is even more critical. Occasional large gains might feel rewarding, but one major mistake can undo years of careful investing.

At the heart of defensive investing lies Warren Buffett’s concept of a “margin of safety.”
It’s easy to make investments that work if the future unfolds exactly as you expect. The harder — and more important — question is: What happens if it doesn’t?

Marks warns investors about two types of pitfalls:

• Analytical errors, such as a failure of imagination — not considering a full range of outcomes.

• Psychological pitfalls, driven by emotions, herd behavior, and misplaced confidence in prevailing narratives.

At times, the most dangerous mistake isn’t buying the wrong asset or missing an opportunity — it’s insisting on doing something clever when the market offers no obvious opportunities. Knowing when to sit tight is as important a skill as knowing when to act.

As Marks puts it:

“There are old investors, and there are bold investors, but there are no old bold investors.”

In Conclusion

These ideas have been invaluable to me in shaping how I approach investing and manage my expectations around returns. The quotes I’ve shared are the ones that resonate most deeply, and I hope they’ll continue to guide me as long as I’m actively managing my portfolios.

At the end of the day, adding value in investing isn’t about predicting the future — it’s about developing the skill, judgment, and discipline to position yourself advantageously across a range of possible outcomes. Superior investors find ways to capture more of the upside while limiting the downside, and that comes from carefully weighing probabilities, understanding risk-reward trade-offs, and avoiding costly mistakes.

Another post done, another lesson learned. I hope you took away as much from this as I did in writing it :)