The "Wall Street Bible" by a Renowned American Investment Master: The Most Important Thing

Howard Marks, the legendary American investor and co-founder of Oaktree Capital, is renowned for his value investing principles and contrarian thinking, particularly in the realms of credit markets and distressed debt investments. His investment philosophy has earned accolades from Warren Buffett, Charlie Munger, and other investing giants. His book The Most Important Thing is frequently referred to as the "Bible of Wall Street."

Howard Marks' Core Investment Philosophies

Second-Level Thinking

Most investors rely on "first-level thinking" (e.g., "This company is great, so buy its stock").Second-level thinking, however, requires deeper analysis: "Is the market too optimistic? What are the underlying risks? Are there opportunities others have overlooked?"

• Key Insight: Superior returns come from unique and accurate judgments.

  
  

  Risk Control as the Priority

Marks believes the true risk lies not in volatility but in the permanent loss of capital.

• The key to investment success is not about "how much money you make" but "how you avoid significant losses."

• He advocates for "defensive investing," focusing on margin of safety and downside protection.

  
  

Join《Expert Member》Plan

Market Cycles and the Pendulum Theory

Market sentiment swings like a pendulum between "extreme optimism" and "extreme pessimism," leading to significant price fluctuations in assets.

• Investors must recognize where they are in the cycle, buying during excessive pessimism and selling during excessive optimism.

  
  

  Contrarian Investing

Marks aligns with Buffett’s philosophy: "Be greedy when others are fearful; be fearful when others are greedy."He excels in purchasing undervalued quality assets during financial crises or market panics, such as his extensive investments in high-yield bonds during the 2008 subprime mortgage crisis.

Buying Low

A great company doesn’t necessarily make a great investment. The key lies in the price being low enough.

• Marks emphasizes that "the deviation between price and intrinsic value" is the source of excess returns.

Oaktree Capital’s Success

Marks co-founded Oaktree Capital in 1995, specializing in high-yield debt, distressed debt, and special situation investments.During the 2008 financial crisis, Oaktree purchased large amounts of credit assets at low prices, earning massive returns afterward and solidifying Marks’ reputation as the "King of Distressed Debt."

• Assets Under Management (AUM): Over $100 billion.

• Track Record: Consistently outperforms the market.

Marks' Famous Investment Memos

Marks is well-known for his investment memos to clients, offering deep analysis of market trends, risks, and opportunities. These memos are widely read by global investors, including Buffett. Classic topics include:

• Risk (2006)

• The Race to the Bottom (2007) – Accurately predicted the subprime crisis

• The Psychology of Bull Markets (2013)

• Liquidity (2018)

(Samples of these memos are available for free on Oaktree Capital’s website.)

---

Marks vs. Buffett: Similarities and Differences

Dimension	Howard Marks	Warren Buffett
Investment Focus	Credit markets, distressed debt, high-yield bonds	Stocks and full company acquisitions (e.g., Coca-Cola, GEICO)
Style	Focus on contrarian investing and market cycles	Long-term holding of “moat” businesses
Risk Perspective	Extreme focus on risk control and avoiding permanent losses	Similarly values margin of safety but is more optimistic
Key Publications	The Most Important Thing, investment memos	Shareholder letters, Berkshire Hathaway annual meetings

Notable Quotes

• “Investing isn’t about buying good things; it’s about buying good things well.”

  
  

  (In other words, price matters more than quality.)

• “Those who can’t handle volatility don’t deserve high returns.”

• “When markets are at extremes, the greatest risk is going with the herd.”

• “Smart people act first; fools act last.” (A warning against herd behavior during bubbles.)

Summary

Howard Marks’ investment philosophy revolves around second-level thinking, strict risk control, contrarian investing, and capitalizing on extreme market emotions. His approach is particularly effective during crises, making it suitable for investors aiming for long-term, stable returns. To dive deeper, start with The Most Important Thing and his memos, incorporating real-world examples like his actions during the 2008 financial crisis to fully grasp his thought process.

Why The Most Important Thing Is a Must-Read

Howard Marks’ The Most Important Thing: Illuminated is a classic investment book that even Warren Buffett has repeatedly read and recommended. This book distills Marks’ decades of investment wisdom, particularly emphasizing the importance of "Second-Level Thinking" and risk management. Below are its key insights and why top investors like Buffett hold it in such high regard.

Join《Expert Member》Plan

1. Second-Level Thinking: Beyond Market Consensus

   • First-Level Thinking (Surface-Level Thinking): For example, "This company has a bright future, so buy its stock." This intuitive reaction is the consensus of most market participants and cannot generate excess returns.

   • Second-Level Thinking (Deep Thinking): Requires considering more variables: "Is the market overly optimistic? What are the hidden risks? Are there overlooked details?"

     ➠ Key Insight: Investment profits come from unique and "correct" perspectives.

   
   

2. Understanding Market Efficiency and Its Limitations

   • Marks agrees that markets are "mostly" efficient but rejects the idea of full efficiency (as argued by the Efficient Market Hypothesis).

   • Opportunities arise from market inefficiencies: Emotional extremes, like panic selling or euphoric buying, create chances for contrarian moves.

   
   

3. Risk Management Over Return Pursuit

   • Definition of Risk: Marks stresses that the real risk is "permanent capital loss," not short-term volatility.

   • How to Manage Risk:

     • Focus on "downside risk" rather than just forecasting upside potential.

     • Be cautious during market euphoria, and seek opportunities amidst panic.

   
   

4. Cycles and the Pendulum Theory

   • Market sentiment swings like a pendulum between "excessive optimism" and "excessive pessimism."

   • What Investors Should Do:

     • Identify the position in the cycle (e.g., greed at the end of a bull market or fear at the end of a bear market).

     • Take advantage of mispricing caused by extreme emotions.

   
   

5. Value Investing and the Search for "Bargains"

   • Marks follows the value investing framework of Graham and Buffett but places greater emphasis on:

     • The divergence between "price" and "value": A good company isn’t necessarily a good investment; the price must be reasonable.

     • Sufficient margin of safety: Even if your judgment is wrong, buying at a low price reduces potential losses.

   
   

6. Controlling Emotions and Contrarian Thinking

   • The Market Paradox: The most dangerous time is when it feels "risk-free" (e.g., at the peak of a bull market), and the safest opportunities often appear when "fear is widespread."

   • Importance of Discipline: Stick to principles and resist being influenced by herd psychology (e.g., FOMO – fear of missing out).

Join《Expert Member》Plan