The Most Important Thing
Mastering risk, cycles, and second-level thinking with Howard Marks
Welcome back to Guru Gems, your weekly dose of timeless investment wisdom from the world’s most successful long-term investors.
This week’s issue is a bit different—no ‘gem’ pick, but something just as valuable. I’ll share my 5 learnings from one of the best investing books of the past two decades: The Most Important Thing, by legendary investor Howard Marks, co-founder of Oaktree Capital Management.
If Peter Lynch taught us to “invest in what you know”, Howard Marks teaches us how to survive the journey—by understanding cycles, risk, and market psychology.
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Legendary Memos
Howard Marks is known for his legendary memos on markets, contrarian thinking, and risk management.
Warren Buffett once wrote, “When I see memos from Howard Marks in my mail, they are the first thing I open and read. I always learn something.”
In his book ‘The Most Important Thing’, Marks draws from these memos to compile the most important lessons he has learned as an investor.
In a next edition of the book, titled ‘The Most Important Thing Illuminated’, Marks’ book is annotated by other renowned investors, including Chris Davis and Joel Greenblatt.
It’s really cool to read the comments of these other legendary investors and how they interpret Marks’ words or add their own perspective. In my 5 learnings below, I will include some of these comments.
The central thesis of the book is that superior returns don’t come from predicting the future, but from understanding risk, cycles, and human psychology better than others.
Here are my five key lessons from Marks' essential work:
🔄 1. Second-Level Thinking is Everything
“Your thinking has to be different and better.”
Most investors stop at surface-level logic: “Great company = great stock.”
Second-level thinkers go deeper: “Everyone thinks it’s a great company, so it’s overpriced.”
Success comes from seeing what others miss and being right about it.
💡 Lesson: Great returns require more than simple logic. They require insight that isn’t already priced in.
Joel Greenblatt: “The idea is that agreeing with the broad consensus, while a very comfortable place for most people to be, is not generally where above-average profits are found.”
📉 2. Risk Is Not Volatility
“Risk means uncertainty about which outcome will occur and about the possibility of loss when the unfavorable ones do.”
For Marks, risk is the essential element in investing and he devotes three chapters to it:
Understanding Risk
Recognizing Risk
Controlling Risk
Marks rejects the Wall Street idea that volatility equals risk.
Real risk is the permanent loss of capital, not temporary price swings.
💡 Lesson: Risk isn’t a number—it’s a judgment. And the best investors are superior judges of risk.
Howard Marks: “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.”
🤔 3. The Power of Contrarian Thinking
“It’s our job as contrarians to catch falling knives, hopefully with care and skill. That’s why the concept of intrinsic value is so important. If we hold a view of value that enables us to buy when everyone is selling - and if our view turns out to be right - that’s the route to the greatest rewards earned with the least risk.”
Contrarian investing isn't simply doing the opposite of what everyone else is doing—it's about independent thinking and having the courage to act on your convictions when they differ from the consensus.
The contrarian approach requires:
Intellectual honesty - Being willing to admit when you're wrong
Emotional stability - Maintaining composure when others are panicking or euphoric
Patience - Waiting for the right opportunities even if it takes years
Conviction - Having strong enough beliefs to act against the crowd
💡 Lesson: The best opportunities often arise when conventional wisdom is wrong, but it takes courage and discipline to capitalize on them.
☑ 4. The Importance of Knowing What You Don't Know
“We may never know where we’re going, but we’d better have a good idea where we are.”
This is a great chapter in the book and connects to many other topics like risk and market cycles.
The core idea is that successful investing requires intellectual humility—understanding what you can and cannot know.
What you can't know:
The future direction of markets, interest rates, or the economy
The exact timing of market turns
Which specific stocks will outperform
What you can know:
The current valuation of assets relative to their intrinsic value
The level of risk you're taking
Where you are in various cycles (“everything is cyclical”)
Your own psychological biases and limitations
This knowledge gap is why Marks advocates for defensive investing: building portfolios that can survive and thrive in various scenarios rather than betting everything on one particular outcome.
💡 Lesson: You need flexibility and humility. Anyone claiming certainty is probably missing something.
⚠ 5. Avoiding Pitfalls is More Important Than Hitting Home Runs
“If we avoid the losers, the winners will take care of themselves.”
Marks believes that avoiding the big mistakes matters more than finding the big winners. This defensive approach recognizes a fundamental asymmetry in investing: you need a 100% gain to recover from a 50% loss.
Some of the most dangerous pitfalls investors face:
Emotional decision-making: Fear and greed cause investors to buy high (when optimistic) and sell low (when pessimistic). The antidote is developing emotional discipline and sticking to your investment process regardless of market sentiment.
Inadequate diversification: Don't put all your eggs in one basket—whether that's one stock, one sector, one geography, or even one investment style. True diversification protects against the unknown unknowns.
Timing the market: Trying to predict short-term market movements is pointless. Even if you're right about direction, getting the timing wrong can be costly. Focus on valuation, not timing.
Following the crowd: When everyone is doing the same thing, it's probably the wrong time to do it. The biggest losses often come from popular investments that turn out to be bubbles.
💡 Lesson: A defensive approach doesn't necessarily mean being conservative—it means being thoughtful about risk and building a portfolio that can weather various scenarios without permanent loss of capital.
Joel Greenblatt: Investor, know thyself. How much pain can you take on the downside? This should inform the size of your initial portfolio allocations to specific investments and investment categories.
“The relation between price and value holds the ultimate key to investment success. Buying below value is the most dependable route to profit. Paying above value rarely works out well”
— Howard Marks
I hope you enjoyed this week’s Guru Gems newsletter. I will be back next week with a new edition!