Hello, and welcome to The Investor’s Bookshelf. Today, we’ll be looking at The Most Important Thing, a book that I’ll unpack for you in about twenty minutes. We’ll cover its essence: how to avoid common pitfalls in investment strategy and how to properly assess an investor’s true ability.
There’s a famous American movie called The Big Short. It’s about the 2008 global financial crisis and tells the story of several brilliant Wall Street investors who saw through the illusion of the housing bubble before it burst. They prepared early, and when the crisis finally struck, not only did they avoid losses, they made enormous profits. What’s remarkable is that this film is based on a true story. Hard to believe, isn’t it? During the crisis, many people lost fortunes—some even went bankrupt. Yet a handful managed to swim against the tide and make money in the middle of chaos. Naturally, this makes us wonder: how on earth did they do it?
The author of today’s book, Howard Marks, is a figure cut from the same cloth as the protagonists of The Big Short. He is a master at moving against the current in times of crisis and securing extraordinary returns. His contrarian brilliance earned him the nickname “the Fearsome Vulture of Wall Street.” Marks’ influence in the investment world is so profound that even Warren Buffett is counted among his admirers. Since the 1990s, Marks has been publishing investment memos for global investors each year. Buffett once said: “When I see Howard Marks’ memos in my mail, the first thing I do is read them immediately.”
The Most Important Thing is essentially a curated collection of Marks’ most valuable insights from over two decades of those memos. Buffett rarely recommends books, but in 2011 he strongly endorsed this one, even noting that he had read it twice. Marks originally intended the book for professional investors, but because the advice is so practical and the language so clear, it has also been warmly embraced by ordinary investors. For newcomers just stepping into the world of investing, the book offers highly valuable guidance.
At its core, Marks’ investment philosophy can be summed up in four words: going against the tide. He boldly asserts that to truly make money in the market, one must resist simply following trends. Blindly “going with the flow” is the rookie mistake; only through disciplined contrarian investing can one ultimately outperform the market. Since 1987, relying on this unique strategy, Marks founded Oaktree Capital and built it into one of the largest asset management firms in the world.
In what follows, I’ll focus on two key areas:
- The common strategic pitfalls Marks identifies, along with the contrarian strategies he recommends.
- How to sharpen your judgment to tell whether an investor is truly skilled or not.
Part One
Let’s begin by looking at Howard Marks’ views on different investment strategies and what he means by contrarian investing. The phrase “contrarian investing” is already a familiar one—many people have heard it. By definition, it means to go against the crowd. That may sound straightforward, but to a seasoned veteran like Marks, contrarianism as an investment strategy is far more nuanced than that simple phrase suggests. Let’s unpack it.
In the book, Marks first gives us two hypothetical examples of investors. Imagine two people, each having earned ten million dollars. The first person won his ten million by playing Russian roulette and hitting the jackpot through sheer luck. The second is a diligent and skilled dentist who earned his ten million dollar fortune through years of steady work, treating patient after patient. Now here’s the question: both have ten million—are those two fortunes really the same?
Obviously not. The gambler’s money was won by chance, with huge randomness. If you asked him to pull off another jackpot, the outcome would be unpredictable. The dentist’s wealth, on the other hand, comes from skill and consistent effort—largely independent of luck. Investing, Marks argues, works the same way. Many professionals may carry the same titles on their business cards, but in reality, some are gamblers in the market, while others are dentists.
Some people believe it’s better to be a gambler, since the market itself is just one giant casino where luck is unavoidable. Others think the gambler’s risk is too great, and that being a diligent “dentist” is safer. Marks, however, believes that a true contrarian investor is neither a pure gambler nor a pure dentist, but rather a dentist who understands the rules of the game and applies them shrewdly.
What does that mean? To illustrate, Marks asks us first to consider how gamblers invest, and then how dentists invest.
The Gambler’s Approach
Gambler-style investors are easy to recognize. They believe that by riding market trends, they can strike it rich through timing and luck. Many U.S. investors may recall the bull market just three years ago, leading up to late 2021. With the Federal Reserve holding rates near zero and liquidity flooding the system, markets soared. After the pandemic crash in 2020, the S&P 500 skyrocketed, reaching a record high of 4,766 by year-end 2021. At that time, everyone felt like a genius. Tech stocks were surging one after another—Tesla and NVIDIA repeatedly broke records, while “meme stocks” like GameStop and AMC were driven to absurd heights.
Amid the frenzy, many investors thought: “Just follow the trend. Buy tech, buy whatever’s hot. There’s no way to lose. Missing out would be the real loss!” Egged on by friends bragging—“Don’t worry, everything’s going up, my account is already up tenfold!”—one hesitation led to another, until finally, people downloaded Robinhood and joined the retail stampede into the market.
But we all know what came next. In 2022, the Fed began its aggressive rate hikes, and the market collapsed. The Nasdaq fell from 16,000 to near 10,000 within a year, countless stocks were cut in half—or worse—and retail investors suffered devastating losses, with many losing even their principal. In hindsight, the old saying came true: “When the taxi driver and the barber are all recommending stocks, risk is just around the corner.”
The Dentist’s Approach
Dentists, by contrast, take a very different view. They remain calm and rational, believing that markets always swing like a pendulum—once it reaches an extreme, it will inevitably swing back. Since markets are cyclical, they reason, why not ignore the market environment altogether and focus solely on intrinsic value?
So these “dentists” perform exhaustive fundamental analysis—earnings, cash flows, hard assets, management, brand value, and more—all with one goal: buy what is solid, buy what is valuable. They tell themselves they are practicing long-term value investing. Even if short-term returns are absent, as long as the company is strong and has potential, big payoffs will come eventually.
But markets have a way of humbling even rational investors. In 1968, First National City Bank (today’s Citibank) popularized a then-famous strategy called the “Nifty Fifty.” The principle was simple: buy the biggest, most admired companies—names like IBM, Kodak, Polaroid, Coca-Cola, Avon, Hewlett-Packard, Motorola. The thinking went: if a company is this good, there’s no need to worry about price. Even if it looks expensive today, in a few years it will prove cheap. This approach was, on the surface, pure rational value investing.
But reality turned out differently. Kodak and Polaroid were decimated by digital photography; Motorola was acquired; IBM lost ground to faster-moving competitors; others disappeared into obscurity. The lesson: blindly clinging to “rational” value while ignoring price trends can be just as foolish.
Chastened, our dentist says: “Fine, I’ll follow market trends too. Instead of blue chips, I’ll buy future industries—Internet, AI, VR. These must be the future!”
But Marks warns: the future has many possibilities, and predicting trends with certainty is almost impossible. Even industries that truly represent the future may not be good investments if bought at the wrong price. Think of the 1990s tech boom. Everyone saw the transformative potential of the Internet and e-commerce. Tech stocks soared, more investors piled in, prices rose further, the media fanned the flames, and a seemingly endless virtuous cycle took hold. Yet, by early 2000, with no external trigger, tech stocks collapsed. The dot-com bubble was born. Thus, chasing industries just because they look like “the future” is another trap. For Marks, a true “growth stock” is one where the price is below intrinsic value—not simply because it belongs to a fashionable industry.
The Contrarian’s Approach
So, we’ve seen two mistakes to avoid: the gambler’s blind trend-following and the dentist’s rigid focus on fundamentals alone. What, then, defines true contrarian investing? For Marks, it is starting from price and maintaining deep skepticism of whatever “everyone knows.”
He offers his own experience as an example. Oaktree Capital, the firm he co-founded, is now the world’s largest distressed-debt investor. The very phrase “distressed debt” scares most people—junk bonds, high default risk, seemingly no attractive features. Most investors wouldn’t touch it.
But Marks asked a different question: “Why dismiss an entire asset class without first considering its price?” If nobody wants it, isn’t the price likely to be low? If the demand and price eventually rise, won’t the returns be excellent? Seen this way, “trash” in the market’s eyes may actually conceal solid opportunities.
That contrarian logic led Marks and his partners to found Oaktree in 1987, specializing in distressed debt. His approach proved invaluable again in the years before the 2008 financial crisis. Between 2005 and 2007, optimism reigned. Most people believed housing was inflation-proof and that economic cycles had been tamed. They argued globalization spread risks across countries; computers and models made markets more predictable. The prevailing mood was serene confidence.
Marks saw things differently: when everyone believes there is no risk, that’s the biggest risk of all. In 2005, Oaktree began pulling back early. For two or three years, they endured the pain of explaining to clients why they weren’t making money when “everyone else was.” But when the crisis hit in 2007–2008, Oaktree was ready. They scooped up distressed assets at rock-bottom prices. By 2009, as the economy recovered, the cycle turned in their favor and Oaktree reaped massive profits. Today, the firm manages over $100 billion globally.
This, Marks argues, is the true meaning of contrarian investing. Or, to borrow Warren Buffett’s famous words: “Be fearful when others are greedy, and greedy when others are fearful.”
Part Two
What we’ve just covered are the pitfalls Marks warns against, along with the contrarian strategies he recommends. Yet, Marks emphasizes that all of these contrarian strategies still require a foundation of investment knowledge. You need to know how to analyze a company’s fundamentals, how to assess intrinsic value, and how to judge whether an asset is over- or undervalued. In other words, you must first master the “dentist’s skills” of investing before you can wisely play the “casino game” of markets. Without that foundation, any so-called “investment philosophy” is likely just gambling, dependent on luck.
But suppose you’re a beginner investor, with some money to put to work. How should you choose a reliable, competent investment manager? Put another way: how do you sharpen your judgment to know whether an investor truly has skill?
Most people’s first instinct would be: look at their track record. If someone has a history of successful investments, surely they’re more capable and trustworthy, right?
Marks tells us it’s not that simple. In his 35 years on Wall Street, one of the strangest things he observed is that those with the most impressive past performance often had the shortest careers. Why? Because the end of many an investing career came not from mediocrity, but from disastrous mistakes after early triumphs. The higher the highs, the easier it was for later blunders to knock them out entirely. Marks points out that luck never disappears from investing. Many managers with dazzling results simply got lucky. Don’t overthink it—it really can be as simple as “a pig flying in the right wind.”
So what should you do instead? Marks suggests: don’t just examine results—look at how those results were achieved. He breaks this down into three steps: know yourself, know the other, and talk about the future.
Step One: Know Yourself
First, clarify your own investment goals and risk tolerance. Choosing a manager is like choosing a life partner—you need to know what you want to find the right match. Setting your goals upfront prevents you from becoming overly greedy or swept away by the euphoria of easy money.
Too many investors think: “If I can earn 8%, that’s good; 10% is better; 20% or 30% is even better.” But that kind of thinking, even if you understand contrarian investing, makes it hard to resist chasing short-term gains—and that leads straight into excessive risk. Instead, you should think: “My target is 8%. I’d be pleased with 10%. But 20–30% would bring risks beyond what I can accept, so I must avoid them.”
The key is to always remember the possibility of failure and to plan for worst-case scenarios. Ask yourself: how much volatility can I truly withstand? What outcome would cross my personal red line? Then, when selecting a manager, consider whether you need someone more aggressive or more defensive, depending on your own financial position and temperament.
Step Two: Know the Other
Next, look at the manager’s long-term performance. Since luck heavily influences short-term results, only long-term records can reveal true skill. But don’t just look at averages—look at how they performed in different market environments.
For example, if an aggressive manager makes more than others in a bull market, that’s not necessarily skill. But if in a bear market they lose less than average, that’s genuine ability. Likewise, a defensive manager who outperforms in down markets and keeps pace in up markets is demonstrating real talent. By contrast, if a manager’s results simply track the market year after year, you can conclude that luck and environment matter more than skill.
Step Three: Talk About the Future
Finally, ask the manager about their view of the future. In sales, there’s a well-known trick: the more confidently you make a claim, the more likely people are to believe you. The same is true in investing. The industry is full of confident smooth-talkers, promising precise predictions of trends and outcomes, dazzling clients with apparent certainty.
Marks calls these people the “I know” school. For them, the future is predictable and singular. They bet everything on their forecast, even when they pretend to diversify. In reality, all their bets rest on blind faith in their version of the future.
On the other side are those in the “I don’t know” school. They don’t claim certainty, but they are cautious and prudent. They’ll tell you that no one— not even themselves—can predict the future. Instead, they treat the future as a set of probabilities. They’ll lay out multiple possible scenarios, explain how their portfolio addresses each, and show how they’ve structured it to minimize risk.
Once you hear their answers, it becomes easy to tell who belongs to which school. Marks advises avoiding the “I know” investors. They may sound impressive, but sooner or later they’ll fall hard—and drag their clients down with them.
Conclusion
That just about wraps up today’s discussion. Let’s take a quick look back. The central idea of The Most Important Thing can be summed up in a single phrase: maintain independent thinking, be a contrarian, not a follower of trends.
To clarify what contrarian investing really means, Marks first dissected two common strategic errors. One is the “gambler’s” approach—chasing markets and relying entirely on luck. The other is the “dentist’s” approach—focusing rigidly on intrinsic value while ignoring price dynamics and the market’s role in shaping them. In Marks’ view, neither of these qualifies as a mature investment philosophy. True contrarian investing requires independent thought, respect for the laws of price, and an ability to analyze the forces driving price changes. Above all, when everyone else is saying the same thing, you must remain cautious. Ask yourself a few more “why’s” before committing capital, and never follow the crowd blindly. As Warren Buffett famously put it: “Be fearful when others are greedy, and greedy when others are fearful.”
For newcomers to investing, when you need to select a manager—or simply want to judge whether an investor is trustworthy—Marks offers three key guidelines. First, be clear about your own investment goals and your tolerance for losses. Second, don’t focus only on past results; instead, examine how those results were achieved, especially across different market environments. Finally, ask them about their view of the future. If someone presents the future with absolute certainty and unwavering conviction, steer clear. That sort of confidence is often an illusion, and falling for it can be costly.
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