Howard Marks is the head of Oaktree Capital Management Co., Ltd. and wrote this book. The closed fund managed by Oaktree Capital has a return of about 19% per year, which is about the same as Buffett’s Berkshire Company. Every year, he writes a letter to investors called “A Memorandum from the Chairman.” This book is what he thinks is the most important thing for investors to know. The parts that I think are directly helpful to investing are shown below.
learn second-level thinking
Max says that there are two levels of thinking: the first level and the second level. The first level of thinking is simple and surface-level, and anyone can do it. This is why we often say, “Think with your knees and know it.” The second level of thinking, on the other hand, is deeper and more complex. It’s more in-depth, complicated, and circuitous, and you need to master second-level thinking to beat the market and get better investment results.
Here are some examples of questions that can lead to second-level thinking:
- What are the possible future results?
- Which outcome do I think will come?
- What are the odds that my opinion is correct?
- What market consensus do you have?
- How different are my expectations from the market consensus?
- How closely does the market price of this asset match what the market consensus thinks it is?
- Is the consensus mentality reflected in prices overly optimistic or pessimistic?
- If market consensus turns out to be correct, what effect does that have on asset prices? If my expectations are correct, what effect does it have?
Pay attention to the boom cycle.
Max believes that everything has cycles, and cycles always prevail in the end, in other words, “Nothing goes in the same direction forever, trees don’t go straight across the sky, and few things go The value will drop to zero, don’t speculate on the future based on today’s events.”
The credit cycle is a good example:
start of ascent
- The economy is booming
- There are many people providing funds, and the amount of funds increases
- Little bad news (loans and investments appear to be less risky)
- Risk aversion disappears
- Financial institutions provide more funding
- Various easing policies
- Funders begin lending to ineligible
start of reversal
- Losses lead to disappointed borrowers to exit
- Increased risk aversion, credit restrictions and higher interest rates
- The supply of funds is reduced, and only the most qualified can borrow money
- Enterprises are in urgent need of funds, but borrowers do not extend their debts, and default events are frequent
- The economy shrinks even more
When it reaches the extreme, it starts to rise again.
Market Heat Assessment Guide
This guide is used to figure out how hot the market is. The author says that if most of the features you chose are in the left column, you should keep more cash on hand.
| Economic Situation | Active | Stagnant |
|---|---|---|
| Economic outlook | optimistic | look after |
| Lender | rush | keep |
| Capital market | loose | crunch |
| Amount of Funds | adequate | shortage |
| Loan Conditions | loose | strict |
| Interest Rate | Low | high |
| Spread | Small | Big |
| Investors | Optimistic, hopeful, strong buying | Pessimistic, feeling hopeless, wait and see |
| Asset holder | happy to hold | in a hurry to let go |
| Seller | few | many |
| Market | crowded | little attention |
| Fund | The threshold for subscription is raised, new funds are added every day, and the fund manager is controlled | Open to everyone, only the best funds can raise funds, and investors have bargaining power |
| Recent Performance | excellent | poor |
| Asset Price | high | Low |
| Expected Return | Low | high |
| Risk | high | Low |
| Investor Characteristics | Active and wide-ranging investments | Be cautious and invest carefully |
Take Away Notes Before Investing
NOTE 1
Value is the best place to start for successful investing or a successful career in investing. You need to know where the value of the investment you want to buy is at. Value is made up of many parts and can be measured in many ways. Simply put, it is the value of cash and tangible assets on the books, the ability of the company to run or the ability of the assets to make cash, and the potential for everything to go up in value.
NOTE 2
If you want to do well with your investments, you need to understand value better than anyone else. So you have to learn things that other people don’t know, see things from a different angle, or analyze things well. In an ideal world, all three should be present.
NOTE 3
Your view of value must be based on facts and analysis, and you have to stick to it. You won’t know when to buy and when to sell until you do. Only if you have a strong sense of value will you have the discipline to take profits on a high-priced asset that everyone thinks will keep going up or the guts to hold the asset in a crisis and add to it, even if the price drops every day. Of course, in order for your work to pay off, your estimate of value must be right.
NOTE 4
The most important thing to know about investing is the relationship between price and value. The best way to make money is to buy something for less than it’s worth. Paying more than what something is worth rarely works.
NOTE 5
Why do people sell something for less than it’s worth? There are great chances to buy, mostly because most people don’t realize how things really are. It’s easy to find good investment targets, but you have to pay close attention to find cheap ones. Because of this, investors often think that objective merits are investment opportunities when they are not. Great investors never forget that the goal of investing is not to buy well, but to buy well.
NOTE 6
Buying below value is a key way to limit risk and increase the chance of making a profit. Neither buying stocks with high growth rates nor taking part in markets that are hot and strong will have the same effect.
NOTE 7
Price and value are related in a way that is affected by psychological and technical forces that, in the short term, can be stronger than fundamentals. Because of the big changes in price that these two things cause, investors can either make a lot of money or lose a lot of money. You have to stick to your view of value and deal with both psychological and technical factors if you want to make big profits without making big mistakes.
NOTE 8
Economic and market cycles go up and down, and most people think they will always go in the same direction, no matter which way they go. This kind of thinking is the main cause of crises because it shakes up markets, drives prices to extremes, and starts bubbles and panics that most investors can’t stop.
NOTE 9
In the same way, the way people think about investing swings back and forth like a pendulum, going from optimism to pessimism, trust to doubt, fear of missing out to fear of losing money, and eagerness to buy to eagerness to buy. Swing between sells. As the pendulum swings back and forth, most people buy at high prices and sell at low prices. As a result, there are always problems when you’re part of the crowd. Taking contrarian investments in extreme situations can help investors avoid losses and win in the end.
NOTE 10
In rational markets, there needs to be a certain amount of risk aversion, but sometimes there isn’t enough risk aversion and sometimes there is too much. This change in how investors think is a very important part of what causes bubbles and crashes in the market.
NOTE 11
Never forget how powerful the psychological side can be. Greed, fear, leaving doubts behind, obedience, jealousy, ego, and capitulation are all part of human nature, and they can push the average person to act, especially when most people think the same way and the situation gets bad Time. They affect other people and are felt by investors who are smart. No one should be immune to them or separate from them. We can feel them, but we shouldn’t give in to them. Instead, we should be aware of them and stand up to them. Use your mind to beat your feelings.
NOTE 12
Most trends end up going too far in both bull and bear markets. Those who catch them early will make money, while those who get in too late will lose. This is why my first investing saying, “The smart people always start first and the fools end up,” is true. Rarely are people able to fight the urge to overextend, but most successful investors have this skill.
NOTE 13
It is impossible to know when a market that is too hot will cool down or stop going up. We don’t know where we’re going, but we still need to know where people are. From how people around us act, we can figure out where we are in the market cycle. When other investors aren’t worried, we should be careful, and when they’re panicking, we should do more.
NOTE 14
But even investing in the opposite direction won’t always pay off. The best times to buy and sell are when prices are very high or very low, and extreme prices don’t happen every day. We can’t help but enter and leave the cycle at less desirable times, and few people would be happy to do it only every few years. We have to be careful when dealing with things that go against us.
NOTE 15
Most likely, the best investment performance will come from making decisions based on good value judgments, good value for money, and a general pessimistic view of the market. However, even so, there may be a long time before we turn to what we believe to be the situation. Far from being too low, a price is about to go up. This is my second big investing motto: “It’s hard to tell the difference between being ahead of the time and failing.” It takes patience and perseverance to hold for the long haul until proven right.
NOTE 16
In addition to being able to measure and pursue value when the price is right, successful investors must have the right approach to risk. They must move beyond academia’s single definition of risk as volatility and understand that the most important risk is the risk of permanent loss. They need to know what could go wrong with each investment goal and be willing to take risks only when the rewards are high enough.
NOTE 17
Most investors only care about the chance to make money. Some people will look more closely and learn that it’s just as important to understand risk as it is to get reward. But few investors really understand “correlation,” which is a key part of keeping risk in check across an entire portfolio. Because correlations are different, investment goals with the same absolute risk can be put together in different ways to make investment portfolios with very different levels of overall risk. Most investors think that diversification is holding many different investment targets, but few people understand that if you want to effectively diversify risk, you can only hold a portfolio that can reliably respond differently in various environments. achieved.
NOTE 18
When done right (especially in a bull market), offensive investing can lead to surprising returns. However, these returns are not as reliable as those from defensive investing. So, most outstanding investment records are made up of small losses that happen rarely. “If we don’t lose targets, winning targets will take care of themselves” has been Oaktree’s motto for years, and it has always been true. Diversification makes sure that each portfolio doesn’t lose a lot of money, which is a good place to start for investment success.
NOTE 19
Controlling risk is what defensive investing is all about. Not only do defensive investors try to do the right thing, but they also pay a lot of attention to not doing the wrong thing. Since “ensure survival in bad times” and “seek maximum return in a bull market” are opposites, investors must find a middle ground between the two. “ensure survival against adversity” is what defensive investors choose to focus on.
NOTE 20
A key part of defensive investing is the use of margin of error. Even though most investments work out well when the future goes as planned, the margin of error keeps things manageable when the future doesn’t go as planned. Investors can get the margin of error in a number of ways, such as insisting on getting real, long-term value now, buying only when prices are lower than they should be, not using leverage, and spreading their investments across different types of investments. Focusing on these things will make it harder to make money when things are going up, but it will give you the best chance of not getting hurt when things go wrong. “Never forget that a six-foot-tall man can drown in an average five-foot-tall river crossing.” Error margins will help you keep your strength and get through a downturn in the market.
NOTE 21
Risk controls and room for error should always be in place in your portfolio. But you must keep in mind that they are “hidden assets.” Most of the time, the market is bullish, and the value of defense doesn’t become clear until bearishness and the tide go down. So, in a bull market, defensive investors must be happy to make profits, maybe not the most, but enough to protect themselves from risk, even if it turns out later that they didn’t need to.
NOTE 22
One of the most important things to know about investing, and a mental trait of some of the best investors, is that we don’t know what’s going to happen next. Aside from what everyone agrees will happen, not much is known about the economy, interest rates, and markets in general. To gain a knowledge advantage, investors should spend their time on “knowable” industry, company, and securities information. The more you focus on one thing, the more likely you are to learn something that other people don’t know.
NOTE 23
Many investors think they can predict where the economy and markets will go in the future and act accordingly. However, this is not true. They think something will happen, so they go on the attack, which rarely gives them the results they want. When people invest based on strong but wrong beliefs, they could lose a lot of money.
NOTE 24
Many investors think that the world is orderly and can be controlled and predicted by anyone, whether they are professionals or not. They don’t take into account how random things are and how likely things are to happen. So, it’s easy to act on something that you know will happen, and sometimes it works and brings you fame, but doing the right thing in the moment won’t make you successful in the long run. In economic forecasting and managing investments, there are usually people who can make good predictions, but it’s rare for the same person to make good predictions twice. Most of the time, investors who do well are “close to right.” No one else does it better.
NOTE 25
Avoiding economic instability, troubled companies, market panic swings, and other common investment traps where investors get ripped off is an important part of doing things the right way. Even though there is no surefire way to do this, the best way to avoid being scammed is to be aware of these possible risks.
NOTE 26
Another important factor is to have reasonable expectations. Investors often get into troubles like taking risks because of unreasonably high returns or reliable guaranteed returns, and neglecting to pursue the increase in return with the accompanying increase in risk taking. The key is to think carefully about whether or not these investments are “too good to be true.”
NOTE 27
Neither a conservative investor who limits losses in a down market nor an aggressive investor who makes money in a rising market can prove that they are good investors. If we want to know if an investor can really add value, we have to look at how they do in an environment that is different from their own. When the market turns, can the offensive investor not let all of his profits go back? When the market goes up, can the investor who plays it safe still take part? This difference in performance is what shows how good an investor you are. Does an investor have more winning stocks than losing stocks? Is the winner better off than the loser in terms of money? Does the long market pay more than the losses on the short market? Does the long-term performance beat the returns that the investment style would suggest? Great investors do these things, and if they don’t, their returns may just come from the beta times the volatility of the market.
NOTE 28
Only a very smart investor can regularly predict the probability distribution that will dominate future events and feel compensated by the money made from the risk of bad things happening, which is hidden in the probability distribution’s left-hand tail.
Use this simple explanation to show you what makes a good investment, such as knowing the range of possible returns and the risk of bad things happening, and you should know everything you need to know. Now it’s up to you to figure out how to invest well, which will be a hard, exciting, and thought-provoking journey.