The Most Important Thing - Howard Marks [1]

"What is the secret of success in investing?"
The answer to this question is simple, "having a philosophy of effective investment strategy".
You may ask "Where does that come from?"
Well, it needs time and experience. No one is perfect from the beginning. Of course, someone may be lucky, novice mom-and-pop investors may be lucky enough to earn money from concentrated investments. The experience comes from lessons whether it is directly from investor's own harsh encounters of a great depression or indirectly from book which was written by investment gurus.

The important thing is to be aware of what's going on in the world and how it affects in the stock market. When a similar situation recurs the lessons can be very useful for developing the market insight. Otherwise, most investors are volunteered to be a victim to repeated booms and bust cycles. The most valuable lessons come from recession. I have not experience most of the depressions in the stock market. However, by taking lessons indirectly by useful materials such as books, newspaper, or podcasts, I could encounter the notorious events happened during the great depression (1929-1933), oil crisis (1973, 1979), Nifty Fifty (1969-1973), death of equities (1979), Black Monday (1987), Russian financial crisis and bankruptcy of LTCM (Long Term Capital Management) (1998), Dot-com bubble (2000-2001), large scale corporate accounting scandals (2002), great recession (2007-2009), and COVID-19 recession (great lockdown). By encountering these incidents, it is inevitable for investors to learn the lesson of great leaps and falls.

In the book 'The Most Important Thing' has twenty parts of principles in investments. The lessons that Howard Marks gives can be very meaningful for the investors whether they are experienced or novice. I will quote or summarize the most impressive parts short and briefly [1 - 4 parts].

Second level thinking
The field of investment is not always regular and contains many variables. Environment is impossible to control, never happens exactly the same as the past. Sentiments from investors are unpredictable leading to market volatility. The field is more of art than science. Howard marks emphasizes second level thinking which needs strategy of being unconventional, intuitive, and complex can achieve more than benchmark return such as index funds. Thinking beyond and stepping further market prediction is key to succeed in the investment field.

Understanding market efficiency
An average return can be achieved if the price of an efficient market already reflects the market's forecast. However, to win the market, investors must have a different view that is contrary to the market's predictions. There is a term called alpha and beta.

"Alpha helps reveal how a stock or fund might perform in relation to its peers or to the market as a whole. Beta or often referred to as the beta coefficient, beta is an indication of the volatility of a stock, a fund, or a stock portfolio in comparison with the market as a whole." - Investopedia

Accepted wisdom which is other expression of market efficiency. Getting over the idea of being an average needs the skill alpha. It should always be countered that investors cannot beat the market. Having deep and adaptive second level of thinking will help investors getting over it. “Many of the best bargains at any point in time are found among the things other investors can’t or won’t do.", explains Howard Marks.

Estimate intrinsic value
The buying price must be lower than the selling price. In other words, buying cheap and selling stocks at a high price is a general principle of the stock market. However, since selling is performed in the future and buying is carried out now, it is difficult to approach the stocks which have appropriate price. There must be an objective criterion for defining what is expensive or what is cheap, but it is most effective when it is valued based on intrinsic value. Measuring intrinsic value leads the way for investors to purchase a stock.

There are two ways for evaluating intrinsic value. One is analyzing the corporate value, the other is technical analysis.
Technical analysis is obsolete method due to random walk hypothesis. According to the hypothesis, past stock movements are not helpful at all to predict future stock price. “We all know that even if a coin has come up heads ten times in a row, the probability of heads on the next throw is still fifty-fifty. Like wise the fact that a stock’s price has risen for the last ten days tells you nothing about what it will do tomorrow.”  Momentum investors are the best example of investing in technical analysis. When TMT (tech, media, telecom) stocks rallies, they put their investment in very short term.
Value analysis has two types of investments: value and growth. The purpose of a value investor is to invest when the price of a security is lower than the present intrinsic value (margin of safety), and the purpose of a growth investor is to find a security whose value will increase rapidly in the future. Value investors believe present value of the asset is lower than the price. Growth investors buys stocks when they consider the stock of future will rapidly grow.
Value is more of present, growth is more of future. In my opinion, value has never lead to bubble or great falls. In opposite view, value stocks sometimes frustrate investors because they don't give the excitement that prices will skyrocket. However, value investors like Warren Buffett must have solid belief of value in order to withstand without profit for long time.
See my blog about Warren Buffett's recent value investment on five Japanese trading companies.
https://techongstudy.blogspot.com/2020/09/sogo-shosha-and-berkshire-hathaways.html

The Relationship Between Price and Value
To understand the relationship between value and the price is to know about the sentiment of the investors and technical factor. Technical factor may include margin call when inevitable situation comes out during collapse of stock market. Second factor is sentiment of investors.
"Psychology plays a key role in investing. Emotions that affect investing include fear and greed, but are more diverse and can significantly impact results. Investor psychological profiles affect how an investor's portfolio performs because investing decisions are directly linked to emotions." - Seeking Alpha
The error that investors claim can be based on excess liquidity and growth of the firms. However, it can lead to the trap of the greater fool's theory when the bubble starts to burst. An investment strategy based on sturdy value is most reliable. As John Maynard Keynes points out that markets are not rational as investors thought, it can remain irrational until investors run out debt repayment capabilities.