Generate Big Profits with these Investing Techniques, from Billionaire Investor Howard Marks
In this best-selling book from billionaire investor Howard Marks, he outlines how you can implement the investment philosophies that he developed over many years of managing billions of dollars.
His unconventional wisdom can be applied by every investor.
Key Lessons:
- Big profits are made in MISPRICINGS
- Second Level Thinking
- How INTRINSIC VALUE is key to strong returns
- Managing Risk
- Where the best opportunities can be found
- Market Psychology
- Prepare for Random events
MISPRICINGS
Since opportunities to beat the market are rare, successful investing requires perceptive thinking.
Successful investing means buying MISPRICED assets. Sounds simple, but mispricing’s are rare.
Why?
Because most of the time, thousands of investors are actively gathering information about various assets and evaluating them diligently.
Because of this, assets don’t stray too far from their INTRINSIC VALUE.
And when an asset is priced appropriately, which is typically the case, it’s hard to profit from it.
Still, Mispricings do occur.
For example, in January 2000 Yahoo = $237 per share.
That April, it traded at $11 per share. The price must have been wrong at some point during that period.
In general, mispricings make profits and losses possible in a big way.
But detecting them is a difficult task.
If your investment goal is to earn higher than average returns, your thinking has to BE DIFFERENT and better than everyone else.
SECOND LEVEL THINKING
It works like this:
First-level thinkers say “It’s a good company, let's buy”.
Second-level thinkers go beyond conventional wisdom by saying:
“It's a good company, but everyone thinks that, so the stock is probably overrated and overpriced, let’s sell.”
This approach is so effective because it acknowledges the fact that all investors put together actually make the market.
Second-level thinking takes all these other investors into account, in order to beat the market.
Not just submit to it…
INTRINSIC VALUE
Coming up with an accurate estimate of intrinsic value is the ideal starting point for successful investing.
You do this by analyzing a company’s fundamentals.
How?
Intrinsic Value is determined by fundamentals, such as:
Making an accurate estimate of intrinsic value is the cornerstone of successful investing.
It will then allow you to spot (and buy) assets below their fair value.
Intrinsic value is crucial, yet many overlook it.
If someone offered to sell you their car, you would find out what it is worth before buying it.
It works the same with assets.
We have a tool that allows you to easily calculate a stocks intrinsic value for free - Value Sense
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You can sign up here.
MANAGING RISK
Dealing with it is an essential aspect of investing.
Investing requires us to deal with the future. But since we can’t predict the future with any real certainty, risk is unavoidable.
So investment risk is always present. Even when it’s hard to recognise.
Especially when prices are high, since they’re ever more likely to fall.
This takes us back to the importance of knowing an assets Intrinsic Value.
Because in the long term, prices revert back to an assets Intrinsic Value.
Thus, serious risk assessment is necessary to make wise investment decisions.
The Best Opportunities Exist Where Others Wouldn’t Dare to Go.
Although it might feel uncomfortable at first. Make it your goal to find underpriced assets, which are perceived to be considerably worse than what they really are.
If nobody owns something, demand for it can only go up.
Even if the asset goes from taboo, to even “just tolerated”, it will perform well for you.
MARKET PSYCHOLOGY
Market forecasts are mostly wrong.
Consider the fact that few forecasts correctly predicted the global credit crisis and economic meltdown in 2008.
Avoid psychological sources of error.
Some of the biggest investment errors come from psychological factors, like:
- Greed
- Fear
- Envy
- Ego
Greed is the most powerful. Strong enough to vanquish our aversion to risk.
RANDOM EVENTS
Investment outcomes often hinge on random events.
So, create an investment approach that anticipates this.
Consists of finding the right balance between offensive and defensive investment tactics.
Offensive = accepting high levels of risk in pursuit of gains
Defensive = built on the avoidance of loss
best-selling
Investing requires a deep understanding of the fundamentals that drive stock prices.
Following the crowd creates significant risk and limits your upside.
Successful investing requires you to look and think differently to consensus and most importantly, buy mispriced assets.
