Books, books, books. The Most Important Thing

January 28, 2019
books learning

As a young adult growing into adulthood, one thing that I’ve been increasingly curious about is investing. There’s so many options but I have no knowledge or expertise on the correct action to take. Luckily I have a friend that could point me to some basic resources. The first of which was “The Most Important Thing” by Howard Marks. What I enjoyed about it was its emphasis on the philosophy of defensive investing. Just like running a startup, risk is the most challenging part and must be managed accordingly.

Second Level Thinking

First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple.

The market is me by definition. So why do I think that I can do better than me and the people better than me? Some are going to have superior analysis, advanced models and years of education in a space that I’m not very familiar with. Introducing what Marks calls “second level thinking”.

Asking second level questions can be hard and takes a lot of practice + experience to learn from. However, one context to easily apply this style of thinking is through market cycles.

Bears and Bulls

Risk of an asset should be baked in and considered into the price of it. When things start going well, the perception of risk is reduced and its consideration in its price is slowly eliminated. To bring it back to the first point about second-level thinking I’m going to reference the 2017 ICO craze.

Everyone thought that they too could relive the experience of holding a digital asset that goes from $1 to $10,000 overnight with a global pool of liquidity. Many, including myself, used first-level thinking such as:

However, very few stopped to ask themselves the following and not participate in the hype:

In hindsight these are very easy questions to ask, but very few were able to use level headed reasoning. Everyone from retail investors to VCs in private sales got caught out. This goes to show the power of market psychology. I respect Ari Paul in his blog for being hyper aware of this:

“Over the following month, the ICO table got much more competitive. Initial valuations skyrocketed as investor capital flooded into the space. And a great many of the professionals entering cryptocurrency are currently focused on ICOs. So…for now at least, I’m not.”


So what should the optimal strategy for investing be? Well it depends since investing is a zero-sum game.

As an individual, limiting yourself to how much you can afford to lose is the most important thing. However given the choice, how many would cap their gains in a bull market? It’s very hard to say since greed takes over. As result, what was green becomes red to the point that you can’t tolerate.

Here’s a list of what a bull herd psychology looks like and what bear psychology looks like.

Wrapping Up

Knowing yourself and the environment in the present is a key lesson I learned from this book. Predicting the future is a game of luck, not skill. The chance you get it right can lead to massive pay offs, although incorrectly guessing could lead you to lose everything depending on how you managed your risk. I’m still a beginner when it comes to investing although I hope to share more about my learnings as I go along this journey with you all!

Books, books, books. #3: As a Man Thinketh.

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