Howard Marks on Ensuring Survival

The most dangerous words in investing are: “It’s a great company.”

Howard Marks has spent a career warning investors not to confuse quality with value. Great companies can be terrible investments if you pay too much.

For a value investor, price has to be the starting point. No asset is so good that it can't become a bad investment if bought at too high a price. And there are few assets so bad that they can't be a good investment when bought cheap enough.
– Howard Marks

This idea goes against how most people invest. They chase trends. They pick industry leaders. They buy whatever CNBC is praising. But Marks says the question isn't what you’re buying, it's what you’re paying. He compares it to being offered a used car. Would you agree to buy it without asking the price?

The same logic applies to markets. Tech stocks in the late ’90s and junk bonds in the early ’80s both reveal the same mistake: investors fell in love with an idea and forgot to ask if it was priced right.

During the course of my 35 years in this business, investors' biggest losses have come when they bought securities of what they thought were perfect companies, where nothing could go wrong, at prices assuming that degree of perfection…and more.
– Howard Marks

Smart investing begins with intrinsic value—your own well-researched, rigorously developed estimate of what an asset is truly worth. Without that anchor, falling prices shake your confidence, rising prices lead you to chase. But when you buy something for less than it's worth, your risk is lower and your odds of success rise.

The point isn't to buy the best company. The point is to buy the best deal.

Marks is a legitimate genius, but he makes successful investing accessible to just about everyone in his book, The Most Important Thing: Uncommon Sense for the Thoughtful Investor.

If you missed yesterday's Howard Marks missive, read it at www.mydailyoracle.com. And watch for tomorrow's post in your inbox. It will be the third one this week to deal with Marks.

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