The Most Important Thing

October 8, 2016

The concept of “Uncommon Sense” and other core virtues necessary for successful long term investing.
October 2016

The Most Important Thing” is a stellar compilation of essays and insights that should hold prime real estate in every investor’s library. Published in 2013 by Howard Marks, Chairman and Co-Founder of Oaktree Capital Management, it represents a consolidated distillation of his 30-plus years experience as a top tier institutional investor. In Marks’ eyes it is primarily a mixture of investment philosophy and organizational mindset – an “Uncommon Sense” – which empowers superior long term investment results.

We were fortunate to hear Mr. Marks speak at the recent CFA Toronto Annual Investment Dinner and have been avid readers of his “Memos From The Chairman” for many years. In particular, with respect to his memos, we wanted to highlight several essential reads from recent years which are reflective of Aventine’s (and the ACE Fund’s) broad approach to capital investment and risk management. While out of respect for Marks and Oaktree we won’t breach copyright by directly posting or linking to the individual Memos we’re paying homage to below, should you wish to read further they are easily accessible on the Oaktree website.

Dare to be Great.

In his Memo “Dare to be Great II” (April 2014), Marks outlines the necessary structure, values and principles required to foster a culture of superior investment performance. Core among these is the willingness to consistently and genuinely pursue the sort of unconventional investment behaviour that by its nature tends to create – at least initially – great discomfort. The goal he says is asymmetry, “acheiveing a preponderance of gain over loss”, which requires an understanding that the avoidance of all risk is not realistic. Instead, one should focus on effectively taking risk, or as we say – taking risk well and having a plan to control your downside.

It’s Not Easy.

Marks opens this memo (September 2015) with a classic quote from Charlie Munger who states “It’s not supposed to be easy. Anyone who thinks it is easy is stupid.” In a world full of intelligent, well-informed, technologically advanced and profit seeking investors , achieving consistently superior performance requires an edge, a way of thinking that is not just different, and not just better, but both different and better. Marks calls this “second-level thinking” and identifies it as the cornerstone of a mental state which encourages variant perception, unconventionality and iconoclasticism, in an investment sense. Put another way, great investors tend to spend a lot of their time being lonely.


The memo “Ditto” (January 2013) is devoted to exploring the cycles in investor attitudes and psychology as the primary source of risk in global capital markets, particularly with respect to the dynamic between price, value and the “quality” of an investment asset (eg. no asset is so exceptional that it can’t become overpriced, making it poor value, and vice versa). Something that we at Aventine frequently speak to is the concept Marks calls “the perversity of risk”, or the inverse relationship between the perception of risk and the presence of risk. As he quite rightly notes, the risk of capital loss is most severely elevated when there is a widespread perception among market participants that there is no risk of capital loss!