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If we break our leg, the doctor will tell us where the fracture is when they take an X-ray, right? Yes, the problem is very clearly visible to the eye, as a white line. Correct, but when it comes to our money, that is, if we take an X-ray of our investments, all we see is a big mess. It's not easy to understand what is a profit and what is a loss.
It's true that nothing in the stock market is as clear as black and white, everything is shrouded in a deep ambiguity . That's where the real trouble begins. This is exactly the goal of our in-depth analysis today, which is to discuss how we can identify the facts behind that ambiguity rather than blindly investing in it.
Today, we are going to analyze the summary of the wonderful book The Most Important Thing written by Howard Marks, co-founder of the renowned Oaktree Capital Management . Um this is a very interesting topic. This book is like a real guide for investors. Yes, our mission today is not just to invest money in the market, but to understand how to identify real risk and build sustainable wealth with the right mindset.
Making money is one thing, but protecting it from market fluctuations and turning it into more wealth is a completely different skill. So let's go where the real wisdom lies. Let's first look at the first and most important lesson that Howard Marx, crunching his decades of experience in this book, has to offer .
He is adamant that our work is not over just because we have identified a good company . Oh, that means we're talking about the biggest mistake investors usually make . Yes, a company is making good profits . Its products are good. What does everyone think when they find out that the future is amazing?
It's understandable that people would close their eyes and invest in it, thinking it's the best investment, but this book calls it a big valuation trap. The valuation trap. Okay, let's analyze this a little deeper. See, finding a good company is only half the battle, pricing it right is the real skill.
Does that mean that the price we buy at is more important than how good the company is? Yes, this is where the real interesting thing lies . For example, let's take Company A. Let's say it has amazing benefits . Let 's say that rights management is also very efficient. Correct, but suppose that the company's stock trades at a price 45 times its earnings.
Isn't 45 times a lot? When the valuation is that high, no matter how good the company is, it becomes a risky deal. I understand that. This is like buying a world-class luxury car for 10 times its original price . Definitely a good comparison. That car could be amazing. No matter how great the car is, from a financial perspective, spending that much money is a bad financial deal.
It's true that you can't pay whatever price you want for a car just because it's good. It's the same in the stock market, meaning that a good company is different from a good investment. Just think about how badly its resale value drops even if there's a small scratch on that car. Um, it falls a lot .
The situation is exactly the same for stocks with high valuations in the market . The market always expects miracles from that company . That means that even if there is any minor negative news, no matter how much profits fall, the share price will fall to the bottom. Yes, it is the same valuation trap.
Let's say there is another company called Company B at the same time. It may not work wonders in the field of technology. Perhaps a small cement company or bank that is just recording modest growth . Right, but if it is found at a valuation much lower than its actual value, it will definitely be a good investment in the long run .
So before investing, a person should look at how good a company's business is and also at its current valuation. Yes, if it is at that price, you should definitely ask questions about what the future returns will be . Okay, we've talked about the small markup on the car, right? Now let's look at the actual risk that would arise if the price were to drop.
Risk is certainly a very misunderstood word in the market. Yes, usually when people think of risk in the stock market, they think of the red arrows that appear on TV every day or the market falling 5% in one day. In fact, it is not a risk. The fluctuations that appear every day in the market are just the natural nature of the market.
But what is real risk? Real risk is the permanent loss of our capital, which means the money we have invested completely evaporates. Yes, let's look at this through a small calculation. Suppose a person invests one lakh rupees in a stock. What happens if that stock falls 50%? The investment falls to 50,000.
Okay, now how much does that stock need to grow to turn that 50,000 into a lakh rupees? That's interesting. It's not enough for the stock to just increase by 50%, you have to make a 100% profit on the remaining 50,000. It's a terrible mathematical trap that many people don't notice, requiring a 100 percent gain to cover exactly 50 percent of the loss.
Yes, Howard Marks says that such permanent loss is the real risk . I have a strong doubt here for a minute . Ask yourself, if a stock continues to rise slowly for six consecutive months without any fluctuations, then people will lose their fear and think it is very safe. That's my question too. Many people believe that this is a very safe investment because the graph always goes up.
Is there a risk in it? If we look at this from a broader perspective, a surprising truth emerges. There is a big difference between outward movements and the inherent risk . Does that mean it's not as safe as it seems? Yes, a stock may have been rising for six months, but the company could be mired in serious debt and its business could be falling.
Then why would the price increase? If people outside are buying just because they see it on social media or because they are greedy when they see it, the price will continue to increase. Oh, that means people will keep buying even if the company isn't making a profit . Yes, while it looks so peaceful and safe on the outside, the risk inside is as terrifying as a volcano.
That's right. The longer a stock goes up without its financial fundamentals, the more invisible risk it has. Of course, this is not limited to just one stock. Sometimes the entire market behaves irrationally in this way. Um, this is where things get even more juicy . Tell me how these market cycles and human emotions work .
The market is never stable. Investor emotions, primarily fear and greed, drive prices. Does that mean they will also ignore actual business statistics ? Yes, let's say the original price of a stock is 100 rupees . If their business is good and it increases to 150 rupees, that is reasonable. Right because it has financial justification .
But then if there is a huge discussion about that stock and people start buying it without any analysis, it will go up to 200 rupees. That additional 50 rupees did not come from business growth. Exactly, it was just an increase due to concerns that greedy neighbors were profiting . Looking at it this way, it seems like the market is not just about numbers, it's like a music concept.
Can you explain a little bit about the concept of music? I mean, look, if someone starts shouting loudly during a live show, the people next to them will also shout without even knowing the real reason. Yes, they shout with excitement, and when they see those people, others will shout, and the entire hall will erupt in screams.
Greed works exactly the same way in the market. It spreads from one person to another. 100% correct. Just as there is no reason behind those cries, there is no business strength behind that additional increase in the market. Um, but that concept doesn't always stay the same, that's where I'm coming from.
When economic conditions change, whether it's central banks raising interest rates or profits falling, the music in that concert suddenly stops. Oh, that's when all that greed that existed until then turns into fear in a matter of seconds. Those stocks can collapse at the slightest disappointment. Wow, what's the antidote to get rid of this kind of group mentality?
How are we supposed to think differently if everyone is going the same way ? This is where Howard Marks' wonderful concept of second-level thinking comes into play. That means thinking differently than Govinda in the crowd . Can you give an example of the difference between first-level thinking and second-level thinking?
There is definitely a huge craze in the market right now about artificial intelligence (AI). Yes, AI is being talked about everywhere. This company is bringing a new AI product to those with first-level thinking. Profits have increased by 20%, so they think they should buy shares immediately. This is what many people in the market do, yes, but second-level thinking doesn't happen like that.
They take it a step further and ask questions. What do you mean by that? They wonder if the market had already anticipated this growth and therefore the share price had increased before I bought it. It's about thinking differently from others. But isn't it very difficult? Standing against the path that everyone else is taking, putting everything under a magnifying glass and doubting it, is it mentally exhausting?
This raises a very important question . This is not about blindly opposing everyone. Does that mean that just saying no is not a contrition? Not sure, everyone. Saying that a stock is good but not good after working hard is not second-level thinking. And what is the correct approach? Analyzing the same information with more comprehensive evidence than others, questioning whether hopes or fears are still embedded in that share price.
I understand, but no matter how thoroughly we analyze, no matter how cleverly we use second-level thinking, our predictions may be wrong somewhere. Yes, no one is 100 percent correct. And is there any safety net that can protect us from those mistakes ? This is where we need to build our defenses . It's called the margin of safety.
What is the margin of safety? No one can predict the future 100 percent. Suppose we assume that the original value of a share is 100 rupees. We will have a margin of safety only if we buy it for 70 rupees rather than buying it for 98 rupees . Oh, that means we won't lose much even if there's a small mistake in the estimate.
Specifically, one of the two people takes extreme risks for high returns, while the other is cautious and practices diversification. This is called defensive investing. If we apply this to a fact of life, it is like the seat belt we wear when driving a car. Well said, yes, that's right, no matter how great a driver we are, the oncoming driver may make a mistake or the road may not be good.
Then what protects us is this margin of safety. No matter how great an analyst we are, this defense is always more important than profits. It is more important to protect the capital we have earned. However, how to put this margin of safety into practice is very simple. We should follow certain rules such as not investing money in businesses we don't understand and not taking risks in the stock market by borrowing money .
All of these are great theories, but tell me how to apply these facts in everyday life . This is where we need to do a reality check. Many people would be happy with a 12 percent return on their portfolio . But when they find out that their friend has earned a percentage of their income, they start to feel jealous and anxious.
Yes, but you shouldn't be so jealous. Their goals are theirs, their risk-taking ability is theirs. For example, one person's goal may be to buy a house in five years, while another's goal may be to retire in six years . How do we compare the two of them, exactly? That's exactly why we need to ask ourselves five important questions before buying anything.
Tell me what those five questions are. First, why are we buying this investment? Second, is its price reasonable? We've already talked about the right price. What happens if the rest of the third part is not what we expected? Fourth, how much risk are we actually taking? These are all very logical questions.
The fifth question is whether this is an information-based decision or an emotion-based decision . Wow this is very important. What do we understand from all this in the end? Not only are stocks risky, but diversified mutual funds are also a great way for those who know their limitations. Yes, we have to admit that even the most experienced make mistakes.
A good decision can be a loss due to market conditions. Um, it means that we should not judge the decisions we make solely based on the immediate outcome. A bad decision can lead to a profit, even with a bit of luck, but it never saves. Wright: To summarize the key points we have discussed so far, it is essential to recognize risk, not always chase profits, maintain a margin of safety, and especially keep our emotions in check .
If you protect your wealth, the profits will come automatically. After hearing all this, a question arises in the method. What is it? It seems that the biggest mistake we make in the world of investing is not misjudging the market. Oh, and imagine how much more peaceful our lives would be if we just questioned our own arrogance, our ego, our overconfidence, and our fixed belief that we know everything.
This is a very profound thought. If we accept that we know nothing in front of the market, half the risk is reduced. Yes, let's improve the decisions we make even when the future is uncertain. Let's end our in-depth analysis today with this wonderful thought . See you again.
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