The Most Important Thing

Investing consists of exactly one thing: dealing with the future.

-Howard Marks

Several years ago I was introduced to the writings of Howard Marks and have been a loyal follower ever since. The reflections he shares in his memos, while occasionally written from the perspective of a value investor, offer insights and reasoning that are applicable to many different fields of investing and life. I consider his memos to be essential reading, and The Most Important Thing acts as an excellent companion piece with additional thoughts and commentary. Below I’ve highlighted a few topics that I thought were worth a discussion

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Deconstructing Peter Lynch

Actively managed mutual funds have earned their place among the most unloved of paper assets, and rightly so. The high fees combined with persistent under-performance are a serious drag on growing one’s capital. Peter Lynch, famed manager of Fidelity’s Magellan Fund briefly touched on the failure of active managers in his book Beating the Street and even went so far as to suggest allocations to index funds as part of one’s portfolio. This was somewhat prescient as the book was written in the early 1990s, well before the passive investment fad was in high gear. But remember, Lynch himself was an active fund manager. Based on return alone he’s considered among the greatest ever. From May of 1977 through May of 1990 Lynch captained Magellan to an annualized return of 29.06% compared to just 15.52% for the S&P 500.

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Ray Dalio’s Economic Machine

I feel a deep sense of responsibility to share my simple but practical economic template
-Ray Dalio

Here’s a simple and straightforward explanation of how the US economy works from hedge fund manager Ray Dalio. Keep in mind that this explanation is a theory, albeit a very pragmatic one, and not definitive law. That being said it’s probably the best 30 minutes of economic education out there on the inter-web. For those who don’t have 30 minutes here’s the high points:

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Mutual Fund Mea Culpa

I firmly believe that revisiting your mistakes is one of the best ways to learn. Two of the most important lessons I learned early on in my investing experience were: 1) high fees negatively impact returns and 2) actively managed funds typically under-perform passive indexes over longer periods of time. [1] Prior to using low cost index funds in an asset allocation strategy I owned a number of high fee actively managed mutual funds. Below I’ve compiled a list of the active funds that I used to own against a comparable offering from Vanguard. Ten year annualized returns and volatility of the funds are included for comparison. A more detailed description of my ownership with my insights is included for each fund below.

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Buffett’s Conviction

Warren Buffett is without a doubt one of the greatest investors to walk the planet. Writing about him on a personal finance blog is cliché to say the least. His track record, a 21.6% annualized rate of return over 50 years, is incredible and likely never to be repeated. What I find more impressive than the returns and dollars he’s generated is his temperament. His common sense wisdom, supported by his actions and behavior provide investors of all levels with some valuable lessons.

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