The Most Important Thing summary

The oldest rule in investing is also the simplest: “Buy low, sell high.” That might seem blindingly obvious, until you try to put it in practice. And then you start to wonder, what’s low and what’s high? To answer that, there has to be some objective standard. And for our purposes, the most useful one is the asset’s intrinsic value.

In fact, coming up with an accurate estimate of intrinsic value is the ideal starting point for successful investing. You would do this by analyzing a company’s general attributes, which are called fundamentals. Fundamentals analysis involves asking questions pertaining to the company’s economic well-being — such as, is the company earning a profit? Can it repay its debts?

Investing requires us to deal with the future. But since we can’t predict what will happen with any real certainty, risk is unavoidable.

Investment risk is always present, even when it’s hard to recognize. This is especially true when prices are high, since they’re ever more likely to fall. High prices are due to excessive optimism and insufficient skepticism that prices will remain high. So perhaps paradoxically, the prime element of risk creation is the belief that risk is low – maybe even non-existent.

Although there are very few sure things, when it comes to the world of investments, there are two rules we can always count on.

Rule number one: Most things are cyclical, due to the nature of humanity. Mechanical things move in a straight line, but humans don’t. People are emotional, inconsistent and mutable. And more specifically, when investors become emotional, it creates cyclical patterns in markets.

Most investors tend to follow the trends. Superior investors, however, do the exact opposite.

In fact, bucking trends is the key to successful investment, because crowds make errors with an almost mathematical regularity, creating insane market turbulence.

If you follow market forecasts, then you know that these investing tools can sometimes be right.

However, the key question isn’t whether they’re sometimes right, but whether forecasts consistently provide actionable and valuable information.

When it comes to analyzing the financial market, plenty of people are going to follow similar lines of reasoning and reach similar conclusions. And yet, people who arrive at the exact same conclusion often behave differently. That’s because psychological factors don’t influence everyone the same way.

In fact, some of the biggest investment errors come from these psychological factors, like greed, fear, ego and envy. These forces can drive us to pursue high returns by accepting high levels of risk.

Every now and then, someone takes a huge risk that pays off. And although it’s great to be on the receiving end of such a scenario, it’s worth remembering that winning a gamble is the result of luck and boldness, not skill.

Indeed, luck plays a huge part in investment. When it comes to the markets, a great deal of success is a matter of being in the right place at the right time. And moreover, success can also entail being in the right place for the wrong reasons. In fact, outcomes often hinge on totally random events.