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The Most Important ThingUncommon Sense for the Thoughtful Investor$
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Howard Marks

Print publication date: 2011

Print ISBN-13: 9780231153683

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231153683.001.0001

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The Most Important Thing Is … Adding Value

The Most Important Thing Is … Adding Value

Chapter:
(p.166) 19 The Most Important Thing Is … Adding Value
Source:
The Most Important Thing
Author(s):

Howard Marks

Publisher:
Columbia University Press
DOI:10.7312/columbia/9780231153683.003.0019

This chapter is about a well-known important requirement for successful investing: adding value. It is not hard to perform in line with the market in terms of risk and return. The trick is to do better than the market: to add value. This calls for superior investment skill, superior insight. The performance of investors who add value is asymmetrical. Asymmetry—better performance on the upside than on the downside relative to what the individual style alone would produce—should be every investor's goal. This chapter explains what it means for skillful investors to add value. To this end, it introduces two terms from investment theory: beta, a measure of a portfolio's relative sensitivity to market movements, and alpha, defined as personal investment skill, or the ability to generate performance that is unrelated to movement of the market. If we are consistently able to decline less when the market declines and also participate fully when the market rises, this can be attributable to alpha, or skill. This is an example of value-added investing.

Keywords:   value, investment, investors, asymmetry, investment theory, beta, alpha, value-added investing, investment skill

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