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The Most Important Thing by Howard Marks

Second-Level Thinking

Investing is as much art as it is science.


It is essential that one’s investment approach is intuitive and adaptive rather than fixed and mechanistic.


Anyone can achieve average returns, just invest in an index fund that buys a little of everything. That will give you market returns.


Successful investors want more than market returns, they want to beat the market.


The definition of successful investing according to Howard Marks: Doing better than the market and other investors.


To achieve above-average results requires second-level thinking.


If you want to do better than average, your thinking has to be better than that of others, both more powerful and at a higher level.


What is second-level thinking?

First-level thinking says“It’s a good company, let’s buy the stock!”

Second-level thinking says“It’s a good company, but everyone thinks it’s a great company and it's not. So, the stock is overrated and overpriced, let’s sell.”


First-level thinking is simplistic and superficial, and just about everyone can do it.

Second-level thinking is deep, complex and convoluted.


A second-level thinker takes many of these things into account:

  • What is the range of likely future outcomes?
  • Which outcome do I think will occur?
  • What is the probability that I’m right?
  • What does the consensus think?
  • How does my expectation differ from the consensus?
  • How does the current price for the asset comport with the consensus view of the future and with mine?
  • Is the consensus psychology that is incorporated in the price too bullish or bearish?
  • What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

The difference in workload between first and second level thinking is massive.


First-level thinkers look for simple formulas and easy answers.


How can one find bargains within efficient markets? You must bring exceptional analytical ability, insight, or foresight.

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Jeremy Silva

Jeremy Silva lives near San Francisco with his wife and son. He is a writer, blogger, and personal investor. He is passionate about education, personal development, project management, and investing. His blog has over 100 book summaries on many topics including investing, self-help, and business. You can click on the link to read some interesting book summaries on Jeremy’s website (https://jsilva.blog/book-summaries/).