1 The Most Important Thing is … Second Level Thinking

The art of investment has one characteristic that is not generally appreciated. A creditable, if unspectacular, result can be achieved by the lay investor with a minimum of effort and capability; but to improve this easily attainable standard requires much application and more than a trace of wisdom. – Ben Graham, The Intelligent Investor

Everything should be made as simple as possible, but not simpler. – Albert Einstein

It’s not supposed to be easy. Anyone who finds it easy is stupid. – Charlie Munger

Few people have what it takes to be great investors. Some can be taught, but not everyone . . . and those who can be taught can’t be taught everything. Valid approaches work some of the time but not all. And investing can’t be reduced to an algorithm and turned over to a computer. Even the best investors don’t get it right every time.
economics isn’t an exact science.
I most want to emphasize is how essential it is that one’s investment approach be intuitive and adaptive rather than be fixed and mechanistic.
  • pyrrhic: won at too great a cost to have been worthwhile for the victor. Losing 45% while the market drops 50% qualifies as market outperformance, but what a pyrrhic victory this would be for most of us.
  • eloquently: fluent or persuasive in speaking or writing: an eloquent speech: They have – or manage to acquire – that necessary “trace of wisdom” that Ben Graham so eloquently calls for.
  • perspiration: the process of sweating: In some pursuits, getting to the front of the pack means more schooling, more time in the gym or the library, better nutrition, more perspiration, greater stamina or better equipment.
But in investing, where these things count for less, it calls for more perceptive thinking . . . at what I call the second level.
you must find an edge they don’t have.
You must be more right than others . . . which by definition means your thinking has to be different.
Second-level thinking is deep, complex and convoluted. The second-level thinker takes a great many things into account:
  • What is the range of likely future outcomes?
  • Which outcome do I think will occur?
  • What’s the probability 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’s 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?

tote up: add together, add up: I think most of them fail to tote up their records, or they overlook their bad years or attribute losses to bad luck.

  • Unconventionality: not based on or conforming to what is generally done or believed: his unconventional approach to life

You can’t do the same things others do and expect to outperform…. Unconventionality shouldn’t be a goal in itself, but rather a way of thinking.

Conventional Behavior Unconventional Behavior
Favorable Outcomes Average good results Above-average results
Unfavorable outcomes Average bad results Below-average results
  • eminent: famous and respected within a particular sphere: The attractiveness of buying something for less than it’s worth makes eminent sense.