‘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’s overrated and overpriced; let’s sell.”
First-level thinking says, “I think the company’s earnings will fall; sell.” Second-level thinking says, “I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.”
First-level thinking is simplistic and superficial, and just about everyone can do it. Second-level thinking is deep, complex and convoluted.
I am reading Howard Marks’ exceptional book on investing, ‘The Most important thing’ where he explains the concept of second-order thinking.
Beyond just investing, even in life, being ‘more right’ requires deeper thinking. Being able to ask “And then what?”, as the FS blog writes on the topic.
Extraordinary performance comes from seeing things that other people can’t see. Have you seen or experienced second order thinking based decisions?
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Book #13/52 2022