How do you take your investing to the next level?
Source: Public Domain Archive
Investing is complicated. It’s not enough to understand stocks, bonds, accounting, and discounted cash flow. You also need to have insight that the rest of the world doesn’t—or can’t have. Junk bond investor Howard Marks puts it this way:
“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 let’s sell.”
Second-level investors have to be able not just to understand a firm’s financial performance but also to get behind that performance. This could come from anticipating economic and cultural trends; it could come from being willing to own unfashionable investments in unpleasant circumstances. After all, cheap stocks and bonds are usually cheap for a reason—like coal mining companies today, or tech stocks after the internet bust.
Second-level thinking is hard. It forces you to think in probabilities, not absolutes. It makes you see both sides of every argument. You have to seek out opinions and research that differ from your own. Above all, keeps you from getting too confident in your own abilities.
Because there are two types of investors: those the market has humbled, and those whom it hasn’t—yet.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!