Second Level Thinking

Recently, there was a book "The Most Important Thing: Uncommon Sense for the Thoughtful Investor" by Howard Mark.

This is a good book. The book strongly emphasize on a term called "SECOND LEVEL THINKING", which is very important for one who wants to be successful in investment. Howard Mark is implying that most people do first level thinking spontaneously, while only minority carries the habit of second level thinking.

First Level Thinking is a shallow way to interpret things without much effort needed to assess it's validity. It is simplistic and superficial, just about everyone can do it.

Second Level Thinking is deeper, complex and convoluted. It takes many things into consideration.

Examples of 1st vs 2nd level thinking in the book

1st Level Thinking says "It's a good company, let's buy the stock" 
2nd Level Thinking says "It's a good company, but everyone think it's a great company, and it's not. So the stock is overrated and overpriced; lets sell" 

1st Level Thinking says "The outlook calls for low growth and rising inflation. Let's dump our stocks." 
2nd Level Thinking says "The outlook stinks, but everyone is selling in panic. Buy!" 


First Level Thinking plays a very important role in all the bubbles happened in the past:
- The internet will change the world, let's buy internet stocks!
- China will grow forever, let's buy Chinese stocks!


Everyday, the market, the financial press, are full of information promoting first level thinking. In order to be successful, it is important to start develop SECOND LEVEL THINKING within ourselves.