Howard Marks: Great Investors Use Second Level Thinking

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In this interview with 3ProTV, Howard Marks discusses the difference between first level thinking, which is simplistic and often wrong, and second level thinking, which is more nuanced and takes into account all of the factors involved. Here’s an excerpt from the interview:

Marks: This idea that there was no price too high for these stocks. I mean, I was lucky because I was a boy at the time, literally a boy.

And I learned an important lesson in the 70s, which is that there are no assets which are so good that there’s no price too high.

For every asset, regardless of how good it is, there’s such a thing as a bargain price, fair price, overpriced. That’s a realization that nobody had at the time.

But some people said, yes it’s a great company, but it’s not that great you see. And this is the greatest example of second level thinking. The first level thinker says it’s a great company, you should buy the stock.

It’s simplistic, everybody understands that, probably wrong.

The second level thinker says it’s a great company, but it’s not as great as everybody thinks, so as a result it’s overpriced, you should sell the stock.

You see, that’s a very simplistic example but the point is you have to take your thinking to a higher level, more in-depth, more nuanced, asking more questions, not so superficial.

And I’m very lucky to have learned this lesson at a very young age. By the way, you only learn from difficulty. Very few lessons are learned through success.

You can watch the entire discussion here:

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