Howard Marks: Second-Level Thinking Separates Good Investors from Great Ones

In this interview with Global Money Talks, Howard Marks reflects on key investment lessons he learned early in his career. In the 1970s, he realized that no asset is so exceptional that it justifies an unlimited price.

Regardless of quality, every asset has a fair value, and overpaying can lead to poor outcomes. He emphasizes the importance of second-level thinking, which involves deeper analysis beyond surface-level conclusions.

For instance, recognizing that even great companies can be overpriced requires nuanced judgment. Marks highlights that valuable lessons often stem from challenges, not successes, and credits these insights for shaping his investment philosophy over his 54-year career in the industry.

Here’s an excerpt from the interview:

Marks: And then number two, 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, literally a boy—and I learned an important lesson in the 70s, which is that there are no assets 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, a fair price, and an overpriced value. That’s the realization nobody had at the time.

Some people said, “Yes, it’s a great company, but it’s not that great.” You see, 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, and it’s probably wrong.

The second-level thinker says, “It’s a great company, but it’s not as great as everybody thinks. 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.

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

You can watch the entire interview here: