Second level thinking in investing.

Your goal in investing isn’t to earn average returns. You want to do better than average. Your thinking has to be better than others, more powerful and at the higher level. Since other investors may be smarter, better informed, have better equipment, you have to find the edge they do not have. You must think of something they haven’t thought of, you must see things they missed, you have to react and behave differently.  In short being right may be a necessary condition for investment success but it won’t be sufficient.  You must be right more than others which by definition means your thinking has to be different than others all the time! This what you just read is a definition of “Second level thinking” taken from the book: “The most important thing” by Howard Marks. It is a great book and today I would like to write about the first chapter of this book which is dedicated to “Second level thinking” in investing. Who doesn’t want to achieve better than average investment  returns? Of course everybody wants it but just a minority of the investors are able to consistently achieve more than average returns.  What are the reasons that just a few investors are achieving more than average returns? The reasons are simple:

1-Rules are not always working

2-Environment is not controllable

3-Circumstances rarely repeat themselves 

4-Psychology plays a major role in the markets and because it is highly variable, cause and effect relationships are not working.

Certain investment approach may work for a while but everyday conditions can change and a new approach is needed.  Investing is more like an art than a science and this means it can get a little messy.  In my view the definition of successful investing is: doing better than the market and better than the other investors. In order to accomplish that you need good luck or superior second level thinking. Counting on luck is not a good plan so you are left with developing extraordinary thinking. You can’t do the same things others do and expect to outperform others. In order to distinguish yourself from others it helps to have ideas that are different and to process those ideas differently. You are probably thinking right now: Why don’t you show me a proof of this what you are preaching right here, right now? It is easy to talk about something but it is much harder to talk and actually apply this in your own life. OK let me show you examples of second level thinking in practice. In March 2020 when we had panic on the stock market because of the pandemic and for the straight 2 weeks we had all stocks went down around 30% I was looking at the Delta Airlines stock.  All airlines experienced massive sell off because of travel restrictions and a really grim future for the airline industry. Airlines were probably the most hated stocks in March and  April 2020. Even the icon of investing the great  Warren Buffett dumped all his shares of airlines stocks. At the same time my thinking was: Airlines are the necessity for modern society to function normally and grow and eventually we will come back to flying and airlines will start making money. This way of thinking pushed me to log on to my account and buy Delta Airlines stocks.  I deeply believed in March, 2020 that Delta will survive the health crisis and after a while will start making money. Below is the video when you can see me buying Delta Airlines shares in panic of March 2020:

 Right now as of November 25, 2021 my Delta shares are 104% up!  If I did cost average buying of the Delta shares  which is recommended by the majority of the investments advisors I’d probably  be up 10-20%. I didn’t follow common advice because I wanted to use my second level thinking and see if it works and so far it is working. Besides of Delta I bought more stocks in those extraordinary times of March 2020:

Norvegian Cruise Lines I purchased in March 2020- right now  shares are up 115% 

JP Morgan Chase  I purchased in March april 2020- right now shares are up 54%

Disney  I purchased in March and right now shares appreciated 123%

There are more companies I purchased using contrarian thinking in March April 2020.   You can see them in my YouTube channel. If you want your portfolio to perform better than average you have to be different and better than average. You can’t expect better results by doing what everybody else is doing. Those who consider investing  a simple process are not aware of second level thinking and many people are wrongly believing that everyone can be a successful investor. Not everyone can, but the good news is that the majority of investors use first level thinking and this increases returns available to  second level thinkers and if you want to consistently achieve superior investment returns you have to be one of the second level thinkers.

If you want to learn more about this what I was just talking about please read the book: “The most important thing”- everything that I was talking about today is taken from this book. Thanks to Howard Marks I learned how to use second level thinking and make contrarian decisions. If you are interested in thinking outside of the box I’ll post the link to the book in the video below for you. Please stay healthy and well in these extraordinary times and always fight for more than average returns!