March 26, 2014

Critical thinking important for Investing

The investment mosaic is a complicated one, and no one rule always works. How-to books may sell copies and make money for the authors, but they don't usually make the readers much money. There is no substitute for hard work in delivering superior investment returns. There are 86,400 seconds in a day, and it's up to you to decide what to do with them. As I have repeatedly written, there is no secret sauce, magical elixir or special stock chart that provides clarity to our investment decisions -- rather it is a byproduct of hard-hitting research.

A variant view and second-level thinking are necessary reagents to good investment returns. In The Most Important Thing: Uncommon Sense for the Thoughtful Investor, author Howard Marks addresses these two subjects.

In investing you must find an edge by often thinking of factors/ideas that others haven't thought. Importantly, you must also avoid being too early -- especially if your investor base has a different time frame than yours.

Second-level thinking trumps first-level thinking in delivering returns. 

As Howard puts it, 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 the stock's overrated and overpriced. Let's sell." First-level thinking says, "The outlook calls for low growth and rising inflation. Let's dump our stocks." Second-level thinking says, "The outlook stinks, but everyone else is selling in panic. Buy!"