Thursday, September 19, 2013

Second Level Thinking from Investor Howard Marks..

19th September 2013 BSE Sensex 20646 Up 684 points in a single day

The recent run up in the markets would leave us wondering suddenly what has changed.


Investor Howard Marks says “lack of second level thinking is the biggest differentiating factor between a good and a bad investor”.

If it's a good company, let's buy the stock is what a first level thinker would think. However, the second level thinker would say, it's a good company but it's priced as if it's a great one. So the stock is expensive and hence, let’s sell.

Likewise, if the first level thinker thinks the outlook is bad and hence, we should sell our stocks, the second level thinking would lead us to believe that everyone is also thinking the same way and thus, it could actually be the time to buy.

Making Investment decisions based more on feel good factor and intuition is not what one must do.  
If you apply second level thinking, perhaps we realize we are not out of the woods yet. The markets are just reacting to the news and no real action has happened on the ground.  Our fundamentals remain pretty weak.

But this once again highlights the power of equities,  which one must never ignore.