Second level thinking of Investments
This month I was busy with some seminars and investor awareness programmes
and taken some vacation with family. I have realized after meeting the
investors that there is a lot of confusion in their mind. As a member of
adviser community it is our responsibility that to educate the investors about
changing scenario about financial world. Today, I am sharing some parts of an
email got from founder of Safal Niveshak, Mr. Vishal Khandelwal. I think it is
very useful for every investor.
Here is what Howard Marks writes on investing
defensively in his amazing book The Most Important Thing…
When friends ask me for personal investment advice,
my first step is to try to understand their attitude toward risk and return.
Asking for investment advice without specifying that is like asking a doctor
for a good medicine without telling him or her what ails you.
So I ask, “Which do you care about more, making
money or avoiding losses?” The answer is invariably the same: both. The problem
is that you can’t simultaneously go all out for both profit making and loss
avoidance. Each investor has to take a position regarding these two goals, and
usually that requires striking a reasonable balance. The decision should be
made consciously and rationally.
Here is what Ben Graham
wrote in The Intelligent Investor…
“The art
of investment has one characteristic that is not generally appreciated. A
creditable, if unspectacular, result can be achieved by the lay investor with a
minimum of effort and capability; but to improve this easily attainable
standard requires much application and more than a trace of wisdom.”
The ironical truth about
investing is that, despite hundreds of rules that guide the practice of being
an investor, there is no rule that works all the time, and in the same manner.
Investing is, after all,
not like a game of football where the ground and the ball remain the same
throughout the ninety minutes of play. It’s more like cricket where the pitch
changes its behaviour with every new ball, and the ball changes is shape every
time it’s bowled.
So, when you are an
investor, the environment in which you play isn’t controllable, and
circumstances rarely repeat exactly. What’s most important then is how you
behave when others are behaving oddly.
One of the best tools to
think and behave better in investing is what Howard Marks calls the “second
level thinking”. Here is how Marks explains it in his book The Most
Important Thing…
· 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!”
· First-level thinking
says, “I think the company’s earnings will fall; sell.” Second-level thinking
says, “I think the company’s earnings will fall less than people expect, and
the pleasant surprise will lift the stock; buy.”
In other words,
first-level thinking, as the name suggests, is what comes to our mind first.
And given that our mind is searching for simplicity, in most cases, this kind
of thinking is simplistic and superficial, and just about everyone can do it (a
bad sign for anything involving an attempt at superiority, like in investing).
In essence, if you wish
to perform better than the rest – or in other words, perform better than
average – your thoughts actions, expectations, and portfolio have to diverge
from the norm.
Most importantly, you
don’t have to be just different, you also must get it right…not 100% of the
times, but it’s good to aim for a distinction…that is 75%. And for that, you
need to practice second-level thinking.
For more detail about any other query related investment,
you can contact me through my email.
Warm regards,
Arvind Trivedi
Certified Financial Planner
arvind.trivedi79@gmail.com
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