Investment Shastra

Build your Investment Philosophy – With help from Howard Marks!

In the course of your investment history, you may have come across many how to invest books, blogs etc. Little good these may have done you, with the investment wisdom that rarely seems to hold up in practice. Stock investing is anything but simple – Some of you may have learnt it the easy way while some of you the hard way! There are no shortcuts, formulas or easy tricks.

But why am I telling you this? Well, if ‘How to books’ cannot help you, there should be something that can! Yes, there is – a book detailing the development of an investment philosophy, a book that fully acknowledges the complexities of investing, a book that also warns you about the perils of the financial world

Built on a lifetime of investment experience and analysis, ‘The Most Important Thing’ by Howard Marks explains the keys to successful investment and the pitfalls that can destroy capital or ruin a career. It gives us insightful thoughts of a man who struggles with his own investing decisions on a daily basis. In fact it is one of the few books that has received acclaim from legendary value investor Warren Buffet who calls it – “This is that rarity, a useful book.”

So are we asking you to read the book? Well yes, if you have the time. But if you do not, we bring you a series of Stock Shastra articles on the distilled investing wisdom of Howard Marks from the book ‘The Most Important Thing’.

So will we be telling you the one most important thing that you should look out for while investing? Let us be clear at the start – there is no such thing! There is no surefire recipe for investment. They are many aspects to investing and they’re all important. Successful investing requires an investor to pay attention to many aspects all at the same time!

Marks starts the book with a chapter on “second-level thinking,” and this one of the most valuable lessons in the entire book. Having a good understanding of this concept alone will put you leaps and bounds ahead of most of your colleagues.

Let’s start with understanding what second level thinking actually is? Perhaps it is best understood with the help of examples:

  • “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 short, first level thinkers look for simple and superficial answers. While second level thinkers takes a great many things into account making second level thinking deep and convoluted. Thereby, the difference in amount of work required for first and second level thinking is massive. And this is exactly why there are very few second level thinkers. As Charlie Munger rightly puts it, ‘It’s not supposed to be easy. Anyone who finds it easy is stupid.’

What makes second level thinking all the more difficult is that Investing is more art than science. This is why no single rule will always work in investing. And thus no single algorithm can be developed. Also, investor psychology plays an important part in stock market. So, a single investment approach too cannot work all the time.

Thus, an important take away for investors is that the investment approach you develop has to be intuitive and adaptive rather than fixed and mechanistic.

Successful investing is doing better than the markets and other investors. Your goal should always be to achieve greater than average results. Which is where you will require second level thinking.

So, how do you acquire this second level thinking? Superior investing requires insight. And insight cannot be taught. Just like the saying in basketball ‘You can’t teach height’. You need to remember that your goal is not to earn average returns rather to do better than average. And to do this you need to develop thinking process that better than the others.

You must think of what others do not think, see what others miss, react and behave differently than others. But that’s not all – you also need to be right, in fact you have to be more right than others!

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Aliya Sayyed

Manager - Equity Research; Total 10 years works experience ranging from equity analysis, portfolio management, and financial planning. MBA in Finance. Passionate about equity research. Likes reading Finance, business, and classic fiction. Spends free time with friends and family.


  • […] Written by Aliya Sayyed-Team MoneyWorks4me 23. May, 2014 0 Comments The only way you can make great returns in the market is to ‘Buy Low, Sell High’. Now that’s glaringly obvious, you might say. Well if it is; let me ask you to elaborate on what is actually ‘High’ and what is actually ‘Low’? Most of us do not know the answer to this question.  And providing an answer to this, is the purpose of my second blog of the series on ‘The Most Important Thing’ by Howard Marks. You can read the first one here. […]

  • thank you for posting such an insightful article.
    It is true that second level thinking request a lot of effort and dedication. Which is why it is difficult for people with a full time job to invest using second level thinking. keep up the good work.