“Would-be investors can take courses in finance and accounting, read widely and, if they are fortunate, receive mentoring from someone with a deep understanding of the investment process. But only a few of them will achieve the superior insight, intuition, sense of value and awareness of psychology that are required for consistently above-average results. Doing so requires second-level thinking.” Howard Marks, The Most Important Thing

“Second-Level Thinking” is a term popularized by Howard Marks of Oaktree Capital to describe those investors who look beyond the obvious. According to his view of the world, most investors are “First-level thinkers” who react primarily based on what they see in front of them. As an investor it's been a hugely valuable concept to me and, as you'll see, it complements nicely the work done by other great investors like Warren Buffett and Seth Klarman. If you're interested to read more I can highly recommend reading his book “The Most Important Thing”

First Level Thinkers

First-level thinkers react to what they see in front of them. If a company is releasing a cool product, they buy the stock. If a company is growing sales rapidly through overseas expansion, they buy the stock. If a company has been hit by a profits warning, they sell the stock. That's not to say these are necessarily the wrong decisions, it's just that on average you're unlikely to outperform the market with this simplistic approach.

If you're planning a career in asset management or equity research, you'll meet a lot of these people. Don't be too upset by their presence – after all these are the participants who create the opportunities for the second-level thinkers. If you don't recognize them, there's a risk that you're engaging in this behavior yourself – in that case, read on, read Marks' book and train yourself to become a “second-level thinker”!