Wisdom from Howard Marks; Whose letters Buffett never Skips


  • Howard Marks coined the term “Second Level Thinking” in his book The Most Important Thing
  • Second Level Thinking is not the Straightforward approach, complex indeed but differentiates the extraordinary investors from the average investors
  • Avoid bias from Superficial Knowledge, do you own research, ask the right questions and never hesitate to act on it

With us leading our lives in the chaotic environment, it would be no wonder, if we get deviated while making a decision. We assess the current situation and predict our versions of the future to self-validate our decisions, but we often fail to consider the consequences of the decisions we make.

Let us explore this with the help of an example, you received some money and had been looking to invest it. The first level thinking would say to invest it right away whereas, the second level thinking says to hold patience for the right time and right opportunity and then go for it. There might be incidents and experiences in your lives that create a bias within about different things. Additionally, with the easy access of internet and social media, we are most prone to be convoluted by someone else’s interpretation of things.

A stock which most people consider to be worth buying may be overvalued from someone else perspective, so stick to your own research and analysis. The world has been wrong on multiple instances, including the housing market meltdown which progressed to the biggest recession of the 21st century. If everyone looked at the things as they appeared, Big shorts would never have been real. We at Kalkine promote investors to emerge as the next Michael Burry. The best way to consider and evaluate your decisions is to apply the second level thinking.

Second Level Thinking, Empowering Investors Globally

“Second level thinking” the term was first used by the legend himself the Howard Marks in his book The Most Important Thing. The First order thinking is quick and common, an almost instant perception of something without any research or backing of any data. One benefit of it is that it does solve the immediate problem without any understanding of the repercussions attached to it. So, think before you take any major decisions, do not let your decisions appear as the next problem.

Remember that your goal in investing is not draw average returns but to gain much more than average, if you agree to that your thinking has to be better than others, more powerful, original and at a higher level. While other investors do enjoy access to massive data, are smart and well informed, we need to have an edge over them to perform better than them. In short, we need to do extra to secure extra for ourselves.

To assess a stock which as per many has a positive outlook, you need to think deeply about it, try considering something others haven’t thought of, find the loopholes and develop your insights. The only criterion for earning good return in investing is not being just right but being better than others. Once the thinking is focused towards this direction, you will achieve great success through your investments.

Reading newspaper or watching a news channel would help develop your first level of thinking. Also, a common wave of thought about market performance can be overheard from various channels. Second level thinking requires you to go beyond that common thought.

Here are a few examples you may refer to understand the second level thinking better-

  • When most people say it’s a great company buy its shares, the second level thinking may tell, it’s a good company and not great, people are buying it even though its overpriced. Sell it!
  • Everyone is panic selling. Second level thinking may tell, though everyone is selling due to panic leading the stocks to crumble and be undervalued, so buy it! Don’t think we are telling you buy a decaying stock, we mean is that while others are selling the price of the stock many decline to an extent that the stock actually becomes undervalued.
  • The first level thinking says that the earnings of an oil company would decline following the cancellation of a long-term contract. So, sell it. Now, the second level thinking would look upon the stock to check if the products value that is will oil prices actually increase the impact on revenue and company’s earnings. The less impact on the revenues would escalate the share prices. So, buy it

Howard Marks has gained a celebrity stature in the investment market and is followed largely by many but when someone like the oracle of Omaha, The Warren Buffett calls you personally or endorses your book, it is time you realise you have made it and you have made it big time. The second level is supported by the followers of value investing.

We understand that the second level thinking is complex, deep and convoluting, but requires one to question himself rightly. Understand that you can’t do the same things other people do and expect it to work out brilliantly over others.

The way of thinking helps to get and process new ideas. In fact, the entire process can be conceptualised by the 2X2 matrix. Depending upon the response a good or bad result is anticipated but if the thoughts are unconventional then we have the opportunity to achieve exceptional outcomes. It is a choice which has to be dealt carefully.

Whether it is equity markets or our lives, I do not remember anyone who made it large by doing the usual stuff, there is always something extraordinary. For you to achieve the same, you need to think on a different level to achieve the next level of success. So, get on with your ideas, research, ask the right questions, and don’t hesitate to turn your second level ideas into actions.





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