- MONEY MATTERS -
Second-level thinking in finances BY CRAIG POPP
everyone else is selling in panic. Buy!” The classic example of first-level thinking is buying what you know. That is, I shop at this store or I buy that product, therefore I will buy the stock of said company. This ignores deeper consideration that should be applied. The company could have a good product but bad business model, or be poorly managed. Second-level thinking takes a lot of work. However, doing so is a way to separate yourself from the masses. I believe the concept can be applied beyond the world of stocks. Any decision (personal or business) can be improved by challenging yourself to think beyond the conventional. How do you utilize second-level thinking? Below are ideas you can generally apply: Always examine both sides. You must be willing to seek out opinions that are different than yours.
Craig Popp, CFA, is a financial adviser at the locally owned, independent office of Raymond James Financial Services, Inc., member FINRA/SIPC at 115 Litchfield Ave. S.E. in Willmar. Popp also authors “The Cognitive Bias,” a blog covering the topics of personal finance, wealth management and investing. He can be contacted at 320-235-1416. Any opinions are those of Craig Popp and not necessarily those of RJFS or Raymond James. Investment advisory services offered through Raymond James Financial Services Inc.
Play devil’s advocate with yourself (or assign someone this role) and make a case for how the contradictory information could be right. Think in terms of probabilities. What are the odds I’m right? What are the odds I’m wrong? Process over outcome. Nobody bats 100 percent. If you experience an unfavorable outcome, don’t blame others — or some outside factor. First, examine the process you took to make your decision. What is my edge? What do I know? What don’t I know? Do I know what I don’t know? Who is my competition? What do they know? What do I know about them? What do they know about me? The path to success in the competitive arena is often not what it seems. Many people try to outwork the next person without realizing the ‘next persons’ are doing the same thing. The goal of second-level thinking is not a purposeful divergence from the crowd — but rather a way of thinking that sets you apart from others. A way of thinking that gives you an advantage.
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e need to think outside the box. How many times have you heard that slogan? The concept sounds appealing; unfortunately, theory and practice often don’t align. In most instances “thinking outside the box” is easier said than done. In the investment industry, the select group who can apply this concept are called secondlevel thinkers. Famed investor Howard Marks developed the theory of secondlevel thinking in his book “The Most Important Thing.” The easiest way to explain it is to quote Marks. “First-level thinking is simplistic and superficial, and just about everyone can do it. All the first-level thinker needs is an opinion about the future. Second-level thinking is deep, complex, and convoluted.” Marks continues with specific 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
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