Just started reading.. "The Most Important Thing" by Howard Marks..Few words from that below.. Lot to follow :-)

[Surya Reddy]

At bottom, it’s a matter of what you’re trying to accomplish. Anyone can achieve average investment performance— just invest in an index fund that buys a little of everything. That will give you what is known as “market returns”— merely matching what ever the market does. But successful investors want more. They want to beat the market.

In my view, that’s the definition of successful investing: doing better than the market and other investors. To accomplish that, you need either good luck or superior insight. Counting on luck isn’t much of a plan, so you’d better concentrate on insight. In basketball they say, “You can’t coach height,” meaning all the coaching in the world won’t make a player taller. It’s almost as hard to teach insight. As with any other art form, some people just understand investing better than others. They have— or manage to acquire— that necessary “trace of wisdom” that Ben Graham so eloquently calls for.

Everyone wants to make money. All of economics is based on belief in the universality of the profit motive. So is capitalism; the profit motive makes people work harder and risk their capital. The pursuit of profit has produced much of the material progress the world has enjoyed. But that universality also makes beating the market a difficult task. Millions of people are competing for each available dollar of investment gain. Who’ll get it? The person who’s a step ahead. In some pursuits, getting to the front of the pack means more schooling, more time in the gym or the library, better nutrition, more perspiration, greater stamina or  better equipment. But in investing, where these things count for less, it calls for more perceptive thinking . . . at what I call the second level.

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.

Remember, your goal in investing isn’t to earn average returns; you want to do better than average. Th us, your thinking has to be better than that of others— both more powerful and at a higher level. Since other investors may be smart, well- informed and highly computerized, you must find an edge they don’t have. You must think of something they haven’t thought of, see things they miss or bring insight they don’t possess. You have to react differently and behave differently. In short, being right may be a necessary condition for investment success, but it won’t be sufficient. You must be more right than others . . . which by definition means your thinking has to

be different.

What is second- level thinking?

• 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.”

First- level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first- level thinker needs is an opinion about the future, as in “The outlook for the company is favorable, meaning the stock will go up.”

Second- level thinking is deep, complex and convoluted. The second level thinker takes a great many things into account:

• What is the range of likely future outcomes?

• Which outcome do I think will occur?

• What’s the probability I’m right?

• What does the consensus think?

• How does my expectation differ from the consensus?

• How does the current price for the asset comport with the consensus view of the future, and with mine?

• Is the consensus psychology that’s incorporated in the price too bullish or bearish?

• What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

The difference in workload between first-level and second-level thinking is clearly massive, and the number of people capable of the latter is tiny compared to the number capable of the former.

First- level thinkers look for simple formulas and easy answers. Second level thinkers know that success in investing is the antithesis of simple.

That’s not to say you won’t run into plenty of people who try their darnedest to make it sound simple. Some of them I might characterize as “mercenaries.” Brokerage firms want you to think everyone’s capable of investing— at $10 per trade. Mutual fund companies don’t want you to think you can do it; they want you to think they can do it. In that case, you’ll put your money into actively managed funds and pay the associated high fees. Others who simplify are what I think of as “proselytizers.” Some are academics who teach investing. Others are well-intention-ed practitioners who overestimate the extent to which they’re in control; I think most of them fail to tote up their records, or they overlook their bad years or attribute losses to bad luck. Finally, there are those who simply fail to under-stand the complexity of the subject. A guest commentator on my drive time radio station says, “If you have had good experience with a product, buy the stock.” Th ere’s so much more than that to being a successful investor.

First- level thinkers think the same way other first-level thinkers do about the same things, and they generally reach the same conclusions.

By definition, this can’t be the route to superior results. All investors can’t beat the market since, collectively, they are the market.

Before trying to compete in the zero-sum world of investing, you must ask yourself whether you have good reason to expect to be in the top half.

To outperform the average investor, you have to be able to out think the consensus. 

Are you capable of doing so? What makes you think so?

[Surya Reddy]

Hi Team,

One important recommendation from Dr. as part of yesterday's discussion we had at BIC is to read "The Most Important Thing" by Howard Marks" . Hope you guys will complete it before me, though I have started reading it long back... :-)

Best Regards,

Surya