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This chapter describes an important requirement for successful investing: second-level thinking. 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. As an investor, the goal is not to earn average returns; it is to do better than average. Thus, the investor's thinking has to be better than that of others—both more powerful and at a higher level. For their performance to diverge from the norm, their expectations—and thus their portfolio—have to diverge from the norm, and they have to be more right than the consensus. Different and better is an apt description of second-level thinking. This chapter explains what second-level thinking is and how it differs from first-level thinking.

This chapter discusses an important requirement for successful investing: second-level thinking. Investing, like economics, is more art than science. One must remember how essential it is for one’s investment approach to be intuitive and adaptive rather than fixed and mechanistic. The definition of successful investing is doing better than the market and other investors. Would-be investors can take courses in finance and accounting, or 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. This chapter articulates the critical importance of second-level thinking to investment success and presents three examples illustrating its distinction from first-level thinking. It includes views and insights from four renowned investors and investment educators.

This chapter considers an important need for successful investing: understanding market efficiency and its limitations. The 1960s saw the emergence of a new theory of finance and investing, a body of thought known as the “Chicago School.” The theory included concepts that went on to become important elements in investment dialogue: risk aversion, volatility as the definition of risk, risk-adjusted returns, systematic and nonsystematic risk, alpha, beta, the random walk hypothesis and the efficient market hypothesis. The efficient market hypothesis has proved to be particularly influential in the field of investing. This chapter links market efficiency with second-level thinking and market inefficiency. It argues that investors should look for markets or assets that are not fully efficiently priced rather than chase after the false god of completely inefficient markets. It also contains comments and insights from four renowned investors and investment teachers.

This chapter looks at what is crucial for successful investing: contrarianism. Superior investing requires second-level thinking—a way of thinking that is different from that of others, more complex and more insightful. By definition, most of the crowd can’t share it. Thus, the judgments of the crowd can’t hold the key to success. Rather, the trend, the consensus view, is something to game against, and the consensus portfolio is one to diverge from. As the pendulum swings or the market goes through its cycles, the key to ultimate success lies in doing the opposite. In other words, we have to do the opposite of what others do: to be contrarians. Contrarianism is an important skill for successful value investors, and the most important ingredient to developing this skill is experience. This chapter includes comments and insights from four renowned investors and investment educators.

This chapter examines another crucial factor for successful investing: contrarianism. Most investors follow trends. Superior investors are the exact opposite. Superior investing requires second-level thinking—a way of thinking that is different from that of others, more complex and more insightful. The judgments of the crowd cannot hold the key to success. Rather, the trend, the consensus view, is something to game against, and the consensus portfolio is one to diverge from. As the pendulum swings or the market goes through its cycles, the key to ultimate success lies in doing the opposite. This is the core of Warren Buffett's oft-quoted advice: “The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct our own affairs.” He is urging us to do the opposite of what others do: to be contrarians. The ultimately most profitable investment actions are by definition contrarian: the investor buys when everyone else sells (and the price is thus low) or they are selling when everyone else is buying (and the price is high).