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The Most Important Thing: Uncommon Sense for the Thoughtful Investor resources

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4 S E C O N D - L E V E L T H I N K I N G fall less than people expect, and the pleasant surprise will lift the stock; buy.” First- level thinking is simplistic and superfi cial, and just about every- one can do it (a bad sign for anything involving an attempt at superiority). All the fi e rst- level thinker needs is an opinion about the future, as in “Th outlook for the company is favorable, meaning the stock will go up.” Second- level thinking is deep, complex and convoluted. Th e 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 diff er 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? Th erence in workload between fi rst- level and second- level think- e diff ing 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. Th at’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 “mercenar- ies.” Brokerage fi rms 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- intentioned practitioners who overestimate the extent to which they’re in control; I think most of them fail to tote up their rec ords, or they overlook their bad years or attri- bute losses to bad luck. Finally, there are those who simply fail to under-

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