First-Level Thinking

Howard Marks has a great investing concept called “second-level thinking.” It’s the idea that superior results come not from knowing what everyone else knows, but rather from seeing things differently and more accurately. It’s a concept that has always resonated with me. Markets, on the other hand, have often rewarded something that looks a lot more like first-level thinking these past few years.

What that looks like is a strategy built around what’s exciting and top of mind. If an idea dominates headlines, trends on social media, or gets regular airtime on CNBC, it often turns out to be a pretty good place to be. Meme stocks, Bitcoin, and a rotating cast of AI-related winners have all had their moments in the sun. In that kind of environment, deep fundamental work can feel less immediately relevant than simply recognizing where enthusiasm is building.

That is a very different investing environment from the one that shaped me.

In business school, I was raised on Graham, Dodd, Buffett, and Munger. The framework was to think like a business owner, stay within your circle of competence, and focus on what a business is worth (rather than what the market is excited about this week). That training still forms the foundation of how I think about investing today. But recent years have also been a useful reminder that markets sometimes reward different styles over shorter periods of time (many of which don’t resemble my foundational approach).

Short-term success is neither meaningless nor should strong results be dismissed. But short-term outperformance, by itself, does not always tell us everything we want to know. Over shorter windows, results can reflect skill, favorable conditions, risk-taking, or some combination of all three. That’s one reason investing requires humility. It’s easy to draw strong conclusions from recent outcomes, but often the full story only becomes clear with time.

So how do you invest in an environment like this?

I keep coming back to something my kids hear at school all the time: have a growth mindset and focus on what you can control. In investing, I cannot control what theme the market embraces next quarter. I cannot control whether enthusiasm runs further than seems reasonable. And I cannot control when careful fundamental work will be rewarded.

What I can control is the process.

I can keep doing the kind of work I believe in — studying businesses, understanding industry structure, assessing management teams, and estimating what a company’s earnings power might look like three-to-five years from now. I can keep asking whether a stock price offers an attractive long-term return relative to that future earnings power. And I can keep operating within areas where I have real competence (rather than stretching for whatever happens to be most fashionable at the moment).

That approach may not always feel exciting, and it may not always be in sync with the market’s current preferences. But our job isn’t to predict every shift in sentiment. Our job is to make thoughtful long-term decisions with your capital.

In the short run, different styles can lead the market at different times. Our responsibility is to stay disciplined, keep learning, and apply a process that we believe gives us the best chance of compounding capital over the long term.

That is what we remain focused on.

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