Second Level Thinking

It is important to have what is known as second-level thinking in order to succeed in investing. First-level thinking is simplistic and easy. It is also superficial. Many first-level thinkers don’t know what second-level thinking is. The difference between first-level thinking and second-level thinking will be clear with some examples. Examples of second level thinking First level thinking says, ‘Since it is a good company, let’s buy the stock. Second level thinking says, ‘Since it is a good company, everyone seems to be interested in it. Hence, it is possible that it is overvalued. Hence, let’s sell the stock’. For instance, at the peak of the dot com bubble in the late 1990’s, everyone was interested in internet stocks. A first level thinker would have bought the stocks in the bubble and would have made losses when the bubble burst. On the other hand, a second level thinker would have thought that since everyone is interested in IT stocks, they would be overvalued. Hence, he would have sold IT stocks. First level thinking says ‘In the future, the outlook will be of high inflation and low growth. Hence, let’s go ahead and sell stocks’ Second level thinking says, ‘The future outlook is bad. But, everyone might be selling. Hence, let’s move ahead and buy stocks.’ For instance, when the crash in March 2020 happened, many first level thinkers would have sold stocks as the outlook called for low growth and the risk of covid was high. However, second level thinkers would have said, ‘Everyone is selling in panic. So, stocks are available at cheap valuations.’ Hence, let’s buy stocks.’ The first level thinker would have exited in losses, while the second level thinker would have made good profits as the Sensex has risen by more than 100% since the crash happened.

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