# Second-Level Thinking ## The Idea in Brief First-level thinking is simplistic: "This is a good company, let's buy the stock." Second-level thinking asks: "This is a good company, but everyone thinks it's great and the stock is overpriced—let's sell." To outperform, you must think differently *and* better than the consensus. Being right about something everyone already knows is worthless. --- ## Key Concepts ### First-Level vs Second-Level First-level thinking is shallow, obvious, and shared by most people. It asks: "What's going to happen?" Second-level thinking is deeper: "What's going to happen, what do others think will happen, and how does my view differ?" First-level: "This company has great earnings growth—buy." Second-level: "This company has great earnings growth, which everyone knows, so it's priced for perfection. Any disappointment will crush the stock—sell." ### The Consensus Problem If your view matches the consensus, you'll get consensus returns (average, at best). Above-average returns require a non-consensus view that turns out to be correct. Being non-consensus and wrong is worse than being consensus. The bar is high: different *and* right. ### Second-Order Effects Second-level thinking extends beyond investing. Every action has first-order effects (immediate, obvious) and second-order effects (delayed, less obvious). First-level thinkers optimise for first-order effects. Second-level thinkers ask "and then what?" Rent control: First-order effect is cheaper rent. Second-order effect is reduced housing supply, as landlords exit the market. ### The Effort Required Second-level thinking is hard. It requires knowing what the consensus thinks, understanding why they think it, identifying where they might be wrong, and having conviction to act differently. Most people don't bother—which is why it works. --- ## Implications **In investing:** The question isn't "is this a good company?" but "is this a better company than the price implies?" Cheap stocks of bad companies can outperform expensive stocks of great companies. **In strategy:** Ask what competitors expect you to do, then consider whether doing something different creates advantage. Predictable strategies get countered. **In decisions:** Before acting, ask "what will happen after this happens?" Trace the chain of consequences at least two steps out. **In contrarianism:** Being contrarian isn't automatically valuable. You need to be contrarian *and* right. That requires understanding why the consensus exists and having a specific reason to disagree. --- ## Sources - [[The Most Important Thing]] — Howard Marks' core framework; the foundation of superior investing is thinking better than the crowd - [[Alchemy]] — Sutherland on psycho-logic; second-level thinking about human behaviour, not just economics - [[Playing to Win]] — Strategy requires thinking about competitor responses, not just your own moves