Luck is very important, according to Marks, and he advised the future MBAs to “put themselves in the way of good luck” as opportunities only come around once in a while and you have to take them.
On the importance of second-level thinking
Eight years ago, Marks’ son advised him to invest in Ford because they were coming out with great new products. “Who doesn’t know that!” Marks said in response. He was not trying to denigrate his son’s enthusiasm for Ford, but to challenge him to think on a second level. The things everyone knows will not bring you an edge.
If you think the same as everybody else, you will act the same as everybody else. If you act the same as everybody else, you will perform the same as everybody else. If you want to outperform, then you have to think differently and act differently with higher level thinking.
With first-level thinking, an investor thinks that a company is great and buys the stock. With second-level thinking the investor thinks that the company is great but not as great as everyone thinks and therefore sells the stock. Marks described first-, second- and third-level thinking in the context of Maynard Keynes’ observations in predicting winners in newspaper beauty contests in London in the 1920s. With first-level thinking, you pick the winner based on your opinion. However to win the contest you need to have at least second-level thinking and pick the girl who you think will get the most votes.
Ben Hunt provided further details on Keynes’ observations of third-level thinking on his Epsilon Theory blog. Hunt stated that to win the contest you have to make a third-level decision and pick “who will get the most votes when all the voters are basing their votes on who they think will get the most votes”.
Successful investing comes from “variant perception,” Marks said, where the consensus view is incorporated into the price of the asset and you have a different view from the consensus. If your variant view is correct, then eventually the consensus comes to agree with you and the price moves favorably in your direction. Marks said if you think investing is easy and you do not see the complexities, you will not be successful.
On the ingredients for investment success
In the short term, Marks said the ingredients for success are aggressiveness, timing and skill. He mused that if you have enough aggressiveness at the right time, you don’t need any skill.
Marks said he has been successful by not taking bets that could lose dramatically, by mitigating loss, and by being consistent rather than having brilliant successes outweighed by dismal failures. He said, “If we avoid the losers, the winners take care of themselves.” He stressed the importance of matching your investment strategy with your personality and offered that his conservative nature supported his success in the bond market
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