In some ways, investing is more like an art form than a scientific discipline and, if we apply the right strategies, it is not actually that hard to earn average returns. However, consistently earning above-average returns requires something special, which not all investors possess. While there are many people who are happy to make average investments and returns, others want to stay one step ahead, and beat the market. This book is for everyone, but especially for these people. In order to achieve such an ambitious objective, we need to be able to adapt and commit, rather than just follow a standard one-size-fits-all process.
Although an investor can, in theory, follow any given model, and simply imitate its rules, in the end, they will not be able to replicate it perfectly, and achieve the exact same results. What works for one investor may be disastrous for another. A basketball player may well follow a given programme, and train extensively, but no amount of training will ever make them grow taller, which means that they would likely be better off following a custom-built programme especially for them. Investing works in exactly the same way.
Firstly, in order to receive above-average returns, we have to realise that our thought process must also be above average. Since there is no single, foolproof strategy involved in investing, what will help us most is what the author calls ‘second-level thinking’, which is essentially a process that allows us to see beyond the obvious. This will help the investor find as much value as possible in the market, and consequently take advantage of those opportunities which others may have missed. First-level thinking results in a simplistic and superficial approach, which almost anyone is capable of. Second-level thinking, on the other hand, is deeper, more complex, and intricate.
With first-level thinking, we will likely carry out an analysis of the company and, if everything looks good, we might proceed to buy some shares. However, there are certain questions involved in second-level thinking, which help us understand the depth of this thought process, such as: what is the range of possible future outcomes? What is the probability of each of them occurring? Which is more likely than the other? What is the probability that I am right? What does the consensus think? It is important to highlight here that the term ‘consensus’, which we will come across again during the course of this analysis, refers to the average forecasts of certain data and values concerning a given company, which are provided by financial analysts on the basis of the main macroeconomic data, and the relative company’s results; the consensus, being an average, can theoretically be considered reliable, because it eliminates the upward and downward spikes provided by individual analysts. Other useful questions to ask include: how do my expectations differ from the consensus? How does the current asset price relate to the consensus’ view of the future, and mine? Is the price affected by consensus psychology? Is it too bullish or bearish? What will happen to the asset price if the consensus turns out to be right, and what will happen if I am right?
It is clear to see the enormous difference in workload between first- and second-level thinking, and this is just the tip of the iceberg. Some people look for simple strategies, and easy answers but, in order to find great deals in the markets, we need to possess, or develop exceptional analytical and intuitive skills. While most investors tend to follow trends, excellent investors very often go in the opposite direction, because one of the worst things we can do is buy something when it is at the peak of its popularity. It takes great courage to sell when others are buying, and buy when others are selling, but this often provides the greatest opportunities for profits. We cannot succeed by simply following trends, otherwise everyone would become great investors. Often, even if the temptation to join the masses is strong, we have to do just the opposite, but this is only possible, as we will see later, if we have solid know-how on which to base our decision.
