First Level Thinking & Second Level Thinking
As Howard Marks (his biography at www.forbes.com/profile/howard-marks/) writes:
"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in: 'The outlook for the company is favorable, meaning the stock will go up.'
Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account:
- What is the range of likely future outcomes?
- Which outcome do I think will occur?
- What's the probability I'm right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future and with mine?
- Is the consensus psychology that's incorporated in the price too bullish or bearish?
- What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?"
The broad consensus of investors is often wrong. Following consensus is not a sustainable way to profit from investing.
After Mr Trump was elected as the new President of United States, many technology stocks fell. Using first level thinking, many investors had sold off their tech stocks in the belief that Mr Trump's protectionism policy will be bad for tech stocks.
But instead, using second level thinking, we become positive on tech stock instead. This is because tech is a big business and it will find its way to thrive inside Trump regime. Tech companies with potential to rise its EPS (earnings per share) will continue to do well. This is why the sell off in tech is likely to be short term panic, rather than a real worry.
On 16 November 2016, we had proposed to do an Upside Participation Note in anticipation of rebound for Alibaba & Alphabet.
Details of Update Participation Note as at 16 November 2016:
Trade date: 16Nov16
Valuation date: 30May17
Alibaba initial price: 91.5400
Alphabet initial price: 770.49
Alibaba strike price: 86.9630
Alphabet strike price: 731.9655
Participation rate: 155%
Notional: USD100k
Link: myasiaprivatebank.blogspot.sg/2016/11/upside-participation-note-on-alibaba.html?m=0
As at last Friday 6 January 2017, share price of Alphabet Class A was at 825.21 & Alibaba was at 93.89.
Indeed recent share price of Alibaba & Alphabet are higher than our entry price. Furthermore investors enjoy upside capital gain with a multiplier (participation rate).
"First-level thinking is simplistic and superficial, and just about everyone can do it (a bad sign for anything involving an attempt at superiority). All the first-level thinker needs is an opinion about the future, as in: 'The outlook for the company is favorable, meaning the stock will go up.'
Second-level thinking is deep, complex and convoluted. The second-level thinker takes many things into account:
- What is the range of likely future outcomes?
- Which outcome do I think will occur?
- What's the probability I'm right?
- What does the consensus think?
- How does my expectation differ from the consensus?
- How does the current price for the asset comport with the consensus view of the future and with mine?
- Is the consensus psychology that's incorporated in the price too bullish or bearish?
- What will happen to the asset's price if the consensus turns out to be right, and what if I'm right?"
The broad consensus of investors is often wrong. Following consensus is not a sustainable way to profit from investing.
After Mr Trump was elected as the new President of United States, many technology stocks fell. Using first level thinking, many investors had sold off their tech stocks in the belief that Mr Trump's protectionism policy will be bad for tech stocks.
But instead, using second level thinking, we become positive on tech stock instead. This is because tech is a big business and it will find its way to thrive inside Trump regime. Tech companies with potential to rise its EPS (earnings per share) will continue to do well. This is why the sell off in tech is likely to be short term panic, rather than a real worry.
On 16 November 2016, we had proposed to do an Upside Participation Note in anticipation of rebound for Alibaba & Alphabet.
Details of Update Participation Note as at 16 November 2016:
Trade date: 16Nov16
Valuation date: 30May17
Alibaba initial price: 91.5400
Alphabet initial price: 770.49
Alibaba strike price: 86.9630
Alphabet strike price: 731.9655
Participation rate: 155%
Notional: USD100k
Link: myasiaprivatebank.blogspot.sg/2016/11/upside-participation-note-on-alibaba.html?m=0
As at last Friday 6 January 2017, share price of Alphabet Class A was at 825.21 & Alibaba was at 93.89.
Indeed recent share price of Alibaba & Alphabet are higher than our entry price. Furthermore investors enjoy upside capital gain with a multiplier (participation rate).
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