City Builders

Block 29: How to Think About Investing

Wow, well, we’re here. The last topic on this journey. Before you become a full-on city builder, there are a few helpful ways to think to become a great investor. After all, investing is the business of making decisions. So we have to think about thinking (so meta, we know…).

 

Key #1: Second Level Thinking

 

Second level thinking was popularized by Daniel Khaneman, a famous Israeli behavioral economist. He wrote the book "Thinking Fast and Slow," and in it there is a section on second level, or second order thinking. The premise is that a lot of people only think in one level. For instance, let’s say you are looking at investing in a company with pristine financials. Everyone knows the company is fantastic. But the company is valued so richly that it would basically be impossible for the company to deliver.

 

The first-level thinker says, “Let’s buy it, it is a great business.” The second-level thinker says, “Everyone knows it is a great business so it might actually not be a great investment.” The third-level thinker might even say, “I’ll still buy it though because I am going to hold it for so long that the business will eventually outperform these expectations.” Being a second-level thinker (or higher) enables you to see the complexity of the world. Looking at the world simplistically works well if you know why it works well. You are then on the other side of complexity. For example, the third level thinker knew why she believed what she did. Had she just said, “I am going to hold companies for the long term,” she may be discouraged when it looks like it isn’t working out.

 

In other words, don’t be complex just to be complex; think things through to really understand why you are making the decisions you are. Don’t follow our advice blindly; test it and figure out your edge. This brings us to the second key…

 

Key #2: Know Your “Why”

 

If we don’t know why we are doing something, we won’t have any velocity. That’s why all the way at Block 1, we started with why. Velocity is the measurement of speed and direction. You can be going really fast but if it is in the wrong direction, it’s useless. Knowing your why gives you direction. It gives you clarity and purpose.

 

For example, if you know why you are invested in a particular company, you can check the current circumstances against that “why.” This is called forming an investing thesis. It is important so you can hold your companies through the ups and the downs. If the facts change though, so should your mind, just like famous British economist John Maynard Keynes said.

 

Without knowing our “why” we have no basis for making decisions. But we can always improve…

 

Key #3: Growth Mindset

 

Carol Dweck, renowned Stanford psychologist, wrote a book called MindSet. The premise was that our mindsets influence our ability to grow and learn. Sounds obvious right? But the truth in those words is weighty. If you are thinking, “I’m just not good with numbers or I am a poor investor,” there is so much hope for you. The more you practice and take hold of this “growth mindset,” the better you will become over time. It’s the fundamental principle: practice makes perfect. But begin to notice your thoughts. If you start thinking you aren’t good at something, don’t focus on the negative; begin improving. It’s not necessarily a mind-blowing concept, but it can change your outlook. And it will help you in investing as well as, more importantly, in life…