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Blink 3 of 8 - The 5 AM Club
by Robin Sharma
Uncommon Sense for the Thoughtful Investor
If you want to become a successful investor, you need solid grounding in the basics.
So let’s start with a simple definition: investing consists of putting money into assets and expecting an increase in value.
Taking it a step further, successful investing means buying mispriced assets (assets that are priced too low), selling them later at a higher price and earning a profit.
It sounds simple, but mispricings are rare. Why? Because most of the time, there are thousands of participants actively gathering information about various assets and evaluating them diligently. When this thorough assessment is indeed the case, the asset’s price doesn’t stray far from its intrinsic value – that is, the price the asset is actually worth.
And when an asset is priced appropriately, which is typically the case, it’s hard to profit from it.
Still, in practice, mispricings do occur. For example, in January 2000, shares of Yahoo sold at $237 apiece. But then by April, share prices had fallen to $11. If you had owned the stock, your investment would have suffered massive losses. And how do we account for this sizable fluctuation? Well, the price must have been wrong on at least one of these occasions.
In general, mispricings make profits and losses possible in a big way. But as we mentioned, detecting these mispricings is a difficult task.
So if your investment goal is to earn higher-than-average returns, your thinking has to be different and better than everyone else’s.
This is called second-level thinking, and it works like this: first-level thinking says, “It’s a good company; let’s buy the stock.” Second-level thinking goes beyond the conventional wisdom by saying, “It’s a good company but everyone thinks that, so the stock is probably overrated and overpriced; let’s sell.”
This approach is so effective because it acknowledges the fact that all the investors put together actually make the market. Second-level thinking takes all these other investors into account in order to beat the market, not just submit to it.
In The Most Important Thing, Howard Marks outlines the sometimes controversial investment philosophy that he developed and honed through many years of market experience. In his view, successful investment requires us to pay thoughtful attention to many different aspects of the current market, and too often use that information to counter the predominant trends.
Investing, like economics, is more art than science.
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Try Blinkist to get the key ideas from 5,500+ bestselling nonfiction titles and podcasts. Listen or read in just 15 minutes.
Start your free trialBlink 3 of 8 - The 5 AM Club
by Robin Sharma