Since we’ve gone out on our own, I’ve been asked several times, “How did you come up with the name, Second Level Capital?” The defensive and sarcastic devil who lives in my head usually wants to say that Goldman Sachs was already taken, but I acquired a bit of restraint in my old age. We’ve heard hindsight suggestions ranging from Second Tier Capital to Next Level Capital, been rebuked by several snarky friends who said “someone is just going to name themselves Third Level Capital…”, and while we appreciate the constructive criticism, I think we’re going to stick with it. Here’s why.
Second-level thinking (or second-order thinking) was a term thrust into the mainstream with Howard Marks’ 2012 book, The Most Important Thing. To me, the easiest way to think about second-level thinking is to ask yourself, “and then what?”. Marks does a more eloquent job and 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.”
For example, most people believe that interest rates will rise. I don’t think most people believe they will go up in a straight line, but if you asked 100 people if they thought interest rates would be higher in five years, most would say yes. I would also venture a guess that five years ago, people would have said the same thing. But wouldn’t you know it, the 10-year Treasury yield in May of 2014 was 2.57%…and today, it’s 2.41% (ironically, still some of the highest interest rates in the developed world). It’s important to remember, especially on days like today, that stocks average approximately 7% per year over any extended period of time. If we assume that the risk-free rate of interest stays near 2.41% for the next five years, the choice of where to put your money is an easy decision. Until interest rates start going up (IF they do), I’m going to agree with Warren Buffett, who said just last week that “stocks are ridiculously cheap”…if you believe interest rates will stay lower for longer.
Starting this venture, we envisioned creating something that would be a bit different and shine a light on some of the pitfalls of poor investment management, but as we sit here 4.8% off all-time highs in the S&P 500, I’ve started to realize that it’s not only from an asset-allocation standpoint where we’ve added value, it’s with people. The second-level thinking comes out quite a bit during the planning process, where we are forced to create a first-level negative (delaying consumption, making IRA contributions, saving for the future) that eventually turns into a second-level positive. Wait, I give you money now instead of buying a nicer car?!? And then what?!? Oh, I get to retire eventually…yeah that actually sounds nice.
Several clients in the fourth quarter of last year asked about trimming their stock holdings as the market fell 20% in three months. For most people, we said what we always do, “it’s your money and at the end of day if you want to do something it’s your choice…but assuming we do sell some equities, then what?” Most people never get to the second level in their mind because so many decisions are based in emotion. And because the arbitraging of fear and greed are the only true ways to invest for the long-run, we’ll be here to make sure you don’t do something for the wrong reasons. I hope that people recognize what goes into your investment management decisions and how knowing is just half the battle…it’s what you’re really getting from quality trusted advisors.
– Adam