Uncommon Sense Investing: Challenging Conventional Wisdom

Conventional investing wisdom often leads the crowd to buy high and sell low. By contrast, the art of uncommon sense investing offers a path to outperformance through contrarian insight and disciplined analysis.

Embracing Second-Level Thinking

Howard Marks introduced the concept of contrarian, second-level thinking to describe an approach that goes beyond surface-level reactions. Instead of accepting first-order impressions, thoughtful investors probe deeper.

For example, when earnings decline, a first-level thinker might reflexively sell. A second-level thinker asks: Will the decline be worse or better than anticipated? Could the market overreact, creating a rebound opportunity? This extra layer of analysis can transform fear-driven sell-offs into strategic entry points.

Managing Risk with Uncommon Wisdom

Risk is not static. When markets feel safest, risk is often at its highest. Recognizing this perversity of risk in markets helps investors avoid pitfalls.

Rather than relying on popular sentiment, uncommon sense investors focus on the gap between price and intrinsic value. Buying assets at discounts to fundamental worth provides a margin of safety and potential for outsized returns.

• Buy assets at discounts to fundamental value when others shy away.
• Profit from probabilities instead of attempting perfect market predictions.
• Maintain margin of safety by undervaluing risk and overvaluing opportunities.
• Resist herd-driven bubbles by questioning widespread optimism.

Questioning Conventional Investing Rules

Many investors follow rules born from backward-looking credit ratings or static risk assessments. Uncommon sense demands we challenge these norms.

Ask yourself:

• Why am I stretching for yield? Could the extra income justify potential downside?
• Is the public market discounting critical risks or opportunities?
• Am I overexposed when comfort is highest and underexposed when fear reigns?

By rejecting one-size-fits-all mandates and dynamic complacency, investors can defy the herd mentality and uncover hidden potential.

Exploring Alternative Investments

Uncommon sense investing often extends beyond stocks and bonds. Diversification through alternative investments can reduce correlation and boost returns when traditional markets stall.

Practical Steps to Start Your Uncommon Journey

• Develop a second-level mindset: question consensus opinions.
• Conduct rigorous due diligence on business models and covenants.
• Align incentives and conduct diligence by partnering with transparent managers.
• Allocate a portion of your portfolio to private or low-correlation assets.
• Monitor intrinsic value gaps and be ready to act when disparities arise.

Implementing these steps requires patience and discipline. Uncommon sense investors must resist emotional biases and market noise.

Over time, the combination of deep analysis, risk awareness, and strategic diversification can lead to more consistent, above-market returns. By challenging conventional wisdom at every turn, you position yourself to capture opportunities others overlook.

Ultimately, uncommon sense investing is not a guarantee of success, but a framework for thoughtful decision-making that privileges risk awareness and probability focus over blind optimism. Embrace contrarian ideas, value independent research, and maintain a long-term perspective to transform market volatility into lasting gains.