First-level thinking has served investors well over the last decade. Apple is a good company, buy Apple. IBM can’t innovate, avoid.
Second-level thinking is sexy. First-level thinking is underrated.
It’s tempting to over-think things. But often times we end up twisting our brains into a pretzel. For example, this is what an investor’s internal monologue might sound like right now:
I think the economy is going to boom. Great. So do most people. Yeah but I think the economy is going to boom and stocks are going to follow suit. Crap. Wait a minute. Doesn’t the market lead the economy? And if the economically sensitive stocks are on fire, then maybe we already missed the move. Damnit.
I don’t think now is the time to get cute. If the economy catches fire, it’s likely that stocks will as well.
The stocks that are most levered to the economy, like industrials and materials, are all telling you that growth is around the corner. I would listen to them.
If you think the economy is going to boom, then it’s probably best not to think four steps beyond this. Can earnings explode and stocks fall? Sure. Anything’s possible. But would you bet on this happening?
Ben and I got into this and much more on the latest episode of Animal Spirits.