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Imagine it's the end of 1999. Your colleague sitting next to you just boasted that their stock account doubled in just a few months thanks to buying shares in internet companies. The press says the Internet will change the world, and that's absolutely true. So, would you buy it? If the answer is yes, you're not stupid at all.
That was also the answer of millions of people at the time. Today we'll look at why such a seemingly logical answer can lead to losses, and a simple question that can help you avoid it. That question came from Howard Marks, the investor whose letter Warren Buffett said was the first thing Buffett opened and read.
Marx called this way of thinking second-order thinking. To understand quadratic thinking, forget about stocks for a moment. Let's say there's the best pho restaurant on your street, always packed with customers. The owner wants to sell the shop. First-order thinking says, "The restaurant is good, it's crowded, let's buy something." A quasi-thinking mind asks another question: "Everyone knows this restaurant is delicious, but does the price already reflect that deliciousness?" If the owner demands a price that would take you 20 years of selling pho to recoup your investment, then even a good restaurant can be a bad deal.
In short, the question isn't whether this thing is good, but whether it's better than the price people are paying for it. This is the key question for today's video. Did everyone know this, and has it been factored into the price ? Now, going back to 1999, everyone knew the internet would change the world.
What about the price ? The Nasdaq index, which focuses on US technology stocks, has increased fivefold in about five years. In other words, prices not only take into account a bright future but also anticipate uncertain outcomes . A famous example is pest.com, an online pet shop that even has a dog puppet as its mascot.
The company sold many items at prices below cost but still went public in early 2000. Put your questions here. Pet.com is selling at a loss. Did everyone know? Already. Has the stock price already factored in that loss ? Looking back, it's almost none. On May 2, 2000, Howard Marx sent clients of the fund management company Ore a letter with the very strange subject line, bubble.com.
He didn't predict the market downturn; he pointed out that people believe in good ideas, so no price is too high. Everyone is afraid of missing out, and even Warren Buffett is criticized for being outdated. In other words, Max wasn't asking if the internet was good. He asked how much of those good things were already included in the price.
More than two months later, the bubble began to burst. The Nasdaq lost nearly 80% of its value, and PES.com closed down less than a year after going public. Anyone who bought into the Nasdaq index at its peak in 2000, without considering dividends, would have to wait 15 years to break even. It's worth noting that the Internet has truly changed the world, just as everyone thought.
The story is true, only the price is wrong. But second-order thinking also has a pitfall. Simply thinking differently from the majority isn't enough. You also need to think correctly, and no one knows when exactly that will happen. Marx himself wrote in the letter that high prices do not necessarily mean they are about to fall.
Quadratic thinking doesn't help you predict dates, but it helps you understand how much you're paying for expectations. So what does this mean for Vietnamese investors? Remember early 2022 when the VN Index rose to over 1500 points and the number of new accounts opened reached a record high. The story sounded very plausible at the time.
With the economy recovering after the pandemic, money is flowing into the stock market. But in November of the same year, the index sometimes dropped below 900 points. In fact, Vietnam's economy still grew by more than 8% in 2022. That's the truth. The market that year was also affected by many other factors, but the question remains worth asking.
Everyone knows the economy is recovering, right? Already. To what extent has the price been factored in? For ease of use. This is a one-minute test before you buy any stock. First question: What is my reason for buying this? And is there anyone who doesn't know the reason? Secondly, if everyone knows the reason, to what extent has it been factored into the current price ?
Thirdly, what have I noticed that the majority are overlooking or misunderstanding? If you can't answer that, chances are you're paying the same price as everyone else. This is a way to self-assess your thinking, not a buy or sell signal. In short, first-order thinking asks, "What is good?" Quadratic thinking asks whether that good deed has been paid for yet?
This idea is present right in the first chapter of The Most Important Thing. The most important thing, roughly translated, was written by Howard Marx in 2011 from letters he had sent to clients over more than 20 years. The book, approximately 200 pages long and divided into several short chapters, doesn't teach how to choose stocks but rather how to think critically.
This book is suitable for people who have been investing for a while, have experienced both wins and losses, and want to understand why. The book also features another image of Max: the psychological pendulum of the market, and how he used it in 2008. We'll dedicate a separate video to that story. Now, remember this handy question.
Did everyone know this, and has it been factored into the price? Regarding the stocks you hold, is your reason for buying them something everyone knows? Please leave your comments in the comment section. See you in the next video.
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