A philosophy has to be the sum of many ideas accumulated over a long period of time from a variety of sources. One cannot develop an effective philosophy without having been exposed to live’s lessons.

“Experience is what you got when you didn’t get what you wanted.” Good times teach only bad lessons: that investing is easy, that you know its secrets, and that you needn’t worry about risk. The most valuable lessons are learned in tough times.

1. The most important thing is… Second-level thinking

Because investing is at least as much art as it is science, it’s never my goal—in this book or elsewhere—to suggest it can be routinized. In fact, one of the things I most want to emphasize is how essential it is that one’s investment approach be intuitive and adaptive rather than be fixed and mechanistic.

First-level thinkers look for simple formulas and easy answers. Second-level thinkers know that success in investing is the antithesis of simple.

Just about anyone can do first-level thinking (just form an intuitive opinion) but the second-level thinker requires an effort with an aim to seek the truth.

First-level thinkers think the same way other first-level thinkers do about the same things, and they generally reach the same conclusions. By definition, this can’t be the route to superior results. All investors can’t beat the market since, collectively, they are the market.res an effort with an aim to seek the truth.

2. The most important thing is… Understanding market efficiency (and its limitations)

The bottom line for me is that, although the more efficient markets often misvalue assets, it’s not easy for any one person—working with the same information as everyone else and subject to the same psychological influences—to consistently hold views that are different from the consensus and closer to being correct. That’s what makes the mainstream markets awfully hard to beat—even if they aren’t always right.

With millions of people doing a similar analysis on the basis of similar information, how often will stocks become mispriced, and how regularly can any one person detect those mispricings? Answer: Not often, and not dependably. But that is the essence of second-level thinking. Second-level thinkers know that to achieve superior results, they have to have an edge in either information or analysis or both. They are on the alert for instances of misperception. My son Andrew is a budding investor, and he comes up with lots of appealing investment ideas based on today’s facts and the outlook for tomorrow. But he’s been well trained. His first test is always the same: “And who doesn’t know that?”

Bottom line: Inefficiency is a necessary condition for superior investing. Attempting to outperform in a perfectly efficient market is like flipping a fair coin: the best you can hope for is fifty-fifty. For investors to get an edge, there have to be inefficiencies in the underlying process (mispricing) to take advantage of.

Therefore, finding a market (not just the public equity market) that has a large degree of inefficiency and you believe you have the necessary skill set to exploit such inefficiency is key.

3. The most important thing is… Value

For investing to be reliably successful, an accurate estimate of intrinsic value is the indispensable starting point. Without it, any hope for consistent success as an investor is just thatL hope.

Being right on growth is more dramatic and being right on value is more consistent. In the long run, consistency trumps drama.