Fast Food, Slow Thinking

Investing: “It’s not supposed to be easy. Anyone who finds it easy is stupid.” – Charlie Munger

Over the past 2 years, McDonald’s stock is up over 70% while Chipotle’s is down 38%.

McDonald’s 2-year total return graph1

Was this expected to happen? Not exactly.

In July 2015, Chipotle’s stock had advanced 70% over the prior 2 years while McDonald’s gained only 4%.

McDonald’s July 2013 to July 2015 total return graph2

At the time (2 years ago), most everyone was bullish on Chipotle and bearish on McDonald’s. A few reasons why, beyond the wide differential in recent stock market performance:

First-level thinking in July 2015 would have consisted of the following:

  • Chipotle is great company and McDonald’s is bad company.
  • I think Chipotle’s earnings will rise and McDonald’s will fall.
  • I want to buy Chipotle and sell/short McDonald’s.

Second-level thinking in July 2015 would have consisted of the following:

  • Chipotle is a good company but everyone thinks it’s a great company. I think Chipotle’s earnings will rise less than people expect. By extension, Chipotle’s stock is overloved and overvalued.
  • McDonald’s is a good company but everyone thinks it’s a bad company. I think McDonald’s earnings will fall less than people expect. By extension, McDonald’s stock is underloved and undervalued.
  • I want to buy McDonald’s and sell/short Chipotle.

With the benefit of hindsight, selling Chipotle and buying McDonald’s in July 2015 may have seemed like an easy decision. In reality, it was anything but. As Howard Marks wrote:

 “Anyone who thinks it is easy is a first-level thinker …  first-level thinkers see what’s on the surface, react simplistically, and buy or sell on the basis of their reactions … the first-level thinker simply looks for the highest-quality company, the best product, earnings growth or the lowest p/e ratio. He’s ignorant of the very existence of a second level at which to think, and of the need to pursue it.”

Contrast this with the thought-process of a second level thinker…

“Is it good? Do others think it’s as good as I think it is? Is it really as good as I think it is? Is it as good as others think it is? Is it as good as others think others think it is? How will it change? How do others think it will change? How is it priced given: its current condition; how I think its condition will change; how others think it will change; and how others think others think it will change? And that’s just the beginning. No, this isn’t easy.”

The next time you are ready to make a change in your portfolio, ask yourself whether you are being a first-level thinker or a second-level thinker. Ask yourself whether you are thinking fast or slow, and if you have any valid reason to expect a superior return than the market.


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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.


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