My son was reading level 1-2 books by three. He's 6 now and reads at a 4th grade level. He did not learn how to read by sounding out words. Once he knew the "rules" of reading, he would just look at a word and say it. This isn't saying that he didn't make mistakes, he just would rather try and say the whole word than slow down and sound out each part. For example, explaining that a word ending in an e makes the vowel "say itself" is a general rule.