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Monday, September 10, 2007

Investing: The Last Liberal Art

Good Books: (via Emergic) Robert Hagstrom’s book Investing: The Last Liberal Art talks about the need for a latticework of mental models. It is inspired by Charlie Munger’s thinking that one needs to have a framework of the best ideas across multiple disciplines. I have been a Charlie Munger fan for a long time. So it wasn't difficult for me to understand the concept. It's a good book.

From the book description: Investing: The Last Liberal Art offers a unique picture of investing within the larger world. It explains how investment management works by borrowing the big ideas from other complex disciplines: biology, economics, mathematics, philosophy, physics, and psychology. In the biology chapter, Hagstrom analyzes the central nervous system and the immune system as complex adaptive systems and then draws parallels with the behavior of the economy and the stock market. In the physics chapter, he explores a mathematical distribution and considers the advantages of scale in relation to the bigger is better models that define the business strategies of Wal-Mart, McDonald's, and Home Depot. This interdisciplinary approach or model describes in which mechanisms the markets work and how to select and hold stocks.

Chetan Parikh writes in his review:
This book is certainly the best book that I have read for a long time. It is a book on how to connect and unify many disciplines - physics, biology, social sciences, psychology, philosophy and literature - to investing and the markets. It also contains some serious advice on how to read a book - a boon to avid bookworms like me.

Ideas just bubble from every page - the author warns in the preface: "Reading this book requires, then, both an intellectual curiosity and a significant measure of patience." - I went through the book in just two sittings, impatient as I was for more. In a way, this book crystallises the thoughts of Charlie Munger, Vice-Chairman of Berkshire Hathaway, who believes in a liberal arts understanding of investing and feels that building a latticework of mental models could greatly help people to improve their investment returns. Bill Miller, the investing superstar of Legg Mason, actually practices this by gaining insights from various disciplines to aid his investment thinking.

To be an intellectual Christopher Columbus, an investor should acquire models or concepts from various branches of knowledge and then attempt to recognise patterns of similarity in them. Investment decisions have a higher probability of success when ideas from other disciplines also lead to the same conclusion. As Charlie Munger has stated - "You've got to have models in your head and you've got to array your experience - both vicarious and direct - on this latticework of models." As Benjamin Franklin said it is forming "habits of mind" that seek to link together different disciplines. Intelligence is really a factor of how many connections or links one has learned. As Munger also stated: "You can reach out and grasp the model that better solves the overall problem. All you have to do is know it and develop the right mental habits. Worldly wisdom is mostly very, very simple. There are a relatively small number of disciplines and a relatively small number of truly big ideas. And it's a lot of fun to figure it out. Even better, the fun never stops. Furthermore, there's a lot of money in it, as I can testify from my own personal experience. What I'm urging on you is not that hard to do. And the rewards are awesome. It'll help you in business. It'll help you in law. It'll help you in life. And it'll help you in love. It makes you better able to serve others, it makes you better able to serve yourself, and it makes life more fun."

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