Robert G. Hagstrom
1 Applying New Paradigms for Insightful Investing
Robert Hagstrom (Sr VP of Legg Mason Focus Capital) has written a light, entertaining interdisciplinary book about investing with an open mind. His main thesis is that ideas about investing, economics, and markets are part of a larger body of human knowledge, yet the pressures of the modern world tend to make us specialize in one field. However, by searching out connections and parallels between markets/finance and ideas in diverse fields of knowledge, we can (hopefully!) invest in a more insightful way.
Hagstrom then takes us on a tour of physics, biology, social sciences, psychology, philosophy and literature. In approximately 20-page chapters, he presents some essentials in each field that apply to investing.
Physics, for example, has long embraced the notion of equilibrium. Equilibrium also permeates finance; for example, supply and demand are equilibrated by the proper price. A key idea in biology is Darwinian natural selection. Hagstrom draws parallels between natural selection and the evolution of profitable trading strategies; unprofitable strategies die off in the process of competition.
The social sciences also give us insights into how people behave in groups, whether as political parties, as investors, or as cultures. These fields show emergent behavior of groups of individuals, and that the behavior of the group is more than the sum of it's parts. In economies, Adam Smith's "invisible hand" guides us towards the goal of properly rationing resources. Cities evolve distinct neighborhoods without any centralized planning. The stock market crashes occasionally as investors react to others reactions.
Psychology is also an area of prime interest to investors, because emotion and cognition influence decision-making. The emerging field of behavioral finance has shown that the market tends to overreact to news, and that a contrarian investment strategy can be profitable. Indeed, investors can often attest to an internal struggle between fear of and greed. Unchecked, these can lead to gold rushes, internet mania, or stock market crashes.
In the field of philosophy, Hagstrom focuses on the "pragmatism" movement in America, which believed that ideas are "true" if they have practical value and provide some benefit to you, rather than conforming to some transcendent absolute "truth." Adopting a pragmatic point of view may allow a trader to more easily move to a new trading model or cut losses rather if a given model or position isn't working.
Finally, Hagstrom discusses literature. He notes that literature not only stretches our imagination, but it can also teach us to read analytically, think critically, separate fact from opinion, and to discuss ideas with an open mind. This mental flexibility is crucial not only as investors in digesting news, but also as human beings.
In many of these chapters, Hagstrom returns to the emerging science of complex adaptive systems, which provides a unifying theme. Complex adaptive systems have a large number of individual units, and these units can be anything - ants, neurons, votors or investors. These units change or adapt their behavior based on their interactions with other units as well as the overall system. These systems have self-organizing properties, and generate emergent behaviour beyond the behavior of individual units (i.e. cities `spontaneously' form distinct cultural neighborhoods without planning). These systems are constantly evolving and in flux, and occasionally go through periods of sudden change (like an avalanche, or stock market crash). The common qualities of complex adaptive systems have implications for investors. The market will always be in flux, not in equilibrium, and it's more organic and emotional than mechanistic; as a result, it has small constantly changing inefficiencies that people compete to take advantage of.
Overall, my one general criticism of the book is that one can see how these fields might apply to investing at a concept level, but of course "the devil is in the details." If you're an experienced investor, you will NOT read about how all this applies to the CAPM, or what you should do now with your 401(k). But to be fair, Hagstrom says in his preface that that's not his goal - it would be impossible in one book to flush out all the details. That being said, I thought it was valuable how he described the interdisciplinary fields of "complex adaptive systems" and "behavioral finance" - these are indeed important new areas of research, ones that may reap benefits in the future. Without an interdisciplinary view of finance, these promising fields would not have come into being.
So in summary, I think this was a light, quick, enjoyable quick tour through the intellectual history of many fields. It was a valuable reminder to think outside of one's discipline to keep perspective and gain new insights. So if you want to think in a broader way about markets, then I'd recommend it.
2 Liberal Arts Light, but Excellent Intro to Investing
A good, but light introduction to various liberal arts subjects for interested investors. The subjects R. Hagstrom tackles are topics any liberal arts major in college would've already been exposed to in varying degrees, however, for MBA's and those out there who've not yet "invested" their own time into "life's larger issues" and subjects, then this book is an excellent jumping off point.
On the flip side, those of us who have spent a lot of time studying and thinking about liberal arts, and are new to business and investing but would like to learn more, Hagstrom's book helps synthesize the business/investment world with various disciplines which at first glance seem not to be related, but which in actuality, as Hagstrom shows, are inextricably linked.
Overall, I recommend this book along with Peter Lynch's, "One Up on Wall Street" for serious long-term investors who understand that there's more to life than income producing stocks.
3 Brilliant book, deserves to be widely read
This extremely well researched and written book argues for a liberal education - that is a process of continual learning in different fields/areas in order to improve understanding of how the world works. In relation to investing this means that just doing a finance or economics degree is not enough (although obviously helpful) and that knowing something from areas such as Psychology, Philosophy, biology, history will help you improve your performance.
As well as about being about stock market investing, the book makes a strong case for a more liberal education at University, not only to improve students'job prospects, but also the way they will live their lives (and consequently affect others).
Read it.
4 Beware
I read a book entitled "latticework" by the same author and I ordered this title thinking it would be a continuation of the subject. Unfortunately it is the same book with the different title. I am a little ticked because it was not obvious when I submitted my order
5 If you are trying to upgrade your thinking, here's how
I have given the book 5 stars because in the very long run and the big scheme of things, the notions put forth will make you a significantly better person and thinker and as such the idea deserves to be understood.
The idea of attaining "worldly wisdom" is a huge goal and one can only benefit immensely by trying to attain it--a lifetime project.
This book is not for the average investor however (though they will benefit). It's for those who are already advanced in the investment game and want to achieve the extra edge.
This is also a book for those who would like to be more well rounded in their thinking; it will also appeal to the intellectuals.
This is not really a book about investing, as much as it is a book on how to think better--perhaps it needs to be retitled once more and placed in the self help book category on how to think better and to be a better person.
For those arm chair investors who want a more practical application of worldly wisdom, read Janet Lowe's book on Bill Miller "The man who beats the S&P". It was Miller's "worldly wisdom" attitude that lead to Hal Varian and Brian Arthur who introduced Miller to the notion of increasing returns which allowed Miller to think in a different way than the average investor about...Amazon.com.
The rewards of worldly wisdom are significant!
6 Worldly Investment Wisdom
This may be Hagstrom's best book yet. It's jam-packed with investment wisdom. The approach to investing described in this book is one that is based on a working knowledge of a variety of disciplines that was pioneered by Charlie Munger, Warren Buffett's brilliant partner at Berkshire Hathaway. Years ago, Munger developed what he termed "a lattice of mental models" that he used to create a powerful way to achieve superior investment results. According to Munger, investment decisions are more likely to be correct when ideas from other disciplines lead to the same conclusions. That is the topmost payoff-broader understanding makes us better investors.
How does one achieve worldly investment wisdom? Hagstrom believes that it is an ongoing process of acquiring the significant concepts-the models-from many areas of knowledge and then learning to recognize patterns of similarity among them. The first is a matter of educating yourself; the second is a matter of learning to think and see differently. Hagstrom notes that acquiring the knowledge of many disciplines may seem a daunting task. Fortunately, you don't have to become an expert in every field. You merely have to learn the fundamental principles-what Munger calls the big ideas-and learn them so well that they are always with you.
Hagstrom's book is intended as a starting point for this self-education process. He examines a specific discipline-physics, biology, social sciences, psychology, philosophy, and literature-from the perspective of its contribution to a latticework of models. Hagstrom does a great job of explaining the role of complexity theory in understanding financial markets and the evolving global economy.
After you read Hagstrom's book, you will be on your way to achieving worldly investment wisdom.
