Investing: The Last Liberal Art

Investing: The Last Liberal Art

ROBERT G. HAGSTROM
Copyright Date: 2013
Edition: 2
Pages: 216
https://www.jstor.org/stable/10.7312/hags16010
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  • Book Info
    Investing: The Last Liberal Art
    Book Description:

    Robert G. Hagstrom is one of the best-known authors of investment books for general audiences. Turning his extensive experience as a portfolio manager at Legg Mason Capital Management into valuable guidance for professionals and nonprofessionals alike, he is the author of six successful books on investment, including The Warren Buffett Way, a New York Times best-seller that has sold more than a million copies.

    In this updated second edition of Investing: The Last Liberal Art, Hagstrom explores basic and fundamental investing concepts in a range of fields outside of economics, including physics, biology, sociology, psychology, philosophy, and literature. He discusses, for instance, how the theory of evolution disrupts the notion of the efficient market and how reading strategies for literature can be gainfully applied to investing research. Building on Charlie Munger's famous "latticework of mental models" concept, Hagstrom argues that it is impossible to make good investment decisions based solely on a strong knowledge of finance theory alone. He reinforces his concepts with additional data and a new chapter on mathematics, and updates his text throughout to reflect the developments of the past decade, particularly the seismic economic upheaval of 2008. He has also added a hundred new titles to the invaluable reading list concluding the book.

    Praise for the first edition:

    "I read this book in one sitting: I could not put it down." -- Peter L. Bernstein, author of Against the Gods: The Remarkable Story of Risk

    "Elegant and irresistible. Robert G. Hagstrom makes the complex clear as he confidently crisscrosses through the disciplines of finance, biology, physics, and literature. The only way to understand investing better, [Investing] shows, is to understand the world better. Ideas spark off the page at every turn. This is simply a gem of a book." -- James Surowiecki, New Yorker

    "Investing is a brisk and engaging read, and it is a pleasure to be in the presence of Hagstrom's agile mind." -- International Herald Tribune

    eISBN: 978-0-231-53101-6
    Subjects: Business, Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. PREFACE
    (pp. vii-xii)
    Robert G. Hagstrom
  4. 1 A Latticework of Mental Models
    (pp. 1-12)

    In April 1994, at the Marshall School of Business of the University of Southern California (USC), students in Dr. Guilford Babcock’s Student Investment Seminar got a rare treat: a powerful dose of real-world knowledge from a man whose thoughts on money are widely considered priceless.

    Charles Munger—Charlie, as he is known throughout the investment world—is vice chairman of Berkshire Hathaway, the holding company run by Warren Buffett, the world’s most famous investor. Trained originally as an attorney, Charlie is Buffett’s business partner, friend, and straight man. He commands attention whenever he speaks.

    Charlie Munger is an intellectual jewel...

  5. 2 Physics
    (pp. 13-25)

    Physics is the science that investigates matter, energy, and the interaction between them—the study, in other words, of how our universe works. It encompasses all the forces that control motion, sound, light, heat, electricity, and magnetism and their occurrence in all forms, from the smallest subatomic particles to the entire solar system. It is the intellectual foundation of many well-recognized principles such as gravitation and such mindboggling modern concepts as quantum mechanics and relativity.

    This is all very serious stuff and frequently intimidating to nonscientists. Does it have a place in our latticework of mental models for investors? I...

  6. 3 Biology
    (pp. 26-44)

    The market crash of 1987 caught most scholars, economists, and investment professionals by surprise. Nowhere in the classical, equilibrium-based view of the market so long considered inviolate was there anything that would predict or even describe the events of 1987. Then, some thirty years later, we learned this hard lesson all over again. The stunning events of 2007–2009 and their devastating dominoes only served to reinforce this unsettling sense of being blindsided by something wholly unpredictable. This double failure of the existing theory left open the potential for competing theories. Chief among them was the belief that the market...

  7. 4 Sociology
    (pp. 45-65)

    “I can calculate the movement of the heavenly bodies,” said Sir Isaac Newton, “but not the madness of men”—a humbling confession for a man universally considered the greatest mind of his generation.¹ What on earth could have prompted such a remark? Turns out, intellectual giants are human too.

    In February of 1720, Newton invested a modest sum of his substantial wealth in shares of the South Sea Company. This British joint-stock company, founded in 1711, was granted a monopoly to trade in Spain’s South American colonies as a part of a treaty from the War of the Spanish Succession....

  8. 5 Psychology
    (pp. 66-83)

    In 2002, the Nobel Prize in Economics was shared by two people: Vernon Smith, for having “established laboratory experiments as a tool in empirical analysis, especially in the study of alternative market mechanisms,” and Daniel Kahneman, for “having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” It was a remarkable achievement for both men, of course, but especially for Kahneman. For you see, Kahneman is not an economist—he is a psychologist.

    Psychology studies how the human mind works. At first glance it may seem far removed from the world of investing,...

  9. 6 Philosophy
    (pp. 84-103)

    Of all the different areas of knowledge surveyed in this book, philosophy is both the easiest and the most difficult. It is the easiest because it deals with familiar issues that affect every single one of us on a daily basis, and every single one of us comes into the world equipped with what we need to consider it: a brain, a heart, and a soul.

    It is, at the same time, the most difficult discipline for one simple reason: it requires us to think. Unlike the sciences, philosophy does not come prepackaged with absolute answers. Whereas many of us...

  10. 7 Literature
    (pp. 104-124)

    Charlie Munger, whose concept of a latticework of mental models inspired this book, is sometimes asked, when he describes his concept to audiences, how a person goes about learning those models. They may use different words to frame their question, but essentially those in the audience are asking, “I certainly understand the value of knowing key ideas from different disciplines and building my own latticework, but I didn’t learn any of that in school, and I’d be starting from ground zero. Frankly, it seems overwhelming. How do I cultivate the kind of depth and breadth of knowledge that leads to...

  11. 8 Mathematics
    (pp. 125-145)

    Nightingale, perched upon an oak, was seen by Hawk, who swooped down and snatched him. Nightingale, begging earnestly, besought Hawk to let him go, insisting he wasn’t big enough to satisfy the hunger of Hawk, who ought instead to pursue larger birds. Hawk replied, “I should indeed have lost my senses if I should let go food ready to my hand, for the sake of pursuing birds which are not even seen within sight.”

    Undoubtedly you recognize the fable of “The Hawk and the Nightingale,” and you already know the moral of the story: “A bird in hand is worth...

  12. 9 Decision Making
    (pp. 146-164)

    A bat and ball cost $1.10.

    The bat costs one dollar more than the ball.

    How much does the ball cost?

    You now have a number in your mind. I’m sorry to tell you this, but chances are excellent that your answer is wrong. Don’t despair—over half the students at Harvard, MIT, and Princeton got it wrong too. And they didn’t do any better on the next two problems.

    If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets?

    In a lake, there is a patch of...

  13. READING LIST OF ST. JOHN’S COLLEGE
    (pp. 165-168)
  14. NOTES
    (pp. 169-178)
  15. BIBLIOGRAPHY
    (pp. 179-188)
  16. ACKNOWLEDGMENTS
    (pp. 189-192)
  17. INDEX
    (pp. 193-204)