New Robert Hagstrom book offers much food for thought for planners
book review by Bruce Colin, CFP®
Benjamin Graham’s contributions as an investor, teacher, and writer are unparalleled. Author of seminal works such as Security Analysis and The Intelligent Investor. Mentor to Warren Buffett. Intellectual father of value investing. But in Graham’s memoirs, he wrote that after graduating from college he had no early indications that he was cut out for finance.
Certainly nothing about his academic interests at Columbia College foretold a career on Wall Street, let alone a celebrated one. Ironically, he only sampled elementary economics before deciding not to pursue it further.
Instead, Graham’s curiosity as an undergraduate led him toward a varied curriculum that included coursework in French, German literature, English, mathematics, and philosophy—a classic liberal arts education steeped in inquiry and critical thinking. Some have always regarded such an education as impractical preparation for the working world, particularly one that increasingly seems to value specialized skill sets and technological know-how. But in a new edition of his book Investing, the Last Liberal Art, Robert Hagstrom argues that investing requires multidisciplinary thinking that extends well beyond the boundaries of finance alone.
A Latticework of Models
Hagstrom’s book certainly will appeal to those who are sympathetic to the merits of a liberal arts education, and the book’s title almost assures the self-selection of a receptive audience. But it is also a book that will resonate with many financial planners whose professional knowledge base, which includes investing, is by definition multidisciplinary.
Hagstrom is chief investment strategist and managing director for Legg Mason Investment Counsel. The first edition of his book, published in 2000, was originally titled Latticework: The New Investing, but relaunched as a paperback under the current title in 2002.
He attributes his choice of the word “latticework” to a lecture once given by Charlie Munger, vice chairman of Berkshire Hathaway. Addressing a group of students, Munger described stock picking as “a subdivision of the art of worldly wisdom” and challenged his audience to create a “latticework of models” for their decision-making. Hagstrom’s journey toward appreciating worldly wisdom and latticework begins with Benjamin Franklin.
We learn that it was Franklin who originated the idea of a liberal arts education with his proposal to establish the Public Academy of Philadelphia, now known as the University of Pennsylvania. Franklin felt that such an education would help prepare students to become successful in both public service and business. While unmentioned by Hagstrom, it seems entirely fitting to his discussion that the Wharton School, one of the world’s most renowned business schools, grew out of the larger liberal arts environment envisioned by Franklin.
Expand Your Disciplines
Chapter 1 continues as Hagstrom moves on to examples of interdisciplinary approaches to problem-solving, including the Santa Fe Institute in New Mexico where experts in the physical and natural sciences, mathematics, and social sciences collaborate to study complex systems at work in areas as diverse as our immune response, the environment, and yes, even investing. Hagstrom points out that the exact operation of markets and economies remains a mystery to us, and our models for explaining them often fail us. The book’s liberal arts thesis becomes clear when he argues that “Perhaps it is time we expanded the number of disciplines we call upon in our search for understanding.”
Hagstrom’s search for understanding, at least early on, seems devoted to convincing readers that our markets are not efficient, rational, or orderly. As he progresses through chapters devoted to physics, biology, and sociology, he uses those disciplines to build his case. He begins by reviewing the impact of Isaac Newton’s work on our understanding of the physical world, and contends that his influence extended beyond the bounds of physics to other disciplines as well, including economics. But Newton’s ideas about equilibrium, according to Hagstrom, do not serve us well when attempting to understand the capital markets. He then borrows from the work of Charles Darwin to suggest that markets are better described as being adaptive and evolutionary, and presents a sociological perspective that occurrences of “diversity breakdowns” prevent markets from being efficient.
At this point, readers may well feel that they have been drawn into the active-versus-passive investing arena, as laid out by a practitioner of the former, but Hagstrom does not expressly frame his discussion this way. But he does seem to anticipate debate, if not on this matter than certainly on others, when he notes in the preface that his “discussions are, of necessity and without undue apology, both brief and general. If you happen to be an expert in any one of these disciplines, you may quibble with my presentation or may conclude I have omitted certain concepts.”
There is not much to quibble about with regard to Hagstrom’s decision to include a chapter on psychology. It is hard to imagine an adviser in today’s world who is not at least passingly familiar with the work of Daniel Kahneman, Amos Tversky, Richard Thaler, Terrence Odean, and others who have defined the growing field of behavioral finance. In addition to reviewing their contributions, Hagstrom also uses this chapter to explore the difficulty faced by investment professionals when trying to assess their clients’ risk tolerances.
On balance, readers will walk away with much food for thought after finishing the book’s remaining chapters on philosophy, literature, mathematics, and decision-making. It is an ambitious syllabus not unlike that which was pursued many years ago by a young man who later looked back on his education and wrote that “the high point of my academic career was something called the English-History-Philosophy Seminar.”
His name was Benjamin Graham, and it would be a shame if today’s investors were to forget his example.
Bruce Colin, CFP®, is president of an advisory firm in Southern California. He may be reached at firstname.lastname@example.org.