A Latticework of Mental Models

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 partner, friend, and straight man. He commands attention whenever he speaks.

Charlie Munger is an intellectual jewel somewhat hidden behind his more celebrated partner. This anonymity is not Warren's fault. Charlie simply prefers the lower profile. Except for specific appearances such as the one at USC and his prominent role at Berkshire Hathaway's annual meetings, he remains largely out of public view. Even at those annual meetings, he deliberately keeps his remarks brief, allowing Buffett to answer most of the questions from shareholders. But occasionally Charlie does have something to add, and when he speaks, the shareholders straighten and shift forward to the edge of their seats, straining to get a better view, to catch every word.

In Dr. Babcock's classroom that day in April, the atmosphere was much the same. The students knew whom they were listening to, and they were anticipating receiving the benefit of considerable investment expertise. What they got instead was something infinitely more valuable.

At the outset, Charlie mischievously admitted that he was about to play something of a trick on his audience. Rather than discussing the stock market, he intended to talk about "stock picking as a subdivision of the art of worldly wisdom."' For the next hour and a half, he challenged the students to broaden their vision of the market, of finance, and of economics in general; to see them not as separate disciplines but as part of a larger body of knowledge, one that also incorporates psychology, engineering, mathematics, physics, and the humanities.

In this broader view, he suggested, each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom, that solid mental foundation without which success in the market--or anywhere else--is merely a short-lived fluke.

To drive his point home, Charlie used a memorable metaphor to describe this interlocking structure of ideas: a latticework of models. "You've got to have models in your head," he explained, "and you've got to array your experience-both vicarious and direct-on this latticework of models." So immediate is this visual image that latticework has become something of a shorthand term in the investment world, a quick and easily recognized reference to Munger's approach.

It is a theme he returns to often. At the Berkshire Hathaway annual meetings, for instance, he frequently adds to Buffett's answer to a question by quoting from a book he has recently read. Often the quote at first appears to have no direct link to investing, but with Charlie's explanation it quickly becomes relevant. It is not that Warren's answers are incomplete. Far from it. It is just that when Charlie is able to connect Warren's ideas to similar ideas in other disciplines, it tends to elevate the level of understanding among the group.

Charlie's attention to other disciplines is purposeful. He operates in the firm belief that uniting the mental models from separate disciplines in such a way as to create a latticework of understanding is a powerful way to achieve superior investment results. 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. It will be immediately obvious, however, that the ramifications are much wider. Those who strive to understand connections are well on the way to worldly wisdom. This makes us not only better investors but better leaders, better citizens, better parents, spouses, and friends.

How does one achieve worldly wisdom? To state the matter concisely, it is an ongoing process of, first, acquiring the significant concepts--the models--from many areas of knowledge and then, second, 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.

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 Charlie calls the big ideas--and learn them so well that they are always with you. The following chapters of this book are intended as a starting point for this self-education. Each one examines a specific discipline--physics, biology, social sciences, psychology, philosophy, and literature--from the perspective of its contribution to a latticework of models. Of course many other sources are available to the intellectual explorer.

A protest is commonly heard at this point: isn't that what a college education is supposed to do for us, teach us the critical concepts that have been developed over the centuries? Of course. Most educators will tell you, in passionate terms, that a broad curriculum grounded in the liberal arts is the best way, perhaps the only way, to produce well-educated people. Few would argue with that position in theory. But in reality we have become a society that prefers specialization over breadth.

This is wholly understandable. Because students and parents spend a small fortune on a college education, they expect this investment to pay off promptly, in the form of good job offers after graduation. They know that most corporate recruiters want workers with specialized knowledge, who can make an immediate and specific contribution to the organization. It is little wonder that most of today's students, faced with this pressure, resist a broad, liberal arts education in favor of a specialty major.

At one point in our history, we were given a superb model of what constitutes a good education. Perhaps we should have paid better attention.

Excerpt from Chapter I of "Investing: The Last Liberal Art" by Robert G. Hagstrom

Robert G. Hagstrom is Senior Vice President and Director of Legg Mason Focus Capital. He has authored the New York Times best-selling The Warren Buffett Way and The Warren Buffett Portfolio, as well as The Nascar Way. He lives with his family in Wayne, Pennsylvania.