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Book review about investment: Robert G. Hagstrom's latest liberal art

Genre: Commodity Commerce
Writer: Robert G. Hagstrom
Title: Investing: The Last Liberal Art (Buy a guide)



Robert G. Hagstrom, Leading Investment Strategy and Managing Director for Legg Mason Investment Advisor and eight authors of the ebook have been inspired by this guide in the idea of "mental models" by Charlie Munger. Charlie Munger is a person who strongly believes that knowledge basically can lead to a better strategy to investing.

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This e-book evaluations theories of seven educational disciplines – physics, biology, sociology, psychology, philosophy, literature and arithmetic – in each chapter to construct a lattice building that helps us higher understand financial markets and finally grow more healthy in our investment selections

Hagstrom supplies a quick overview of each of these educational disciplines and examines in more detail sure subjects in every area. He then presents a set of understanding frameworks from these disciplines to make the reader extra conscious of how the financial system works.

This ebook offers a convincing foundation for a free art strategy to investment and harsh criticism of corporate faculties about their weighting

The purpose of this guide is to not give the reader an investment know-how or strategy, however to encourage buyers to develop a multi-disciplinary strategy that unites

Hagstrom notes that Those that are approaching funding in the apply of thoughts, as well as expanding the latticwork of religious fashions, are fascinated by his thoughts. He also claims that those who are just on the lookout for a mannequin for fast victory will probably be out of the ebook.

Introduction: Mental Well being Models (19659003) “Real learning and sustainable success come to those who seek to build mental health models and then learn to think in an associative, multidisciplinary way. "- Charlie Munger

Robert G. Hagstrom, Chief Investment Officer and Managing Director of Legg Mason and author of eight investment books, found inspiration from this book in the mind of Charlie Munger on the concept of mental health.

The technical definition of Latticework is "a frame made up of a cross-section of strips of building material, the design is created by crossing the strips forming a network."

If you love to write, it's time to start a blog on the book. [19659006] Hagstrom discovered that universities no longer take into account the importance of students developing a comprehensive skills package that gives them the opportunity to develop mental health models.

the book shows that there is no longer enough to simply obtain and manage accounting, economics and finance investing basics for a successful career. To produce an average return, Hagstrom believes that it requires much more than technical knowledge.

Investment decisions have better chances of success when other areas of thought lead to the same conclusion.

This book discusses the great ideas of 7 academic disciplines – physics, biology, sociology, psychology, philosophy, literature and mathematics – that enable us to develop mental health models that help in understanding financial markets.

A broader understanding makes us better investors. leaders, citizens, parents, spouses and friends. This development of understanding begins with diving into significant concepts from many different areas and learning to differentiate between them

The purpose of this book is to develop the ability to think about finance and invest in one piece, one piece of data, in one piece. Hagstrom promises that "exceptional awards are possible for those who are willing to contact mental health models." Balance is one of the basic concepts of physics, and the primary focus of this chapter is how to compare discipline with our financial markets and economy.

The balance is scientifically defined as the balance between opposing forces, forces or effects. The breakdown of this concept generates the terms static balance, which typically recognizes the resting system and the dynamic balance that is achieved when competing in an offset system.

For over two hundred years, economists have been relying on equilibrium theory to explain the behavior of economies

British economist Alfred Marshall was the main producer of the concept of economic balance in the economy. He used this concept to explain the relationship between demand, supply and price. Marshall believed that balance is a natural state of the economy, and competition always determines the equilibrium price.

Thus, there are always forces that guide supply or demand back to their equilibrium, and the marketplace is constantly correcting imbalances. He used the following analogy: “Just like a stone-hung stone has moved from its equilibrium, gravity is going to bring it back to its equilibrium. due to uncertainty about the future of the stock market. Interestingly, he believed that people make sensible decisions that correspond to their individual preferences, and that stock prices reflect these sensible decisions at any time

The person who has been awarded the Paul Samuelson market theory at the next level is Eugene Fama.

The doctoral thesis "Behavior of Stock Price" at the University of Chicago is the basis for "modern portfolio theory". Fama's message is that stock prices are unpredictable because the market is too effective.

In an efficient market, many intelligent investment professionals have simultaneous access to an incredible amount of relevant information, and they apply this information aggressively so that stock prices adjust immediately – which restores balance – before anyone can benefit. He therefore believes that stock prices fully reflect all available information.

Many scientists have begun to question the balance theory that dominates our vision of the economy and the stock market. The book constantly defines a stock exchange as a "complex adaptive system", a system with many interactive elements that constantly change the behavior of environmental change

If such a complex system continually adapts, it is impossible that such a system, including the stock market, would achieve a perfect equilibrium [19659006] This puts the theory of consistent financial equilibrium on a serious issue. If there were real market equilibrium, there would be no boom or crash, no black swans, no supply and demand differences, no economic surplus or shortage.

The traditional counterpart suggests the opposite; The market is not sensible because its investors are not sensible. Individual investors or agents are irrational and inevitably distort the securities. This creates opportunities for profitability

Hagstrom firmly believes that there is both balance and imbalance in the market. If Newton's view of balance is in itself inadequate, what other mental health models should we add?

Biology: Evolutionary Economy

The fall of the market in 1987 attracted the most researchers and investment professionals as a surprise. According to the equilibrium view of the market, almost nothing could have been predicted to crash in 1987. Fast forward twenty years later and the same problem came again due to the fall of the market in 2008.

These two events led to the need for alternative theories to describe economic behavior. The idea was that the market was best understood from a biological point of view. In this chapter, Hagstrom focuses on the evolution of biology and how it relates to economic evolution

The numerous features of Charles Darwin's evolutionary principles can be observed throughout the history of the stock market. [19659019] Most importantly, "coping with the best investment method" leads to a constant need for adaptation just like Darwin's natural choice. Darwin acknowledged this process for years in the animal world. “Well prepared to appreciate the struggle for existence, it immediately struck me that under these circumstances, favorable fluctuations would usually have been preserved and disadvantages would be destroyed.

The result would be the formation of a new species. ”Darwin's concept isn’t only meant for certain species, nevertheless it was additionally of the identical species. As we all know, the small, gradual modifications in the generations of the generations began so as to add a larger change, which is described as an evolutionary course of.

Hagstrom reminds us to keep in mind that it’s all the time changing, albeit its velocity. He urges buyers to desert Newtonian theories that haven’t any modifications and to take Darwin's concept of the world that’s similar to the financial system.

Hagstrom has defined 5 trade methods which were crucial tendencies and the way they’re progressively

  1. in the 1930s and 1940s: Benjamin Graham and David Dodd advised that the "discount-hard ebook worth" strategy was dominant .
  2. 1950s: Dividend Model Controlled This Age; Investors gradually attracted more shares that paid high dividends. The strategy became so popular that dividend yields fell below the historical value of bonds.
  3. 1960s: Investors were out of dividend strategy and relied more on companies expected to increase their income
  4. 1980s: Warren Buffett stressed the need to focus on companies with large cash flows
  5. Today: Evolving Fifth Strategy return on investment

Evolution took place in the stock market through economic choice. Hagstrom believes that if you decide to believe in this theory of economic development, the market will never be effective.


Sociology is a study of how people work in society and whose main goal is to understand group behavior. All areas of social science are platforms that help us think about how people make themselves into groups or societies and how these groups behave.

Hagstrom explains how individual behavior is strongly influenced by other people in the collective group. We have also realized that economies and stock markets are adaptive systems, which means that their behavior is constantly changing as individuals in the system.

Feature of complex adaptive systems, their adaptability is incorporated into the theory of birth. The theory of development refers to the way in which individual units (cells, neurons or consumers) combine to create something larger than the sum of parts. Many individuals who try to satisfy their own needs are involved in buying and selling with other people, creating a rising structure called the stock market.

Gustave Le Bon was a critical critic of the crowd's intellect: "They will by no means attain the requirements

They’re all the time intellectually worse than individuals. “Unlike Le Bon's beliefs, James Surowieck's book The Wisdom of Crowds is in conflict with“ crowds of crowds ”. Two important variables that buyers have to make selections are variety and independence.

“The stock market is more stable when it is made up of a diverse group of representatives (intelligent and stupid) than in a market consisting solely of intelligent agents. “When diversity is lost, also known as diversity, it makes the market ineffective.

The cascades of information cause breakdowns of diversity and occur when people make decisions based on other actions based on their own private information. Thus, these information circuits can help explain market upturns and crashes.

Hagstrom then discussed the sociological idea of ​​the fundamentalists and the followers of the trend, which can lead to the explanation of market behavior.

Trend Followers seek to take advantage of market changes either by buying or selling prices when prices fall. The ombudsmen buy and sell the price on the basis of the difference between the price of the security and the underlying value.

When the number of fundamentalists is small, market bubbles are evolving. Essentially, when the imbalance between fundamentalists and trend followers becomes unbalanced, diversity is likely to occur

It is not necessary for all investment professionals to have the same information, but they must keep mutual information about the various choices available. The lower this level of mutual knowledge is, the greater the probability of instability.


Psychology examines how the human mind works, while psychologists are concerned about the part of the brain that directs cognition (the process of thinking and knowledge). ), as well as the part that guides emotions

20. Since the end of the 20th century, the concept that psychology plays a role in economic decision-making has been developed. Because the modern portfolio theory was based on the premise of reasonableness, the suggestion that individuals make decisions absurd was pioneering.

The significant amount of behavioral funding that Hagstrom emphasizes in this chapter is to avoid losses.

The aversion of loss exists when people choose an option they think they have no chance of losing their decision with an uncertain outcome. In 1979, Daniel Kahneman and Amos Tversky wrote a paper entitled "Prospect Theory: Analysis of the Risks of Decision Making."

Their most important discovery was to understand that individuals are inherently losses. They were able to prove mathematically that individuals regret the losses more than they consider to be exactly the same size gains.

For example, why do people want to hold bonds when we know that over the years stocks have constantly exceeded bonds?

Loss of further diving as a barrier to losing gives us a term called aversion to myopia, which reflects a combination of aversion to loss and measurement of investment. Myopia's aversion to loss is the only major psychological barrier that prevents investors from operating well in the stock market.

University of California Behavioral Economist Terence Odean published an article Why do investors trade too much?

He studied stores for over 7 years and followed more than 97,000 trades among 10,000 investors. He noted that the most active traders had the worst results, while the least traded merchants had the highest returns.

This leads to the conclusion that people who may have suffered the most from the aversion of myopic losses and abide by their stock sales did not do as those who resisted their natural impulse to sell and hold their land.

Psychologists say people are information processors; They build mental health models that help anticipate events. Therefore, poorly designed mental models based on carefully thought-out information will lead to poor investment performance.

Our brains are engines that naturally look for patterns and then search for meanings. We are looking for information that confirms what we believe, and we reject information that contradicts what we believe.

Hagstrom examines some of the human brain patterning tools and examines why these tools lead to market instability

human brain, Hagstrom explains, is not intended for optimal handling of stock market data, resulting in system fluctuations that cause fluctuations in the system.

However, in order to compensate for these built-in shortcomings, investors stand out from the stock market speculators. This allows them to ignore trends and focus on the equity value of the shares. This allows investors to take advantage of psychological fluctuations to buy shares at a discount.

Philosophy: A pragmatic view of investment

The word philosophy is based on two Greek words, which are usually translated as "love" and "wisdom." “The philosopher is therefore the one who loves wisdom and is dedicated to the search for continuous wisdom.

There are three main parts of philosophy research, but Hagstrom owns this chapter in the bottom of philosophy, called epistemology. understand the boundaries and nature of knowledge. Hagstrom points out that if we can consciously embrace an epistemological framework, we can go a long way towards improving investment results by avoiding confusion and ambiguity

Again, the stock market is a complex adaptive system.

Hagstrom then puts the question: "Are complex adaptive systems really complex and inexplicable, or are they complex only because we have limited ability to understand them?"

One of Hagstom's favorite phrases in this book is:. “The multipliers used by investors to explain the market sometimes lack the statistical strength needed to properly describe the event in the financial markets. So if the description is defective, the explanation is probably wrong.

Hagstrom called the philosopher Ludwig Wittegenstein an “investment in a philosophical father”. He targeted particularly on the Wittegenstein language to work on the word, ”the which means of the phrase is its use in language. “

He continued to explain how analysts 'language to describe Amazonia in its early days clouded investors' perceptions of the company, and was simply not true. Since Amazon started selling books, many investors first compared Barnes & Noble.

As the Amazon inventory became more diversified, investors began to compare it to Wal-Mart, but Hagstrom said the comparisons were not accurate, and Amazon was much more

” And the descriptions had totally different outcomes. ”If the which means of the word is its use in the language, then the“ meaning ”of the corporate can be found within the language.

Fact modifications as circumstances change and when new discoveries from the world are made, we should continually attempt to get info so that we will stick with whatever is true. Considering that folks resolve their doubts and type their beliefs

These beliefs guide later actions and lead to habits. When on the lookout for the true definition of faith, one should take a look at the following actions – this proposal is known as pragmatism. The aim of considering is to supply ways of working.

Hagstrom stated what exactly pragmatic means, "Pragmatism retains the reality (in statements) and correctness (in action) decided by their practical results.

Pragmatism is the right philosophy for constructing and utilizing mental health fashions

The one option to do better than the inventory market is for different buyers to interpret related info that differs from different buyers Nevertheless, when you will have stated this, your interpretation have to be right


Hagstrom makes an software for reading as an alternative of analyzing how sure written methods or approaches can get info about the financial system, inventory market or basic investments.

Here luvuss a Hagstrom interviews graduates of the School of High-quality Arts, St John, who focus solely on intensive research in Western literature.

He talks to the graduates of this school, which is at present working in the monetary sector, who believes that this intensive reading curriculum made them better thinkers who helped them both as buyers and in different areas of life.

Charlie Munger as soon as stated:

Key rules, actually great ideas, have already been written, ready for us to seek out them and make them their own. “Munger and Warren Buffett constantly emphasize the importance of understanding the basics of any business or industry you invest in.

This means not only gathering information about a company or industry, but understanding it at a really deep level. The purpose of this chapter is for investors to broaden their horizons while reading, not just for reading information.

There are plenty of readings available to investors that are available daily – WSJ, New York Times, training manuals, etc. – that add to the facts rather than increasing your understanding. Such reading includes new knowledge, but not necessarily new insights

Once we have developed our skills as sharp readers, it is becoming easier to decide what should and should not go through our communication channel, which is critical to successful

According to Hagstrom, the analysis reads three goals: (1) develop a detailed understanding of what the book contains, (2) interpret the content by looking at the author's own perspective on the subject, and (3) analyzing success successively in presenting this perspective.

As a reader, Hagstrom urges us to determine if the book is true, not whether it supports what you have already thought. He says we have to check our opinion from the door.

At the end of the chapter, Hagstrom draws parallel to his love for the magazines and his interest in investing.

By investing he is skeptical and waiting for communication points. Both investing and searching are worried about collecting clues (financial information) to determine if the market is precisely pricing security.

Reading in non-financial areas is the key to developing mental models. Benjamin Doty, Investment Director of Koss Olinger, said in his reading: “Literature adds, what most business Nonfiction can, it dramatizes the complexity of events. It places you, the reader, right next to the signs when they face the consequences of their actions. ”


This chapter discusses a lot of mathematical concepts which are crucial for sensible funding. All buyers know that fashions assist to determine the danger and position themselves with a purpose to navigate the uncertainties.

One idea introduced by Hagstrom was Bayesian analysis. More commonly recognized decision-making principle Bayesian evaluation is an attempt to incorporate all obtainable info into the decision-making process

Think about the discounted money circulate (DCF) which has been thought-about one of the simplest ways to guage

Chance principle and Bayesian analysis may also help us deal with future uncertainty.

Though these obtainable instruments assist to alleviate uncertainty and make educated assessments, the DCF still has many unknown issues, akin to horizons, progress charges, financial ups and downs, confusing shoppers and new competitors. How do buyers substitute all alternatives? Hagstrom replies: "Solely the method is consistently updating the possibilities with goal info that the choice tree works."

He believes that investors are always exposed to high personal bias because of subjective probabilities; this is the challenge investors face. Whether it is or not, almost all decisions made by investors are probabilities. It is very important that their probability statements combine the historical record with the latest available data.

Hagstrom insists on the importance of recognizing the difference between system trend and system trends.

For example, one of the most well-known by-product markets occurred in 1975 and 1982. The Dow Jones Industrial Average was 784 at the beginning and end of this season. Some stock market predictors are using similar ways to what happened and what is happening today.

Investors could be in for a long time when the market does not seem to pick up, and if they are urged to avoid stocks. Is it true that sideways markets are not profitable for long-term investors? No, this is not true. Warren Buffet earned a 676% return during this time, and his friend Bill Ruane and Rick Cunniff gave a 415% cumulative return.

Investors who focused on system development (market average) were the wrong conclusion during this period. Market fluctuations were dramatic, leading to many opportunities for high returns. Investors who focused on this are looking for trends in the system.

Whenever you hear someone say, "It's all on average, it’s sometimes a modulation of the typical recession

Sir Francis Galon, a. This is principally a concept that lastly says that variance is corrected in the system

Regression is usually used as a prediction software on Wall Road; it’s a easy mathematical estimate that permits buyers to predict the longer term. Nevertheless, if this is so simple and efficient, why predict so onerous?

Properly, recovery to the typical isn’t all the time instantaneous; Overestimation and undervaluation would not have a set time period once they exist. Available on the market itself, the typical could also be unstable; yesterday common will not be tomorrow's average. The typical is able to transfer to a new location, which is often a really troublesome concept for buyers.

An example of how this could occur is the S&P 500 index. This index shouldn’t be a passively managed stock basket that not often modifications. Normal and Poor & # 39; s yearly scale back corporations and provides new corporations (around 15% of the index modifications a yr)

The S&P index is creating in Darwinian and is consistently growing its strengths.

Fifty years in the past, the manufacturing, S&P 500 index was dominated by power corporations. In the present day, know-how, healthcare and finance corporations dominate it.

The typical return on fairness in the current three industries is larger than the variety of industries 50 years in the past, which exhibits an ideal instance of how the typical has shifted. It is extremely essential that buyers remain versatile of their considering and keep in mind that the regression of the typical concept, though essential, just isn’t indestructible.

The mathematical concepts discussed on this chapter are necessary for buyers to know the return events. Arithmetic leads us to precision and ambiguity;

Determination Making

Hagstrom introduces us to the idea of two alternative ways of considering, system 1 and system 2. System 1 considering is intuitive; it really works routinely, shortly and effortlessly without any voluntary management. Psykologiset puolueet rikkoivat System 1: n ajattelua.

Pyrimme tekemään intuitiivisen päätöksen, mutta emme ymmärrä, että kognitiiviset virheet johtuvat luontaisista harhaisuuksistamme. Toisaalta System 2: n ajattelu on heijastava, koska se toimii hallitusti, hitaasti ja vaivattomasti. System 2: n ajattelun toiminnot edellyttävät keskittymistä ja liittyvät subjektiivisiin kokemuksiin, joissa on sääntöihin perustuvia sovelluksia

Epälineaarisissa järjestelmissä, kuten osakemarkkinoilla ja taloudessa, System 1: n ajattelu (aivojemme intuitiivinen puoli) on paljon vähemmän tehokas kuin System 2: n ajattelu. Hagstrom huomauttaa: ”Järjestelmän 2 ajattelun voimavaratilanteen parantaminen – asiaankuuluvien tietojen varantojen syventäminen ja laajentaminen – on periaatteellinen syy, miksi tämä kirja on kirjoitettu.”

Ne, jotka skannaavat jatkuvasti kaikkiin suuntiin, auttavat heitä tekemään good selections will be the successful buyers of the longer term.

Those that research the art and science of investing are higher prepared for incorporating the principles, methods, and information from several totally different disciplines. Our investment mannequin have to be dynamic; it should have the power to vary with the setting simply as a biological organism evolves.

Charlie Munger asked his classmates on the 15th reunion of the Harvard Regulation Faculty class of 1948, “Was our education sufficiently multidisciplinary?” The problem we face as buyers has much less to do with the information that’s out there to us and extra to do with how we choose to piece that information collectively.

Hagstrom constantly preaches, “Our failures to explain are caused by our failures to describe.” The lesson discovered from this guide is that descriptions based mostly solely on financial theories aren’t enough to explain the conduct of markets. It is an incredibly crucial talent to assume creatively and assemble a latticework of psychological models to assume in multidisciplinary phrases. want to thank the Titans of Investing for allowing us to publish this content. Titans is a scholar organization founded by Britt Harris. Study extra about the group and the man behind it by clicking both of these links.

Britt all the time taught us Titans that Knowledge is Low cost, and principal can discover treasure troves of the great things in books. We hope solely may even categorical their because of the Titans if the e-book review brought knowledge into their lives.

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