Learning to Think Like Charlie: Building on Charlie Munger's Mental Models

Using the latticework mental model to become a more successful investor

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Jul 03, 2019
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Charlie Munger (Trades, Portfolio), a guru investor in his own right and partner of Warren Buffett (Trades, Portfolio) in Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial), is also famous in the investing community for his way of thinking. Rather than being satisfied with knowing just accounting, finance and mathematics, Munger developed a multi-disciplinary approach to making investment decisions.

Inspired by Munger’s thinking, author Robert G. Hagstrom wrote “Latticework: The New Investing,” which was published in 2000. Later, his publisher relaunched the book with the new title, “Investing: The Last Liberal Art.” The second edition was published in 2013.

Hagstrom is chief investment officer and senior portfolio manager at EquityCompass, which he joined in 2014. Previously, he held several senior positions at Legg Mason Investment Counsel. He is also the author of several books about Buffett, including the best-selling title, "The Warren Buffett Way."

In the preface, he described his overall approach:

“Keep one thing firmly in mind: this is not a how-to book on investing. You won’t find a new set of step-by-step instructions on how to pick stocks or manage your portfolio. However, after reading this book, what you will have, if you are willing to spend some time with challenging ideas, is a new way to think about investing and a clearer understanding of how markets and economies work.”

Or, as Munger put it, “People calculate too much and think too little.”

In a presentation to the Marshall School of Business at the University of Southern California in 1994, Munger called on the students to “broaden their vision of the market, of finance and economics in general.” He wanted students to see these subjects, not as separate disciplines, but pieces of a broader body of knowledge, one that includes the sciences, social sciences, literature and mathematics.

Hagstrom continued:

“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 cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom.”

Munger considered that multi-disciplinary approach the solid mental foundation essential for a successful career in the market. His metaphor was: “a latticework of models.”

Hagstrom noted that Munger doesn’t often speak at Berkshire meetings, or anywhere else. Generally, he leaves most of the commentary to Buffett. However, he sometimes adds to Buffett’s answers by quoting from a book that he read recently. At first, the reference may seem unconnected to Buffett’s point, but does become relevant when Munger explains.

How does all this relate to investing? Hagstrom wrote, “Charlie’s attention to other disciplines is purposeful. He operates in the firm belief that uniting the mental models from separate disciplines to create a latticework of understanding is a powerful way to achieve superior investment results.”

In context, a “broader understanding makes us better investors.” So, how do the rest of us get to that kind of worldly wisdom? First, we learn the “significant concepts,” the models, from many different disciplines. Second, we look for patterns of similarity among them.

As Hagstrom described the process, “The first is a matter of educating yourself; the second is a matter of learning to think and see differently.”

It’s not necessary to know everything in each of the disciplines; instead, it’s a matter of getting to know the fundamental principles, “the big ideas” in Munger’s parlance. Get to know each of them very well well enough that you should never forget them.

More than two and a half centuries before the publication of Hagstrom’s book, Benjamin Franklin made a similar argument. There was no institution of higher learning in Philadelphia like those that existed at Yale, Harvard, and the College of William and Mary. Franklin wrote:

“As to their studies, it would be well if they could be taught everything that is useful and everything that is ornamental. But art is long and their time is short. It is therefore proposed that they learn those things that are likely to be most useful and most ornamental, regard being had to the several professions for which they are intended.”

Out of Franklin’s advocacy came the Public Academy of Philadelphia, which later became the University of Pennsylvania. Uniquely for the time, he was proposing more than just a college for the clergy (which was the role of Yale, Harvard and similar institutions); what he had in mind was a secular curriculum to help students thrive in business and the public sector. Franklin was proposing the first liberal arts education.

Another of the champions of connecting seemingly disparate ideas is Professor John H. Holland of the University of Michigan. Hagstrom said Holland has proposed that innovative thinking requires two key steps: first, an understanding of the basic disciplines that provide us with big ideas. Second, an awareness and use of metaphors.

Regarding metaphors, Holland made the case that metaphors are more than just colorful representations — they can also translate ideas into models. Essentially, a basic metaphor helps us explain one concept by comparing it with a more widely recognized concept. Holland would use a simple model to help us understand another, more complex model.

In the TV series "Connections," James Burke showed how inventors made discoveries by observing something that existed and something they wanted to build. For example, the carburetor in a gasoline motor was invented because of the example of a perfume sprayer. It, in turn, was inspired by an Italian experimenting with the hydraulic power of water a century earlier.

Hagstrom added, “A latticework of mental models is itself a metaphor.” That metaphor is inspired by the structure of a latticework fence panel, with its open spaces and its connective strips. He also compared the concept of latticework to neural networks.

And, the concept is familiar in many disciplines: “Psychologists easily relate latticework to connectionism; educators link it with the brain’s capacity to seek and find patterns.”


“This is the heart of the investing philosophy that is presented in this book: developing the ability to think of finance and investing as one piece of a unified whole, one segment of a body of knowledge. Done right, it produces nothing short of a lollapalooza effect. I believe it is our best hope for long-term investment.”

Disclosure: I do not own shares in any company listed, and do not expect to buy any in the next 72 hours.

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