Learning to Think Like Charlie: Literature and Critical Thinking

'It's a huge mistake not to absorb elementary worldly wisdom…. Your life will be enriched—not only financially but in a host of other ways—if you do'

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Jul 12, 2019
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When other people tell Charlie Munger (Trades, Portfolio) that the idea of creating their own latticework of mental models seems overwhelming, he responds with two points:

  • First, few people get the right type of education; instead of a broad education that teaches them to think, they get specialized education in academic silos. Too much specialization may help students get a job after graduation, but it doesn’t prepare them to think critically.
  • Second, he says we must educate ourselves; the big ideas already exist, are written down and ready for us to discover them.

That’s how Robert Hagstrom lead off chapter seven, Literature, in his book, “Investing: The Last Liberal Art.” The book was inspired by Munger and its goal is to help each of us become a better investor by developing our own latticework of big ideas. It will help us see investing in a broader perspective, to help us avoid errors and make the right decisions.

The goal for this chapter is to help us analyze books, documents or other written missives, and then critically evaluate them. As the author said, the process is like analyzing a potential investment. He pointed to the way Munger and Warren Buffett (Trades, Portfolio) analyze stocks; it’s not just data gathering, but also thinking and analysis. Although it wasn’t one of their stocks, the example of Amazon.com Inc. (AMZN, Financial) in a previous chapter helps us understand what they understand before they buy.

While Munger has a low opinion of most universities, Hagstrom offered the example of one that might be acceptable to him: St. John’s College in Annapolis, Maryland. Uniquely, its liberal arts curriculum is devoted to what it calls the Great Books program. Hagstrom talked to a number of its graduates who work as investment managers.

One of those managers was Lee Munson of Portfolio LLC, who told Hagstrom, ““My education at St. John’s gave me a sense of perspective, a broader view of the world. It was very clear that to be successful I would have to consider all the possibilities not just the tunnel vision you get from standard finance classes.”

The author next turned to the issue of communication, “one way through the psychological quicksand threatening our ability to make good investment decisions is communication—the transmittal of accurate and complete information, free of noise.”

To get above the noise, we need a cognitive mechanism that allows us to prioritize and authenticate the ongoing blasts of information. A powerful mechanism we all possess, or can possess, is being able to think critically.

To learn more about reading analytically and thinking critically, he introduced Mortimer J. Adler, who wrote the classic and best-selling title, “How to Read a Book.” It’s a must-read for every student at St. John’s College.

Adler argued the main purpose of reading a book is to increase understanding, which is distinct from the purpose of reading for information. Hagstrom added, “Clearly, information is a prerequisite for enlightenment, but the trick, says Adler, is not to stop at just being informed.”

Readers should address four essential questions, according to Adler:

  1. What is the book about as a whole?
  2. What is being said in detail?
  3. Is the book true, in whole or part?
  4. What of it?

Hagstrom summarized, “Looking back over Adler’s complete program, we take note of the connections he has carefully built. Each level of reading is connected to the next, and the process is cumulative. We cannot hope to reach the highest level of reading until we master the earlier ones.”

A personal example from the author may help clarify the process. When researching the philosophy chapter of this book, he was going into a field about which he had limited knowledge. So he first educated himself about the basic concepts, then selected those that were most relevant to investors. In the process, he discovered William James and the concept of “pragmatism,” which seemed quite relevant.

He then read two biographies of James and skimmed his written work, including personal letters. All of that prepared him to read James’ major work on the topic, “Pragmatism: A New Name for Some Old Ways of Thinking.” Once complete, he spent time sitting quietly and thinking about the material in the context of his personal life experiences. Finally, Hagstrom wrote, “As everything I had learned gradually sorted itself out in my mind, I concluded that pragmatism is an area of philosophy that seems to have important lessons for investors.”

What about reading analyst reports? That’s one of the practical applications that come out of this mental model. Hagstrom suggested reading with a process and purpose in mind. First, check the facts and for simple arithmetic mistakes; analysts make them too. Ask yourself how you might verify facts in the report; for example, looking at independent sources or going to the original source, a company’s financial documents.

Next, you consciously work out how much of the information in the analyst report is fact and how much is opinion. What’s behind that opinion? If there is some form of self-interest, then you will be able to select what is worth taking in and what is not. In using such an approach to the process, you are thinking critically.

Hagstrom also recommended reading fiction as a way of learning to think critically. Benjamin Doty, the senior investment advisor at Koss Olinger in Gainesville, Florida, combined business and English in his graduate education. In the wake of the 2008 financial crisis, he began teaching a class at the University of Minnesota titled, “The American Novel, Business and Financial Crisis.”

The class began with Robert Shiller’s analysis of the crisis (“The Subprime Solution”), then moved on to several fiction classics: “Macbeth,” “Richard III,” “The Great Gatsby,” “Oil!” “The Heart of Darkness,” “The Rise of Silas Lapham,” “American Pastoral” and Doty’s personal favorite,” The Financier” by Theodore Dreiser (a story about extreme greed and extreme ambition).

While the investment community may not give much attention to fiction, some professions do. The military, for instance, with each branch of the American services having its own reading lists. Again, the objective is not to teach facts or opinions, but to develop critical thinking faculties.

Finally, Hagstrom recommended the branch of literature known as detective fiction, and the three Great Detectives (as selected by the owner of a mysteries book shop in New York): Auguste Dupin, Sherlock Homes and Father Brown. The author wrote, “Great Detectives, in sum, outwit the criminal not because they work harder, not because they are luckier, not because they can run faster, hit harder, or shoot straighter, but because they think better.”

Hagstrom gave the final words in this chapter on Literature to Munger:

“I believe in … mastering the best that other people have figured out [rather than] sitting down and trying to dream it up yourself…. You won’t find it that hard if you go at it Darwin like, step by step with curious persistence. You’ll be amazed at how good you can get…. It’s a huge mistake not to absorb elementary worldly wisdom…. Your life will be enriched—not only financially but in a host of other ways—if you do.”

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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