Blog on Value Investing | Safal Niveshak

A Crash Course in Building Your Latticework of Mental Models

Note: This is a review of Robert Hagstrom’s book Latticework – The New Investing [1]. This review first appeared in February 2015 issue of our premium newsletter, Value Investing Almanack.

As a school kid, when I was taught to solve a mathematical problem in a certain way, nobody encouraged me further to attempt the same problem in another way. You know why? Because in our traditional education system we have been trained to think in a limited way.

Charlie Munger, the inimitable vice chairman of Berkshire Hathaway, calls this a-man-with-a-hammer syndrome – To a man with hammer, every problem looks like a nail. So how do you overcome this handicap? The answer lies in developing a sound thinking process and that’s where multidisciplinary learning comes into picture.

Hagstrom’s book, unlike most other investment books, is about Munger’s way of learning – multidisciplinary education. So I won’t advise you to read this book if all you are looking for is magic formulas or readymade rules of sound investing.

This is a powerful book arguing for the importance of a multidisciplinary approach to investing. So if you are one amongst the many investors who have been searching out companies to invest in for a number of years and all you have learned is to plug basic financial information into excel models, this book will give you some new mental tools to assist your analysis.

The term latticework is attributed to Charlie Munger. He views a latticework of mental models [2] as an interlocking structure of ideas that is clearly multidisciplinary in nature. Drawing from this transdisciplinary focus, Hagstrom takes us through some key principles or laws from a number of disciplines such as psychology, physics, biology, and philosophy, among others. He then applies these theories to investing and the stock market.

Hagstrom argues that a successful stock picker must be ready to shift models and look at the markets from different vantage points with the passage of time. Instead of working like an analyst – using just factual information to plug into excel models – investors need to regard the insights or models from other disciplines too.

The task of the investor, Hagstrom explains, is to be well-read and always be on lookout for new perspective of understanding the world around us.

Anyways, before talking about this book, let me share with you a quote from Charlie Munger –

You must know the big ideas in the big disciplines, and use them routinely…if the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience – both vicarious and direct – on this latticework of models.

Latticework of Mental Models: Inversion

Watch this one minute video [1] and when you’re done smiling, think about the problem in a rational way.

At first, the problem seemed that the kid had his head stuck between the iron bars. Although nobody saw how the kid’s head really got trapped in the first place – they just assumed that he somehow managed to slide his head through the narrow bars. Naturally, the intuitive solution was to pull the head in the same way it got stuck – which obviously didn’t seem to work.

But the right solution appeared when people stood the problem on its head (no pun intended) i.e., instead of trying to pull the head they pushed in the body through the trap. They inverted the problem and voila! Problem solved.

That’s called principle of inversion. It’s a common trick used by mathematicians but rarely practiced outside the discipline of mathematics. Carl Jacobi, a German mathematician, said, “Invert, always invert”, expressing his belief that the solution of many hard problems can be clarified by re-expressing them in inverse form.

A Tribute to the World’s First Investing Teacher

As part of my Mastermind Value Investing Course, I ask students to watch the following video created by ‘The Heilbrunn Centre for Graham and Dodd Investing’ of Columbia Business School, where Benjamin Graham taught value investing in the late 1920s.

This video showcases Graham giving a lecture, and also his students’ views on the legacy of this great man whom the world now knows as the ‘Father of Value Investing’.

If you can’t watch the video above, click here.

My exercise for Mastermind students is to watch the complete video and share the “one” big idea from it that inspires them the most from Graham’s teachings or from what his students say of their teacher.

Value Investing Meetups – Bangalore & Mumbai

I had recently announced an initiative called Meetups @ Safal Niveshak, with the aim to bring the tribe members together, face-to-face, to channel the energy for a shared vision – simplifying the art of value investing and making it available to as many small investors as possible, around the country.

This idea is really simple – To meet regularly in small groups across cities in India…to learn and grow together in our investment journey.

My Most Powerful Tool for Thinking and Decision Making

Note: This is an updated version of the article that was part of the May 2015 issue of our premium newsletter, Value Investing Almanack.

When historian Charles Weiner looked over a pile of Richard Feynman’s notebooks, he called them a wonderful ‘record of his day-to-day work’.

“No, no!”, Feynman objected strongly. [1]

“They aren’t a record of my thinking process. They are my thinking process. I actually did the work on the paper.”

“Well,” Weiner said, “The work was done in your head, but the record of it is still here.”

“No, it’s not a record, not really. It’s working. You have to work on paper and this is the paper. Okay?”, Feynman explained.

Richard Feynman, who won the Nobel prize for Physics, understood that writing his equations and ideas on paper was crucial to his thought.

Let me ask you this – how many times it has happened that, after reading a book, you thought you understood the idea but found it difficult to explain it to others? The idea seemed pretty clear in your head but the moment you had to verbalise it you discovered that either you didn’t have a proper grasp on the idea at the first place or you were unable to explain it in a logical coherent way to a third person.

Lecture on Value Investing at Goa Institute of Management

I recently delivered a lecture on Value Investing and Behavioral Finance at Goa Institute of Management.

Click here to download the presentation slides PDF (7 MB file), or read it in the panel below.

I have been extremely fortunate to be able to share my thoughts and experience with budding minds.

Please share this presentation with the young around you. Even if you can enlighten one mind and get him/her on to the right path of managing his money and behaviour sensibly, it would be a great job done.

By the way, on Safal Niveshak’s 5th birthday, I had invited tribe members to subscribe to Value Investing Almanack, promising to give away 100% proceeds to Nirvanavan Foundation to part-fund the purchase of a minibus to ferry kids from a few villages in rural Rajasthan to their schools.

I’m happy to report that that bus has arrived, and they call it the ‘Dream Bus’…and rightly so, as you can see from the smiles all around…

Here’s my heartfelt thanks to the tribe members who helped me in this cause!

That’s another great way to lighten up a few budding lives, isn’t it? 🙂

Latticework of Mental Models: Moral Hazard

Millions of years ago, before the agriculture revolution, when homo sapiens was still living life as a hunter-gatherer, there was this one naturally occurring phenomenon which aroused a sense of wonder, fear and longing at the same time in his mind. The phenomenon occurred on its own in nature and humans found it very useful but it espoused extreme dread too because of its destructive capabilities.

I think you can guess what I am talking about. That natural phenomenon was fire!

About 100,000 years ago, humans finally learned how to create fire and it accelerated the development of human race. Fast forward to this day. Even after having developed technologies to create, douse and control all sorts of fires, wildfire is one thing where humans have found themselves helpless in front of mother nature.

Wildfire kills 339,000 people every year[1], even today! So why we haven’t been able to do much about wildfire carnages? Agreed, we can’t prevent a tsunami or an earthquake but we can surely prevent and contain a fire. Right?

The surprising truth is that with the help of modern technology the number of wildfires have come down drastically over the last hundred years but the total destruction caused by these fires hasn’t gone down proportionately. It even seems to have increased.

Life 2.0: Breathe In, Breathe Out

Some of the greatest things, the greatest discoveries, have come about by serendipity. Let’s explore its magic here.

Few years back while working with a colleague in his cubicle, I noticed that a reminder would pop up on his screen every 10 minutes with just one word written on it – Breathe. I tried ignoring it initially but after some time I had to ask him, “Dude! Do you really need to remind yourself to breathe?”

“It’s not just about breathing!” he replied with a smile.

“Care to throw some light?” I asked him.

He started explaining, “Of course, I don’t need to remind myself to breathe. Nobody needs to. Everyone knows how to breathe. It is something that occurs to us automatically, spontaneously, and naturally. We are breathing even when we are not aware of it.

“However, I do need to remind myself to breathe properly,” he continued, “You might find it foolish that there is a proper and improper way of breathing. I mean how hard is it? Just breathe in, and breathe out. Right?”

“Yeah, right.” I said.

“Wrong! The truth is that most people don’t realize the power of breath. If done properly it can increase your energy and productivity manifolds,” he said.

I was intrigued with his statement, but before he could tell me more about it he had to leave for a meeting. But I couldn’t wait so I went ahead and started reading and researching on my own on this and what I found was remarkably profound and life changing.

Control Switch for Physiology

I guess you would agree with me that our behavior influences our performance and the results we produce.

Now what defines our behaviour? Our thoughts. Isn’t it?

And thoughts are governed by feelings which in turn are controlled by our emotions. Our emotions take shape based on our physiology – health, general state of well-being, breathing, heart-rate, etc. Now this isn’t something new and you probably know about this already.

Most of our physiology is largely seen as an effect rather than cause. A common belief is that our physiology can’t be controlled or changed immediately. But there is one thing which is in our control that can control a lot of other involuntary activities like heart rate, body temperature, etc. And that control button is how you breathe.

Let me share some interesting trivia about where else breathing is a well-known tool for performance.

Tennis players use a certain pattern of bouncing the ball or a breathing pattern to put them in an optimum state of mind also referred as ‘the zone’. Right breathing is an effective tool for not just every sportsperson but for many actors and stage artists also.

Ask any accomplished actor and he will tell you that dialogue delivery is all about breathing in a certain way. I remember Aamir Khan talking about how he can induce an emotion in his body just by changing his breathing patterns. That’s what separates him from others – he doesn’t just act but actually lives the character.
[Read more…] about Life 2.0: Breathe In, Breathe Out

Stock Market Crash: Your 10 Big Questions…Answered

Crash. Collapse. Carnage. Calamity. Meltdown. Panic.

Well, these are some attention-grabbing keywords you must have heard and read in business media over the past two days. Even I used the word crash in the headline of this post to grab your attention. And it worked, didn’t it?

Well, that’s the way the psychology of fear works, and especially when it come to the stock market. The media adds so much fuel to fire, that short-term losses end up overshadowing our awareness about the possibility of long-term gains.

Amidst this, here are answers to the ten key questions on the current crash I have received from tribe members since yesterday – all asking what to do as others around them lose their heads.

You won’t find perfect answers below, but this is just my attempt to help you get over your fears, which may otherwise lead you to act in haste, which can cause some damage to your process of long term wealth creation.

Let’s start right here.

Cheat Sheet for Investing Your Money (Free E-Book)

“Go to college, study hard, get good marks, land up in a decent job and you’re settled.”

The world around us has changed but this advice hasn’t.

The concept of getting good grades and finding a good job is an idea whose time has passed. It is not a bad advice but we need new ideas and different kind of education.

In the long term, the old advice is not just insufficient but downright risky.

We have been taught, and taught pretty well, how to work hard to earn money. But what about making our money work hard for ourselves? Every rupee that you earn has in it the seed to multiply into thousands. You just have to know where to sow that seed and how to water it.

The only way to learn that is to start on the path of self-education. A wise man said – “School education will earn you a living but self-education will make you a fortune.”

It does not matter where you stand today. Whether you are a student, in a job, a professional or even unemployed, you have the ability to educate yourself and take control of your personal finances.

If you are reading this, my guess is that you have already spent some time looking for the answers to your financial and investment queries. Therefore, you are a seeker who has already taken the first few steps.