Synopsis:
Hagstrom’s succinct wisdom drawn from various disciplines ranging from psychology, philosophy, physics, biology, sociology, and literature is astonishing. It’s also foundational for a modern investor. The marketplace is displayed in prices, which are numeric, but the prices are generated, and affected, by people. People’s knowledge and behavior change over time, making the marketplace a complex system. Hagstrom brilliantly describes the importance of critical thinking and how to profit from a broad education.
The One Takeaway:
Description and explanation of human behavior in the marketplace is too limited when seen through finance theories alone. If that lens was adequate on its own to inform investors of which way the market might move, then no investor would ever have a profitable advantage. However, when an investor has a mental model that has durable foundation and flexibility built in, an investor has a better chance of spotting opportunities to take advantage of.
Best For:
Anyone feeling that the education they’ve acquired thus far is somehow inadequate to reflect the world and its effects on their lives and investments. This book is not so much a missing link as connective glue.
This book is the intellectual foundation for what we practice here every week. Whether we're separating gambling from investing or diagnosing a business using Marcus Lemonis’s 3 Ps (People, Process, and Product), we're building a 'latticework of mental models' Hagstrom champions. This book arms you with the why behind our how.
What I Got Out of the Book:
When I peruse the shelves, I have a checklist and a test to see if a book is worth my money and time.
The cover has to grab my attention (there are roughly 30,000 titles in a large bookstore competing).
If I’m familiar with the author, that’s a plus.
If I’m not familiar with an author, I’ll read the blurb and testimonials.
If the topic is something I’m interested in, I’ll scan the table of contents to see what the author proposes to teach and if the sequence is logical.
Then I open to page 1 and begin reading. If the writing holds my attention past page 1, that’s a green light to take the next step.
Then I’ll open to a random page and read. If I’m curious how the author connected the dots from page 1 to that page and I’m still learning and engrossed, that’s when I check the price against what I think the knowledge is worth.
If I can afford it and the price is good value, I’ll buy it.
All that information to tell you this. My friend in California recommended this book, showing me nothing but the cover. I ordered it immediately. Once I realized Hagstrom was the same author who wrote The Warren Buffett Way, I knew the knowledge would be worth it.
It was my January read, and every chapter was an intellectual delight. The information was presented clearly - and that’s no small feat to present an overview of so many disciplines and relate them to investing in just over 200 pages.
One fine point that Hagstrom makes is that there is a lot of noise that drowns out relevant signals. Investors need to receive clear signals so they know whether to buy, sell, or hold. Since the noise probably won’t die down, what we need desperately is a process to reduce noise so the signal can be detected. Otherwise our investment decisions will rarely, if ever, be rational.
There are quips and quirky experiments related in the book, particularly the El Farol experiment in the chapter on Biology. Imagine a patron of a Mexican restaurant who enjoys their Thursday night karaoke, but doesn’t want to be crowded out. He constructs a model to closely determine which Thursdays are best to attend so it’s lively but not too packed.
It’s all in the book. Worthwhile reading, in my opinion.
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