Book Review: Investing: The Last Liberal Art
Investing: The Last Liberal Art. 2013. Robert Hagstrom.
Consider the following:
- The food-locating strategy used by Native American hunters and Norwegian fishermen is the same as that used by ants.
- Human neurons operate several orders of magnitude more slowly than silicon chips.
- There is evidence that Islamic physicians in Morocco treated mental illness as early as the eighth century.
These are not facts that business schools typically expose their students to. But in Investing: The Last Liberal Art, Robert Hagstrom maintains that the knowledge conveyed in a liberal arts curriculum begets wide understanding that improves investment skills. Hagstrom’s success in the profession — he is senior vice president and portfolio manager at Legg Mason Capital Management — makes his opinion on the subject worth considering.
Lest investors miss the relevance of studying the disciplines for which Hagstrom provides overviews (physics, biology, sociology, psychology, literature, and mathematics), he connects a few dots. For example, he links Isaac Newton’s equilibrium models to Alfred Marshall’s equilibrium-based economics and, via the work of Paul Samuelson, to the efficient market hypothesis. The philosopher Ludwig Wittgenstein probably never dreamed that his discussion of the numerous ways to perceive a triangle would be applied to differentiating Amazon.com from brick-and-mortar retailers Barnes & Noble and Walmart. In the same utilitarian vein, Hagstrom goes so far as to say, “The ‘cash-value’ of studying philosophy is very real.”
Some readers of Investing: The Last Liberal Art may not be persuaded to take a deeper interest in nonfinancial studies, as Hagstrom advocates. They will, however, encounter a body of knowledge that CFA charterholders ought to possess. Just one example is the story of Sir Francis Galton and the ox, an oft-told but foundational tale about the wisdom of crowds.
Hagstrom also covers more advanced concepts derived from contemporary research. Particularly interesting is Terrance Odean and Brad Barber’s finding, based on the discount brokerage accounts of more than 60,000 households, that the most active traders had the poorest results and the least active traders achieved the highest returns. From his own research, Hagstrom reports that risk tolerance is unaffected by level of wealth. Rather, he finds that it is a function of age, gender, personal control orientation, and achievement motivation, as well as whether one views success in the stock market as a matter of skill or luck.
This comparatively short book reflects Hagstrom’s personal predilections within the vastness of the liberal arts. For instance, the disciplines he chooses to discuss exclude history, despite the fact that Benjamin Franklin, whom he lauds as the father of liberal arts education, stated that reading history teaches almost every kind of useful knowledge. (Hagstrom contends that Franklin had a very broad definition of history, encompassing several other disciplines.) But economist Henry Kaufman, who has endowed chairs in business history at several institutions of higher learning, sees in history just the sort of practical value that Hagstrom extols:
Hagstrom also commends detective novels to his readers, maintaining that they help the investor master the vital skill of solving puzzles. Devoting fully one-eighth of a chapter on literature to this genre is controversial in light of critic Edmund Wilson’s description of whodunits as “a field which is mostly on a sub-literary level.” Hagstrom nevertheless insists, “There is much to be learned from popular fiction.”
Investing: The Last Liberal Art opens the reader’s mind to ideas that may well lead to valuable insights about the financial markets. As the author points out, no less an authority than Charlie Munger of Berkshire Hathaway places great store by the study of liberal arts as a means of achieving investment excellence.
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Thanks for this excellent review. It gives a good sense of what appears to be an interesting book. It’s certainly timely to have the liberal arts better understood and defended against various contemporary tendencies that devalue it.