Investing: The Last Liberal Art
Click here to buy the book.🚀 The Book in 3 Sentences
Investing: The Last Liberal Art covers essential investing concepts drawn from a variety of disciplines beyond finance and economics.
Expanding on Charlie Munger’s well-known "latticework of mental models," the book argues that sound investment decisions cannot be made based solely on financial theories.
The book advocates for a multidisciplinary approach to investing, introducing key concepts from fields such as physics, biology, sociology, psychology, and literature.
🧠 Key Takeaways
When insights from different fields—like psychology, physics, or biology—all lead to the same conclusion, that decision becomes more reliable. By adopting a multidisciplinary approach, you reduce the risk of error because you're not relying on a single perspective.
The stock market, as a complex adaptive system, is constantly in flux. This constant adaptation means that perfect equilibrium, which in the case of the stock market is where share prices across the board are in exact alignment with intrinsic values, is never completely reached. It can certainly happen on an individual company level but is exponentially more difficult (or impossible) to achieve across the entire market.
The less you keep tabs on what share prices are doing, the less volatile your investments will seem because the daily fluctuations aren’t even on your radar.
It’s easy to forget about the potential risks of investing when the recent past has been so good to you. However, when the market turns, the psychological pendulum swings. Investors who once felt unstoppable become fearful, driven by loss aversion. This is where the pain of losing money outweighs the pleasure of making money. As a result, many investors will panic and sell their stocks out of fear.
If you look at the most successful investors, you’ll notice that their interests stretch far beyond finance and accounting. They aren’t just focused on financial statements or market trends—they draw on the big ideas from other subjects like psychology, history, economics, sociology, and even areas like biology and physics.
By investing in individual, high-quality companies, investors can take advantage of opportunities that a sideways market wouldn’t otherwise allow.
The S&P 500 is basically “survival of the fittest” being put into practice: underperforming and outdated companies get replaced by stronger, more competitive ones. Over time, this systemized, “Darwinian” approach to portfolio management allows the S&P 500 to keep up with the times—economic changes, new industries, and new technologies—something a lot of individual investors struggle to do.
✍️ Memorable Quotes
“Investment decisions are more likely to be correct when ideas from other disciplines lead to the same conclusion.”
This is why Charlie Munger believed that it’s crucial to build a "latticework of mental models."
When insights from different fields—like psychology, physics, or biology—all lead to the same conclusion, that decision becomes more reliable. By adopting this multidisciplinary approach, you reduce the risk of error because you're not relying on a single perspective.
Instead, you're building a well-rounded case supported by fundamental principles from a wide range of disciplines.
“If a complex adaptive system is, by definition, continuously adapting, it is impossible for any such system, including the stock market, ever to reach a state of perfect equilibrium.”
The stock market, as a complex adaptive system, is constantly in flux.
New information is constantly being introduced, and those who participate in the stock market—investors, companies, and analysts—are always reacting and adapting to this information in their own unique ways…sometimes rational, sometimes not.
This constant adaptation means that perfect equilibrium, which in the case of the stock market is where share prices across the board are in exact alignment with intrinsic values, is never completely reached. It can certainly happen on an individual company level but is exponentially more difficult (or impossible) to achieve across the entire market.
“But no matter its pace, we must remember there is always change. And this is why we must leave Newton’s world and embrace Darwin’s. In Newton’s world, there is no change. You can run his physics experiments thousands of times for thousands of years and always get the same result. But not so with Darwin and not so with economics. Companies, industries, and economies may mark time with no discernible changes, but inevitably they do change. Whether gradually or suddenly, the familiar paradigm crumbles.”
In Newton's world, the laws of physics are consistent. If you drop an object, it will always fall in the same way, and the result will be predictable. The same actions yield the same results every time.
However, investing and the stock market don’t work like that. These have more in common with Darwin’s theory of evolution, where change is inevitable and survival is based on adaptation.
In Darwin’s world, species must evolve over time to survive as their environments shift. In the same way, companies, industries, and entire economies have to evolve otherwise they will decline, and potentially even disappear.
For investors, this means that no matter how well a company or industry is performing today, things will inevitably change. You need to stay vigilant and avoid assuming that what worked in the past will always work in the future.
Companies that thrive today might struggle tomorrow if they’re unable to adapt and evolve. We’re seeing this play out right now with a handful of different companies — names like Altria Group (MO), Walgreens (WBA), and Intel (INTC) come to mind.
Large, multibillion-dollar companies like these are hard to kill off, but whether they will successfully evolve, regain competitiveness, and ensure long-term viability remains to be seen. Only time will tell.
“When stock prices climb, the ratio of trend followers to fundamentalists begins to grow. This makes sense. As prices increase, a larger number of fundamentalists decide to sell and leave the market and are replaced by a growing number of trend followers who are attracted to rising prices. When the relative number of fundamentalists is small, stock market bubbles occur, explained Bak, because prices have moved far above the fair price a fundamentalist would pay.”
In 1987, Per Bak, a Danish physicist, came up with the idea of "self-organized criticality," which became one of the most important discoveries in statistical physics.
His theory explains how complex systems, like the stock market, behave. The main idea is that small events can, over time, cause massive changes within these systems.
To paint a picture of this concept, imagine you start dropping single grains of sand onto a large, flat table. At first, the sand spreads out evenly across the surface. But as more grains are added, they start to pile up.
As the pile gets steeper, it becomes more unstable. Eventually, it reaches a point where just one more grain of sand causes an avalanche, and the whole pile comes crashing down.
The stock market, as a complex system, works in a similar way.
Rising share prices are like grains of sand being added to the pile. With each new grain added, the instability of the market increases, and the makeup of the market starts to change.
At first, Rational Agents—those who make decisions based on a company’s fundamentals—start selling their stocks as prices get too far away from intrinsic values. This leaves room for Noise Traders, who are more driven by market momentum (and FOMO) than fundamentals.
This shift causes share prices to be propelled more by hype than by how well a company is actually doing, which leads to a bubble. This doesn’t just happen at the market level, either. It can occur at the individual stock level as well.
Each new Noise Trader entering the market pushes prices even higher (steepening the pile), but it’s impossible to know which event (bad earnings, breaking news, etc.) will be the straw that breaks the camel’s back, triggering the eventual, large-scale come down (the avalanche).
When the party is finally over, and when share prices come back down, the makeup of the market will shift back to a higher concentration of Rational Agents, and the cycle will start all over again.
“The longer the investor holds an asset, the more attractive the asset becomes but only if the investment is not evaluated frequently. If you don’t check your portfolio every day, you will be spared the angst of watching daily price gyrations; the longer you hold off, the less you will be confronted with volatility and therefore the more attractive your choices seem. Put differently, the two factors that contribute to an investor’s unwillingness to bear the risks of holding stocks are loss aversion and a frequent evaluation period.”
By checking your portfolio less often, you shield yourself from the day-to-day noise of the market, which can otherwise make investing feel like a ride on Thunder Mountain. Put differently, the less you keep tabs on what share prices are doing, the less volatile your investments will seem because the daily fluctuations aren’t even on your radar.
This brings us to two of the most critical factors that cause investors to make poor, emotional decisions in their portfolios: loss aversion and frequent evaluation.
Loss aversion refers to the idea that people feel the pain of losing money much more than they feel the joy of making money (studies have shown there is a 2:1 ratio). Frequent evaluations only amplify this emotional response.
The more often you check your portfolio, the more opportunities you have to torture yourself when share prices dip. This frequent exposure to Mr. Market’s mood swings can make you more risk-averse, and can potentially discourage you from holding onto stocks for the long term.
On the other hand, checking your portfolio less frequently helps you see your investments in a clearer light, and helps you stay focused on long-term fundamentals rather than short-term fluctuations. It's a practice of patience and discipline—and helps you adhere to the timeless principle that time in the market, not timing the market, is what ultimately builds lasting wealth.
“Pruitt believes investors react to the stock market the way Walter Mitty reacted to life. When the market is doing well, they become brave in their own eyes and eagerly accept more risk. But when the market goes down, they rush for the door. So when you ask an investor directly to explain their risk tolerance, the answer comes from either a fearless bomber pilot (in a bull market) or a henpecked husband (in a bear market).”
During a bull market, investors tend to take on the role of the “fearless bomber pilot.” This overconfidence, which is fueled by recency bias, leads to more risk-taking and speculation.
It’s easy to forget about the potential risks of investing when the recent past has been so good to you. However, when the market turns, the psychological pendulum swings.
Investors who once felt unstoppable become fearful, driven by loss aversion. This is where the pain of losing money outweighs the pleasure of making money. As a result, many investors will panic and sell their stocks out of fear.
This shift reveals just how fragile risk tolerance can be. It’s easy to call yourself a long-term investor when the market is working in your favor, but it’s much harder to maintain that attitude when the market is putting you through the wringer.
The big challenge is learning to spot these emotional extremes and staying level-headed instead of letting your inner Walter Mitty—whether he's the brave pilot or the worried husband—control your investing decisions.
“The only way to do better than someone else, or more importantly, to outperform the stock market, is to have a way of interpreting the data that is different from other people’s interpretations. To that I would add the need to have sources of information and experiences that are different. In studying the great minds in investing, the one trait that stands out is the broad reach of their interests. Once your field of vision is widened, you are able to understand more fully what you observe, and then you use those insights for greater investment success.”
If you look at the most successful investors, you’ll notice that their interests stretch far beyond finance and accounting. They aren’t just focused on financial statements or market trends—they draw on the big ideas from other subjects like psychology, history, economics, sociology, and even areas like biology and physics.
This ties back to Charlie Munger’s idea of building a "latticework of mental models.” By following your curiosity and studying a wide range of topics, you can make connections and see things that others might miss.
That’s why I’m such a big advocate for using a note-taking tool like The Investors Almanac. There’s so much to learn out there, and writing about your findings helps it sink in more deeply.
While taking the time to write and reflect on what you’ve learned may slow down the process, it makes your learning more meaningful and long-lasting. In essence, effective writing is effective thinking.
“When I first heard that argument—that we might be facing a sideways market similar to the late 1970s and it was best to avoid stocks—I was puzzled. Was it really true that sideways markets are unprofitable for long-term investors? Warren Buffett, for one, had generated excellent returns during the period; so did his friend and Columbia University classmate Bill Ruane. From 1975 through 1982, Buffett generated a cumulative total return of 676 percent at Berkshire Hathaway; Ruane and his Sequoia Fund partner Rick Cunniff posted a 415 percent cumulative return. How did they manage these outstanding returns in a market that went nowhere?”
Investing in individual companies, which are a subset of the market, allows investors to target businesses they believe have the best chance to deliver strong returns. Even during times when the market trades sideways, the individual companies within can still grow, gain market share, and improve profits, resulting in performance that deviates from the market.
This is exactly what Buffett and Ruane did during the sideways market of the late '70s. By zeroing in on standout companies with strong fundamentals, they achieved remarkable returns of 676% and 415%, while the market as a whole remained flat.
For long-term investors, this distinction is important: a flat market doesn’t have to mean flat returns if you focus on high-quality businesses. Buffett and Ruane’s success is proof of this, exemplifying the rewards for those willing to look beyond the market average.
By investing in individual, high-quality companies, investors can take advantage of opportunities that a sideways market wouldn’t otherwise allow.
“Most people think the S&P 500 Index is a passively managed basket of stocks that rarely changes. But that is untrue. Each year the selection committee at Standard & Poor’s subtracts companies and adds new ones; about 15 percent of the index, roughly 75 companies, is exchanged. Some companies exit the index because they have been taken over by another company. Others are removed because their declining economic prospects mean they no longer qualify for the largest 500 companies. The companies that are added are typically healthy and vibrant in industries that are having a positive impact on the economy. As such, the S&P 500 Index evolves in a Darwinian manner, populating itself with stronger and stronger companies -survival of the fittest.”
The fact that the S&P 500 constantly fine-tunes itself gives it a serious edge—and it’s a big reason why “the market” is so tough to beat.
The S&P 500 is basically “survival of the fittest” being put into practice: underperforming and outdated companies get replaced by stronger, more competitive ones. Over time, this systemized, “Darwinian” approach to portfolio management allows the S&P 500 to keep up with the times—economic changes, new industries, and new technologies—something a lot of individual investors struggle to do.