A Multidisciplinary Approach To Investing by Joao Alves, Ahead Of The Crowd
It was after watching Masters of Money – Keynes, a BBC documentary about John Maynard Keynes, that I revisited my meditations on the idea of a multidisciplinary approach to investing.
Through this documentary, I learned about Keynes’ affiliation with the Bloomsbury Set while studying at the University of Cambridge. The Bloomsbury Set was an unconventional university society whose members were influential artists, writers, philosophers and all around intellectuals.
David Einhorn's Greenlight Capital returned -2.9% in the second quarter of 2021 compared to 8.5% for the S&P 500. According to a copy of the fund's letter, which ValueWalk has reviewed, longs contributed 5.2% in the quarter while short positions detracted 4.6%. Q2 2021 hedge fund letters, conferences and more Macro positions detracted 3.3% from Read More
Keynes is known to be one of the most influential thinkers that have ever lived, notable for suggesting solutions to (1) the dangers that the Great Depression posed to capitalism, (2) to the funding problems inherent in battling the Nazis during World War II, and (3) building a resilient post-world war economic order of growth and prosperity.
These points are already known, but what fascinates me the most is the mystique behind what made this man, not only one of the greatest thinkers of all time, but also one of the greatest investors as well.
As a member of that group, Keynes deliberately decided to alienate himself from the brainy, academically centered atmosphere at Cambridge, and spend more time with artists, philosophers and deep thinkers. Perhaps, it was this juxtaposition of backgrounds, values and skills – this exposure to an eclectic range of knowledge and different ways of looking at the world – that turned Keynes into a worldly philosopher in the field of economics, whose ideas echo to this day.
Multidisciplinary Approach To Investing - Embracing The Paradox
The concept of ‘multidiscipline’ is a result of mental flexibility. Some say that flexibility is the enemy of ‘focus’, and thus of excellence. However, I don’t believe so.
We all hear advice that advertises the need for focus and persistence in order to achieve success. But like all pieces of advice, no matter how true, it lacks something. It lacks context.
Indeed, focus and persistence are necessary in so many dimensions, but perhaps not enough. More importantly, focus and flexibility of mind are not mutually exclusive concepts.
In my opinion, ‘focus’ is important because it serves as an antidote to the biggest problem that I see around, not only in finance, but also in many other fields: the problem of not knowing what to look for. Focus provides direction and purpose, which paves the way to the questions that should be asked in order to get the necessary answers that result in success.
The importance of mental flexibility is derived from the huge problem that the market is an organic environment of complexity and ever-changing “facts”.
Flexibility helps in adapting to and anticipating change, just as George Soros describes his approach: “I don’t play the game by a particular set of rules; I look for changes in the rules of the game.”
Together, ‘focus’ and ‘flexibility of mind’ can be antidotes to the fast-paced, data-driven dynamics of the market – a tool for clarity, for seeing what others don’t.
Learning to manage the balance between both is a powerful ability. Something I don’t yet know how to do. However, this post seems like a good first step in this “journey of a thousand miles.”
The first time I came across this idea of a multidisciplinary approach to investing was reading Charlie Munger’s speech entitled A Lesson on Elementary Worldly Wisdom. Charlie Munger, one half of the brains at Berkshire Hathaway, the other being Warren Buffett, is an advocate of the concept ‘a latticework of mental models’, which is another way of communicating this idea of a ‘multidisciplinary approach’ to problem solving. Nevertheless, Munger communicates his ideas with so much depth and detail, and in such clarity that makes the reading of this text a necessity.
When a man of Munger’s stature speaks – with his depth of thought, clear articulation and consistent track record of investment success – we ought to listen.
Munger’s idea of developing a “latticework”, a range of different mental models, is exactly what Keynes did at his time as a member of the Bloomsbury Set, seeking perhaps to solve the problem that Munger tackles in his speech, which is conveyed in the following quote:
“To the man with only a hammer, every problem looks like a nail.”
By exploring different ways of thinking, a sort of analytical ‘committee’ is generated within, one which deals with a problem in many different ways.
For example, when dealing with an issue of valuation or a question about the economy, the specific problem can be examined through many angles; not only through ratio analysis of companies’ financial statements or analysis of fundamental and technical factors linked to the economy like supply and demand (among many others), but also through the application of other thought processes, like the following:
- Philosophy – dialoguing with the problem in form of questions in order to first pin point the underlying fundamental truths, then search for answers from that starting point
- Psychology – investigating the role of perception and herd behavior in the price dynamics of a stock as well as in the value of its underlying business.
- Mathematics – studying the problem through the mechanics of probability, in terms of the inferences and forecasting of variables
- History – studying a spectrum of past occurrences, in hope of providing a more accurate probabilistic anticipation of the future
I dare to speculate that the main skills Keynes acquired as a member of the Bloomsbury Set, were that of selective observation and the art of questioning; learning to dig deeper into the problem and to think the unthinkable, just as artist and writers and philosophers do when faced with the challenge of trying to understand the depths of human nature. These are skills of supreme importance and arguably, evidence for many of Keynes’ accomplishments, some of them being the ability to point out fallacies and limitations in the study of economics and its application to political fronts and the markets, as well as the ability to challenge the need for complete reliance on mathematics for optimal decision-making in investing.
When people talk of finance, the relevant degrees that come to mind seem to be in economics and business. I used to believe this. I don’t anymore. People who still do are missing a lot. It doesn’t matter which inputs are used to reach a correct output, so long as those inputs do have value and do in fact reach the correct output. (Indeed, in finance, there’s no “correct” output, but there seems to be a range for correct outputs. For the sake of the argument, lets take this idea of “correct output” as this range, which allows for alpha generation and consequently outperformance.)
The point therefore, is in differentiating oneself from the practices employed by the crowd, and dealing with the complexity of a financial problem in a much deeper level. And that is why I believe in a multi-disciplinary approach to finance.