In 1994, Charlie Munger famously talked about a latticework of mental models. He then went on to explain what he meant by citing examples from mathematics, psychology, biology, and microeconomics. Since that day, investment writers of all stripes picked up on the idea and have produced tonnes of material documenting interesting mental models. But is that quite enough?
I’d argue that the notion of mental models as only these very broad ideas from different fields is rather limiting. At least to the extent that one thinks these are enough for becoming a good investor. I believe that there is a hierarchy of mental models themselves. At the top are these broad ideas – what I’ll call the core mental models. They remain largely unchanging over time. As Munger says, maybe 80 or 90 of them are probably enough to take you a long way. However, there is a richer and more dynamic set of mental models that you need as well.
A Deeper Hierarchy of Mental Models
Consider what Warren Buffett is doing when he’s reading 500 pages a day? Obviously, he’s not just accumulating these core mental models. There are only so many of them out there. He’s also not just reading about one company after another, throwing away everything he just read if he doesn’t like the company. Of course he’s storing away facts. But more importantly, he’s constantly updating his mental models of how the world works, how an industry works, and so forth. That’s the only way reading 500 pages a day has a compounding benefit to an investor.
I’m pretty certain that a big part of Munger and Buffett’s success comes from this deeper understanding they’ve built up over the decades. Between the core mental models and knowing what McDonald’s earned last quarter is an enormous base of structural understanding of the world. That the the food itself usually costs about 30% of revenues in a restaurant business is such a thing. Now this knowledge is not as timeless as the core mental models. But it is crucial knowledge nonetheless. It is only when you know this that you can understand why Domino’s has a massive advantage – because their food costs are only about 20%.
On Why It Matters
In a class on creative writing, renowned writer Margaret Atwood said, “unless you know the original, you don’t understand why that’s an interesting variant”. She was talking about stories that might essentially be a twist on the Cinderella story, and that to enjoy the new story, you have to be familiar with the original one. And so it is with investing. In order to identify new emerging patterns, you have to know the existing patterns. Only then can you tell something has changed or something is different.
There is another important reason. The cross-fertilization of insights from one field to another often leads to massive value addition. For this to happen, however, it is important for one person to have reasonable understanding of more than one field. Unfortunately, the way knowledge is organized today, the effort required to build up an understanding of a new field is unduly high. That is why you’d have to read (and watch) a lot of material to build an understanding of a new subject – sifting nuggets of wisdom from masses of generic babble. If we can organize knowledge so that a smart individual can rapidly build up an understanding of a subject, the rate of cross-fertilization can be materially accelerated.
On Why Wikipedia Is Not Sufficient
In conversations with many of the best learners, I’ve found that they start with Wikipedia. They’ll read the relevant articles on Wikipedia to get a basic foundation. As Tim Urban of Wait But Why told Tim Ferriss in 2018, “Wikipedia is good at telling you where the walls are.” But then you have to dive deeper – read more articles, watch more YouTube videos – to piece together a fuller understanding of the subject.
What we need is a distillation of what one would find during this deep dive. Perhaps a curated collection of the best articles to read and the best videos to watch to get up to speed. When one person has made the effort to figure it all out, why shouldn’t we all leverage that, helping us all grow faster?
Little Indigo Book
For a decade now I have fretted about figuring out an efficient way to acquire this knowledge; to learn about how the world works. In September 2010, I started my first company, Third Wave Solutions, partly as a means to acquire and organize this knowledge. It didn’t take long to realise two things. One, that it is a gargantuan effort that is impossible for a single corporate entity to muster. Second, despite the obvious value of such a resource, I cannot think of a business model that allows it to be done very profitably. So I have finally decided to try something different.
I am happy to announce the launch of Little Indigo Book. L.I.B. is a community-driven not-for-profit effort, à la Wikipedia. The objective is simple – building a resource that documents and explains how the world works – the structure and economics of industries, the broad architecture of laws and regulations, the mechanisms and processes of the global economy, and more. These are complicated fields and hard for any single person to put together, even for a single topic. By employing a wiki-like mechanism, my hope is that we can get multiple people contributing to a single topic, creating and refining content until it becomes a well-polished whole.
The last few years has seen an explosion in the number of people producing rich content on these lines, as videos, podcasts, blog posts, twitter threads, and more. If we can organize and consolidate these brilliant pieces, the value created would be tremendous.