The Value of Latticework

“A mind without instruction can no more bear fruit than can a field, however fertile, without cultivation.”
— Cicero

So how does one make a lot of money in markets?

There is a phalanx of nihilistic educrats who believe the question should not be asked. You should simply settle into an index fund, they thunder, and accept that you have no chance of doing better than anyone else.

The first step to market riches, then, seems clear: Ignore the fiscal prudes who demand that you lie back and think of England, and conduct some vigorous investigations of your own. Find out the truth for yourself.

The second step is similarly straightforward: Recognize what the typical investor is doing…and then take an alternative path. If you follow the crowd, you will get the same mediocre results as the crowd; thus, to build real wealth, you must go your own way. Simple, no?

But simple does not always mean easy. It is harder to break from the herd than most realize. Many who consider themselves “contrarians,” for example, are nothing of the sort; they just like the sound of the word. Those who always and everywhere oppose the crowd aren’t genuine contrarians, either — they are just reverse conformists. The teenager with blue hair and a nose ring is no more daring or mold breaking than the young Republican in a business suit; individuality is more than just the inverse of the status quo.

Similarly, if an investor’s decisions are always defined by what the crowd does — or doesn’t do — then groupthink still dominates. As noted author Michael Lewis told Fortune, “People think they are more unusual than they are. Whenever you see someone say, ‘I like to think outside the box,’ you know that they are so deeply in the box that they’ll never get out.”

The answer, then, is not reacting to the crowd, but thinking differently from the crowd. It is not just a matter of believing unconventional things; it is a matter of seeing the world through unconventional eyes. The true independent is one who sometimes goes with the flow, and sometimes goes against; who trusts in his own counsel; who separates the wheat from the chaff; who first and last follows his own light.

Following one’s own light can be tough. It demands a willingness to learn, to take responsibility, to handle the pain of mistakes. There is no status quo to fall back on, no shelter in rationalization. In contrast, there is tempting comfort in running with the herd…even when that herd is barreling blindly toward the edge of a cliff. But if the goal is to amass real wealth, the herd is simply not an option.

Clear vision is a must; it’s no good trying to discern the path with a muddled mind’s eye. This is what latticework (as defined in the previous essay) is all about: developing a sharper understanding of reality, which in turn leads to insight the crowd does not possess.

To put it another way, latticework is about cultivating subtleties — something the average man in the street has little time for. Lee Humphries expounds: 

“Within their areas of competence, experts have many more categories of awareness than novices. The perception of subtleties is what Michael Jordan, Warren Buffett, and Yo-Yo Ma have in common. Not only have experts gathered many ‘elemental’ facts about their field; they have linked them to one another to produce a vast array of ‘relational’ facts… It is these latent relationships that the mind processes in its search for insight. The processing is autonomous and subliminal, but you can encourage it. Each day use your powers of observation and reasoning to learn some new thing about your field. Reflect on its connection to what you already know. Reflection compounds knowledge.”

Developing a latticework of one’s own is a bit like building a snowflake. Each new element — be it a surprising observation, a unique point of reference, or a morsel of food for thought — can be compared to a simple geometric shape. As the shapes overlap and inlay one another, an intricate structure begins to crystallize. The final product conveys nuance and texture in a way that sound bites, or lone geometric shapes, never could. 

At the end of the day, latticework is more than just a methodology. It is a commitment to absorbing and appreciating the subtleties of this world, for both practical and aesthetic benefit. It is the difference between TV Guide and Shakespeare…ground chuck and filet mignon…”Duke of Earl” and Beethoven’s Ninth. It is recognizing that the joy of knowledge and the pragmatic application of knowledge can serve the same purpose: enriching one’s life on multiple levels.

As a bonus, latticework might even rejuvenate the brain. Neuroscientists used to believe that adults have a fixed number of brain cells, with any loss being permanent; they have since discovered otherwise. The Economist reports:

“Thousands of new brain cells or neurons grow each day in the brains of rats and, presumably, in the brains of people, too. But only those animals that actively engage in learning get to keep the new cells. In their mentally lazy companions, new cells die after a couple of weeks.”

So there you have it. Latticework can be good for your portfolio and good for your noggin too.

And that about wraps up my stump speech. Next will be the sequel to “Punctuated Bubbleibrium” — what I had originally planned this piece to be, before the opening aside took on a life of its own.

We have a delicious roster of topics ahead; 2007 is going to be a lot of fun. Fun with a purpose, that is: better understanding markets from a latticework perspective.

Till next time,

The Daily Reckoning