Anyone who has observed the last 10,000 years of human cultural evolution should be aware that we have become an increasingly specialized society. Specialization has allowed human communities to become much larger and more technologically advanced; if the baker focuses on making bread and the ironsmith focuses on making horseshoes, both benefit from the increased output. This is the basis of trade and of the Ricardian comparative advantage.
Undoubtedly, specialization has been a great boon to human society as a whole, but what about individual humans? In an ever-more specialized world, does it pay for any individual person to be a specialist? What is good for the collective may not always be good for the individual. For some peopple, it might actually make more sense to be a generalist with wide knowledge across multiple domains rather than to have deep knowledge of a single domain.
A latticework of theory
Berkshire Hathaway’s (BRK.A, Financial)(BRK.B, Financial) Charlie Munger (Trades, Portfolio) believes that the key to his own success lies in being a generalist in a world of specialists, from seeing the larger picture that eludes those who are too focused on bread-making and horseshoe-smithing. In a well-known speech from 1994 that he delivered at the University of Southern California, he said:
“The first rule is that you can't really know anything if you just remember isolated facts and try and bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form. You've got to have models in your head. And you've got to array your experience - both vicarious and direct - on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and fail in life. You've got to hang experience on a latticework of models in your head.”
What are the advantages of generalist thinking over specialized thinking for an investor? For one thing, being a generalist can help you easily adapt to changing circumstances. An investor with very deep but narrow knowledge of a single sector can find themself at a loss when that industry enters secular decline. Munger originally trained as a lawyer, so it is perhaps unsurprising that he went on to develop this point of view.
Furthermore, when knowledge and expertise become increasingly isolated, it becomes hard to see how different parts of the world fit together. You can be the most talented battery analyst in the world, but without a knowledge of the consumer automobile segment it is unlikely that you will be able to parlay your specialized knowledge into a coherent idea of where the market for electric vehicles is headed.
But there’s more to being a generalist than just knowing a lot of different facts. What Munger calls a "latticework of theory" is just a set of different approaches that you can deploy. For instance, the way a lawyer approaches a problem is very different to how an engineer will approach it, and still more different to how a historian might approach it. No one approach will always be the right one in all circumstances, but by learning to combine and blend them, you can improve the quality of your decision-making dramatically.
Disclosure: The author owns no stocks mentioned.
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