In this case by criteria not in our table of characters, but by other criteria that won't concern us, we establish Latimeria as the outgroup. The population is greatly threatened by extinction today because of human meddling. Last week the New York Times reported that fortunately an whole new population has been discovered. Close outgroups are better than distant ones, if you don't want to be fooled by unrelated characters.
Sister groups are best of all.
As tetrapods evolved from fish their heads become dorsoventrally flattened and their limbs lenghten and acquire digits. The elbow joint is strengthened by addition of the olecranon, a process of the ulna. If we somewhat arbitrarily take Acanthostega and Ichthyostega to be tetrapods, not fish, we can see from the cladogram how the monophyletic groupings are nested hierarchically. Tetrapods are nested within the choanates. The cladogram shows us more than just a classification.