Invert, Always Invert

To find solutions to problems, it might be a better idea to invert the problem. As Charlie Munger found out, success in investing is more about avoiding losers, than finding winners. Inspired by the mathematician Carl Jacobi, Charlie Munger said:

Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don't we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead - through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities and you will succeed. Tell me where I'm going to die, that is, so I don't go there. - Charlie Munger

Warren Buffett quote:

Charlie and I have not learned how to solve difficult business problems. What we have learned is to avoid them. - Warren Buffett

Munger says that the best way to achieve success is by avoiding failures. He implies that it is not brilliance that made Berkshire Hathaway succeed. They consistently avoided stupidity.

It is easier to avoid failures, than to strive for success directly.

Looking at problems and scenarios from a different perspective helps us to identify obstacles in a better way.

Step-by-step guide to inversion

We can summarize inverted method to problem solving as below:

  1. Figure out what you want to achieve.

  2. What do you don't want to happen? This is the worst-case scenario.

  3. How could the worst-case scenario happen?

  4. How can you avoid the worst-case scenario?

Let's look at how to drive safe? By avoiding accidents. How do you avoid accidents? Here is how:

  1. Proper car maintenance, including brakes, tires etc.

  2. Before you drive, adjust that the rear view mirrors are correctly aligned. Check blind spots when changing lanes

  3. No speeding and control emotions.

  4. Give enough time for other drivers to notice the turn indicator.

How about investing:

  1. Buy stocks below the intrinsic value. Margin of safety is a cushion for smarter investing.

  2. Try to avoid major capital loss by speculating on risky investments.

  3. Understand your circle of competence, and try to avoid acting outside it.

  4. Doing both Fundamental Vs. Technical Analysis, always try to understand market's expectations embedded in the stock price (for example, growth rates). If market expectations are more optimistic than you think is justifiable, avoid the stock.

Success in investing is more about avoiding losers, than finding winners.