Invert, Always Invert

Jan. 29, 2017 5:37 PM ET2 Comments6 Likes
Finalytiks profile picture


  • To find solutions to problems, it might be a better idea to invert the problem.
  • Charlie Munger popularized this method, taking a leaf out of mathematician Carl Jacobi's maxim "Invert, always invert".
  • This concept can be applied to investing - think: "what could go wrong in this investment?".
  • As Buffett and Munger found out, success in investing is more about avoiding losers, than finding winners.

Inverting a problem to find solutions is a concept I heard from Charlie Munger. Inspired by the mathematician Carl Jacobi, he 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 has a similar take:

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 some real-life examples:

How to drive safe? By avoiding accidents. How do you avoid accidents? Here is how:

  1. Maintain the car properly, including brakes, tires etc.
  2. Ensure that the rear view mirrors are correctly aligned for your view. Ensure that your blind spots are covered as much as possible.
  3. Do not over-speed. Also, control emotions.
  4. Do not change lanes, or make turns without indicating. Also, give enough time for other drivers to notice the turn indicator.
  5. Dim the headlights at night when cars come from the opposite direction.

Want a good life? Avoid what could cause misery.

How do you make your customer happy? By preventing occurrence of mistakes. So, think how you can prevent them.

Want to achieve something? Try to understand what is preventing you from achieving that.

Want to solve a social problem? Try to understand what is the obstacle to solving the problem.

Applicability in investing

Take your favorite investment idea and think like this:

  1. You are now sitting 10 years in the future.
  2. Your favorite investment idea has failed miserably.
  3. What has gone wrong?

This helps you to think through what all could go wrong.

Another way to do this is to think "why this is not a good investment?".

Keep these things also in mind:

  1. Buy stocks much below the intrinsic value. Margin of safety is a cushion for our stupidity.
  2. Try to avoid permanent capital loss by speculating on risky investments.
  3. Understand your circle of competence, and try to avoid acting outside it. Understand what you cannot do.
  4. While doing a DCF, try to invert and 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.

This article was originally published in my blog My Investing Life.

Follow on Twitter @MyInvestingLife

This article was written by

Finalytiks profile picture
The Banking Analyst (tBA):* CFA Charterholder with more than a decade's experience in finance* More than six years' experience in covering banks in developed markets* Currently covering the US banks exclusively"Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1."~ Warren Buffett

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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