One of the most valuable pieces of advice I have read from the great Charlie Munger (Trades, Portfolio) is "Invert, always invert. Many hard problems are best solved only when they are addressed backwards."
This straightforward advice has helped me avoid many investment disasters and dangerous situations in life. The logic behind it is simple; by flipping the idea on its head, you can get a better idea of what is causing the problem and try to avoid it, rather than trying to fix the problem without understanding the root cause.
Working backward
Although he has popularized the idea, Munger wasn't the first to have come up with it. He borrowed it from Carl Jacobi, who decided the best way to solve difficult problems was to invest them and then address the problem backward. As Munger once described:
"[Jacobi] knew that it is in the nature of things that many hard problems are best solved when they are addressed backward."
Considering the flip side of the equation is just as important in investing as it is in mathematics. Investors need to ask themselves, what is the flip side? What can go wrong that I haven't seen? All great bridge winners and chess players use the same kind of mental model, as Munger once illustrated:
"Well, great declarers in bridge think, 'How can I take the necessary winners?' But they think it through backwards, too. They also think, 'What could possibly go wrong that could cause me to have too many losers?'"Â
Learning from others' mistakes
When combined with other mental models, this can be a mighty force for good. For example, Munger advocates learning vicariously from others' mistakes.
I feel it is probably accurate to say that every single day thousands of investors make mistakes. We only hear about a few of them, but even this is enough for us to construct a mental model of what we know does and doesn't work in investing.Â
These mistakes might have been genuine, after all investing is hard. However, we will only know if they are genuine mistakes by flipping the scenario on its head, asking what went wrong and how we can look at the situation to make sure this mistake isn't repeated in future. As Munger put it:Â
"The more hard lessons you can learn vicariously, instead of from your own terrible experiences, the better off you will be."
The other benefit of using this strategy, as well as avoiding the most damaging mistakes, is that it is psychologically more comfortable.
Losing money is psychologically stressful and a string of successive losses could scar any investor. By learning from the mistakes of others, you can avoid any damaging psychological effects that may come as a result of losing money. You can learn and get better without having to suffer as a result. For instatnce, Munger once said:
"I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes."
This is another one of those situations that may seem to be boring for so many investors. After all, trading is much more interesting than sitting around thinking about the mistakes other people have made. The results of all the time and effort spent doing this only materialize after a few years.
Still, for those investors who have the patience, Munger's advice can help substantially. To find the answer to any question, invert, always invert.
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