Updated: Jun 19, 2019
Charlie Munger, the right hand man to Warren Buffett, popularized a simple, but profound saying originated by a German mathematician named Jacobi. The saying was this: invert, always invert.
Jacobi was talking about math, but his ideas apply more broadly to problem solving as well. Inversion is the practice of looking at a problem from a different perspective. For example, let’s say your goal is to lose weight. You might do some research and find that eating fewer calories than you burn is the solution in its simplest form. So you set out to make a change and see results. But for some reason, it just doesn’t seem to be working.
Let’s try inverting the problem. Instead of asking yourself, “what is the best way to lose weight?” you might ask, “what is preventing me from losing weight?” This may seem like the same question, but it isn’t. It forces you to look at the problem in a different way, by focusing on the roadblocks rather than willpower.
By inverting and focusing on the obstacles to your goal, you may find out that you actually eat more and exercise less when you’re in a hurry. You might also find that you eat more when junk food is convenient. Therefore, you can focus on those two roadblocks: being in a hurry and the convenience of junk food.
You may make the change to leave work a little earlier to make sure you have time to cook a healthy meal and you may forbid yourself to keep junk food in the house. The value of this is that you aren’t depending on your willpower, but just setting up the right systems to achieve your goals. This is the power of looking at problems in a slightly different way.
But what does any of this have to do with investing? Well, investing is problem solving so inversion can help. Instead of asking yourself, “what is the best way to become a great investor?” you may ask, “what is preventing me from becoming a great investor?” In that spirit, I wanted to lay out the inversion of a great investor. Put simply, here is what not to do.
Wake up and immediately check the prices of your stocks.
Then, dozens of times throughout the day, stay glued to the minor fluctuations.
Watch CNBC and talking heads, leading you to worry about the latest economic crisis.
Buy that stock tip from the online publication that has the tagline, “Latest Hot Stock Tips! Don’t Miss Out!”
Don’t focus on the business results; instead, just buy what that smart neighbor tells you to.
Keep up with all the latest financial news to make sure you’re an “informed investor.”
Don’t learn how to value a company, but instead just focus on metrics that you have been told are important like something called a PE or was it EP?…I forget. Anyway, make as many trades as possible to maximize your gains. You don’t want to miss out on profits after all.
Buy low, sell high.*
Make daily trades. Inactivity is boring and a waste of time.
Don’t sell that one laggard stock, it has gone down too far. You have to wait until it gets back to the price that you bought it at. Oh, and don’t buy that really great company, its stock has increased 50% in the past four months. That goes against buy low, sell high.
Don’t research the company, just check the stock chart. It seems like it has gone down too far to stay there. It can’t possible go lower.
Do more research before purchasing that new $600 TV than on a huge investment in a new stock.
Freak out when the market is down more than 1% in a day.
Contemplate selling all your stocks so you can “get out while you can.”
Act emotionally and have no basis for why you are making your decisions, just follow your gut.
Become cocky after a good week in the market.
If you get lucky and make a great trade, believe it was because of your skill. If you get burned on a trade, blame it on Trump.
Don’t read the annual reports of companies; those are boring. Instead, read the short 400 word articles from your favorite financial news site telling you to buy their latest picks.
Don’t try to change your mind at all, but make sure your conviction never waivers.
Don’t think independently; follow the crowd.
“Buy the dips.”
When your stocks go down, don’t put any cash to work; the markets could go down more!
Let your mood be affected by the markets; after all, aren’t you serious about this?!
There you have it, if you ever want to be a terrible investor, it’s all laid out for you. Just follow each of those steps and you’ll be well on your way to awful returns and a miserable investing experience. There is one thing in common for all of that anti-advice: it’s easy to do. It’s easy to flip on the TV and see a guy screaming “BUY, BUY, BUY.” It’s easy to sell because you’re nervous. It’s easy to let others form your opinions. But it will lead to sub-par returns.
If you do the things that everyone else does, you’ll get the same results. It’s that simple. Take the road less followed. And remember to invert, always invert.
*-more on that another time
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