A Simple Hack To Stop Making Dumb Investments and Regretful Trades

Using the wisdom of Charlie Munger to help your investing

When Warren Buffett and Charlie Munger first met, Susie noticed something she hadn’t seen before. She had been married to Buffett for several years and he was the sharpest talker she knew. No one could touch him when it came to business or stocks. That evening, however, she remembers watching Warren meet his match. It was Larry Bird vs. Magic Johnson or Ted Williams vs. Joe Dimagio. Susie Buffett’s first thought was, “I think Warren felt Charlie was the smartest person he’d ever met and Charlie felt Warren was the smartest person he’d ever met.”

If you read enough about Buffett and Munger, you start to observe how certain phrases, tips, and aphorisms repeatedly get shared. One of those is this thing called inversion. It’s actually one of Munger’s favorite life hacks. He once said this:

“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. Tell me where I’m going to die, that is, so I don’t go there.”

Tell me where I’m going to die, that is, so I don’t go there.

I was recently thinking about some of my worst investing decisions, and I really think 90% of them could have been avoided had I remembered this line. Instead of thinking about all the things that could go right, think about all the things that could go wrong. Lay everything negative out on a giant piece of paper. What’s the worst thing that could happen here? What does everyone else know that I don’t? These are only a few examples, but there are countless ways to invert by asking questions about the worst possible outcomes.

“A lot of success in life and business comes from knowing what you want to avoid: early death, a bad marriage, etc...” — Charlie Munger

Sometimes the key to great investing is to simply avoid stupidity. One really bad mistake can ruin a year of gains. Poof. Gone. But that’s where I believe inversion is essential. Don’t act before you’ve thought through the worst of the worst. Work backward and then decide if you can manage it.

Thanks for reading! If you enjoyed it, subscribe to my email here and I’ll send you some of my other writings and notes. Make sure you’re also following me on Twitter and StockTwits. If you want to read more, check out the links below:

  1. 121 of the best things Charlie Munger has ever said
  2. The talk Charlie Munger gave at Harvard about human psychology
  3. Books to learn more about the genius of Charlie Munger