Inversion Examples - Problem Solving in Reverse - Wealest.com - The Ideas of wealth creators — Wealest (2024)

The above quote from Charlie Munger is funny, but it also demonstrates the power of inversion.

What’s one way to get more of the thing you want? Avoid the thing that will destroy the thing you want. To get more life, just avoid death. To get more good, avoid the bad. This is inversion.

Inversion is the practice of thinking through problems in reverse. It’s the practice of “inverting” a problem - turning it upside down - to see it from a different perspective.

In its most powerful form, inversion is asking how an endeavor could fail, and then being careful to avoid those pitfalls.

Charlie Munger says that much of his success has come from him and Warren Buffett avoiding stupid mistakes:

“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”

Inversion comes originally from algebra, where an equation is oftentimes easier to solve if you invert it. But it also works for non-math problems.

If you have a long stock position, it would be wise to invert your argument and ask how could this investment fail. What are the scenarios that would cause the intrinsic value of the company to decline permanently?

For a business or creative project, it’s asking what would prevent people from buying your product, listening to your podcast, or subscribing to your newsletter.

The more you understand what will cause you to fail, the better armed you are to make decisions that avoid those mistakes.

Munger tells us: “Any year that you don’t destroy one of your best-loved ideas is probably a wasted year.”

We all love our ideas - that’s why they are hard to destroy! There are a handful of mental models in psychology that make inversion difficult to do.

First, humans don’t like changing their minds. Charlie Munger calls this mental bias Inconsistency Avoidance Tendency.

The moment you make a decision, you like that decision even more than you did seconds before. You don’t want to be inconsistent in your beliefs, attitudes, and ideas, so when you find one you like, you tend to stick with it.

This means that when you go looking for potential downside or holes in your idea, you may not give it your full effort.

The other big obstacle is incentive-caused bias. Once you settle on an idea and have predicted the rewards (incentives) you map back to that idea, you are incentivized to believe that the scenario you envision will play out. You are incentivized to believe the things that you want to be true.

In order to reverse your decision, you have to fight this incentive-caused bias and mentally “give up” on those predicted rewards.

Warren Buffett and His Two Rules For Investing.

Buffett is famous for watching the downside of his investments. His two rules for investing read:

“Rule number one: don’t lose money. Rule number two: don’t forget rule number one.”

He’s inverting the problem. If he can avoid losing money, he’s bound to make some.

This is why I spend a lot of time looking for asymmetric opportunities - ones where the upside is much greater than the downside. If you can make bets with little to no downside, the upside takes care of itself.

Charlie Munger And How *Not* To Kill A Bunch Of Pilots.

In his annual address at the Daily Journal Corporation shareholder’s meeting in 2020, Charlie talks about how inversion helped him as a meteorologist in World War II.

In the war, Munger was tasked with drawing weather maps. But what he was actually doing was clearing pilots to take flights.

Charlie asked a simple question: “Suppose I want to kill a lot of pilots. What would be the easy way to do it?”

He figured out there were only two ways to do that:

1) Get the planes into cold temperatures that would cause them to ice up and crash, or

2) Get the pilot into an area where he would run out of fuel before he could safely land.

So, Munger avoided these two scenarios at all costs. He became a better meteorologist, and probably saved lives, by inverting the problem.

How To Destroy Coca-Cola.

Munger gives us another example of inversion in a talk called “Informal Talk,” printed in Poor Charlie’s Almanack.

Charlie performs a thought experiment where he outlines how you could transform a non-alcoholic beverage like Coca-Cola into a $2-billion empire.

After covering the “no brainer” questions, and using basic math to see how it’s possible to sell so much sugar water (about 3 billion 8-ounce servings per year), Charlie inverts the problem.

Here’s what Charlie thinks would destroy Coca-Cola:

• Unpleasant aftertaste. You have to be able to consume one co*ke after another without any negative impact from the aftertaste.

• Losing any part of the trademark. There must be no “Peppy Cola.” The Coca-Cola trademark needs to be protected above all else.

• Making huge or sudden changes to the flavor. If you did this, competitors would probably copy the old original flavor and sell it to the angry customers who loved it.

Some of these ideas are based on events Coca-Cola actually went through during its rise to dominance.

For example, it faced a fierce competitor (using half its name) when Pepsi-Cola came on the scene. And in 1985, Coca-Cola changed its flavor. It came out with “New co*ke” which was a disaster for the brand.

Marc Andreesen and The “Red Team.”

Charlie isn’t the only one who finds value in these inversion thought experiments. Marc Andreessen, a prolific Silicon Valley investor and the co-founder of Netscape, has an inversion system for stress-testing investment ideas.

He talks about it in Tim Ferriss’ book, Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers.

Andreessen uses a “Red Team” that takes the other side of an investment argument. This team comes in and tries to destroy your investment idea. And if you’re still yelling out all the reasons why it’s a winner after it has been ripped to shreds, then maybe they’ll invest. Ferriss calls it a ‘disagree and commit’ culture.

Andreessen also finds value in studying opposites. Even though he’s a start-up tech investor, he has learned the value investing philosophies of successful investors like Warren Buffett and Seth Klarman.

This is another form of inversion - studying the other side of your general process.

The Pre-Mortem And How To Envision Failure.

Fames psychologist Daniel Kahneman (author of Thinking, Fast and Slow) supports the use of an inversion technique called a PreMortem.

He talks with Shane Parrish on the Farnam Street blog about the popularity of this inversion tactic, which was created by research psychologist Gary Klein.

A PreMortem is a thought experiment to tell the fictional story of your endeavor’s destruction.

Imagine it’s two years into the future and the decision you made has been an absolute disaster. Your goal is to write out the story of that disaster:

How did it unfold?

What were the key failures?

How did those failures compound on one another?

A PreMortem uses storytelling to invert the argument. It allows your imagination to run wild with possible answers to these questions, giving you a great list of pitfalls to avoid.

Through a combination of genetics and repetition, I have taken up inversion in my everyday life.

I have this (incredibly annoying, adds my wife) habit of bringing up what’s wrong with any idea we come up with - even if it’s my own! (Note: This goes much better when I also suggest a solution.)

Inverting is not the same thing as “being negative.” Your emotions should not play a role when you are inverting your best ideas. You are using logic and facts to conclude what decisions should be made. That’s all. There is nothing emotional about it.

If you have inverted the idea, and have a probabilistic point of view of the outcomes, you are in a good position to make the call to either take up or abandoned your idea.

If you pursue, that is a victory.

If you abandon it, that is also a victory.

In successfully destroying an idea, you’ve avoided something that was clearly not as good as it looked from the onset.

You’ve also done something else that is critical for long-term success. You’ve whittled down the number of opportunities you actually act on.

And as Warren Buffett says:

“The difference between successful people and really successful people is that really successful people say no to almost everything.”

Thanks for reading.

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SOURCES

Ferriss, Timothy. Tools of Titans: The Tactics, Routines, and Habits of Billionaires, Icons, and World-Class Performers. HMH Books. Kindle Edition.

Munger, C. T., & Kaufman, P. D. (2008). Poor Charlie's Almanack: The wit and wisdom of Charles T. Munger. Virginia Beach, Va: Donning Co. Pub.

2019 Daily Journal Corp Annual Meeting: https://www.wealest.com/articles/charlie-munger-talk-djco

Here is Tim Ferriss’ site: https://tim.blog/

Here is Shane Parrish’s site: https://fs.blog/

Photo by James Peaco*ck on Unsplash