Sometimes the best way to solve a hard problem is to think through it backwards. German mathematician Carl Jacobi was first to bring this idea into the mainstream in the mid-1800s, using it to solve a lot of hard problems. He came up with the memorable maxim, “Invert, always invert”, which was later and more famously borrowed by Warren Buffett’s partner, Charlie Munger. Of course Jacobi was talking math problems, while Munger was talking investing. So what is it about backwards thinking that generates so much investment success?
To understand what good investing looks like, let’s invert the question and first understand what bad investing looks like.
Some easy examples include:
Investing in something you don’t understand
Investing without a plan
Owning companies with negative cash flow
Owning companies that are going down
This list could go on but you get the idea
What inverting shows us is that by eliminating these simple mistakes, we can win by not losing. And as long as we’re minimizing losses, good performance takes care of itself.
So the next time you can’t go under it and can’t go over it, don’t just go through it. Picture yourself on the other side and think backwards.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.