Watch this one minute video  and when you’re done smiling, think about the problem in a rational way.
At first, the problem seemed that the kid had his head stuck between the iron bars. Although nobody saw how the kid’s head really got trapped in the first place – they just assumed that he somehow managed to slide his head through the narrow bars. Naturally, the intuitive solution was to pull the head in the same way it got stuck – which obviously didn’t seem to work.
But the right solution appeared when people stood the problem on its head (no pun intended) i.e., instead of trying to pull the head they pushed in the body through the trap. They inverted the problem and voila! Problem solved.
That’s called principle of inversion. It’s a common trick used by mathematicians but rarely practiced outside the discipline of mathematics. Carl Jacobi, a German mathematician, said, “Invert, always invert”, expressing his belief that the solution of many hard problems can be clarified by re-expressing them in inverse form.
Charlie Munger, the business partner of Warren Buffett and Vice Chairman at Berkshire Hathaway, came up with his own version of Jacobi’s maxim –
All I want to know is where I am going to die so that I’ll never go there.
Munger is 91 years now so I guess his strategy has worked out pretty darn well so far.
It is not enough to think about difficult problems one way. You need to think about them forwards and backwards. “Indeed,” says Munger, “many problems can’t be solved forward.” You should read how inversion was used by one of Munger’s family members to guess the correct answer to a trivia question .
Roger von Oech’s Creative Whack Pack is a great tool to instil Munger’s way of thinking – combining various ideas from different spheres of life and joining them to create a process of thinking creatively. Here is what the Inversion card says –
Reversing how you look at a situation can open up new possibilities and dislodge assumptions. Example: When everyone else is gazing at a glorious sunset, why not turn around to see the blues and violets behind you? What do you notice when you look at a coffee cup? Its design or color? Reverse your focus and look at the space inside – that’s what gives it its functional value.
Inversion and Proofreading
In this short video , a chess grandmaster walks us through retrograde analysis, which is a method to solve game positions in chess by working backwards from known outcomes. Even if you don’t play chess, you should watch it because it has interesting insights about problem solving.
As mentioned in the video, reading a text backwards reveals glaring errors which aren’t normally caught while you’re reading forward.
The reason this trick works is because when you are proofreading, especially your own work, your brain has a tendency to start skimming through the material and jumping from one sentence to the next. When it does this, it is very difficult to catch mistakes because you can very easily look past them as you are reading. When you go through your essay or article backwards you will catch more mistakes because each sentence is taken out of context so that you can focus on it by itself. Also, it’s easier to spot errors when you view words in a different order.
This cool inversion hack tricks your brain into looking at everything in a different way.
Another useful way to think about forward vs backward thinking is to model them as additive vs subtractive measures. Additive measures manifest in form of an urge to do something about a problem which may not need any intervention . Subtractive measures adhere to the philosophy of “don’t try to fix something which ain’t broken.”
Nassim Taleb calls this ‘subtractive epistemology’. He argues that the greatest and most robust contribution to knowledge consists in removing what we think is wrong. According to him we know a lot more about what is wrong than what is right. What does not work, that is negative knowledge, is more robust than positive knowledge. This is because it’s a lot easier for something we know to fail than it is for something we know that isn’t so to succeed. He dubs this philosophy as Via Negativa.
Taleb has written a whole book, The Black Swan , based on this idea that the absence of evidence doesn’t qualify as the evidence of absence. In other words, just because all the swans, that have been observed so far, are white doesn’t prove that all swans are white. Since one small observation (spotting a black swan) can conclusively disprove a statement – all swans are white – while millions can hardly confirm it, disconfirmation is more rigorous than confirmation.
Inverting the problem not just helps you in solving the problem, but it will also help you in avoiding trouble.
So how does this idea translate into practice? It’s a choice between avoiding stupidity and seeking brilliance.
A lot of success in life and success in business, says Munger, “comes from knowing what you really want to avoid-like early death and a bad marriage.” He continues –
What will really fail in life? What do we want to avoid? Some answers are easy. For example, sloth and unreliability will fail. If you’re unreliable it doesn’t matter what your virtues are, you’re going to crater immediately. So, faithfully doing what you’ve engaged to do should be an automatic part of your conduct. Of course you want to avoid sloth and unreliability.
It’s a common knowledge that to succeed you should find role models and follow them. But it would be equally effective, and perhaps even more, to find anti-models – people you don’t want to resemble when you grow up. And then avoid the path they took.
In Business and Decision Making
John Paul Getty, an American business tycoon, said –
In every business deal or transaction, identify the worst thing that can possibly go wrong, and then make sure it doesn’t happen.
Donald Keough in his book The Ten Commandments for Business Failure  (a book recommended by Warren Buffett) used the inversion principle by showing the direct paths to failure. He talks about things like – not taking risks, being inflexible, playing the game too close to the foul line, etc. These are precisely the things that one can do to ensure a failure in business. Hence avoid them like a plague.
Jeff Bezos, founder and CEO of Amazon, used the inversion principle to break his dilemma about leaving a high paying job and starting Amazon. He recounts –
When you are in the thick of things, you can get confused by small stuff. I knew when I was eighty that I would never, for example, think about why I walked away from my 1994 Wall Street bonus right in the middle of the year at the worst possible time. That kind of thing just isn’t something you worry about when you’re eighty years old. At the same time, I knew that I might sincerely regret not having participated in this thing called the Internet that I thought was going to be a revolutionizing event. When I thought about it that way … it was incredibly easy to make the decision.
Have you heard of post-mortem technique? When a project fails, typically the stakeholders get together and do the root cause analysis trying to figure out the reason for failure and possible learnings from the mistake. It’s a good practice but it’s not sufficient. You need to again apply the inversion principle here. How?
Instead of doing post-mortem at the end, why not do a premortem at the beginning. Sounds confusing? Here is how it’s done.
Before getting started, assume that the project has failed (or in case of a personal decision, assume that it has backfired) one year down the line. That done, run your imagination wild and come with possible reasons for failure. So in a premortem, you think of ways in which the project in its current form is destined for failure before the launch . It’s not easy but if you want to exploit the inversion mental model, it’s something which you should definitely give a try.
In his Art of Investing workshops, Vishal talks about the concept of reverse DCF. The idea is that instead of asking what’s the present value of future cash flows, ask what growth rate market is assuming to justify the present value of future cash flows. Valuation, being an imprecise art, is a good candidate for inversion.
By thinking forward (i.e. by estimating present value of future cash flows), we are prone to making mistakes. By thinking backward, we create a sanity check on thinking forward.
From perspectives on floats to risk arbitrage – everything can be investigated using the lens of inversion. And there is only one place where you can find truck loads of such insights about how to use inversion for stock analysis. That’s Prof. Sanjay Bakshi’s blog . Just go and search for the word “inversion” on his blog – the results would keep you busy for weeks.
Remember Warren Buffett’s rules of investing?
Rule 2: Don’t forget rule 1.
Notice the core message here. It’s not focussing on how to make money, instead it asks you to invert the problem and ensure that you don’t lose money. Put simply, to implement the inversion principle in stock picking, you need to focus less on –
- How to earn great returns, and more on how to avoid permanent capital loss;
- How to pick the great stocks, and more on how to avoid the dangerous ones;
- Things to do for investing success, and more on things to avoid for investing failure.
The inversion trick is a very powerful idea because it de-biases us. Backward thinking makes us more objective. And in business and life, just as in algebra, inversion will help you solve problems that you can’t otherwise handle.
Every time you learn a new mental model your scaffolding, to retain information in useful way, becomes stronger. A wise man once said – A man’s mind stretched to a new idea never goes back to its original dimensions.
I hope that practicing inversion will stretch your mind and build stronger thinking muscles which will make you a better decision maker.
Take care and keep learning.
:The Black Swan
:The Ten Commandments for Business Failure
Akhilesh Pathak says
You are really evolving as a great writer ! I think the magic formula of reading, journaling, thinking and reflecting on the various mental models that you are sharing with us, is working for you as it has worked for most of the great people in the world.
Inversion is one particular mental model, I have found really useful to adopt in my own life. Not become what you don’t like about someone- this one principle can do wonders for us in giving meaning to our professional and personal lives.
Investing is an art not often learnt, much less practiced. We have many examples in the business and investing world demonstrating one cardinal truth- huge success can be achieved with right temperament even with less intellect or money.
You have put up a great message for young and old ones, not many youths will be wasted on young ones anymore, thanks to people like you.
Anshul Khare says
Thanks for your kind words Akhilesh!
Hello Anshul, very well written. Do you think ‘Inversion’ is the cousin brother of ‘Reverse Engineering’. 🙂 Thinking of too much ‘Inversion’ can bring negativity and pessimism. How do we overcome it?
Anshul Khare says
I think Reverse Engineering (RE) is related but differs in some ways. The way I understand RE is that it’s the practice of backtracking an existing line of causality. There is mostly a single path along which you backtrack while reverse engineering. Whereas inversion can sometimes lead you to multiple directions – a collection of alternate histories or possibilities.
That’s my interpretation based on what I know at this point of time. Let me know if you have additional insights on this 🙂
As far as pessimism and inversion is concerned, it can perhaps lead to negativity but then it’s true with any idea taken too far. Every mental model is a tool to assist our thinking and relying too much on one tool may backfire.
Well said Anshul. We are on the same page now. Thanks for the clarification. 🙂
Negativity and pessimism cannot be the outcome of thinking ‘Inversion’; rather after thinking inversion one may be more confident and positive by avoiding some unfavorable outcomes. When you avoid the thinking of ‘Inversion’ you are preventing yourself from actualization and flirting with yourself.
Anshul Khare says
Interesting perspective Soumen. Thanks for sharing.
Manikaran Singal says
Fantastic article Anshul. Would endorse these thoughts through my blog post soon. Thanks for this brilliant piece and thought.
Anshul Khare says
Thanks Mr. Singal!
First of all belated Happy Teachers Day to you and Vishal .
Truly inversion is very powerful idea.You won’t believe this but few days back when I saw my portfolio it was looking very nice with all the companies which were giving me good return and when I inverted it, it was looking very risky and without margin of safety. Therefore last month I sold holdings of many stocks though their fundamentals were not changed and they might continue to do well but they were on very high PE of above 35-50 as my purchase price was around PE of 25 . The risk was very high in case market would have crashed further and I made full use of this volitility by buying shares in those companies which were trading between 5-15 PE with good fundamentals. At present they look good and well with my finger crossed I am hoping they might turn out to be smart picks in future.
Anshul Khare says
Thanks Needhi. Happy Teacher’s day to you too.
Glad to know that you are becoming a better investor with the help of mental models.
Manish Nachnani says
Hi Vishal ,
Having lost over 8 lacs in stock market and ruining self confidence , metal peace , belief in ones avility , sleep less nights , stress , broken relationships and much more – i have evolved as a patient person . What it has done is 100% investments now goes to fixed deposits .
I plan to do a second innings in the stock market after 2009 burn out and this time be more systmatic with no futuure and options and day trading and margin trading – that is where 80% money was lost and no more fancy names or limelight names which occur on CNBC TV18 infact i have a rule if a stock is on CNBC TV18 or being discussed on money control i wont buy , better i am not watchiiing these tv and website and doing own research .
I am commung up with a model portfolio for my self can you review the sand share feedback.
Juan Salda says
I find myself more and more on your blog every single week. Thanks for the great work. You enlighten and educate us to become better thinkers and investors. Regarding reverse DCF analysis, do you have any resources you can share in order to learn how to model/calculate? Thanks!
Are you copying his work or is he copying yours?
Anshul Khare says
I guess both of us are copying Charlie Munger’s work. And then learning in the process 😉