Invert, Always Invert: Charlie Munger’s Strategy for Avoiding Catastrophes and Managing Risk
Anticipate and avoid catastrophes and mistakes on your journey to the north star.
Charlie Munger will always be known for his worldly wisdom. One of mantras he practiced was “Invert, always invert.” What did he mean by that?
In the book Poor Charlie’s Almanac, Talk Four captures Munger’s famous speech in which he talked about this big idea.
Similarly, In Talk One (also in the book) Munger gave a memorable commencement speech to the 1986 batch of Harvard School. Munger used inversion when giving advice to the graduating students – instead of giving a conventional speech on how to be successful, he spoke about the ways in which they could invite misery in their life.
Inversion is a simple, yet powerful idea – if you want to succeed, you not just plan how to achieve success, but also identify points of failure or mistakes (that others have previously made) to be avoided.
Using Inversion for Risk Management
Inversion is a risk management strategy; it doesn’t mean that risks should be avoided. Rather, It forces you to proactively think from different perspectives. It helps in avoiding decisions that might have fatal consequences. For example, in investing, one of the key risks is losing all your money. Inversion helps identify and manage the risk of ruin, which supplements the primary goal of achieving high returns.
An example is Warren Buffett’s Rule #1 of investing, which is to ‘never lose money’. Buffett knew that capital losses could hurt his compounding engine and if he could avoid losing money at all costs, his compounding engine would run uninterruptedly and produce strong results.
The Stoic Connection: How Ancient Philosophers Used Inversion
The inversion mindset was practiced by wise thinkers of the past. The ancient Stoic philosophers like Marcus Aurelius, Seneca, and Epictetus regularly conducted an exercise known as ‘premeditation of evils.’ The goal of this exercise was to envision the negative things that could happen in life. For example, the Stoics would imagine what it would be like to lose their job and become homeless or to suffer an injury and become paralysed or to have their reputation ruined and lose their status in society. And they would plan around those pitfalls to mitigate such risks.
Practical Applications of Inversion in Your Life and Business
How did Munger practice inversion in his life? Munger knew that the three things that will ruin your life were:
- Liquor
- Ladies and
- Leverage
So, he put measures in place to proactively manage the risks of becoming consumed by these vices.
In his business endeavours at Berkshire Hathaway, the company that Munger co-built with Buffett, they made sure that they held more than enough cash to overcome any unforeseen circumstances that could bankrupt the company. And they avoided risky or FOMO bets that could lose them money. The added benefit of having bags of cash was that Berkshire was able to take advantage of opportunistic situations by deploying cash in times of stress, when few others have the ability to deploy capital.
Inversion was one of the many mental models that Charlie Munger mastered. Inversion is handy tool in the toolkit, it’s the one that tells you what not to do, so that you can focus on what needs to be done.
What to know more about inversion? Check out these excellent write-ups by James Clear and Shane Parrish.
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