- The rationalism of upside-down thinking...
- ...and how investors can apply it
We don’t have to guess – or wait for an AI-generated version of Charlie Munger – to speculate on what the investment world’s biggest loss of 2023 made of its biggest story.
Speaking in May, six months before his death at the age of 99, the Berkshire Hathaway legend counted himself as “personally sceptical of some of the hype” surrounding artificial intelligence.
Acerbic, quick and at times brutal, Munger’s own intelligence was never confused with artificiality. But while it was often painted as a foil to the folksy, sunnier wisdom of his better-known investing partner, Warren Buffett, Munger’s intellect was broader in its influences. As he told the writer William Green: “I always realized that there were a lot of dead people I ought to get to know.”
One of those dead people was the 19th century German mathematician Carl Gustav Jacob Jacobi, who made major contributions to a field of algebra known as elliptic functions. In a nod to the source of his own discoveries, Jacobi is said to have told his students to “invert, always invert” in the pursuit of new research topics.
For Munger, the command was a prompt to approach problems backwards. Quite why anyone would want to do this is that it is clarifying, just as a memento mori tells us that everyone – from Omahan billionaires all the way down to magazine writers – will one day die. For many, confronting death forces us to think hard about how to live in the short time we have.
When it comes to investing, this process is about removing the bad, the overly complicated, or (a favourite topic of Munger’s) the stupid. Crudely, it is to ask: how can I bring calamity to my portfolio? This isn’t just a thought exercise in the infinite possible ways things can go wrong, or internalising the journalist Jeremy Paxman’s cynical and paranoid dictum, “why is this bastard lying to me?”
Rather, it is about identifying the obvious issues ahead, and working out how to avoid them.
The reason we know there are issues ahead is because investing involves human decision-making, risk and reward. We are suckers for shiny toys, seeming super-smart, the fear of missing out, and stories that confirm our biases.
But pausing to ask if we are on the path to a poor decision is also a good way to come up with hard questions.
Perhaps you are considering a new fund. What will this investment achieve that your portfolio currently fails to do? Maybe you’re considering a highly rated software stock. How can this company’s profits keep growing at 25 per cent a year in an increasingly competitive industry?
Or, having noted bitcoin’s monster 'price' rise this year, you’re tempted to finally dip your toe in. Even assuming the rally continues, what problems might this punt cause you? If you’re now happy to speculate on opaque price movements in a purely faith-backed asset, how do you justify the rest of your portfolio with its modest aspirations for single-digit annual returns?
Debt, the use of which often provoked suspicion in Munger, nevertheless acts as a clearer analogy for problem-inversion than equity. As mortgage holders can attest, pondering “what could go wrong with next month's cash flow?” or even “how might I lose this family home?” is a much more efficient and sensible way to establish how much to borrow.
Inverting a situation, decision or opportunity won’t always answer it. Spotting problems before they arise is never guaranteed. But in a world that often feels as though it is continually speeding up, turning things on their head can help to slow them down.
Twelve months ago, the frenzied fanfare for all things ChatGPT meant it took a while for people to invert and ask, “what is the problem that AI claims to solve?” A year on, despite a mammoth rally in all things AI, investors are only just getting to “what is the problem that AI claims to profitably solve?” You can bet Munger would want stronger evidence for that as-yet-unanswered inversion.
