Charlie Munger on Inverting: The Rose and it’s Thorn
Back in the last ice age, when I was an intern at my hospital, green both in experience and complexion (it was my first night on call…and I was, lets say a little nauseous with fear!), I asked my resident “ Are you sure you should be leaving me alone with sick people who might die?”
Yeah, confidence was my middle name as you can tell.
My resident gave me some of the best advice I have ever got.
“ Worry about whats going to kill them and take care of it urgently. Keep them alive at all costs. Everything else will take care of itself.”
Fear and good advice concentrated my mind like nothing else, and I learned to worry about “The Dreaded Downside” (in this case, death).
Fast forward to today and my behavior has been modeled this way:
1. Imagine a scenario that requires action.
2. Imagine what is the worst possible outcome(s) of this scenario.
3. Ask yourself how you can prevent/mitigate/evaluate and control such a situation.
4. Put plans in place for this.
5. Initiate said plans if the scenario materializes.
6. Watch how the alternative best case scenarios take care of themselves.
Its been an unpleasant surprise to me just how few people understand this concept.
People think rosy thoughts and don’t want to consider the thorns that come with the roses.
Charlie Munger and Warren Buffet have spoken about this thought process when evaluating investments.
They call it “inversion”
Lets say you are looking at company A (or starting a company called A!)
Something about this has attracted you and you believe there is a reason to invest, right?
This is the “Rose”
What could happen to your thesis that would make this all come crumbling down?
These are the “Thorns”
Play out these scenarios. Understand their likelihood, understand how you would recognize them and take corrective action.
Once you have this information, you are better equipped to make decisions and more likely to get the desired outcome or to at least limit downside loss.
If they don’t materialize, and your thesis becomes correct, nothing more is required!
Munger does this each time when looking at an investment to fully understand his risk and whether the investment should be made.
Its the same for managers in companies and for entrepreneurs from a decisions perspective.
How do I know this works?
How successful are Munger’s stock picks?
I thought that would persuade you!
What I find most interesting in the preceding discussion is how universal and singular the truth is.
It cuts across disciplines and scenarios and is always axiomatic*.
This is the universal thread that I attempt to point out in my blog. It’s all connected.
*Axiom: That which does not require a demonstration of proof. Contrast with a “theorem” which has been proven or a “hypothesis” which awaits proof.