The great Charlie Munger once famously said:
If I know where I will die, I will never go there.
This is a typical example of reverse thinking, a method also popularized by Munger. He advocates the use of 'mental models,' which are frameworks for understanding the world that shape how investors think, solve problems, and make decisions.
Reverse thinking is a powerful cognitive tool that encourages us to approach problems in reverse, focusing on preventing unfavorable outcomes. By flipping the problem and analyzing it from different angles, we can identify and avoid risks, errors, and biases that may hinder our success.
Munger has another famous quote that captures the essence of reverse thinking:
In simple terms, reverse thinking means considering the opposite perspective of things.
This approach forces you to examine potential obstacles, risks, and points of failure, and devise alternative strategies and plans to avoid them.
In a world that often encourages relentless forward progress, taking a step back and looking at things from a different perspective can be immensely helpful. This is the essence of reverse thinking—a problem-solving strategy that works backward from the problem to find solutions. Frequently used in mathematics and by many successful individuals, this method provides new perspectives and unexpected insights.
Understanding Reverse Thinking
Human thinking has directionality. Reverse thinking involves approaching problems from the opposite direction of the norm. It encourages us to consider what should be avoided to prevent failure, rather than focusing solely on what needs to be done to achieve goals. This shift in perspective helps us identify potential pitfalls and obstacles before they occur, allowing us to develop strategies to avoid them.
Reverse thinking is a powerful tool for solving problems because it forces us to look at issues from a different angle. By considering what might go wrong, we can proactively address potential problems, making our plans more robust and resilient. Reverse thinking can also help us break free from conventional thought patterns and discover innovative solutions that may not have been considered.
Art is an excellent example of reverse thinking. Great art breaks all previous rules:
Michelangelo is one of the most important artists in the world. He achieved this by continuously evolving and breaking previous rules. To attain the necessary skills, Michelangelo studied corpses to learn human anatomy, enabling him to bring more natural features to his sculptures. At the time, studying human anatomy was forbidden, but he continued because he believed it was a way to make his art more realistic and credible.
The works he created were vivid and stunning, especially when compared to other sculptures from the same period. Michelangelo once said: his sculptures were not created by him; instead, he 'freed' them from the marble.
It is easier to avoid stupidity than to pursue excellence.
Reverse thinking does not always solve problems, but it helps avoid them. You can think of it as a filter for avoiding foolishness. It may not be glamorous, but it is an easily improvable method. Simply put, reverse thinking means spending less time trying to be smart and more time trying to avoid obvious stupidity. Munger shared his insights on reverse thinking:
"Think backwards, always backwards: invert a situation or problem. Look back. What would happen if all our plans went wrong? Where don’t we want to go, and how do we get there? Instead of seeking success, make a list of how to fail – through laziness, envy, resentment, self-pity, entitlement, and all self-defeating mental habits. Avoid these qualities, and you will succeed."
A great example of reverse thinking is Ben Graham's concept of the 'margin of safety,' which helps investors address the problem of overthinking. If you buy a company at a price below its intrinsic value, even if you make a mistake in your valuation, you can still achieve decent financial returns.
Motivated by the desire to avoid mistakes, Seth Klarman referred to value investing as a risk-averse approach. This is also why Buffett’s first rule of investing is: Don’t lose money. In the long run, avoiding losses or doing foolish things helps us win.
Do not overcomplicate the margin of safety: calculate a company’s intrinsic value using a conservative method, buy it at a sufficient margin of safety, and then wait. It’s that simple, but people always like to complicate simple things because we are too clever (or want to appear clever).
This is why the most difficult part of value investing is the psychological and emotional aspect, not the investment system itself.
Another aspect of reverse thinking that Munger often discusses is the concept of loss aversion. When we fail at something, especially when it involves a painful experience, we tend to remember that experience. For instance, if you buy into a company and its price plummets, causing significant financial losses, that experience will stay with us and may prevent us from attempting to invest again.
Conversely, suppose you purchase a different company, and the outcome is positive. In this case, you are unlikely to have as strong a memory of the gains as you do of the losses.
We always feel the pain of an equivalent loss more deeply than the joy of a gain. Loss aversion is a powerful force and an essential component of reverse thinking.
NBA legend Larry Bird once said in an interview that he hated losing more than he loved winning, which was an important motivating factor behind his success.
Similarly, applying reverse thinking to an investment idea can help you avoid losses and achieve the desired outcome.
Essentials for Successful Investors
Most people believe that to succeed, they need to be the smartest investors or have a complex investment process.
Avoiding mistakes is an underrated way to achieve success in any field, especially in investing. Charlie Munger and Warren Buffett are undoubtedly intelligent individuals and investment geniuses. However, both attribute their success to one specific factor: avoiding errors.
"Charlie and I haven't learned how to solve difficult business problems. What we've learned is how to avoid them."
— Warren Buffett
Buffett and Munger have discovered that the best way to achieve success is by continuously avoiding failure through the avoidance of stupidity. Let's construct a step-by-step approach to reverse thinking in investing:
Clarify what kind of investment objectives you wish to achieve.
What do you hope will not happen in your investments, or what is the worst-case scenario?
Why might the worst-case scenario occur?
How can the worst-case scenario be avoided? You would attempt to observe the worst-case scenario, predict how the company might respond, and whether this justifies the investment.
As investors, we must consider all possible ways that could lead to investment failure. Munger says he spends as much time tearing apart investment ideas as he does creating them. This helps him apply a reverse thinking approach to identify potential flaws.
Regardless of strategy, investors can use a reverse thinking approach to address investments. There are also methods that can help avoid incorrect approaches:
Purchasing stocks with sufficient margin of safety can help avoid foolish mistakes in assessing intrinsic value.
Avoid investing in risky companies and permanent capital loss.
Stay within your circle of competence and try to avoid investing outside your area of expertise. Understand that there will inevitably be things you do not comprehend.
When calculating the intrinsic value of a business, try applying reverse thinking to evaluate growth expectations. If the growth estimates provided by others seem unreasonable to you, do not dwell on them.
The long-term success of investment lies more in avoiding failure than in picking winners.
If you focus on avoiding mistakes and sticking to your investment process, you will ultimately achieve success. Contrarian thinking also helps you avoid getting overly excited about hitting the jackpot. Do not believe in so-called stock-picking gurus who claim they can magically select stocks using a certain method. The phrase 'One general's success is built on the bones of ten thousand soldiers' aptly describes this scenario.Technical indicatorsContrarian thinking originated with the Stoics (AD 63-65), although it was popularized by Munger. Their approach involved what was called 'premeditatio malorum,' which translates from Latin as 'premeditation of evils.'
The Origin of Contrarian Thinking
Although contrarian thinking was promoted by Munger, the Stoics were early practitioners (AD 63-65). Their idea was to engage in premeditated malicious acts, translated from Latin as 'evil premeditation.'
The Stoics aimed to envision all possible negative aspects of life. For instance, they would imagine losing their homes, falling ill, losing social status, or having their reputations tarnished. The Stoics believed that imagining the worst-case scenario in advance could help them overcome fear and create better opportunities to avoid those fears.
While most people focus on achieving success, the Stoics explored how they would cope with failure. If everything went wrong tomorrow, what would it look like? How can we prepare for such possibilities?
By the 19th century, German mathematician Carl Jacobi believed that difficult mathematical problems could be solved through contrarian thinking. One of his theories was translated as 'invert, always invert.'
As Munger put it: 'Jacobi knew that many tough problems are best solved backward—it’s the nature of things.'
Contrarian thinking is also useful in daily work.
In daily work, reverse thinking is also a simple yet powerful tool that can help avoid serious mistakes, thereby increasing the chances of success. By looking at problems from the opposite perspective, you can enhance strategic thinking, strengthen decision-making, and foster a culture of continuous improvement.
Here are six ways to apply reverse thinking in the workplace:
1. Change your mindset
The principle of reverse thinking allows you to anticipate and prevent errors by asking yourself what went wrong or could go wrong, rather than focusing solely on success. So, the next time you face a problem, flip it around to uncover new insights. For example, if the question is “How can we improve productivity?”, the opposite question might be “What is reducing or could reduce productivity?” Remember, a specific, well-defined problem is easier to approach with reverse thinking. For instance:
Every marketing department wants to attract new business, but they need to ask themselves, “What would alienate our core customers?”
2. Address negative factors
Strive to eliminate the “anti-success” factors you identify. This is where the true power of reverse thinking shines. By removing obstacles, reducing risks, and enhancing resilience, you will naturally move toward your goals.
3. Seek feedback through reverse thinking
Accelerate the feedback process by asking your team or stakeholders what you should stop doing or what they dislike about your work. Addressing blind spots can improve performance and build trust.
4. Question assumptions
Challenge preconceived notions and beliefs through reverse thinking. Assume the problem you are facing is usually attributed to a specific cause. Ask yourself whether this reasoning might be flawed due to laziness. Are there other possible explanations? Opening your mind in this way can weaken confirmation bias and groupthink, helping you avoid cognitive errors.
5. Strengthen Collaboration
The principle of inversion can be highly effective in improving teamwork and communication, ultimately enhancing productivity. Collaborate with your team to identify behaviors that lead to unnecessary conflicts and communication failures so these issues can be resolved collectively.
6. Rethink Innovation
Most innovators dream of coming up with the next groundbreaking idea. The example about art mentioned above demonstrates how reverse thinking can also open new pathways for innovation.
Amazon's CEO Jeff Bezos put reverse thinking into practice when he founded Amazon. While everyone else was starting businesses based on trends and worrying that their business models would be quickly disrupted by the rise of new technologies and models, Amazon’s founder Bezos posed a question: 'What will remain unchanged over the next decade?'
Through this kind of 'reverse thinking,' he identified three seemingly ordinary but enduring customer needs.
Maximum choice
Lowest price
Fast delivery
Bezos once said that even 10 years from now, no customer will ever come out and say, 'Hey, Bezos, I love you, I love Amazon, but I hope your prices are higher, and I hope your delivery is slower.' After identifying these three constants, Bezos committed the vast majority of Amazon's resources to these areas, ultimately achieving extraordinary success.
Final Thoughts
Reverse thinking is counterintuitive, yet it is an essential tool for all great thinkers. Most investors do not spend time considering what they do not want to happen.
However, reverse thinking is a crucial tool for many great investors. Charlie Munger, Warren Buffett, Howard Marks, Seth Klarman, and others—all capable value investors—practice some form of reverse thinking by creating a margin of safety in their investments or adhering to their circle of competence.
Reverse thinking helps prevent us from jumping to conclusions about investment ideas. More specifically, it is a way to counteract confirmation bias, one of the most detrimental psychological issues in investing. Through reverse thinking, you can avoid the trap of seeking evidence that supports your own views. This is what reverse thinking can help you avoid.
We conclude with Munger’s words: I think part of Berkshire Hathaway’s popularity stems from the fact that we seem like people who have found the secret to investing. We aren’t smart; we just avoid stupidity.
Editor/jayden