How to lose all your money

One of my favorite techniques for dealing with problems, especially broad and ambiguous ones, is to invert them. This means, rather than thinking about what you do want (which might be very ambiguous, like “how do I be successful?”), you get really clear on what you don’t want, and then avoid doing that. This simple technique helps take care of most of the biggest investing mistakes in my experience.

For example: Charlie Munger, legendary investor, longtime partner of Warren Buffett, and another fan of inverting problems, explained how he used this technique when he was in WWII. Charlie was a meteorologist, and his job was to forecast weather patterns to keep pilots from being killed flying into storms and bad weather.

That’s a pretty important job. It also has a lot of ambiguity. So, Charlie decided to invert the problem. He said “how could a meteorologist kill a bunch of pilots?” He then got really clear on what those weather conditions would look like, and once those conditions were really clear, it became much easier for him to avoid sending pilots into those conditions. Much less ambiguity, i.e. “just don’t send pilots into this kind of weather and you’ll probably be fine.”

To my knowledge, he never killed any pilots. 🙂

I think of this approach like seeing the negative of a photograph, and by studying it, we can much more clearly make out the actual picture.

So, with that in mind, let’s look at how someone might make terrible investment decisions and lose all their money.