Most people come to the market trying to be brilliant.
They watch CNBC. They memorize P/E ratios. They try to outsmart the Fed, outguess the earnings report, and predict the unpredictable. They want to be the smartest guy in the room.
But Charlie Munger, the late vice-chairman of Berkshire Hathaway, had a different approach. He didn’t try to be brilliant. He just tried to be consistently not stupid. He had a mental model for this. He called it:
“Invert, always invert.”
Munger borrowed this from the German mathematician Carl Jacobi. The idea is simple: Many hard problems are best solved backwards.
If you want to help India, don’t ask, “How can I help India?” Ask instead: “What is doing the worst damage to India? And how do I stop it?”
If you want to be a successful investor, don’t ask, “How do I make a million dollars?” Ask instead: “What would cause me to lose all my money?”
Then… simply don’t do that.
The Ultimate Inversion
Munger was a value investor, but his logic is the exact mathematical foundation of Trend Following.
Trend following is the only strategy that fully embraces inversion. We flip the standard Wall Street model on its head.
The “Great Pretenders” on Wall Street are obsessed with the offense. They are obsessed with being right. They ask: “What stock is going to go up?”
Trend followers invert the question. We are obsessed with the defense. We ask: “What happens if I am wrong?”
Here is how the Trend Following mindset applies Munger’s inversion:
1. Invert the Entry (Don’t buy low) The crowd tries to buy low. They see a falling price and think, “It’s a bargain.” They are trying to be smart. They think they know something the market doesn’t. Inversion: We buy high. If a price is hitting 52-week highs, we don’t ask why. We assume the market is smarter than we are. We buy strength.
2. Invert the Exit (Don’t target profit) The amateur enters a trade dreaming about the Lamborghini. They have a profit target in mind. Inversion: The pro enters a trade thinking about the stop-loss. We define the point of failure before we ever put a dime at risk. Munger famously said: “All I want to know is where I’m going to die, so I’ll never go there.” That is what a stop-loss is. It is knowing where you will die, and making sure you get out before you do.
3. Invert the Knowledge (Don’t read the news) The crowd consumes hours of news, trying to find the “reason” for a move. Inversion: We ignore the “why.” We only look at the “what.” Price is the only truth. If the price is moving, the reason doesn’t matter.
The Genius of “Not Stupid”
Munger said, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
Trying to predict the future is stupid. Trying to pick tops and bottoms is stupid. Thinking you know more than the collective wisdom of the market is stupid.
Trend following admits we don’t know the future. It admits we can’t predict.
By admitting we aren’t geniuses, we protect our downside. We cut our losers. We ride our winners. We survive.
And in this game, survival is the only thing that matters.
Invert your thinking. Stop trying to be smart. Start following the trend.
Feedback in:
Hi Michael,
This is a great essay! Been listening to you for years. Just avoiding being stupid goes a long way in the game.
Cheers!
Thanks!
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