Inversion, and why thinking backwards can help you move forwards when investing

German mathematician Carl Jacobi proclaimed, 'Invert, Always Invert'. He believed that difficult problems could be solved by turning the problem inside out.

By Philip Bish · 5 May 2022

By Philip Bish ·
5 May 2022 · 5 min read

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During the throes of WW2, the Allies were finding that their B-17 bombers were returning to England (from Germany), peppered with bullet holes, but only in certain areas of the plane. The Allies wanted to reinforce the planes but had to decide where on the planes they would do this, as there were limitations due to weight constraints.

So where did they reinforce the planes? The choices were:

Where there were lots of bullet holes.
Some bullet holes, or
No bullet holes.

Mathematician Abraham Wald had the unique insight. The planes were reinforced where there were no bullet holes, as the planes that were shot in these areas, never returned from Germany. These areas were the cockpit, the engines, and the fuel tanks. The military adopted Wald’s recommendations, and the results were immediate, with more Allied planes surviving the bombing missions. He solved this problem through the principles of inversion.

So, inversion is an incredible concept and is very effective when used well. Charlie Munger, vice-chairman of Berkshire Hathaway was an avid user of inversion. He often said, ‘All I want to know is where I’m going to die, so that I never go there’.

Inversion can also help us to think through what we should do when the share market falls. Though fear and uncertainty may cause us to want to sell, we should invert the problem and ask ourselves, “why would someone else see this as an opportunity?”.

To take the anxiety out of feeling if this is the best time to jump in or not an investor could smooth out their entry into the market through dollar cost averaging. Investing a little at a time. If invested right now and you have your hand on the button to sell inverting the situation could be a simple trick to help you make the right investment decision.

This month Australian’s will be faced with a decision at the polls where inversion can help. If undecided (or already decided) think about the characteristics you wouldn’t want in a Prime Minister and eliminate that candidate.

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Frequently Asked Questions about this Article…

What is the concept of inversion in investing?

Inversion is a strategy where you think backwards to solve problems. In investing, it involves considering the opposite of your initial instinct, such as asking why someone else might see a market downturn as an opportunity rather than a reason to sell.

How did Abraham Wald use inversion during WW2?

Abraham Wald used inversion by recommending that the Allies reinforce areas of their planes that had no bullet holes. This was because planes hit in these areas, like the cockpit and engines, did not return, indicating their critical importance.

How can inversion help when the stock market falls?

When the stock market falls, inversion can help by encouraging you to consider why others might see the downturn as a buying opportunity, rather than a reason to sell. This can lead to more strategic investment decisions.

What is dollar cost averaging and how does it relate to inversion?

Dollar cost averaging is an investment strategy where you invest a fixed amount regularly, regardless of market conditions. It relates to inversion by helping investors avoid the anxiety of timing the market, which can be a common reaction during downturns.

How did Charlie Munger use inversion in his investment strategy?

Charlie Munger, vice-chairman of Berkshire Hathaway, used inversion by focusing on avoiding mistakes. He famously said, ‘All I want to know is where I’m going to die, so that I never go there’, highlighting the importance of considering what not to do.

Can inversion be applied to decision-making outside of investing?

Yes, inversion can be applied to various decision-making scenarios. For example, when choosing a leader, you might consider the traits you wouldn't want in a candidate and eliminate those options.

Why is inversion considered an effective problem-solving tool?

Inversion is effective because it encourages you to look at problems from a different perspective, often revealing solutions that aren't immediately obvious. It helps in identifying what to avoid, which can be just as important as knowing what to do.

How can everyday investors benefit from using inversion?

Everyday investors can benefit from inversion by using it to challenge their assumptions and make more informed decisions. It can help them avoid common pitfalls, such as panic selling during market downturns, and instead focus on long-term opportunities.