Invert – Always Invert!
Key points:
- Invert your thinking: Look backward to identify risks and potential problems in your financial plan.
- Case study exposes gaps: High earners may lack essentials like life insurance, disability coverage, emergency funds.
- Avoid big mistakes first: Eliminating major risks often matters more than chasing higher returns.
- A planner’s job is to find holes: Fiduciary financial planners focus on spotting weaknesses in your overall plan.
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Invert – Always Invert! – Transcript
Invert, always invert. Thinking backwards can help you avoid problems.
Your financial planner should be looking for problems, looking for holes in your plan.
Whenever we get to this point in the planning process, I’m reminded of this phrase made famous by Charlie Munger: “invert. Always invert.”
Now. Charlie Munger didn’t make that phrase up, on his own.
He just made it famous.
Munger found that quote was from a German mathematician named Carl Jacobi.
When he wasn’t building “differential equations,” he was re-constructing algebra.
Now, I’m not sure about you, but a lot of the algebra that was taught – when I went to school – was based on Jacobi’s work.
So, here’s a simple example. Solve for x.
In this case, X is six. Now, that was an easy one.
Here’s a (fictional) example:
And this is something (similar to what) we see in our office from time to time.
An individual came in to meet with us. A gentleman 32 years old. He is making big bucks in a job in software.
Last year, he made a lot of money day trading in an account at Robinhood.
He recently bought a house, so he’s now got a big mortgage.
His wife also works, but doesn’t make nearly the kind of money that he makes.
And they’ve got a 2-year-old daughter.
He wants to hear our take on the markets.
As we are going through our data gathering process, we ask, instead, “hmmm, what could go wrong, with this picture?”
Well, we found, in going through the planning process, that he doesn’t have nearly enough life insurance.
He had a whole life policy that his fraternity brother from college sold him a few years ago.
Not really helpful.
This guy instead needed a massive amount of cheap, term life insurance. And he needs it, like yesterday.
What would happen if he were hit by a bus?
He’s going to need to cover that huge mortgage, plus any debts that he has.
He’ll need three to five years of expenses for the survivors, for his family.
Plus he will need the estimated cost of college for a 2-year-old.
We ALSO found he had a minimal amount of disability coverage through his employer. If he were suddenly disabled (and that’s how these things often happen – suddenly) he would not enough disability coverage, to cover his bills.
He also had no emergency fund. He had no safety net.
Instead, that money was in a day trading account at Robin Hood.
Now to be clear, we don’t sell disability coverage.
We don’t sell life insurance either.
We talked about having a safety net in last week’s video.
But as fiduciaries and CFP financial planners, this are topics we need to be well-versed in — and areas that need to be addressed, addressed immediately.
What we’re looking for, are the holes, the problems in your path, as we’re putting together a plan for you.
One of Charlie Munger’s very famous sayings was, “let me know where I’m going to die, and I’ll make sure not to go there.”
It sounds funny, but his point was, look for the problems. And do your very best to avoid them.
People want to (usually) plan for optimal outcomes. We’re looking “to make as much money as we can,” or basically, other ways of saying we “want buy our dreams, our happiness.”
Very often your goals and dreams may be accomplished by avoiding the big error, or avoiding the big mistakes.
What Munger says, and it aligns with what we look for also, is “what are the ingredients that we see over and over that create a miserable life?”
Many times, in public talks and speeches, Munger would bring this up. He would ask, “what are the ingredients that you see over and over that would create a miserable life? Let’s work to avoid those kind of things that create a miserable life. And by avoiding big mistakes, big errors, you can pretty much find your way down the right path.”
So we are building plans for clients, or, when we’re listening to their goals and dreams, we are also thinking (and asking)
“OK, what could go wrong? What would be the worst outcome?
What would be the outcomes we want to avoid? Then, let’s work the problem backwards.
Your financial planner should be able to point out the holes in your plan. Or point out the pitfalls… the places, or things that could go wrong.
Remember to invert, always invert. Thinking backwards can help you avoid problems.
