The Inversion Rule of Carl Gustav Jacobi

Carl Gustav Jacobi was a German mathematician who lived in the 19th century. He believed that the answers for difficult maths problems could be found if the problems were expressed in the inverse.

The hardest problems in life are also best solved in reverse.

What does this mean?

Inversion is the process of solving problems by first understanding the opposite approach.

  • Understand a desired outcome or goal. Say, you want to be healthy. Here, health, is the goal or outcome.
  • Figure out the steps and processes that will lead to the opposite outcome. In this case, disease would be the opposite outcome.
  • Do the opposite of the steps that lead to the opposite outcome. In this case, do the opposite of the things that would lead to disease.

Charlie Munger is a strong proponent of this idea. For example, his advice on how to be successful was to tell how to have guaranteed misery in life:

  • Be unreliable.
  • Learn only from personal experience; minimize what you learn from others.
  • Go down and stay down when you get your first, second and third severe reverses in the battle of life.

If you do the opposite of the above, you are likely to be successful.

You can similarly invert anything: successful investing, fulfilling marriage, respect from kids, etc and get the answers you want and the answers that will work in real life.

When I look at investing, the answers I get to successful investing are:

1. Good investing results from strategy and process. It does not come from finding an obscure investment that does well in the future before anybody else. The key is : Buying at lower prices and selling at higher prices. Even simple buy and hold will work only if you are patient enough and buy at lower prices and not sell at those prices.

2. The process that we have should get rid of emotions as much as possible, hope, fear and greed. It should not lead us to blindly follow the herd.

3. It is not finding the next best thing, but having a process that minimizes risk and maximizes return. Look at the stocks that Walter Schloss owned in the 1990s.

4. Unprecedented gains in investing are about luck. The aim should be to develop skill in the process of investing.

5. Some investments, no matter how hard we try, will not work out. That is the reason we need to be diversified.

6. This time is never different. If you buy high, you will suffer usually.

7. The mindset of an investor is that when prices are low to the real value, then the risk is low. The risk is high when the price is high to the real value.

So, invert, always invert.


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