"Invert, Always Invert", says Charlie Munger of Berkshire Hathaway.
Who is Charlie Munger and what does this quote mean? Charlie Munger is the other half of the successful duo that make up the famous partnership between Warren Buffett and Charlie Munger. Charlie Munger graduated from Harvard Law School and went on to a successful career in law, real estate development, Investing, and eventually partnered up with Warren Buffett to help build Berkshire Hathaway into one of the largest publicly traded companies in the world.
The quote "Invert, Always Invert", is Charlie Mungers belief that analyzing a problem from a different perspective can help solve many challenges. The way he solves problems is counter to how most people approach difficult situations. "Many hard problems are best solved when they are addressed backward". For example: if you want to help your company and are not sure what to do, you might ask "what is the best way to hurt my company?". By asking this question it may illuminate ways to help your company that weren't obvious before.
Charlie Munger gave a speech some years ago referring to the famous late night host Johnny Carson, in which Carson described to a graduating class all the ways a person can be miserable. Carson said while he couldn't tell the graduating class how to be happy, he could tell them from personal experience how to guarantee misery. 1. Ingesting chemicals in an effort alter mood or perception 2. Envy and 3. Resentment. Johnny Carson used the inversion principal, using the idea of not solving for X (happiness) he solved for non-X (misery)...you end up with what you really want (happiness).
While Charlie Munger is a genius by all accounts, he has said more than once, “a very effective way to be smart, is to consistently not-be-dumb.” It easier to not-be-dumb than it is to be smart since you can often simply avoid certain types of decisions and activities that are riddled with land mines. Munger says, "Just avoid things like racing trains to the crossing, doing cocaine, etc. Develop good mental habits. A lot of success in life and business comes from knowing what you want to avoid like early death, a bad marriage, etc."
So in terms of investing, if you aren't sure what do to, some inversion thinking can help. Let's say you want to retire comfortably at some point in the future. Here are some inversion questions if you aren't sure how to plan for a comfortable retirement.
Inversion Question: How do I guarantee I have no money in the future?
Answer: Spend more money than you make. Save nothing. Load up on debt.
Inversion Question: How do I make sure I do not understand how I am invested?
Answer: Do not read. Avoid doing any research. Do not ask questions of your advisor if you use one.
Inversion Question: How do I increase the likelihood of my investments not doing well?
Answer: Invest in things you don't understand. Pay a lot of money.
Most times avoiding what you don't want is extremely powerful in moving you closer to what you actually do want. Use the idea of inversion to help you not only with your finances but also with other aspects of your life. So when you face a challenge and you aren't sure how to attack it, you might try doing as Charlie Munger does, "Invert, Always Invert".
The two staples of any diversified portfolio are 1. stocks and 2. bonds. What makes these two asset classes differ is not only in the types of claims they represent (ownership vs. debt), but they also in the structure of their payments to investors.
Whereas stocks are perpetual and may make dividend payments that are unknown ahead of time, bonds exist for finite periods of time. Bonds have a maturity date when the principal is scheduled to be paid back to the investor, however, prior to the maturity date they make scheduled payments that are specified in advance, (called coupons payments).
The first paper discusses how default-free bonds are priced from market-determined yield curves. From these yield curves we can derive the prices and yields on both zero-coupon bonds and coupon bonds that are traded in the secondary market.
The second paper shows how to calculate three types of Duration: Macaulay, Modified, and Dollar Duration. The last part of the paper covers how to calculate bond convexity.
The third paper discusses how to take into account the unique features of zero-coupon bonds and coupon bonds when calculating rates of return on portfolios that hold these types of bonds.
Below are the 3 Morningstar articles referenced above.
Bull Markets Come In All Shapes and Sizes
While this analysis is informative, it’s still an incomplete picture of the anatomy of bull (and bear) markets. Below, we will examine this same data from four other perspectives:
Click here for the entire article from Newfound Research via Morningstar Magazine (PDF version).
This article originally appeared on Flirting With Models, a blog by the firm Newfound Research, a quantitative asset manager. This article also appeared in the April/May 2017 issue of Morningstar Magazine.
Paul R. Rossi, CFA