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

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:

1. Where there were lots of bullet holes.
2. Some bullet holes, or
3. 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.