This article is authored by MOI Global instructor Larry Sarbit, CEO and CIO at Sarbit Advisory Services, based in Winnipeg, Canada. The firm serves as the sub-advisor on two funds for IA Clarington.
“It is in the nature of things that many hard problems are best solved when they are addressed backward.” —Charlie Munger
Last month, I was honoured to speak at the Ivey School’s Ben Graham Value Investing Conference in Toronto. The topic I chose to address was the concept of inverting as it applies to investing. The quote above is from Charlie Munger’s 1986 Harvard School Commencement Speech, where he referred to a brilliant 19th century mathematician, Carl Gustav Jacob Jacobi, who coined the phrase, “Invert, Always Invert!”
Munger, who for over four decades has been Warren Buffett’s investing soundboard at Berkshire Hathaway, built his talk to students on a previous speech given by famed Tonight Show host Johnny Carson, who, Munger noted, was once asked to talk about how to be happy. Carson said he couldn’t do that but he could tell them, from personal experience, how to guarantee misery and proceeded to give them three ways to achieve that goal: One, ingest chemicals (alcohol and drugs) in an effort to alter mood or perception; two, be envious; and three, practice resentment.
Munger then proceeded to add a number of other sure-fire ways to assure a miserable life. His last prescription is my favourite: “Go down and stay down when you get your first, second, or third severe reverse in the battle of life. Because there is so much adversity out there, even for the lucky and wise, this will guarantee that, in due course, you will be permanently mired in misery.”
My contribution at the conference was to apply the concept of inversion to investing. I thought it might be instructive and amusing to discuss guidelines about our world of buying equities by inverting — creating a set of behaviours in investing that I believe will absolutely guarantee failure. I don’t have the space in a column to deal with the full list I have developed. So, I will outline a selection of principles that I believe, if practiced, will guarantee large losses.
Trust unethical people
Warren Buffett has highlighted integrity as a key characteristic he looks for in people he hires, alongside initiative and intelligence. If they lack this first feature, the latter two “will kill you.” Thus, to ensure that you will lose money in investing in common equities, make sure that the people at the senior level of the company you are considering buying shares in have a checkered background. This can sometimes involve some deep digging to find out about these individuals. But for a quick check, simply use Google to do a search on these people. It’s amazing the depth of information you will find about who they are. Flipping this on the other side, we prefer to find people who not only don’t have a sordid background but instead, have a history of great achievement and, in fact, deserve to be making the decisions for your business, while treating all shareholders fairly. If you want to fail, I highly recommend you don’t look for such individuals.
Invest with your emotions — don’t think
At all times, avoid rational, business-like thought. Make sure you do not behave in a calm fashion, but instead, make sure your adrenal glands work overtime in your body. Adrenaline prepares the body for the ‘fight or flight’ response in times of stress and makes you ready to act suddenly. This will help you act instantly, to buy or sell a stock, without any rational consideration. I prefer Blaise Pascal’s approach, “All of humanity’s problems stem from man’s inability to sit quietly in a room alone.”
Be impatient: Demand equity profits now
Pretend you are a three-year-old when investing. Children have no patience; they want ‘it’ and they want it immediately. Not getting a quick return from your investment? Sell! Be sure to avoid undervalued, ignored stocks that will take time to be recognized. This contrasts with business people who build their companies over years and decades with no expectations of instant returns but do create, on occasion, great amounts of wealth over the years, often handing the company down from generation to generation.
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