In a recent podcast, Howard Marks recalled his chat with a pension fund manager who said that his fund was “never above the 27th percentile or below the 47th percentile. It was solidly in the second quartile.” The net result of that consistency during a 14 year period was to move the fund into fourth percentile. Marks concluded that he did not necessarily want to be in the top decile every year but being consistently good enough would ensure long term greatness. This thought process is similar to Warren Buffet’s as this blog by Sahil Bloom on ‘Inversion’ as a mental model for problem solving highlights.
“Warren Buffett famously stated that there were only two rules of investing:
“Rule #1: Never lose money. Rule #2: Never forget Rule #1.”
Buffett (and his business partner Charlie Munger) have often evangelized the benefits of simply avoiding stupidity vs. seeking brilliance. This is a classic example of inversion in action.
When it comes to investing, the first point to internalize is that achieving long-term outperformance is extremely challenging (some would argue impossible!).
(Note: If anyone tells you otherwise, you should run in the other direction!)
Applying inversion, rather than solving for how to achieve outperformance, try solving for how to achieve underperformance. This sounds crazy, but bear with me…
What type of behaviors, thought patterns, and decisions would effectively guarantee you underperform the market? Said differently, how do you guarantee you break Buffett’s Rule #1 and lose money?
By answering these questions, you are eliminating a lot of actions that may have crept into your investing process and scuttled your performance goals. Through this process of elimination, you may find a cleaner, shorter list of behaviors and actions that will help you to craft a strategy for outperformance.”
Sahil highlights the history of ‘Inversion’ as a problem solving tool going back to Stoic philosophers and then shows how it is applicable in various fields such as investing, business, leadership and relationship.
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Note: The above material is neither investment research, nor financial advice. Marcellus does not seek payment for or business from this publication in any shape or form. The information provided is intended for educational purposes only. Marcellus Investment Managers is regulated by the Securities and Exchange Board of India (SEBI) and is also an FME (Non-Retail) with the International Financial Services Centres Authority (IFSCA) as a provider of Portfolio Management Services. Additionally, Marcellus is also registered with US Securities and Exchange Commission (“US SEC”) as an Investment Advisor.
