Common “Verted” Questions
One of the most common things you do when you approach a stock is to estimate intrinsic value in the long run.
How much is it worth?
How much will I make?
How long will it take?
Categorize these questions as forward looking.
If the growth prospects are there, or if it looks like the next big thing, these questions help you jump on the bandwagon.
E.g. it’s easy to join the mad dash with the hottest thing like the Social Media ETF (SOCL). After all, the internet is only going to grow as more devices are used by people to be constantly connected.
But with every investment there are two sides to the story, and the other side is what Jacobi and Munger want you to think about.
Invert, Always Invert. 5 Inverted Investing Questions
The purpose of investing is to make money. To make money, there are two main ways.
- “Risk equals reward” style of investing
- Conservative style by focusing on not losing money
Warren Buffett chooses the second option.
Rule No. 1: Never Lose Money.
Rule No. 2: Never Forget Rule No. 1.
Unless you and I are trained, the most common way to think is the first option. However, to get to Buffett’s playing field, it takes lots of trial and error to get from “how much can I make?” to “how do I not lose money?”.
Same destination. Different road taken.
Here are the top 5 inverted questions I like to ask myself when looking at stocks. It helps me break up the mindset of trying to find bullish reasons.
- How can I lose money? vs How can I make money?
- What is this stock NOT worth? vs What is this stock going to be worth?
- What can go wrong? vs What growth drivers are there?
- What is the market implied discount rate? vs What is a fair discount rate?
- What is market implied growth rate? vs What is the future growth rate?
and a bonus question.
- If this drops 50% today, will I buy more? vs When will I sell?