How to Make Sure you Never Prosper

Speaking to the graduating class of the Harvard School in Los Angeles in 1986, Charlie Munger recalled the only commencement address he had ever heard that he wished had gone on longer. It had been delivered by comedian and TV host Johnny Carson.

Carson told the students that he could not offer any specific advice that would guarantee a happy life. He could, however, offer several reliable ways to guarantee a miserable life.

His recommendations were straightforward: become dependent on substances that alter your mood, cultivate envy, and hold tightly to resentment. Carson had experimented with all three and could personally attest to their effectiveness.

Munger liked this twist on the standard approach to advice so much that he borrowed it and added several prescriptions of his own. Be unreliable. Learn only from your own mistakes and ignore the accumulated wisdom of everyone who came before you. When life knocks you down, stay there.

Munger was demonstrating one of his favorite mental models: inversion. When a question is difficult to answer directly, turn it around. Instead of asking what will produce the outcome you want, ask what would virtually guarantee the opposite.

Want to be trusted? Study the habits of thoroughly unreliable people. Want a strong marriage? Consider what would predictably destroy one. Want to make a good investment? Begin by asking how the money could be permanently lost.

I have learned to use inversion. I use it to identify common risks, human vulnerabilities, and forces of entropy that lead to failure. Seeing that list of known adversaries working against my progress and happiness, I feel obligated to set up defenses against them. Those defenses generally involve establishing the unyielding principles that must be implemented with helpful tools and disciplined habits. Of course, inversion as a mental model does not guarantee success, but it does remove most of the excuses I might use to rationalize lack of progress or failure.

I’ll demonstrate inversion with a useful example. I have often been asked to share general financial guidance with adult children of clients and friends. I enjoy doing it because I know good financial habits will make a meaningful difference in their lives. I want them to walk away with something deeper than “max out your 401K”. My first priority is to convince them that the payoff for good financial habits is not a comfortable retirement forty years from now—the payoff is immediate and lasting prosperity. Financial independence might take a few decades; peace and stability can be had now.

How can prosperity be achieved within a few months? To find the answer, let’s invert and ask how to guarantee a miserable life trapped under the tyranny of household finances.

There are several dependable methods, I highlight three below.

Never do the math.

Never actually do the work to understand how much money is coming in, where you are spending it, and how much is left over or is ending up as debt on the credit card. This is not only effective at bringing financial suffering, it requires no effort and can be sustained for quite a while before its true impact is felt. Ignorance is bliss until that day when you need tires on the car you need to get to work, the checking account is down to $178, the credit card is maxed out, and you still need to get your wife’s birthday gift for tomorrow.

The Defense: The unyielding principle is that you need margin, meaning you must spend less than you bring in. To do that you must predict short-term expected and unexpected expenses. The tool is a cash flow projection. This is not complicated and does not require an MBA. As accurately as you can, project for next month how much cash will come in, how much you are obligated to spend on taxes and bills and rent, and proactively decide where you will spend your discretionary income. There must be leftover, or margin for savings. Then extend that projection out for 12 or 24 months adding things like trips and gifts and known but unplanned things like new tires. This is an exercise of facing the truth of math, and that alone is a powerful motivator.

In the style of James Clear (author of Atomic Habits), make this an easy process that once implemented might take 30 minutes a week.

Remain ignorant.

Taxes are complicated. Investments are confusing. Employer benefits come with documents no normal person would choose to read. Use this as justification for learning none of it. The rules will still apply to you, of course. You will simply experience them as a series of surprises and missed opportunities.

The Defense: Imagine you move to Paris, but decide French is too hard so you resist learning even the most basic phrases. Clearly you will remain an outsider and not gain the full cultural richness you hoped for. That’s what finance is like for many. An intimidating foreign language so you don’t bother to learn. Thriving in the American financial system means learning how investing works, how taxes work, and how to utilize the benefits provided by employers. I encourage young people to start by learning what all the deductions on their paystub are about.

Most critically in today’s world of abundant “content” and “influencers”, learn from a reliable source with depth and experience. Beware, most financial products desperate to grab your attention are likely bad for you.

Postpone Everything Meaningful

Turn saving money or making money into an extreme sport to demonstrate your extraordinary discipline. Let fear shut down every spending decision. If saving 15% is virtuous, saving 50% is saintly. Put off the trip with your parents. Neglect the hobby that makes you feel fully alive. Work through every family gathering. Delay service, creativity, and time with people you love because these things can supposedly be recovered later.

The Defense: Recognize and define honestly the tradeoffs you are making to accelerate financial objectives. Extreme levels of saving or fear of loss or obsessions about spending can be as destructive to prosperity and happiness as overspending or debt.  Some experiences have expiration dates. Your health changes. Parents and grandparents age. Children grow up. Friendships drift. Money can be accumulated and replenished; time cannot. If you are proactively tracking your cash flow, you will know where there is flexibility.

Rules, Tools, and Process

The routes to failure are visible, reverse them. The financial operating system that leads to sustained prosperity and balance does not need to be elaborate. It begins with three practices. Know where your money goes, proactively decide what your priorities are and then direct your resources accordingly. The payoff for the inversion technique only comes when you translate the analysis into repeated virtuous habits that defend you against failure--a weekly financial checklist, a quarterly planning session, a dashboard monitoring your progress.

Start with the basics and an openness to learning. Sustained prosperity is worth the effort and sustained financial stress is worth avoiding. So try inverting. Or, if misery is the objective, don’t invert and follow the advice offered by Carson and Munger.

Source: Charles T. Munger, Harvard School Commencement Speech, June 13, 1986.