Man Muss Immer Umkehren
Notes on Inversion, Dreaming Big, and Risk Management
There’s a fun little aphorism I came across recently that expresses to its reader the following caution: the greater danger for most of us lies not in setting our aim too high and falling short; but in setting our aim too low, and achieving our mark
This nugget, in its various permutations, has been attributed to a wide variety of folks, ranging from Italian renaissance painter and sculptor Michelangelo to former Ohio State Representative Les Brown.
It’s the type of statement that sounds good on paper but ultimately can be neither proven nor disproven, so maybe we should initially take it with a grain of skepticism.
Either way, the incredibly salient question remains: When it comes to our own lives, how high should we aim?
A short digression on finance: Modern portfolio theory offers the following maxim: Return is a function of risk.
More risk => more return
Unfortunately for you (and for me), to the extent you believe in the capital asset pricing model, this maxim is true only in the aggregate, not for individuals. Which basically means that if *you* (or I) take on more risk, *you* (or I) will not necessarily receive a higher return, but rather, the prospect of such, which prospect entails a higher probability of both a) ruin and b) riches, but the expected value of the high-risk path exceeds the expected value of the low-risk path, which path offers mainly the benefit of a lower P(ruin).
On average, in the markets, reality plays out basically in accordance. Some startups go bust, but a diversified portfolio of venture investments tends to outperform a diversified portfolio of secured investment-grade bonds and so on and so forth. (Side shout to erstwhile investment banker and junk bond king Michael Milken, whose Wharton MBA capstone noticed for the world that a diversified portfolio of high-yield bonds outperforms equities on a risk-adjusted basis! Yeet!)
But actually here’s the weird and good news: Your life is not the stock market. And what I mean by this is that the projects into which we invest our time and energy don’t really have the same characteristics as financial securities. But that said, they are really really fucking similar! So similar, in fact, that entire generation of otherwise brilliant private equity bros and investment bankers (including, on occasion, myself) have been hoodwinked into using Fama and French to manage their personal lives! 😬
And who could blame us? The risk vs. return heuristics that come packaged up with a bow from a generation of Nobel Prize winners in economics are like… fucking Promethean in nature. But real talk, if you try to apply them in a broader context (i.e. to your life) you could very well end up blowing yourself up à la Long Term Capital Management.
Anyways, this is relevant because the takeaway from the aforementioned aphorism is, in 21st century investment banking terms, that aiming for a lower long-term ‘return-on-life’ doesn’t actually de-risk your life at all. In fact, according to Michelangelo, aiming for a lower ‘return-on-life’ counterintuitively increases your risk! Because you might succeed at selling yourself short!
Net-net, I tend to agree. You either believe me here or you don’t. But if you do, the takeaway is to aim very very high. Aim for the stars, so to speak, because if you don’t, you are guaranteed whatever mediocrity you’ve implicitly agreed to as far as your life is concerned.
But okay, even if you agree with me on the “aim-high” premise, ideation is cheap and execution is everything. “Aim for the stars” is an emotionally-charged Disney phrase that, taken more literally, applies to a really small subset of humans mainly constituted by future astronauts and tech billionaires.
What does it mean for you or I to aim high in practice? I’d offer the following:
Aiming higher entails a shift in decision making and prioritization in order to maximize the likelihood of extreme positive events.
Two of the key frameworks I use in my own life to enable this are the forward solve and the backward solve. I’ve outlined each below.
Solving forward, we ask ourselves what the best possible outcomes are given the path we are already on, which really means the decision-making frameworks we use today. Everyone is doing their own thing in life but for the sake of example let’s use a typical NYC person: work at job, go to the gym once or twice, go to yoga a few times, party on the weekends, watch a couple Netflix shows, go on one or two hinge dates, etc. (By the way, this is an incredible and beautiful life I am describing here (not dissimilar to mine) - there is magic in simplicity!). If all goes well we’ll stay in decent shape, get promoted a few times, feel connected-ish to our community, watch some great TV, and find a pretty awesome gal or guy to share in the magic of the various moments.
The algorithm for the forward-solve is to average out your decision-making framework and habits from the past couple of weeks, assume conditions remain constant, and then extrapolate out weekly by something like ~260 (the number of weeks that will happen in 5 years) to see what a reasonable expectation would be for where you are going to land assuming society doesn’t collapse. This, as my investor readership knows, is how all financial forecasting is done and it’s usually pretty darn accurate or at least it’s the best we can do for now.
Franklin Covey said that one of the 7 habits of highly effective people is that they “Begin with the end in mind.” This may be true, but I think it’s much cooler to lead off quoting semi-obscure German mathematician Carl Jacobi who said, “Man muss immer umkehren!” (“Invert, always invert!”)
Because I am a pretty good standardized test-taker, I was once hired by a national test prep company to train high-schoolers from Long Island on how to ace the SATs. The cornerstone of their proprietary method was back-solving. After paying $1,200 and giving up their Saturdays for a month, students are taught to plug the multiple choice answer back into the original question and see if it works.
Because it saves time.
Back-solving your dreams is also a useful strategy. To implement it you assume that you have woken up on some day in the future *after* extreme positive events have already taken place. Within the realm of this fantasy, the next step is to use annoyingly specific investigative journalism to find the most likely path that you got there. (The ‘most likely’ part is the key! No lottery winning…).
For example, let’s say you wake up in a beautiful apartment next to the hottie of your choice. Whose apartment is it? Yours? Where is it, exactly? How much does it cost? When did you move in? Where did you live before that? Was it the apartment you are in now or was there a place you lived in between? Where is the rest of your stuff?
That exercise then repeated for every aspect in your fantasy life until it’s all pretty mundane and boring and not fantasy-like at all.
In a nutshell, close your eyes, manifest your wildest fucking dream and then, echoing David Byrne in the Talking Heads’ classic anthem Once in a Lifetime, you ask yourself, HOW DID I GET HERE. Then you make decisions in the present, that are consistent with the backwards-imagined path.
I’m not going to lie, this exercise is extremely difficult. It’s actually very boring and frustrating to try to think of how you might actually get there. And you may find that in slowly, ploddingly finding your way backwards from your wild-ass dream to your present state, you end up just saying fuck it and going to the bar.
And that’s because charting the path to achieving our dreams is also boring and frustrating. It doesn’t matter whether you start and the end and go backwards or start at the beginning and go forwards. It’s your life story and it requires thinking and imagination and hard work and doing a truckload of boring and unpleasant tasks. It also requires lots of waiting around (sometimes at the bar) while your subconscious chews on stuff and works things out.
But the second piece of good news is that if you care for your mind and body, the tag team of your conscious and subconscious *will* likely figure it out. Research suggests that your mind has about 100 billion neurons in with 4 quadrillion connections generating 23 watts of power, doing 100 trillion calculations per second, with information traveling between neurons at ~270 MPH. The world’s most powerful supercomputer isn’t sitting in an IBM lab somewhere, you already own it. And through conscious focus you can set its internal algorithms to basically solve for whatever you want. That’s an incredible amount of processing power to bring to bear on achieving your dreams, which is why it’s difficult to fail if you believe in yourself and never give up.
Forward solving and backward solving our goals are just two ways of reclaiming command of our own internal hardware and software. I find both strategies useful but going backwards allows a bit more imaginative freedom and offers up an opportunity to dream much bigger (you’ll notice that charting your way to a bolder dream requires a much more imaginative path, which is as true in our mind’s eye as it is in the prakritic world of atoms). There is another proverb here that seems equally applicable as the first which goes something like, “Shoot for the moon. Even if you miss, you’ll land among the stars ✨ “
Even in the markets, we still face all of the issues inherent in identifying and defining what risk even is and what it is not and why it’s important. If you haven’t already, I recommend checking out Oaktree’s very thoughtful memo on risk. There’s plenty of quotables in there but suffice to say the big takeaway is that with regards to investing volatility is neither a sufficient nor useful measure of risk. I tend to agree, with the caveat that from a quantitative perspective, ARCH ARIMA models and aggressive daily measurement of VAR have probably provided early warning signals that when heeded have saved broker dealers a lot of money. (Most famously Goldman Sachs who took heed of their quants’ models and dumped MBS during the financial crisis. Margin Call is a pretty fun movie that dramatizes this otherwise very dry subject!)