Invert, Always Invert: 5 Ways Investors Lose Money Near a Top

I have a market indicator nobody charts: a few of my aunties back home in Vietnam. They dabble in stocks and crypto, and they lose money nearly every time. Three times now, when they started asking me how to get in, a top came about 8 months later.

Three times is a tiny sample, so I don't trade on it. But it taught me something more useful: most money lost near a top isn't bad luck. It goes in a few ways that repeat every cycle.

Charlie Munger had a habit for this, borrowed from the mathematician Carl Jacobi: “Invert, always invert.” He explained it in a 1986 graduation speech. Don't ask how to win. Ask how you'd most likely lose, then stay away from it.

Last week I explained why I don't short an expensive market. Shorting is the loud way to lose money near a top. These are 5 quieter ones, and they catch patient, long-term investors, not just traders.

In 1972, Wall Street's favorite stocks were called the Nifty Fifty: Polaroid, Xerox, Avon, Disney, McDonald's and friends. People called them “one-decision” stocks. You bought them and never sold, because quality that good was worth almost any price.

So investors paid it. At the end of 1972, the Nifty Fifty traded at an average of 42 times their yearly profits, more than double the market's 19. Polaroid traded at about 95.

Then came 1973 and 1974. Polaroid fell more than 90% and Avon more than 85%. The businesses didn't vanish overnight. The price people had paid for them did.

The part most retellings skip: Wharton professor Jeremy Siegel later found that all 50, bought at the 1972 peak and held for 26 years, roughly kept pace with the market. A few great businesses grew their profits fast enough to justify the high prices people paid. But nobody knew in 1972 which ones those would be, and you had to sit through falls of up to 90% to get the average.

In the late 1920s you could buy stocks with as little as 10% down and borrow the rest from your broker. By August 1929, more than $8.5 billion was out on loan to people buying stocks this way.

With 10% down, a 10% drop wipes out your whole stake. Your broker asks for more cash, a margin call. If you can't pay, the broker sells your shares at whatever price the market gives. That selling pushes prices lower and sets off the next person's margin call. In October 1929, that chain reaction is a big part of why the fall came so fast.

Today's rules are much stricter, usually 50% down to start. But the borrowing is back. Investors owed about $1.45 trillion against their brokerage accounts in August, up 37% in a year and the second-highest on record, just behind June. By one estimate, that's around 4.5% of the whole economy, higher than at the 2000 and 2021 peaks.

It fits what I see in Smart X Terminal. As of September 28, its credit-conditions gauge reads 73 out of 100, which means lenders are still easy with their money. Easy credit lets borrowing pile up, and it's the first thing to vanish when prices fall.

Borrowing doesn't change whether you're right. It changes how long you're allowed to be wrong.

Money market funds were supposed to be as good as cash. In September 2008, the Reserve Primary Fund held about $62.5 billion, and just 1.2% of it was short-term debt issued by Lehman Brothers. When Lehman failed, that slice went bad. On September 16, the fund's value fell to 97 cents on the dollar.

Three cents was the loss. The real damage was the rush for the door. Investors asked for more than $40 billion back in two days, about two-thirds of the fund, and payouts were frozen.

Investors did get almost all of it back, but slowly. If you needed that money in October 2008, to pay a bill or buy something cheap, you couldn't touch it.

The same kind of door is being tested in private credit. On September 22, Apollo Debt Solutions, a $26 billion fund, limited withdrawals for the third quarter in a row. Investors asked for 14.7% back, and it pays out 5% a quarter. To be fair, requests eased from 16.8%, and these funds are built with caps. But the way out is set by the fund's rules, not by you.

On March 10, 2000, the Nasdaq closed at 5,049. Five weeks later, after a week in which it fell 25%, it closed at 3,321 on April 14. That's a third off the top in five weeks, and it looked like the sale of a lifetime.

For a couple of days, it was. By April 18 the Nasdaq had bounced 14%. Then it kept falling for two and a half years, to 1,114 on October 9, 2002. Anyone who spent everything on the April drop lost about two-thirds of it from there.

The first big drop rarely feels like the first. It feels like the bottom. That's why I don't plan to spend my reserves in one go. I'll stage it, a slice at a time, so being early costs me a slice, not the whole thing.

This one's about me. I started investing at 18. Since then I've been through a sharp crash and a smaller bear market, but everything I've done has happened inside one long upswing in the cycle. Everyone looks like a genius in a bull run, and that includes me.

So I don't put much weight on anyone's recent returns, mine included. A great record from the last few years mostly tells you the tide was coming in, not how someone acts when it goes out. I might be flagging myself here too. Time will tell.

Munger's inversion has a practical version. The psychologist Gary Klein called it a pre-mortem in a 2007 Harvard Business Review piece: before a project starts, imagine it has already failed, then write down why.

It beats asking what could go wrong. Research Klein cites found that picturing the failure as already done helps people spot the real reasons about 30% better.

For a portfolio it takes 10 minutes. Imagine it's the end of 2028 and your portfolio took a hit you can't recover from. Write down the 3 most likely reasons. Then check them against the 5 above: did you overpay, borrow, lock money up, go all in too early, or trust a record that was never tested?

Quick note: the readings and figures here are as of September 28, 2026, when I wrote this. Markets move, so for the live picture I keep Smart X Terminal updated in real time.

Below the line, I run the pre-mortem on my own money. You'll see the 3 ways my plan could fail, the one I can only shrink, and the signal I'd take most seriously.

On the free list? The credit and cycle gauges from this issue are live in Smart X Terminal, and they're a good place to start your own pre-mortem.