How to "Think Backwards" and Chart Your Course

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March 29, 2024
How to "Think Backwards" and Chart Your Course
Written by Matt Burr, General Partner

I oftentimes find myself thinking about the process of thinking and wondering how I might do it better. How can I process the information of the world more efficiently and more effectively? How can I parse through the available evidence to make better predictions, both in investing and in my personal life? In pursuit of this, I’ve read countless books, watched YouTube videos, and listened to podcasts in the hopes of finding ways to upgrade my own abilities. I’ve listened to different luminaries describe myriad techniques such as using history to predict future events, using Bayes’ formula to update one’s conclusions, and calculating expected values, all in the hopes of arriving at a more informed, accurate decision.

One of my favorite methods, as the title of this newsletter suggests, is the art of thinking backwards. Funnily enough, I was first introduced to this concept by my organic chemistry professor in college (sadly, this remains the sole piece of information I remember from this class, probably explaining my poor grade). Here, he began by discussing how to manufacture a new compound from an existing compound. He suggested that the best method to accomplish this task was actually similar to what was done in military planning, which was to approach the problem by thinking backwards. In our class, that meant starting with the ending molecule and identifying the intervening compounds and reactions that would take you to the beginning specimen. According to him, effective military logistics follow a similar process, whereby a general might first identify his end goal (perhaps attacking an enemy location), and work backwards from that to guide his route, the necessary equipment to bring, and the types of troops to employ. Candidly, I have no idea if this is an accurate portrayal of military logistics, so if you have served in a military capacity, please feel free contact me and set me straight. Regardless, I remember being fascinated by this concept, which seemed so foreign to how I normally approached problems.

Over time, I have seen numerous, highly capable people advocate a backwards-thinking approach. For those of you who enjoy Ted Talks, former counterterrorism official Philip Mudd has a fantastic presentation (and book) that describes this process in depth. Mudd describes the increased efficiency this technique allows when planning one’s travel. For example, if you’re taking a trip from your home in Boston to a conference in Tampa Bay, there are almost an infinite number of ways to get there. However, if you know that the conference starts at 7am sharp on Friday, it will probably be more convenient to stay in a hotel than flying down that morning. And then you figure you’d prefer a short drive to the venue, so you look for a hotel within a fifteen-minute radius. From here, you determine the closest airport, and from there, the details of the flight from Boston.

At this point you may be thinking that this is all obvious (and perhaps you’re wondering why you’re still reading). But if it is so obvious, then why do so many of us (myself included) fail to apply it to other areas of our life? I’ll use myself as an example here and admit that many times I’ve started large projects by immediately diving in and looking to gather and analyze data. And this oftentimes led to several false starts when I realized I was looking at the wrong information. Instead, I should have started at the end, asking myself what I was looking to accomplish and what question I was hoping to answer. Only after this initial step would it then make sense to collect the data necessary to answer the question. This mistake can also happen when conducting diligence on a potential acquisition target. People get excited, jump into various workstreams, and become inundated with data and competing priorities without a clear view of the end objective. Instead, we should pose the central questions as to whether a company is a high-quality asset and if the risk of a deal is manageable. Then, we should develop the necessary questions and criteria to help us answer those questions. Finally, we begin to gather the data. In other words, we start at the end and work backwards.

Former CIA case officer John Braddock, another advocate of thinking backwards, describes its use in a process called the DADA method. He explains that this process is a modified version of Colonel John Boyd’s OODA Loop. For those unfamiliar with Boyd and his work, he was a military pilot and polymath whose work inspired the air force to reconfigure their fighter planes for greater maneuverability. OODA is an acronym for Observe, Orient, Decide, and Act. Those pilots in a dogfight who could go through an OODA loop more rapidly than their adversaries generally won the battle. DADA, for its part, stands for Data, Analysis, Decision, and Action. In our daily life, we tend to start at the beginning of this process. In other words, we first gather data about the world, analyze it, decide the best course of action, and then act. This works well for 99% of our day. But what about for larger, more consequential decisions? How can we optimize our approach to make the best decision possible?

According to John, it makes sense to start with the Decision step in the DADA process, and first identify the range of options/actions available. Perhaps we have three companies we are evaluating, but we need to focus on one. How do we decide which one to prioritize? Beginning by analyzing reams of data would be highly inefficient. So, instead, we first identify the options available for us (in this case, the three companies and which to diligence first). Second, we develop and list the key criteria and/or questions that will best help us to make the decision. Maybe it’s understanding and comparing each company’s growth rate, revenue retention, and EBITDA margins, as we believe those are most predictive of success. The point is, we make these criteria explicit. We use them to begin to gather the necessary information, which we can then analyze. This analysis then informs our decision, from which we act.

Starting from the decision and working backwards helps us prioritize an otherwise overwhelming amount of data. It helps us to focus on the right things first, the key requirements needed to make the decision. Of course, we need to stay open to new information, new requirements, and new data. But looking ahead to the end goal ensures we’re thinking clearly, working on the right thing, and applying the information to our end objective. If you encounter a challenging problem and are unsure where to start, start at the end. Ask what your options are, what criteria you require to choose between them, and only then begin gathering and analyzing the data. Have fun experimenting with your own DADA process. I hope it proves as helpful to you as it has been for me.