OMGI’s Nunn: Making sense of Buffett’s U-turns

“Uncle Liam, Peppa Pig is for babies,” my nephew sighed in response to my naive suggestion that perhaps watching the TV might be more fun than violently wrestling with his younger brother. Clearly in the few months since my last visit I’d become hopelessly out of touch. Despite having dedicated the majority of his early life to studying the adventures of the talking pig and accumulating as much Peppa merchandise as possible, he had now – without a hint of embarrassment at the abrupt about-face – changed his mind. “I’m four years old now,” he announced, “I like Batman”.

As adults, very few of us retain this ability to freely discard our most tightly held convictions. At some point in our mental development, our egos start to get in the way. Abandoning a long-held idea or belief, especially when we have defended it publicly, can be painful and we will often go to great subconscious lengths to avoid doing so. As psychologist Dan Ariely describes it:

‘Once we take ownership of an idea… we love it perhaps more than we should. We prize it more than it is worth. And most frequently, we have trouble letting go of it because we can’t stand the idea of its loss. What are we left with? An ideology – rigid and unyielding.’

Nowhere is this truer than in the field of investing, where changing your mind about a stock can easily be interpreted as cowardice in an industry that often prizes swash-buckling conviction over nuance; and as uncomfortable as it is for me to admit, value investors are likely to be particularly vulnerable to this trait.

If, like me, you pride yourself on being willing to take contrarian positions in out-of-favour businesses, it can be all too easy to become rigid in your analysis and dismiss any incremental share price weakness as mere evidence of Mr Market’s irrational short-termism. But of course inevitably, albeit hopefully rarely, it won’t always be Mr Market that is valuing the business incorrectly: sometimes it will be you making the mistake. Toeing the fine line between contrarian courage and stubborn arrogance is undoubtedly one of the biggest challengers that investors face.

It was therefore quite interesting to note that while I was busy debating cartoon characters with a four-year old, other value investors from around the world were gathering in Omaha to pepper Warren Buffet and Charlie Munger with questions at Berkshire Hathaway’s (their investment company) annual meeting.

Most notably this year, there were a number of enquiries into Berkshire’s recent high-profile investments into the airline and technology sectors. With Buffet and Munger having spent most of their careers dismissing airlines as death traps for investors and avoiding technology companies on the grounds that they don’t understand them, it’s perhaps unsurprising that these decisions have raised eyebrows and prompted some observers to question whether the ageing billionaires might be losing the plot.

Personally, I don’t buy it. It would have been the easiest thing in the world for Buffet and Munger to have never gone anywhere near an airline or a technology stock for the rest of their careers. To contradict some of their most well-known and oft-quoted investment advice and admit their prior positions were flawed is an incredibly gutsy thing to do.

The psychological strength it takes to perform that kind of public about-face is extraordinarily rare and there’s no doubt in my mind that it’s that inner-strength that explains why they are amongst the most successful investors of all time. Even after all the success they’ve had, they haven’t allowed their philosophy to mutate into rigid dogmatism. They haven’t allowed their egos to swell to the point at which they can’t admit mistakes. They’ve never lost the ability to change their minds.

In my eyes, whether you’re a 93-year-old billionaire admitting you were too hasty to dismiss a sector of the stock market, or a four-year-old boy coming to terms with the fact Peppa Pig is actually quite annoying; changing your mind when the facts have changed is nothing to be ashamed of. At the very least, it’s proof that your mind remains open to the outside world and is capable of absorbing new information; and there’s arguably no more important skill to master in investing, or in life, than that.

Liam Nunn is manager of the Old Mutual European (ex UK) Equity fund