Nearly all investors would have either heard or recited the following quote erroneously attributed to Lord Keynes “When the facts change, I change my mind. What do you do, sir?”
Whether or not Keynes ever said it matters less than the principle neatly captured by the quote: the importance of intellectual honest and flexibility when faced with new evidence.
Successful investors know that being able to adapt their thinking to new information is an essential skill. Don’t take my word for it, here’s Charlie Munger (yes he did say this):
We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.
Obviously changing our mind can be very hard to do. It is especially difficult if we’ve expressed our opinion publicly or been quoted in the media.
For example, I know one portfolio manager who once worked as a chief investment officer for a large fund manager. The role required him to give frequent interviews where he was expected to offer views on the stock market and discuss the investment thesis for company in his portfolio.
Over time he noticed that it was much harder to sell a stock with deteriorating prospects if he’d recently mentioned the stock in the press. The interview had put him in the position where subconsciously he was being forced to chose between being right (holding the stock) and making money (selling the stock).
Eventually, this fund manager went on to start his own firm and made sure never to give an interview again!
So far, 2017 has seen several high profile investors change their minds and reverse long-held opinions. Here are 4 examples:
- Warren Buffett builds a large stake in Apple after stating for years that tech companies are outside of his “circle of competence.”
- After a lifetime of investing based on mean reversion, Jeremy Grantham admits that, (*gasp*) this time might be different.
- Warren Buffett says that the stock market is cheap if interest rates stay low. This comes despite his preferred valuation metric – market cap to GDP – trading at extreme levels.
- He’s published 11 editions and sold over 1.5 million copies preaching that the market’s a “random walk”, but Professor Burton Malkiel now believes that the market can be beaten.
Now all we need is for John Hussman to launch a trend following strategy and Hell will have well and truly frozen over!
Seriously, how should we react when the luminaries of investment and finance change their minds? It depends. But I do know that we shouldn’t expect anyone to stick to an opinion no matter what.
Demanding consistency for consistency’s sake is foolish, as Ralph Waldo Emerson warns:
A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. With consistency a great soul has simply nothing to do. He may as well concern himself with his shadow on the wall. Speak what you think now in hard words, and to-morrow speak what to-morrow thinks in hard words again, though it contradict every thing you said to-day. — ‘Ah, so you shall be sure to be misunderstood.’ — Is it so bad, then, to be misunderstood? Pythagoras was misunderstood, and Socrates, and Jesus, and Luther, and Copernicus, and Galileo, and Newton, and every pure and wise spirit that ever took flesh. To be great is to be misunderstood.
By demanding consistency of others, we push them into prioritising the opinions of other people over looking for facts and arriving at conclusions based on evidence. Do we really want someone like that to manage our money? No, investors have to and should change their minds.
That said, investing for the long-term requires the patience and discipline to stick to a strategy. This is impossible if you continually flipflop between ideas. After all, this is exactly what drives performance chasing and the behaviour gap.
We need to strike a balance between flexibility and determination, between openness to new information and conviction. It’s a balance that’s difficult to achieve.
I’m asking for you, my readers, to help me answer this question: How can we tell if a new opinion’s a change in the face of new information or simply a back flip?