Value investors spend most of their lives trying to capitalise on the irrational behaviour of others. Be it short-termism, fear of missing out or greed driving the market, they are all emotions the value investor is usually less susceptible to.
But we come with our own set of psychological shortcomings, the most significant of which a strong propensity for stubbornly committing to ideas and refusing to change our minds even in the face of irrefutable evidence.
Changing your mind and reversing a prior decision, particularly if you have lost money, damages your reputation, is an affront to your own ego and shows the world that you are fallible. Sometimes it is the best decision you can make.
In our July monthly report for the International Fund, I confessed that we had sold Russian bank Sberbank just six weeks after we had first bought it:
The investment thesis on Russian bank Sberbank was that, for all the huffing and puffing, self-interested western powers were unlikely to inflict unmanageable damage on the Russian economy.
As unfortunate as it was for Ukrainians (or at least the majority of Ukrainians who don’t want half of the country becoming a part of Russia), that thesis was playing out as expected. Until the tragic downing of Malaysian Airlines flight MH17.
The subsequent escalation of tensions between Russia and the West clearly heightens the risks in this investment. Russian President Vladimir Putin refuses to back down and has apparently been sending even more troops and advanced weaponry to Russian separatists in Ukraine. The United States and Europe are likely to implement dramatically more severe sanctions on Russia, some of which will directly impact the ability of Sberbank to fund itself in European and North American financial markets.
We didn’t sign up for this, as the saying goes. Despite its apparent cheapness, all of our Sberbank securities were sold during the month.
As it should be, the decision was subject to a lot of internal debate and some external debate after the report was published. It’s quite possible that this turns out to be the wrong decision, and the pros and cons deserve to be explored in detail. But what should unequivocally be welcomed is the ability to change our minds. We will make mistakes and we will get things wrong. Generally, the sooner we recognise them the better.
North American luxury leathergoods retailer Coach has seen its share price fall 25% since we fessed up and sold it in October last year. Tesco shares have fallen 20% since our decision to cut our losses just a few months ago. These two decisions have been as important as any purchase during the past 12 months.
Although the attribution is dubious, Winston Churchill’s supposed quote sums it up nicely:
When the facts change, I change my mind. What do you do, madam?