“Faced with the choice between changing one’s mind and proving there is no need to do so, almost everyone gets busy on the proof.John Kenneth Galbraith

The ability to change or adapt one’s strategy is extremely important in investing. Warren Buffet started out as a “Cigar Butt” investor, à la Benjamin Graham. Although it took over a decade, he gradually changed his strategy, and began focusing on the qualitative aspects of businesses such as management, competitive advantage etc. This is not to say that he pays no attention to intrinsic value anymore; he simply tries to buy great companies at very attractive prices.

I’ve noticed recently that various famed value investors have evolved in their investments. In a recent article, Whitney Tilson stated:

“I’ve come to a somewhat similar conclusion with respect to paying more attention to macro considerations in individual stock selection and overall portfolio positioning. Like many dyed-in-the-wool value investors, I have traditionally left macroeconomic or political forecasting to the pundits and focused almost exclusively on individual, bottom-up stock selection.”

Mohnish Pabrai, another famed value investor, has also evolved and rethought his strategy:

“There is a lot to be said for running a concentrated portfolio. Good investing ideas are scarce. It is very hard to find dozens of them. Also, as Buffett says, why would you invest money in your 30th best idea versus investing more in your very best idea? And Charlie Munger is on record stating that a well diversified portfolio can be constructed with just four positions.” Before continuing “One needs to be a learning machine and be willing to give up some of our best loved ideas when the evidence suggests they are flawed. Going forward, to temper volatility, Pabrai Funds will endeavor to size positions at 2%, 5% or 10% of assets. For new positions the norm will be a 5% investment. Stocks that strongly correlate (that is move in lock-step with one another) will be sized at 2% and once every few years positions will be up to 10% of holdings.”

Evidently, Tilson has changed his analytic strategy and Pabrai has changed his allocation policy. There is much to be said about investors who manage to overcome biases such as “rationalization”, “overconfidence”, “anchoring” and “confirmation”, and change their investment strategies to improve their results. These investors, like Buffet, are the most likely to find continued success. “When the facts change, I change my mind. What do you do sir?” JM Keynes

Note: The idea for this post is from Noise Free Investing,  an excellent blog, which I would recommend reading (link).

~ by eboro on February 17, 2010.

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