In a 2019 interview, when asked what made him one of the most successful investors ever, the late great Charlie Munger replied:
Part of the reason I’ve been a little more successful than most people is I’m good at destroying my own best-loved ideas. I knew early in life that that would a useful knack and I’ve honed it all these years, so I’m pleased when I can destroy an idea that I’ve worked hard on over a long period of time. And most people aren’t.
Financial markets are always in a state of flux. The results and outlook for a business can change rapidly, and share prices even more so. An investor unable to adapt to the changing fortunes of the businesses they invest in is unlikely to generate market-beating returns, let alone be the next Charlie Munger.
Why do investors struggle to change their minds?
The problem is that it is very hard to change our minds. Indeed, in his later years, Munger appears to have made two of the biggest errors he cautions investors against. He strayed out of his circle of competence into the sphere of architecture. His proposal to the University of California Santa Barbara was to build student accommodation where 90% of residents would have rooms without windows or natural light. He even offered to fund it with a substantial donation. Understandably, this faced considerable opposition from students and architecture experts, but there was little sign that Munger was willing to take these critiques on board.
Fortunately, Munger’s failings in this area didn’t affect his investments, but it shows how hard it is to give up an idea when one is passionate about it. There are a few psychological reasons why changing your mind about an investment idea is very difficult:
Ownership Bias - the tendency to overvalue items owned compared with equivalent items that are not owned.
I discussed ownership bias a couple of weeks ago when I explained how tipsters may not always be unbiased in their stock selections. Overvaluing what they own can undoubtedly impact investors when it comes to changing their minds, too. But an even stronger effect is often at play: confirmation bias.
Confirmation Bias - the tendency to only seek information that confirms our prior beliefs and ignore or downplay information that contradicts them.
Confirmation bias means that investors often completely ignore the information they would…
