In the past three or four weeks, I've read several comments from Warren Buffett (Trades, Portfolio), Charlie Munger (Trades, Portfolio), and Chinese investor Li Lu, about how important it is to be open to change as an investor.
Investing is not a precise science -- it is an art, and it is relatively fluid. Just because something worked 10 years ago, doesn't necessarily mean that it will work today. This is true of both investment strategies and industries.
A great example is the way Buffett and Munger's views of the railroad, airline and technology sectors have changed and developed over the past few decades.
Berkshire changing with the times
Berkshire Hathaway (BRK.A)(BRK.B, Financial)'s decision to take a sizable investment in consumer electronics group Apple (AAPL) has attracted a lot of media attention, primarily because the media is always interested in what Buffett and Munger are doing, but also because Buffett has stated in the past that he doesn't understand the technology industry.
However, what Buffett does understand is that the world changes, and if you want to be a good investor, you have to change with it. That's why his views on railroad companies, airlines and technology stocks have all changed. Munger spoke about this in an interview with one of China's largest financial publications toward the end of last year. Specifically, he said:
"Warren and I hated railroad stocks for ages. But the world changed, and pretty soon we got down to only four big railroads. And technology changed. The whole world changed. Then we bought railroad stocks and then we bought the whole railroad. We changed our minds because the facts changed. Don't you change your minds when the facts change?"
Buffett built on these comments at the 2019 Berkshire annual meeting of shareholders. Responding to a shareholder who asked Berkshire's managers if they could share their insight into 5G technology, Buffett and Munger both stated that they know almost nothing about the 5G market, but that Berkshire's business managers should, as the group's managers should always be pursuing the best for their respective businesses.
"Our managers, to a great degree, own their businesses. And we want them to feel a sense of ownership. We don't want them to be lost in some massive conglomerate, where they get directions from this group, which is a subgroup of that group."
That's not to say that these managers will always get things right. Indeed, Buffett went on to say, "The world is going to change in dramatic ways."
He continued, "Just think how much it's changed in the 54 years that we've had Berkshire. And some of those changes hurt us." The Oracle of Omaha described Berkshire's businesses that have failed over the years, including textiles, shoes, department stores and trading stamps. But despite these problems, in the "founding businesses of this operation," Berkshire has continued to grow because it has continued to adjust. And the operation will continue to adjust as the world continues to change, Buffett said.
Some of the businesses under the Berkshire umbrella today will be "destroyed by what happens in this world ... And I believe that that's a good thing, but you have to make changes," he said.
To put it another way, Buffett and Munger are well aware that the world will continue to change, and they are not going to try to stop it.
In fact, Buffett said, "we welcome change." Change is a fact of life, and Berkshire knows all too well there are some companies that won't survive for the next 10 or 20 years. The key is to keep adapting with the way the world is changing and not be left behind. As Buffett concluded:
"So, we welcome change. And we certainly want to have managers that can anticipate and adapt to it. But sometimes, we'll be wrong. And those businesses will wither and die. And would better use the money someplace else."
Disclosure: The author owns shares in Berkshire Hathaway.
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