Today, I’m looking at the investing lessons we can learn from three stocks legendary investor Warren Buffett changed his mind about.
Competitive advantage
For years Buffett shunned the technology sector. He spoke of the limited competitive advantage in tech and the difficulty of identifying the few potential winners in advance and being able to buy them at reasonable prices.
It came as a surprise when he revealed in November 2011 that he’d invested $10.7bn in IBM. Despite his aversion to tech, he said he’d read IBM’s annual report every year for 50 years.
He explained that when he read it the latest one, “I got a different slant on it”. He went round the IT departments of all the companies in his Berkshire Hathaway conglomerate. “I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things,” he said.
Buffett had spotted that IBM, due to the “stickiness” of its customers, had a durable competitive advantage. Tech sector it might be, but the facts had changed and Buffett changed his mind too.
Industry dynamics
If he was negative on tech for a long time, he was absolutely scathing of airlines. He described the industry as “a death trap for investors”, again citing the lack of a durable competitive advantage, which he said “has proven elusive ever since the days of the Wright Brothers”.
However, when Berkshire released its Q3 filings in November last year they showed a stake in three of the four major US airlines — American Airlines, United Continental Holdings and Delta Air Lines. Now, these were relatively small investments and were likely made by one of Buffett’s lieutenants, Todd Combs or Ted Weschler, but there’s some indication that the man himself may have been behind a Q4 investment in the fourth major carrier, Southwest Airlines.
It will be interesting to hear what he has to say when he next speaks on airlines, but the dynamics of the industry appear to have changed in recent years, with the big four US carriers all showing rapidly improving profit margins.
A big mistake
Finally, Tesco is an example of a stock that Buffett changed his stance on from positive to negative. At the end of 2012, he owned 415m shares but during 2013 sold 114m, having “soured somewhat on the company’s then-management”.
He confessed to making a “big mistake” by dawdling in selling the remainder of the shares throughout 2014, as Tesco’s problems worsened by the month. He said he should have sold earlier, because “you see a cockroach in your kitchen; as the days go by, you meet his relatives”.
The changing world
While there are many constants in business, industries — and companies — don’t remain the same indefinitely. They may expand, decline, evolve, but rarely do they stand still (and as we’ve seen, Tesco itself hasn’t stood still in just the past couple of days).
At 86 years old, Buffett hasn’t become set in his ways but remains flexible in his thinking, open to changing his mind (and the stocks he’s willing to invest in or ditch) as the world around him morphs. Staying alert to the risks and opportunities in a changing world is surely one of the keys to better investing.
