We recently came across an investor letter from five years ago in which Robert Vinall of Switzerland-based RV Capital went into some detail describing his investment case at the time for subprime auto lender Credit Acceptance Corp. He had bought the stock in the fourth quarter of 2014 when the shares traded between $120 and $160, and while not the point of our mentioning it, they recently traded at around $460.
The reason we bring it up is that in the letter he followed his Credit Acceptance thesis with a short discussion on how important it is for an investor to be willing to change his or her mind as the situation warrants:
The most productive field for the study of finance over recent decades has been behavourial economics. The field was pioneered by Kahneman and Tversky and I had the great fortune to hear Kahneman speak at Zurich University in 2013. Their findings have debunked the idea of homo economicus, Man as a perfectly rational being, forever weighing up alternatives under the cold calculus of advantage and disadvantage. Instead, Man turns out to be wildly irrational, forever torn by mental biases to decisions which, in the cold light of day, are firmly against his interest.
One bias they identified is consistency bias – the unwillingness to move away from a previously held opinion in the face of disconfirming information. It is easy to imagine that this bias is extenuated by penning that opinion in a letter and, not only that, making that letter public. You might legitimately ask whether writing this letter potentially damages future returns. Put differently, would I distance myself from Credit Acceptance or any other idea if confronted with disconfirming information?
I read Walter Isaacson’s excellent biography on Einstein over the summer and learnt an important lesson in this respect.
What struck me about Einstein was his willingness to change his mind. He felt no loyalty to a previous held position, no embarrassment about changing his mind, and as far as I can judge he would not even consider his previous opinion a mistake provided it was consistent with what was known at the time.
Einstein’s ability to change his mind was demonstrated most spectacularly with regards to nuclear weapons. Einstein described himself as a “militant pacifist.” He believed in unilateral disarmament and lent his name to many peace movements. And yet, he coauthored a letter to Roosevelt in 1939 encouraging the Administration to develop a uranium based bomb before Germany beat it to it. His letter led directly to the Manhattan Project.
Consider the irony that the world’s most famous pacifist was also perhaps the sole person capable of catalyzing the U.S. effort to develop the bomb and thereby potentially change the outcome of World War II. He was sufficiently international to understand scientific progress both in Germany and the U.S., sufficiently Jewish to viscerally grasp the unique threat posed by Nazi Germany, sufficiently versed in physics to foresee the implications of the progress in nuclear fission, and sufficiently famous to gain the ear of the U.S. president. No wonder he came to believe God does not play dice.
If the planet’s most famous pacifist can be persuaded of the merit of nuclear weapons, then I hope it is within me to sell Credit Acceptance or any other company should one day the facts call for it.
A thoughtful and healthy reminder for investors, and otherwise.