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Changing Your Mind

The only way to grow and evolve personally or professionally is to constantly challenge your beliefs and convictions.

Closed-minded people put up walls around them. They prohibit new ideas and people from getting in. By doing so they stop growing. The only way to grow and evolve personally or professionally is to constantly challenge your beliefs and convictions. When you see evidence you are wrong, you change your mind.

One of the greatest examples of killing old stupid ideas and changing your mind is found in the story of Daryl Davis. Davis is an African American who has infiltrated the Ku Klux Klan and has slowly changed the minds of some of its most prominent members.

How? By simply having an open dialogue with them. Davis found that most KKK members haven’t even ever spoken to an African American. He engages with them and asks to hear their side. Davis obviously doesn’t agree with them, but he listens and it ultimately ends with them wanting to hear his side. He slowly breaks down their wall of hate.

Daryl Davis has famously befriended former Imperial Wizard Roger Kelly.

“I would go to hell and back for that man. A lot we don’t agree with, but he respects me and listens to me,” Kelly said of Davis.

After Kelly got to know Daryl, he would leave the top spot and the whole club. Davis has befriended 25+ top klans members who have eventually gone on leaving the organization.

This is an extreme example of changing your mind, but it’s a perfect example of the type of growth that can occur by doing so.

John Maynard Keynes was a British economist who is considered one of the most influential economists of the 20th century.  Some of his detractors complained that the opinions he expressed tended to change over the years. Once during a high-profile government hearing a critic accused him of being inconsistent, and Keynes reportedly answered:

“When the facts change, I change my mind. What do you do, sir?”

The super power of not letting your ego get in the way of change when the facts change is evident in most intelligent fanatics.

David Glass joined Wal-Mart in 1976 as Executive Vice President. He then became Vice President and CFO, and would later become CEO. He would work beside founder Sam Walton to build Wal-Mart into a dominant force in retail.

In Sam Walton’s autobiography, Made In America, David Glass says this about Walton:

“Two things about Sam Walton distinguish him from almost everyone else I know. First, he gets up every day bound and determined to improve something. Second, he is less afraid of being wrong than anyone I’ve ever known. And once he sees he’s wrong, he just shakes it off and heads in another direction.”

And this brings us to investing.

I watched this Google Talk with value investor Bill Nygren, and here is the [FULL TRANSCRIPT]. I loved the story below that Saurabh Madaan forces out of Bill. It showcases the power of being open minded, being disciplined to your strategy, and changing your mind.

Saurabh Madaan:

One of your analysts wrote to us. They said that Bill really likes and remembers the facts when you present something to Bill. They presented a stock to you at $10. About six years later, when the stock had grown 20 times, you still remembered the presentation, and you liked it even more so you purchased the stock at $200.

Bill Nygren:

Well, things change over time. The stock that we’re talking about is Netflix. One of our analysts presented it about seven years ago. His story was basically everybody’s focused on the wrong numbers here. What you should look at is the market thinks HBO subscribers are worth, whatever the number was, I don’t remember, $800 a sub. Netflix subs are worth a small fraction of that in the market. It seems like that’s wrong. Netflix is growing so rapidly; HBO isn’t.

At that time, we knew a lot of people in the media industry because of investments that we had, we talked to them. They said, “Netflix is hugely risky. HBO spends about three times as much on programming as Netflix does. They could basically squash it any time they want to.”

By the way, look at their churn statistics, especially in the month of February, when they released House of Cards. This is a one-show company. Most of the media companies that have sold programming to them regret the decision. They had no idea it would be sold to so many people. They’re going to see enormous increases in programming costs. When House of Cards goes up for rebid, they’ll easily be outbid by one of the bigger studios.

We looked at it and said, “The stock’s cheap, but it’s really at a very risky stage of its lifetime.” One of the things we do at Oakmark is, the risk and reward have to be in balance to make something interesting. You can’t go into a high-risk situation for a small reward. You’d only want to be in a high-risk situation if the reward is very, very large. As we looked at it, the risks were just too high.

As I was saying earlier, I don’t even think of this as a mistake. I think you learn a lot about investors by what they look back on and say were big mistakes. A lot of people would say this stock went up 10-fold, 20-fold maybe, not buying it was a big mistake. Well, it didn’t meet our criteria. When we researched it thoroughly it didn’t have the risk return profile that we were looking for.

Fast forward to just a few months ago, one of our young analysts comes into a large room. There are about 20 of us, the investment team, that sit around the table. He’d written a report on why we should buy Netflix. I’d gone through it. Of course, it’s hard to get out of your mind that you missed buying it at 5% or 10% of the current price. The report didn’t really jump out at me. We go into the room and he starts by saying, “People subscribe to HBO now and they pay $15 a month. They subscribe to Spotify, they pay $15 a month. Sirius XM, more like $20 a month.” Those same people, when they rate the services they subscribe to say Netflix is more valuable to them. That if Netflix, instead of charging $10 a month charged $15, it would be selling at 13 times earnings.

It was like the bell went off. It’s like that’s a way of thinking about the business value there that I had never thought of. That the willingness of Netflix to sacrifice current income by not charging as much as they could for their product, to instead grow their subscriber base 25% a year, get to the point today where the moat has become almost so large that it’s impossible to think of somebody displacing them. Eight billion dollars a year on programming, that’s almost now two to three times what HBO spends on programming. And because the sub base is growing so rapidly, the cost per subscriber is going to be substantially less for any programming that Netflix considers buying compared to HBO.

Now clearly, that’s a stock most value managers won’t touch. It sells at almost 200 times earnings, markets at 18 times earnings. It’s just a name they don’t even think about. But I think as value investing has evolved more of the interesting opportunities today are coming from these businesses that the P/E ratio does a really poor job of assigning value.

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