Buffett - Tech Investment - IBM

Fitz123

Evening all,

Only posted here once some time ago when I was initially looking and doing some research on investments. Know a bit more now, but far from an expert.

I can see some other threads here about some of the crazily valued "new" tech stocks like Linkedin & Groupon.

Just wondering what the more experienced investors think of Buffets sizeable investment ($10.4 billion) in IBM and smaller investment in Intel* ? Is this a recognition by him that some of the more mature IT companies (though IBM has moved a lot more into the service/consulting industry in the last number of years) have a sufficient "moat" and predictable future earnings ? Also do you think there is value in some of the large cap IT type companies ?

Would you have invested in IBM at the prices Buffet did ?

* According to Alice Shrodes book on Buffet, he was offered the chance to become an original investor in Intel when it was founded by Noyce & Groves and he turned them down. Funny how things turn out isn't it !!

coylemj

Fitz123 wrote: »

Would you have invested in IBM at the prices Buffet did ?

He started buying at 167 and today it's 187, 'nuf said.

IBM once relied for a significant proportion of it's earnings from mainframe sales and upgrades. This type of business was relatively volatile because in an economic dip banks and other large corporates typically deferred upgrades and new mainframe purchases and this had an instant impact on IBM's bottom line. They almost went under in the late 1980s when there was a sudden move away from mainframes to open systems (aka UNIX) and mainframe sales were hit badly.

Nowadays a significant % of IBM's revenue (and an even bigger % of it's profits) comes from large services engagements such as outsourcing. These are deals which are typicaly signed for at least three years so there is now far less volatility in IBM's revenue stream and this is considered a very attractive attribute in the current climate of uncertainty. Software is now also a significant element of IBM's business, this is a high profit business, both because of the initial purchase price and because most customers who install s/w pay a ongoing annual maintenance charge of the order of 15-20% of the purchase price to cover upgrades and support, again a predictable revenue stream.

The IBM of today is a far different animal than a few years ago.

Raskolnikov

I remember seeing an interview with Alice Schroeder and she said that Buffett has been studying IBM for 50 years, so he is probably more familiar than anyone in the world with the company. Given his age, I am surprised that Buffett has made a technological investment so late in his career, however given his history with the stock, we should not be surprised. I think this might open to the door for him to invest in other tech companies, but only if they have several decades of a track record (so that rules the likes of Google and Apple out!).

The Marlboro Man

Fitz123 wrote: »

Would you have invested in IBM at the prices Buffet did ?

No, I wouldn't buy anything Buffet buys. Buffet is one of the richest and smartest guys on the planet. The guy is worth billions so he (Berkshire) can only buy large-cap companies. Berkshire is so large even after the stock indices major sell off that buying smaller companies is not enough to move the needle. It takes larger companies to move Berkshires performance.

It's ok to study his methods, particularly his early days and how he made his fortune, but I'd be bored stiff buying IBM or Coca-Cola. He holds 400,000 shares in ExxonMobil and 34million shares in ConocoPhilips (1.93% of the company). Conoco has a 1.94% yearly gain to date and ExxonMobil (Xom) has 6.07%...

I know he holds over a 20% stake in The Wasington Post with over 1.7m share. It has a 52 week loss of -20%. General Electric is also down over -14% over the 52 week period. Obviously he bought these a lot, lot cheaper.. But I'm talking about the small investor (by his standards).

The larger the portfolio, the harder it is to make money in the stock market. $53billion in his case.

Buffet is on record as saying he has an affinity for small-cap stocks and envies the small investor.

There's thousands of great, great small companies out there, that can can offer great gains. It's all about research and finding them..

This is a good article..

“Mr. Buffett, if you were starting over today and only had $1 million to invest, how would you do it? What kinds of companies would you look to own?”
Those were the questions a nervous gentleman asked the Sage of Omaha towards the end of the 2006 Berkshire Hathaway shareholders meeting — which I attended with my colleague Chris Mayer.
Buffett didn’t waste much time answering. If he were a retail investor these days with a limited budget he would sock his money into:
1) Smaller companies that the major institutions (including Berkshire) can’t even think about investing in because they are too small.
2) Emerging markets where you can buy great businesses for next to nothing.
Buffett’s affinity for obscure, out-of-the-way investment opportunities (i.e. small-cap stocks) is well documented.
In 1999 he told Business Week “…it’s a huge structural advantage not to have a lot of money. I think I could make you 50% a year on $1 million. No, I know I could. I guarantee that.”

And in a 2005 interview with a group of students at Kansas University, Buffett defended that statement saying:
Yes, I would still say the same thing today…You have to turn over a lot of rocks to find those little anomalies. You have to find the companies that are off the map – way off the map. You may find local companies that have nothing wrong with them at all…
Having a lot of money to invest forced Berkshire to buy those that were less attractive. With less capital, I could have put all my money into the most attractive issues and really creamed it.
To illustrate his point, Buffett told the 24,000+ people who made the trek to the Quest Center this weekend that he would have put 100% of his assets in South Korea a year or two ago when incredible companies (many small-caps) were selling for three or four times earnings. But because Berkshire is a massive $112 billion company, he couldn’t take advantage of the opportunity. The companies were too small and too illiquid for them add to Berkshire’s earnings power. So he had to sit and watch.
As a small investor, you don’t have to sit on the sidelines. You can take advantage of the illiquid opportunities that the big-boys, like Buffett, simply can’t. But as Warren reminded everyone (as he sipped on his Coca-Cola and ate his Sees’s candy), just because he would love to invest in smaller companies doesn’t mean he would change his underlying strategy. He still wouldn’t speculate in companies he didn’t understand.
That comment got people in the audience thinking about their own investment ideas and strategies.
One shareholder asked, “What is your opinion on ethanol? Should I look at those companies now?”
Buffett responded by saying, “I have friends who like ethanol. And I have friends who don’t like ethanol. I’m sticking with my friends.”
He explained that ethanol might well be an adequate investment idea. But the fact is, no one knows what an ethanol plant will be producing in five years. The economics of the business could totally change over that time. And that uncertainty scares him – so he won’t invest. Plus, he made it a point to say, “Ethanol is hot right now. Our general policy is not to look at things that are hot.”
Then the next question came, “Are we in a commodities bubble?”
“My guess is we’re seeing speculation in commodities and the housing market today,” Buffett said.
So the next shareholder dug a bit deeper. “What kind of exposure do you have to silver?”
Warren explained that he has no exposure right now. He got into silver early in the game — when the fundamentals make sense to buy. But he admits that he sold very early as well.
Buffett made the point that silver (like oil and all commodities) isn’t an interest bearing investment. In other words, in order to make money in silver you have to hope (something any value investor doesn’t like to do) it rises. If it doesn’t, you are better off putting your money in stocks or bonds.
Not wanting to leave the area of commodities, one annoying shareholder (who’s piercing voice blared through the speaker system at a decibel level that may have deafened some) asked if investors would be smart to invest in countries where there is an abundance of natural resources per capita.
Buffett responded by saying, “We don’t play big trends. That’s too macro for us.”
And Charlie Munger finally chimed in to end this big-picture discussion by saying, “We failed to profit from the recent commodities boom.”
Everyone laughed.
Of course, being a value investor means you don’t catch every wave.
When you insist on buying companies at cheap prices and selling when they are no longer cheap, you inevitably buy early and sell early. In Buffet’s case, that’s what happened with silver. And a lot of the times, they miss opportunities altogether. The classic example is technology.
Buffett never invested in tech stocks in the 1990s. And he still doesn’t regret it. As he explained to the crowd, we know what we are good at and we stick to those things. In the Olympics, you can win a gold medal if you can run 100 meters faster than anybody. You don’t have to throw the shot-put as well.
The same is true in investing.
You don’t have to get everything right. You just have to know what you do well and stick to that. In Buffett’s case that means staying away from tech and commodities.

Yours from Omaha,

Read more: Invest Like Warren Buffett http://dailyreckoning.com/invest-like-warren-buffett/#ixzz1dzl1F2pG

Buzzliteyear

Fitz123 wrote: »

Evening all,

Only posted here once some time ago when I was initially looking and doing some research on investments. Know a bit more now, but far from an expert.

I can see some other threads here about some of the crazily valued "new" tech stocks like Linkedin & Groupon.

Just wondering what the more experienced investors think of Buffets sizeable investment ($10.4 billion) in IBM and smaller investment in Intel* ? Is this a recognition by him that some of the more mature IT companies (though IBM has moved a lot more into the service/consulting industry in the last number of years) have a sufficient "moat" and predictable future earnings ? Also do you think there is value in some of the large cap IT type companies ?

Would you have invested in IBM at the prices Buffet did ?

* According to Alice Shrodes book on Buffet, he was offered the chance to become an original investor in Intel when it was founded by Noyce & Groves and he turned them down. Funny how things turn out isn't it !!

The one statistic I looked up when I heard of the purchase was IBM's return on shareholders funds. And that's very impressive. And has been for many years. Its a figure that Buffett puts a lot of weight on. That and predictability of earnings. He bets at least 10 years into the future. Thats the discipline isn't? Once you know the company is on the money you ignore the market!

Man of Aran

Myself - I like to merge some of the combined wisdoms of Buffet, Peter Lynch and Jim Rogers.
You just got to learn to be greedy when others are fearful, yet don't try catch any falling knives while dodging the frequent dead cat bounces!

In fairness to Buffet, he made PetroChina (857 on the Hang Seng) one of his first overseas investments and still a great stock today.

Rogers advocates oil , energy and hard & soft commodities. No major oil finds globally sice 1980's or so. Shale sands wont do it.

And as for Peter, still one of the all time great down to earth advisers.
Forget the pie-in- the- sky stuff and dot bombs; they come and go.
Looking too good to be true usually is.
Invest in what you know - look around you on the street or shopping centre - what are people consuming or adopting - 'flying off the shelves'.
5 years from now you might be a lot better off with steady dividend and capital gain from a Roadstone or Kerrygold than these recurring " e businesses" like when the dot coms collapsed at turn of the millenium.

Look for good fundamentals, solid story like great products that people need, low debt, low PE, decent dividend and trading at or below NAV then "load up the truck". If it falls in a falling market , buy more so long as it's fundamental story remains unchanged!
You may not easily find a "10 bagger" but even 50% P.A. is nothing to be snuffed at in these times!

Coming back to IBM then, what's the compelling story today. How does it measure up on growth rate, EPS,debt, NAV and Yield.
Sunset industry or just dinosaur company?

go n'eirigh an bothar linn!

Man of Aran

Has the long awaited rally commenced? Hopefully yes and all the "stability facilitity" measures hold in Europe and States along with cash rich China & Far East quietly weighing in with support.

Hang Seng is roaring away today.
Commodities look good - CNOOC (#883) and Petrochina (#857) flying.

http://www.finet.hk/mainsite/00883/stock.html

Buy those 3 gents a beer!

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" An iomairce eol agus poga bruinnell .... bealach mo neamh-leasa "