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Stocks B / Berkshire Hathaway
|Subject: FAQ: Berkshire and Tech Investing||Date: 3/20/2000 10:26 PM|
|Author: Rubic||Number: 23484 of 214622|
FAQ: Berkshire and Tech Investing
Preamble: The purpose of this FAQ is to address one of the most common posts on the Berkshire board, "Why won't Warren Buffett invest in technology?" I suspect that much of this misinformation is perpetuated and reinforced by the media because it makes good copy, i.e. the irony of the "World's Greatest Investor" as a technophobe. The FAQ will attempt to explain this issue, which gets exhaustive attention on the Berkshire board.
1. Why won't Warren Buffett invest in technology?
(Or in the words of a poster on another board, admonishing Buffett: "Well damn it, get off your lazy butt and learn something about it!!!")
When Mr. Buffett says he doesn't understand technology, he's being a bit disingenuous. Don't fall for that Omaha "aw shucks" routine.
Berkshire was recently ranked by PC Week magazine as 12th among the top 100 leading-edge users of Internet technology out of 2,600 companies surveyed.
When Mr. Buffett claims he doesn't understand technology, he means that it's too difficult for him to predict reliable revenues for any significant period of time. He is also well aware (perhaps more aware than most people realize) of the threats that technology offers to companies' long-term advantages.
It may be worthwhile to read Buffett's own words about technology before dismissing him as a luddite. He's thought longer and harder about the subject than most of today's investors.
2. Why is the Berkshire Board so hostile to suggestions that Mr. Buffett consider investing in technology?
In the first place, many (if not most) of the board regulars are not put off by the idea of investing in technology companies in and of itself. Many of the frequent posters work in technological industries and have a pretty good perspective of its attendent risks and rewards.
Lately -- at least twice a week -- someone posts what they consider some clever comment about Mr. Buffett's lack of tech savvy. They think their comment/question shows some originality, but most regular board members are tired of the posts, tired of the responses, and would prefer to discuss the more interesting aspects of Berkshire.
In addition, many board members fully grasp the quality of some tech companies, and believe they will thrive well into the future. However, the current prices of these companies are often divorced from any sense of economic reality.
If you feel you have something to contribute to this subject, at least show you've done more research than having listened to a CNBC broadcast or read an article by James Cramer.
3. What's wrong with investing in technology stocks?
Nothing. As Mr. Buffett has acknowledged, there is more than one path to investment nirvana. He chooses a particular approach that optimizes risk/reward over long periods of time.
That said, it is probably advisable to carefully look for sustainable advantages (it's much harder than it appears). Consider Xerox and Polaroid in the early 1970's. What portfolio back then would have been complete without these gems?
4. My returns by investing in technology have been great! Why should I consider investing in "Old Economy" companies?
There is only one economy. Like gravity, business rules affect all businesses. And there are limits to growth, especially hypergrowth.
5. Wake up! The world is changing. We're no longer living in horse and buggy days, are we?
People who make this comment often have an under-developed sense of history. The world has always been changing. At one time, Lee De Forest was a household name. He made wireless radio broadcasting practical. Few investors today can name the revolutionary device he invented. And investing in De Forest's company would have been disasterous.
Berkshire board member MayIHaveAnother posted a recent observation: The Motley Fool displays [its history] to all that will see it's tremendous record since it's founding in 1994. TMF's record is impressive indeed, and I doubt there's too many readers on this or any other board that aren't envious of its results since inception. But holding the two side by side, something becomes crystal clear. TMF has an investment style perfectly suited for THIS market. Go back to the advent of the stock market and you couldn't pick a better time to invest in the most extreme growth stocks with all the risk and reward inherent in such a style. But their entire history is based on one style of market in one record bull market.
6. Didn't Mr. Buffett apologize for poor results in his last letter to shareholders? Doesn't he have a responsibility to change his investment style?
Mr. Buffett was not apologizing for his behavior. He was apologizing for poor results. If you were a physician and prescribed a clinical treatment that failed, you'd be likely to say, "I'm sorry", but this does not imply that either your original diagnosis or subsequent treatment was in error -- especially if you had the weight of clinical results on your side.
Mr. Buffett has always said that Berkshire would trade off short-term earnings for long-term value. Unlike other managers, he is not dependent upon his company's market price to buy future businesses.
Had Mr. Buffett strayed from his discipline, he would have risked billions of dollars in an effort to keep up with the market. Such a strategy would ultimately result in a permanent loss of capital.
7. But I'm not like Mr. Buffett. I'm not planning on holding onto my tech stocks forever. Why can't I just sell my stocks when the price goes up?
This strategy is often derisively referred to as the "Greater Fool Theory". If you aren't buying part of a business with long-term prospects of superior returns, you are hoping that someone will pay more for your security after the price has gone up. Why should they?
One problem with this strategy is that as the stock price rises, the less attractive it becomes for rational people to purchase (if the underlying fundamentals don't overwhelmingly justify its enhanced price).
One side effect of GFT is that it can attract otherwise sane people, when they see everyone else making such apparently easy money. Why shouldn't everyone get rich?
8. But 15% a year is too slow for me. I'm young and can take additional risks. Why should I settle for slow growth when some of my stocks are growing over 100% per year?
Your assumption is that a younger investor has less to lose. If you consider the cummulative effects of compound growth, the small amount you may lose in your early years (seed grain) can have a profound affect on your overall returns (bushels of wheat).
Consider Mr. Buffett's two biggest rules of investing:
Rule 1: Never lose money.
Rule 2: Never forget Rule No. 1
9. Most of Mr. Buffett's supporters just see him as if he were some kind of a Omnipotent Being.
You're confusing a well-justified sense of admiration with cult worship. Most of the regular board members are critically aware of Berkshire's shortcomings, but equally aware of its superior strengths.
At another level Berkshire board members are very curious about Mr. Buffett's discipline and history of past investments. Like chess enthusiasts studying a grandmaster's tournament game, we hope to profit from analyzing expert investment strategy.
10. I've just been called a troll. What is a troll? Why are people insulting me?
If you've just made some post along the lines of, "Why doesn't Buffett get with the program and learn something about technology?", you can expect to get flamed, or more likely, ignored by people who added you to their Penalty box. Hopefully, you've been suggested to read this FAQ.
A troll post refers to the practice of posting an inflammatory topic that expects to generate a lot of responses. Hence the term is more like trolling in the fishing sense of the word, rather than the mythical creature -- though many people suspect troll posters of possessing troll-like features. ;-)
11. This FAQ stinks. I want a second opinion.
Okay kiddo, you got it. I've asked GoofyHoofy to provide an alternative viewpoint. He graciously agreed. It's worth noting that he did not review this FAQ prior to submitting his comments.
GoofyHoofy writes: "I don't know that I'd be the best person, because I've never said Warren "should" invest in technology. My thesis is that for him to lay claim (passively, I know he's not running around with a billboard on his back) to "the greatest investor" and to entirely ignore the most massive value creation segment of our society in the past half century is, well, curious.
And the "I don't understand it" mantra is thin. Was he an insurance company genius before he bought GenRe? A newspaper publisher before newspapers? A soft-drink manufacturer before Coke? As for not being able to predict the future of technological companies, who can disagree with the difficulty there? Of course the skeptic must also wonder how he predicted the future of the Buffalo News, a dying afternoon paper in a moribund industry segment, how the future of a chocolate candy company was so clear when chocolate consumption has been flat for decades, and how bright the outlook was for Blue Chip stamps, Dexter Shoes, or the Nebraska Furniture Mart.
And how do we know that a ho-hum furniture company, a candy producer, or even the largest insurance company around will continue to be so in 5 years, much less 10? I'll concede that Coke will be selling syrup, but not that it is necessarily a good investment, although that is certainly possible.
Finally, I always smile when I see people saying "Yes, but his companies are investing in technology, so it doesn't matter." Which in my view is kind of like saying "yes, but his companies are using electricity, so he doesn't have to know anything about it or invest in it." Substitute the word "gasoline" or "paper" or "typewriters" or "credit" any of 100 other accoutrements of business, and you see how shallow this reasoning is. Of course he didn't have to invest in electricity during its hey-day, either. He could have stuck to buggy whips and stagecoaches, those great consumer staples and services.
It occurs to me that Warren may have, by chance, hit the sweet spot with "brands" and "consumer durables" at the right moment in history and ridden the train for all it was worth. It is also possible that his particular investing style will go flat, and will remain so for a decade or longer - as others have, and that to continue the "I won't change my ways" theme will only make him appear increasingly like Grandpa Fuddy instead of leaving behind the legacy of "the greatest investor." Perhaps not, obviously, but therein lies the perceptual danger, which, should it come to pass, translates to the pocketbooks of Berkshire Hathaway investors.
Only time will tell whether the jockey should jump to a younger, faster horse, or stick with the one that's gotten him this far. The tendency of most 70 year olds is not to change horses. I don't know if, for Warren, that's because it's the right plan or whether it is simply the predilection of most people of that age. Perhaps the huge safety margin he seeks is dropping many quite worthwhile ventures from his radar. Perhaps not, but if this extended and, with some obviously hyperpriced exceptions, generally reasonable bull market continues for some time, as is possible, then too much safety margin is an anchor.
But anyway, for me it's like Yogi said. "If he doesn't want to invest in technology, I can't stop him."
It's still fun to bat around the ball, in my opinion, although it clearly offends some of the worshipful."
12. What is the secret word?
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