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Stocks B / Berkshire Hathaway


Subject:  The Problem With Technology Date:  1/28/2007  6:13 PM
Author:  mhirschey Number:  127037 of 225394

Buffett is fond of saying, "I don't understand technology." I smile when I hear him say that because I know that he is sandbagging the listener. Buffett studies all forms of business, and knows how difficult it is for technology-based comapnies to maintain a real competitive advantage. What Buffett is saying to the informed listener is "I don't understand how technology-based companies can now expect to build durable competitive advantage when none have been able to do so during the entire mondern era of the stock market."

Case in point: The Nifty 50 of the 1970s. The Nifty 50 was a group of 50 premier growth stocks that became stock-market darlings during the early 1970s. At the market peak in 1972, the group of Nifty 50 stocks sold at a P/E ratio of 41.9:1, or more than double the market average of 18.1:1. Each of these stocks had proven growth in revenues, earnings and dividends. Virtually none had experienced a dividend cut during the post-World War II period. All had sufficiently large market capitalizations to allow large institutional investors to buy as much of them as their portfolios could hold. They represented the ultimate in one-decision stock investing. An investor simply had to buy and hold. No matter how high Nifty 50 stock prices seemed relative to revenue, earnings, or any other fundamental factors, any perception of being overvalued was sure to be temporary. Superior rates of growth would bail out any buyer, no matter how high the price seemed at the time of purchase. Nifty 50 investors could not lose, or so the story went, until the vicious bear market of 1972-74.

From a bull market peak of 1036.27 on December 11, 1972, the DJIA crashed to 577.60 on December 6, 1974. This bone-chilling drop of 44.3% for the market was relatively mild when compared with the devastation suffered by “Nifty 50" darlings. Coca-Cola dove 66.9% from 149 3/4 to 49 5/8, Disney cascaded down 91.3% from 236 3/4 to 20 ½, Eastman Kodak tumbled 58.9% from 149 1/4 to 61 1/4, McDonald's plunged 63.2% from 77 3/8 to 28 1/2, while Phillip Morris plummeted 59.4% from 118 1/4 to 45. The devastation experienced by stockholders of these Nifty 50 companies does not re