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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 212803  
Subject: The Problem With Technology Date: 1/28/2007 6:13 PM
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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 represent the worst of the story. Although some are no longer considered great growth stocks, all have continued as successful pillars of corporate America. All are now members of the DJIA. Some other former Nifty 50 companies and their shareholders did not fare as well. Former Nifty 50 companies, such as Burroughs, Digital Equipment, Joseph Schlitz Brewing, and MGIC Investment are gone. Their status as “bullet proof” growth stocks not only failed to protect them from disturbing volatility in a full-fledged bear market, for them it was down and out.

The plunge in prices for the original Nifty 50 during the severe bear market correction of 1972-74 has long been viewed as just punishment for absurdly valued stocks and the naive investors willing to buy them. Until recently, no one rose to defend such excesses. No one, that is, until Jeremy Siegel, a professor of finance at the University of Pennsylvania's Wharton School, became part of the Nifty 50 story in 1994 when he published an eminently readable book on the stock market titled Stocks for the Long Run. In his book, Siegel laid out a bullish argument for equity investing and calculated that an investor paying top dollar for the Nifty 50 in late 1972 would have earned nearly the same returns over the next 25 years as someone holding the S&P 500. Siegel calculated that the original Nifty 50 produced a 12.5% annualized return, slightly behind the 12.7% for the S&P 500. "Good growth stocks are expensive, but they can be worth the price," said Siegel.

Siegel's book added fuel to the firestorm of controversy surrounding valuations of the 1990s version of the Nifty 50, the high-flying high-tech stocks, especially those tied to the Internet. When asked what he thought of the new Nifty 50, Siegel hedged. The notion that good growth companies can be worth more than 50 times earnings has been proven by the facts. Siegel's book showed the "warranted" P/E of the original Nifty 50, using a stock price then that would result in a return equal to the S&P 500 over the ensuing 25 plus years. Coca-Cola, for example, traded for a P/E of 46.4:1 in late 1972 but was actually worth a P/E of 82.3:1 given its market-beating results since then. That being said, it is clear that some of the best performances turned in by former Nifty 50 stocks have been generated by lower-multiple consumer products companies, such as Gillette, Pfizer and Philip Morris. Nearly all the superhigh P/E stocks lagged behind, including Avon, International Flavor & Fragrances, and Polaroid. Siegel proclaims that only a handful of the best growth stocks in the past has been worth more than 70 times earnings. Microsoft is one stock that could well live up to its lofty P/E of 70 in 2000, yet it is worth remembering that IBM was once thought to be invincible. Of course, that was when Microsoft was a baby.

Nobody now believes that anyone will oust Microsoft from its domianance of the computer desktop. However the game has changed. Internet-based communication depends less upon desktop-based software, and more upon search and other Internet-based applications. I'd guess that's why Microsoft is so worried about Google. I'd also guess that the super-smart folks at Microsoft will help the company avoid the fate "enjoyed" by Burroughs and Digital Equipment, but their existence, let alone investment success over the next 20 years, is far from assurred. On the other hand, I'm quite sure I'll be buying Dilly bars on the Fourth of July at the Nisswa, Minnesota Dairy Queen in 20 years, God willing.

Next time you enjoy a Dilly bar or sip a Bud, please have the sensibility to smile when someone suggests that Buffett just doesn't understand technology.

Mark
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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127038 of 212803
Subject: Re: The Problem With Technology Date: 1/28/2007 6:35 PM
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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."

Microsoft clearly has a durable competitive advantage.

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Author: dividendgrowth Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127039 of 212803
Subject: Re: The Problem With Technology Date: 1/28/2007 6:54 PM
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The 90s "Nifty Fifty" were not only made of tech stocks. Several members of the original "Nifty Fifty", such as KO, GE, PFE, MRK, and IBM, also joined the party. KO was the first one to fall in 1998 when its P/E shot up to 55. HD and WMT all sold way beyond 50 times earnings in early 2000.



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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127040 of 212803
Subject: Re: The Problem With Technology Date: 1/28/2007 7:04 PM
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The 90s "Nifty Fifty" were not only made of tech stocks. Several members of the original "Nifty Fifty", such as KO, GE, PFE, MRK, and IBM, also joined the party. KO was the first one to fall in 1998 when its P/E shot up to 55. HD and WMT all sold way beyond 50 times earnings in early 2000.

I would also suggest that IBM had a significant durable competitive advantage. It dominated the computer industry for a very long time during an age where competitors would come and go very quickly.

No one ever got fired for buying IBM.

Of course, it is important to remember that durable doesn't mean permanent.

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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127041 of 212803
Subject: Re: The Problem With Technology Date: 1/28/2007 8:47 PM
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Microsoft clearly has a durable competitive advantage.


You bet.

But I'd still rather sell Dilly bars or Snickers.

Mark

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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127043 of 212803
Subject: Re: The Problem With Technology Date: 1/28/2007 8:52 PM
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MC,

From a split and dividend-adjusted 6.47 on Jan. 1, 1972 to today's 97.45, it looks like IBM has returned a below-market 8.3% per year.

The rest of the Nifty 50 techs did worse, much worse.

Buffett's non-tech approach has done better, much better.

Mark

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127045 of 212803
Subject: Re: The Problem With Technology Date: 1/28/2007 9:46 PM
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MC,

From a split and dividend-adjusted 6.47 on Jan. 1, 1972 to today's 97.45, it looks like IBM has returned a below-market 8.3% per year.

The rest of the Nifty 50 techs did worse, much worse.

Buffett's non-tech approach has done better, much better.

Mark


This says absolutely nothing about the competitive advantage that IBM enjoyed long ago.

Railroads had a durable competitive advantage over other forms of transportation for many years, but that doesn't mean that it would be meaningful to measure their recent returns against Berkshire.

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Author: Rubic Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127052 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 1:19 AM
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<< Nobody now believes that anyone will oust Microsoft from its domianance of the computer desktop. However the game has changed. Internet-based communication depends less upon desktop-based software, and more upon search and other Internet-based applications. I'd guess that's why Microsoft is so worried about Google. I'd also guess that the super-smart folks at Microsoft will help the company avoid the fate "enjoyed" by Burroughs and Digital Equipment, but their existence, let alone investment success over the next 20 years, is far from assurred. >>

With due respect, Mark, this is an argument many of us made to you in October 2005 - particularly Eurotrash, who made the most detailed points.

In my tiny corner of the IT world, Microsoft has been irrelevant for years. It simply has no effect on my business decisions. Microsoft will probably make an IBM-ish comeback or three, but its era of global dominance is on the wane.

-Rubic

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Author: MrCheeryO Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127055 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 7:10 AM
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...But I'd still rather sell Dilly bars or Snickers....

Absolutely, or super hi-tech gizmos to the aerospace industry and elsewhere.

http://www.iscar.com/Section.asp?CountryID=1&SectionID=3&SectionFatherID=1

So comfortable with global hi-tech good businesses/managements I read he didn't even need to look at the Israeli operations before sealing the deal.

Not a Dilly Bar to be seen.


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Author: MrCheeryO Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127056 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 7:40 AM
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...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 modern era of the stock market."...

I hope he doesn't say that because it would be patently untrue.

Brk. vs. GE

http://quote.fool.com/chart.aspx?s=BRK-A&t=my&l=off&q=l&c=GE&c=^GSPC

Not the entire modern era but my guess is if TMF charts would go back further things would look even better for GE.

Best thing about Mr. Buffett. He seems to have no interest in demagoguing stuff. In fact, he seems absolutely opposed to that kind of thing, as much as any human being can be. At times some have taken some pleasure here and elsewhere in pointing out inconsistencies in what Buffett says and what he does does. Some legitimate, but a foolish consistency and all that. Why people want to pigeonhole Mr. Buffett based on some of his alleged thoughts, reducing them to a Little Red Book of the Chairman's thoughts, I don't know. Mr. Buffett doesn't seem to feel the need to cling to dogma which is pretty remarkable, especially for a gentleman of his years. Much better at that than I am, probably his biggest among many advantages he has over me.

Warren Buffett:

...But consider the first words in the book: "These studies are the record of a failure--the failure of facts to sustain a preconceived theory." Smith went on: "The facts assembled, however, seemed worthy of further examination. If they would not prove what we had hoped to have them prove, it seemed desirable to turn them loose and to follow them to whatever end they might lead."

Now, there was a smart man, who did just about the hardest thing in the world to do. Charles Darwin used to say that whenever he ran into something that contradicted a conclusion he cherished, he was obliged to write the new finding down within 30 minutes. Otherwise his mind would work to reject the discordant information, much as the body rejects transplants. Man's natural inclination is to cling to his beliefs, particularly if they are reinforced by recent experience--a flaw in our makeup that bears on what happens during secular bull markets and extended periods of stagnation....

http://chinese-school.netfirms.com/Warren-Buffett-interview.html

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Author: eurotrash01 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127057 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 8:41 AM
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With due respect, Mark, this is an argument many of us made to you in October 2005 - particularly Eurotrash, who made the most detailed points.


R-

The professor generally comes around to my way of thinking, with a 6-12 month lag.

Next thing you know, he'll be shorting REITs.

No-position-in-MSFT'ly Yours,

et

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Author: eurotrash01 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127058 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 8:46 AM
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R-

But to be fair, the venerable professor has made quite a bit of coin in this leviathan, as he bought it well. Hats off to him.

et

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127062 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 10:54 AM
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Next time you enjoy a Dilly bar or sip a Bud, please have the sensibility to smile when someone suggests that Buffett just doesn't understand technology.

I use the internet a lot. I spend a lot of money there. In fact, I could no longer live without it. On the other hand, I don't know what a Dilly bar is. Do they employ bar tenders? While I have heard of a Bud, I have no wish to taste one. I wouldn't buy a stock that depends on its success on either. But then you never know what kind of business, excuse me, fanastic business, BRK willl get into next, seeing that it doesn't know what to do with all its cash.

ghu

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Author: jkm929 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127066 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 3:22 PM
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Internet-based communication depends less upon desktop-based software, and more upon search and other Internet-based applications. I'd guess that's why Microsoft is so worried about Google.

Robert Weisman of the Boston Globe staff has a story in today's edition about Google competing against Microsoft in selling business software.

Search provider Google Inc., moving to broaden its revenue beyond advertising, is poised to shake up the business software market.

The company is bundling the Web-based software programs it offers free to consumers into a premium package and, in a challenge to Microsoft Corp., it will be selling a paid version to businesses.

Google's enterprise product, which will include e-mail, calendar, word processing, spreadsheet, instant messaging, and voice-over-Internet programs, is expected soon, said Dave Girouard , vice president and general manager for enterprise at the Mountain View, Calif., company.


http://www.boston.com/business/personaltech/articles/2007/01/29/google_moves_to_shake_up_software_take_on_microsoft/

jkm929

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Author: maracle Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127067 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 3:52 PM
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What I find interesting is that even with a monopoly on desktop operating systems, Microsoft still hasn't really done anything in 5 years. Tech companies seem to have a few limited windows of boom time and the rest of the time is spent scrapping for the slightest little advantage.

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Author: MadCapitalist Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127072 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 4:39 PM
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What I find interesting is that even with a monopoly on desktop operating systems, Microsoft still hasn't really done anything in 5 years. Tech companies seem to have a few limited windows of boom time and the rest of the time is spent scrapping for the slightest little advantage.

Microsoft might not have "really done anything in 5 years," but Microsoft's profit margin, return on equity, and return on assets have all increased nicely over the last 5 years:
http://moneycentral.msn.com/investor/invsub/results/compare.asp?Page=TenYearSummary&Symbol=US%3aMSFT

I'll admit that I blew this one:
"I predict that Microsoft's return on assets and return on equity will continue to drop as a result of this poor use of capital."
http://boards.fool.com/Message.asp?mid=17330893

Oops.

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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127073 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 5:34 PM
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et,

What does the smart money think of LM?

Or shall I say, what will I be thinking about LM in 6-12months?

:)

Mark

PS: Please give my regards to Elliot.

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127074 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 7:24 PM
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The company is bundling the Web-based software programs it offers free to consumers into a premium package and, in a challenge to Microsoft Corp.

This is all a bit OT but I feel free to continue the thread. As I see it this tendency to get more application functionality on-line instead of on your own hardware increases the attraction of Apple computers to consumers and small businesses. The larger business PC market will be harder to crack, but its defences are nevertheless crumbling. MSFT pays a lot for its campus of technical wizards but the amount of innovation it gets in return is laughable. That, of course, will make its business more understandable to WEB, but I would stay away from investing in it.

ghu

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127076 of 212803
Subject: Re: The Problem With Technology Date: 1/29/2007 7:32 PM
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et,

What does the smart money think of LM?

Or shall I say, what will I be thinking about LM in 6-12months?

:)

Mark

PS: Please give my regards to Elliot.


Can Mark or someone else please explain this rather cryptic post.

ghu


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Author: eurotrash01 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127093 of 212803
Subject: Re: The Problem With Technology Date: 1/30/2007 6:42 PM
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What does the smart money think of LM?


Hey Mark,

While recognizing the historic bounty of owning the asset managers, and acknowledging that LM looks cheap to its peers on most metrics...I claim no special knowledge or opinion on LM at current levels.

I'll save my bullets for some other pick of yours.

:)

et

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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127141 of 212803
Subject: Re: The Problem With Technology Date: 2/1/2007 5:13 PM
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I love you Professor, and congratulation on this being the Post of the Day, but honestly, I can't imagine why.

You talk about "tech", and then veer off into the Nifty Fifty, demonstrating how far they managed to fall from their lofty heights.

Your examples? Coca Cola. Disney. McDonald's. Kodak. Phillip Morris. Tech stocks? Oh, yes, you do mention some which are now gone: Burroughs, Digital Equipment, Schlitz Brewing.

Schlitz Brewing? What was the connection to "tech" again?

But wait (as they say on the infomercials) there's more!

Then you go on to posit that Microsoft may meet the same fate, because it is a tech stock. Ignoring the fact that they do seem to have some durable competitive advantage, I'm not sure I see why "Dilly Bars" will continue to be sold 20 years from now any more than Microsoft software. I can name a hundred QSR franchise restaurant operations which have gone under in the last 20 years, and I'll wager that there will be more of them, and that the vendor of Dilly Bars is as likely as any other 2nd tier provider to be one of them. Or not.

Budweiser, your other example, seems a lock - and forever. Then again, as late as 30 years ago Schlitz was the #2 brewery in America, and it's pretty much gone. Sears was once the #1 retailer, Westinghouse was one of the Dow 30, and Woolworth's was a powerhouse selling everyday staples like paper clips, hair ribbons and, perhaps, something equivalent to "Dilly Bars" at the luncheonette counter.

Next time you enjoy a Dilly bar or sip a Bud, please have the sensibility to smile when someone suggests that Buffett just doesn't understand technology.

I think he understands "technology" just fine - I just think he's become more conservative with age, as many people do. He bet the farm on American Express in 1964, even though they had turned their business upside down just a few years before by launching a credit card, and were exiting the actual "express" business as well. He would never take such a gamble today - but he did then, and I'll wager it wasn't because he had a vast understanding of where the "American Express" business was going to be 20 years down the road.

No, I think it's just a different time and a different place. In fact, I suspect that were he a hungry 26 year old with a million or so burning a hole in his pocket, he might "understand" tech just fine indeed.
 


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Author: DURK1 One star, 50 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127148 of 212803
Subject: Re: The Problem With Technology Date: 2/1/2007 11:43 PM
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Goofy,

I have to disagree with you on this one. I personally believe he hasn't changed all that much.

<< He bet the farm on American Express in 1964, even though they had turned their business upside down just a few years before by launching a credit card, and were exiting the actual "express" business as well. He would never take such a gamble today. >>

Actually I think Buffett saw American Express as a great franchise with a one time problem. The one time problem being the salad oil scandal that knocked the price way below what a good company should be selling at with a one time but fixable problem.

He did the same thing with GEICO. It was the low cost provider that ran into a one time but fixable problem and had a great franchise.

If Buffett could figure out the long term economics of a tech company, at the right price I believe he would bet heavily. He has said he can't figure that out, and I believe him.

I don't believe the reason you haven't seen WEB make much hugher bets in the last 10 years in the stock market is simply the good companies he follows have sold for too high a price that made sense to
him. To put it simply, the "margin of safety" wasn't there.

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Author: mhirschey Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127149 of 212803
Subject: Re: The Problem With Technology Date: 2/2/2007 12:03 AM
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Hey Goofy,

It's good to hear from you. I hope all is well.

My point about tech in the Nifty 50 was simple: the Nifty 50 got hit hard; the tech stocks in the Nifty 50 got obliterated. Few stocks are able to justify sky-high P/E ratios over time. Not only did the Nifty 50 tech stocks fail to justify their sky-high P/E ratios, many have migrated to that happy hunting ground in the sky.

The best Nifty 50 tech stocks have proven to be poor investments:

Texas Instruments
IBM
Xerox

Other Nifty 50 tech stocks have been real disasters:

Digital Equipment
Burroughs
Polaroid

I don't think Buffett's preference for well-chosen nontech companies has anything to do with risk aversion; it has everything to do with loss aversion.

Mark

PS: BTW, I personally like Microsoft as a company and an investment at current prices. However, like Buffett, I'd rather own Snickers on the same terms.

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Author: ghu216 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 127150 of 212803
Subject: Re: The Problem With Technology Date: 2/2/2007 12:21 AM
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I have to disagree with you on this one. I personally believe he hasn't changed all that much.

I find second-guessing Mr. Buffett with the benefit of hindsight tedious, but for those who disagree with me, here is a puzzle. Suppose he had been a market participant in the time leading up to the big crash and had sold out at the top, at what point would he have re-entered? I know it's hard not to cheat in answering this puzzle, especially if you are a cult follower. But here you can show how penetrating your understanding of the subject is, I hope there will be many entries.'

ghu

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