Warren Buffett and IBM + Intel

Warren Buffett on TV

Warren Buffett, an iconic stock market investor, announced two days ago on television that he has acquired a 5.5% interest in IBM, now worth about $12 billion.  He apparently began accumulating the stock–the 65 million or so shares he holds amounts to about two weeks’ trading volume–in March.

why the buy is notable

The announcement is notable in a few respects–two small ones and one large.

Let’s get the small fry out of the way first:

1.  No one in his right mind goes on TV and announces he owns a ton of a given stock unless he’s finished buying.  The implicit message is “Feel free to ride on my coattails (and raise the value of my stock) if you wish.”

2.  Portfolio investors are required to disclose their holdings in a public filing (a 13-f) with the SEC each quarter.  According to Dealbook in the New York Times, a portfolio manager can request that the SEC keep secret the names of stocks the manager is continuing to buy.   (I didn’t know about this provision, despite being in the business for over a quarter-century.  Shame on me.  I bet I’m not alone, though.)  Dealbook says that’s what Buffett did in March and the SEC said okay

Now the BIG one:

3.  The purchase represents Buffett’s first significant foray into the technology industry, a place he had previously shunned for lack of little investment appeal.  His explanation for the about-face?  …the world has changed, so he’s changing with it.

Actually, though, I don’t think IBM shows that he’s changed that much.  Buffett has also acquired a relatively small stake in INTC, which I think IS an eye-opener.  He isn’t trying to keep that one out of his 13-f filings, however.  I think this means one of his assistants really wanted to buy it and Buffett is simply watching to see how the stock turns out.  So I think it’s more a test of the assistant than a vote of confidence in INTC.

Buffett as icon

Buffett has an important place in portfolio investment history.  It comes from his being the first, a half-century ago, to understand the implications of an accounting paradox.

Long before anyone else, he realized that continuous spending on advertising to establish a brand name had an enduring positive value, even though this activity appeared in the firm’s financial statements only as a negative–as expense.  (Pick a consumer-oriented company and look at the advertising expense.  It’s mind-bogglingly high today–and it used to be a lot higher.)  Similarly, developing a strong distribution network of competent sales and delivery people also has an enduring value, even though the only reflection of this in financial statements is in (higher than normal) salary expense.

Together, a strong brand name and a top-notch distribution system form a powerful–if invisible–barrier to competitors entering a market.  They also offer the opportunity for operating leverage if the firm can push a wider variety of branded products through its network.

So while his Graham and Dodd competitors were looking for nameless/faceless companies that were piling up lots of working capital and had tons of plant and equipment, Buffett was snapping up branded firms that served recurring needs in service areas like newspapers and insurance, and strong brands like Coca-Cola…at bargain basement prices.  Geico is probably his most famous current holding.

As everyone knows, he made a fortune, both for himself and for his clients.

my (more or less random) thoughts

IBM has a powerful brand name and distribution network.  The industry it operates in aside, the purchase looks to me like vintage Buffett.

I don’t think the Buffett magic works as well as it once did, for two reasons:

–once the investment industry became aware of Buffett’s superior results, everyone studied his methods carefully and began to imitate them.  By the time I entered the business in the late 1970s the value of intangibles and of service firms was already beginning to become conventional wisdom. So Buffett’s edge gradually disappeared.

–the internet happened.  Getting distribution no longer requires years of heavy advertising expenditure; it takes good public relations and web design.

Buffett has transformed himself, consciously or not, into his own brand name.  For the performance of Berkshire Hathaway stock, the mystique of the “Sage of Omaha” is at least as important as perceived investment results.

Why IBM and not AAPL?

To my mind, INTC is the much more uncharacteristic purchase.  It’s still very cheap, I think (remember, I own the stock).  But it’s a capital intensive, research and development dependent, manufacturer of (arguably) business cycle sensitive, high-priced stuff.  It faces substantial competition from ARMH.  In other words, it’s just about everything Buffett has not wanted in a company.

 

 

 

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