Warren Buffett and Amazon (AMZN)

I read a recent comment Warren Buffett made expressing his regret at never having bought AMZN.

As far as I can see–and I’ve never met Mr. Buffett–he’s an urbane, sophisticated, complex individual who chooses a down-home persona to market himself to the world.  I don’t regard anything he says that involves the stock market as being a stray, off-the-cuff remark.  I wonder what he meant.

the top ten

As of March 31st, Berkshire Hathaway’s top ten holdings are, in order:

Kraft Heinz

Wells Fargo

Apple

Coca Cola

American Express

IBM (adjusted down for Buffett’s announced intention to pare his holding by 30%)

Phillips 66

US Bancorp

Charter Communications

Moody’s.

Source:  CNBC (a format that allows easy sorting of the SEC data)

The list comprises 80% of Berkshire’s equities.

 

Yes, despite Buffett’s well-advertised aversion to tech, there are two IT names in the top ten.  But IBM is cutting edge tech circa 1975 and AAPL is a high-end smartphone company looking for a new world to conquer.

the Buffett approach

All these firms do have the signature Buffett look:  they have all spent tons of money developing important consumer-facing brand names.  While that spending has created an enduring consumer franchise, there is no hint of the existence of this key asset on the balance sheet.  Rather, the all-important brand-building expenditure is accounted for as a subtraction from asset value.

The one possible exception to this is Charter, whose cable networks rather than sterling service and extensive advertising give it near-monopoly access to customers.  Here again, however, the ability to gradually write off the cost of constructing those networks through depreciation argues that the balance sheet severely understates their true worth.

The formula, in brief:  the “hidden” value of extensive well-staffed distribution networks plus iconic brands built through extensive spending on advertising and promotion.

limitations

The obvious limitations of this approach are:  that while novel in the 1950s, the whole world has since adopted Buffett’s once-pioneering approach; this would be great if there were no internet undermining the value of traditional brand names and distribution networks.

In other words, a software-driven, internet-based firm like AMZN seems to me to be the last thing that would ever be on the Buffett radar.  It also seems to me that taking AMZN seriously would mean rethinking the the whole Buffett investment approach–not the valuation discipline, but the idea of the value of traditional intangibles–and recasting it in a much techier way.

why not adapt?

Why not do so anyway, instead of kind of limping to the finish line?

Maybe it’s because that doing so would attack the heart of the intangible brand value of Berkshire Hathaway itself–and that attack would come not just from a nobody but from the brand’s most credible spokesperson, the Sage of Omaha himself.

 

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