As we all know, Warren Buffett doesn’t buy stocks if he doesn’t understand the business:
“What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
But Warren who doesn’t even use a personal computer or smartphone bought IBM because of the Company’s future prospects in the artificial intelligence business.
An excerpt from the interview on CNBC (Nov 2011):
Buffet: “So I’m going to say one word, and I want you to figure out where we put all that money and the word is Harold….. We bought about $10.7 billion worth of one stock, and there were several clues in what I said to you. First of all, I referenced a movie. Harold is somebody …. the common shortening of that is Hal. Now, if you think about movies…..if you go back to “2001……A Space Odyssey…Hal was the computer, right?……And Hal, if you take H plus one letter is I, A plus one letter is B, and L plus one letter is M…IBM”
Later in the interview, he explains why he doesn’t buy Microsoft despite the attractiveness of the stock:
“I—well, Microsoft is a special case because Microsoft is off bounds to us because of my friendship with Bill and if we spent seven months buying Microsoft stock and during that period they announced a repurchase or increase of the dividend or an acquisition, people would say you’ve been getting inside information from Bill. So I have told Todd and Ted and I apply it myself that we do not ever buy a share of Microsoft. I think Microsoft is attractive but that—but we will never buy Microsoft. It—people would just assume I knew something and I don’t, but they would assume it and they would assume Bill talked to me and he wouldn’t have. But there’s no sense putting yourself in that position.”
Big Companys, like Berkshire Hathaway, always have more risk of getting sued. This is a disadvantage of being a big investment house which makes them less flexible and more slowly to make decisions and to implement them – 4 most important advantages of small investors –.
But his main concern was that the Company’s reputation can be damaged.
“It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently. ” Warren Buffett
In other CNBC interview, he revealed the reason why he bought IBM:
“And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things.”
After all, of course, he uses his advantage of being a big investor and so, having access to big companies.
No Investment or Financial Advice.
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