For anyone fascinated by Warren Buffett and his extraordinary investing career, Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life is a must read. At over 800 pages, it adds much detail to the scattering of facts that most people have about Buffett’s life.
Any attempt to summarize this book in a few paragraphs would be hopelessly superficial: he was young, then middle aged, and then old. So, I’ll focus on one aspect: the perception that he is a simple folksy person who doesn’t know much about newfangled things like computers and the internet.
In some ways this perception is accurate. He does tend to live simply, except for flying around in private jets to meet the rich and famous. He also has the ability to explain things simply and briefly. However, the work he puts into his investing is neither simple nor brief.
He has spent most of his life consuming and analyzing financial data. He is well-known for avoiding technology stocks. He explains that he doesn’t understand them and has to stay within his circle of competence. I think that many people misunderstand this explanation.
Given the time that Buffett puts into his investing work, it is inconceivable that he hasn’t examined technology companies. It may not be a big fraction of his time, but the total amount of analysis would be considered high for other people. It’s not so much that Buffett can’t understand what these companies do; it’s more that he can’t understand why any of these companies have any durable competitive advantage.
Maybe the reason he can’t understand this is because none of these companies really has a durable competitive advantage. It seems very likely that Coke will continue to earn profits for the next 20 years. But how confident can we be that the same will be true of Microsoft, Intel, IBM, Google, or any other technology company?
I’m not saying that technology companies are necessarily bad investments. They just don’t fit Buffett’s search for a margin of safety. Although Buffett’s public remarks contribute to the impression that he is a simple guy who doesn’t understand technology, the truth is more subtle.
Since I'm in a technology related business I know there's a lot of money to be made there, but it's not always the best industry. Like fashion, a big part of it is driven by insiders doing what they think is cool today. Naturally there's a lot of competition and innovation so a technology-based advantage never really lasts. Maybe another problem Buffet has with technology is that stock prices are bid up too much; at a lower price there's at least a few companies that would be great investments.
ReplyDeleteAlthough the book is mostly stories (like you would expect from a biography) I learned a lot - Buffet's been showing people how it's done for a long time. I have quite a few blog post inspired by the book coming up :)
Although the book doesn't cover the last decade very much, you can figure that out from any news source; it does a great job of filling in some details about the earlier years.
Siliconprairieblog: You're right that technology stocks are often considered hot and their prices get bid up. This would make it even harder for Buffett to find a margin of safety.
ReplyDeletePerhaps Buffett should read Clayton Christensen's books about tech companies. There's an old joke in tech that explains a lot: "God could not have created the world in 7 days if he (or she if you prefer) had had an installed base." Try ripping SAP out of an organization and replacing it with Oracle. Ain't gonna happen.
ReplyDeleteThere are a lot of network effects in technology, but then again fax was one of them. Any company built on fax machines now has to fight with kodak and polaroid to see who can cling to the past the most.
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