by James Saft, Reuters columnist
Warren Buffett’s stake in Apple (AAPL) illustrates not just how the two principals have changed, but, rather, how the world has changed.
Apple has become something that looks strangely like a value stock and Buffett is venturing into an area – technology – he’s in the past said he doesn’t understand.
More to the point, technology has become more than simply a business sector. You can no more be an investor who eschews technology, however you may define it, than you can be a life form not based on carbon. Both are now basic building blocks.
Buffett’s Berkshire Hathaway disclosed a more than $1 billion stake in Apple on Monday, a position he told the Wall Street Journal was taken by one of his two in-house investment managers. Buffett is also mulling backing the attempt of a group including Quicken Loans Inc founder Dan Gilbert to buy the Internet assets of Yahoo (YHOO), according to a report from Reuters citing sources.
This, after all, from a man who during the dotcom boom in the late 1990s explained eloquently why he and partner Charlie Munger steered clear of technology:
“Our problem – which we can’t solve by studying up – is that we have no insights into which participants in the tech field possess a truly durable competitive advantage,” Buffett wrote in 1999.
“If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.”
That argument boils down to two points: Buffett can’t figure out which tech businesses have a defensible “moat” around them or how technology might change to undermine those advantages.
Apple’s premium brand may be that kind of deep moat, but you could argue that the rate of technological change has, if anything, quickened since 1999. The question now isn’t which online pet supply delivery company will win out – we know it is probably Amazon. It is, instead, what company could possibly have a business which is insulated from the impact of technology and digitization. Very few if any meet that definition.
VALUE STOCK?
As the impact of technology on business becomes more pervasive, a policy of sitting things out to see who the winners are in the end carries more risk today than ever before.
One need only consider the impact of autonomous cars on insurance – a sector in which Buffett through GEICO has a large exposure – to see how technological change cannot be avoided. Or for that matter, have a look at IBM, which up until now has been Buffett’s most notable foray into technology investment, and a losing bet thus far.
There is also the fact that Apple has become a lot more like the value companies Buffett has traditionally made his specialty. Apple trades at a price-to-earnings ratio of about 10, roughly half the valuation placed on the broader stock market. Apple is also returning cash to shareholders. And Apple is a cash machine generating huge cash flows which makes it in its own way not too dissimilar to other sectors Buffett has traditionally favored.
These are the characteristics of a more mature company.
Information technology shares, as a sector, are now a much larger part of the market, comprising just under 20 percent of the S&P 500 index. That’s up about a third from 2008 and two and a half times larger than 1989. Steer clear of technology shares and you limit your choices considerably. That’s a particular concern for an investor like Buffett, whose Berkshire Hathaway has total assets of about $550 billion. There are very few companies Buffett can buy in a size which would be meaningful to his returns without himself driving the price up against himself while he builds his stake.
The very fact that Buffett has delegated smaller stakes to two lieutenants, Todd Combs and Ted Weschler, may also be an acknowledgement of the difficulties of managing assets on his scale.
So far, Buffett’s foray into technology is working well this time. Apple, whose shares had fallen about 30 percent over a year, rose 3.71 percent on Monday after the news broke.
Yet the essential risk profile of technology, or its ability to transmit waves of risk to other sectors, is the larger story. The products are great, but as shareholders in Blackberry can attest, the competition and change can be brutal.
If we are all technology investors now, we will all be subject to those risks.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)
