Is Warren Being Very Un-Buffett?

Everyone's marveling over Warren Buffett's addition of tech giant IBM (NYSE: IBM  ) to Berkshire Hathaway's (NYSE: BRK-B  ) portfolio, and I have to admit that I'm no exception.

Why so much shock? For a long, long time, Buffett has very vocally steered clear of tech stocks, saying that he simply doesn't understand them. But during his big reveal of the IBM investment on CNBC, Buffett laid out at least three reasons why the investment shouldn't be a head-scratcher after all.

  1. Great business. If there's something that Buffett loves, it's a company that's sticky -- that is, its customers pay it for goods or services over, and over, and over again. The classic example is razor blades, which consumers need to keep replacing as they wear out. Berkshire currently owns a 2.8% stake in Procter & Gamble (NYSE: PG  ) , and that stems from P&G's takeover of Gillette, which Berkshire had a major stake in. Of IBM, Buffett said, "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."
  2. Management. Without a micromanager bone in his body, Buffett is a stickler for good management. In Buffett's view, IBM's management has been particularly effective, telling shareholders what they're going to do and then -- surprise! -- doing it.
  3. Reverence for shareholders. Unfortunately, it's frightfully easy to track down companies that don't treat their shareholders right. They dilute the share count, misallocate capital, and hand executives huge pay packages for doing it. Not so with IBM, which Buffett believes makes sure to treat shareholders right.

Why else?
There may be even more behind the fact that Buffett was suddenly ready to buy IBM. For one, in a lot of ways, we could say that IBM isn't nearly as much of a true tech company as it used to be.


Source: Company filings.

The services focus of IBM makes it in many ways more similar to a consultant like Accenture than a more software-focused business like Oracle (Nasdaq: ORCL  ) . In that way, the business is more reliant on the expertise of its people and the strength of its brand than the longevity of some specific technology.

In addition, Buffett has been bringing new blood into the Berkshire investing circle. Peninsula Capital Advisors' Ted Weschler was recently hired, but it was over a year ago that Berkshire announced Todd Combs would be stepping into an investing role. During the third quarter, a small position in another big tech name, Intel (Nasdaq: INTC  ) , was added to the Berkshire portfolio. That was likely the work of Combs.

In his interview with CNBC, Buffett said that he's long had his eye on IBM, but perhaps his fresh perspective on IBM has something to do with the new investor at Berkshire.

But... why you shouldn't care about the IBM buy
It can be tempting to assume that because Buffett invested in something, it's a great idea for you to invest in it. Often, that's not the case.

In some situations, Buffett's investment is in a specific security that you can't also invest in, as was the case with preferred shares of GE (NYSE: GE  ) and Bank of America (NYSE: BAC  ) . In all cases though, you may be able to find out what Buffett has done, but you won't get a glimpse into what he's doing or going to do. IBM is a perfect example of that -- Buffett had been buying since March and got a special pass not to tip his position and report it. By the time we found out about it, Buffett was all but done buying.

In other words, if your thought is to simply mirror Buffett's positions, don't be surprised if you end up with very un-Buffett returns. You'd be far better off not worrying about buying individual Buffett buys and simply buying a bunch of Berkshire stock -- which, by the way, is a great buy right now.

What to do instead
Even if it were worthwhile to copy Buffett's buys directly, I would still recommend that Buffett fans keep that old proverb in mind: "Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime."

The SEC mandate that investment managers with more than $100 million under management disclose their holdings ensures that Buffett followers will get some fish from time to time. But in his letters to Berkshire Hathaway shareholders, Buffett has been making it a point to teach readers to fish for themselves for decades.

In other words, worry less about what Buffett is buying specifically, and focus more on what you can learn from the Oracle of Omaha to inform your own investment decisions.

One thing you might learn? Buffett loves dividends. All of his top-10 positions are dividend-paying stocks. Which means you may well find some very Buffett-esque ideas in the Motley Fool's special report, "Secure Your Future With 11 Rock-Solid Dividend Stocks." Click here to claim your free copy.

The Motley Fool owns shares of Bank of America, IBM, Berkshire Hathaway, Oracle, and Intel. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Accenture, Procter & Gamble, Intel, and Berkshire Hathaway. Motley Fool newsletter services have also recommended creating a bull call spread position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of Berkshire Hathaway, Bank of America, and Intel, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (9) | Recommend This Article (20)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 18, 2011, at 4:47 PM, ragrant wrote:

    <i>"Give a man a fish and you feed him for a day. Teach a man to fish and </i> you can sell him a rod and reel, line, tackle, bait, a boat, ... "

  • Report this Comment On November 18, 2011, at 7:02 PM, at802 wrote:

    Give a man a fish and you feed him for a day. Teach a man to fish and he will spend the rest of life fishing, drinking beer and avoiding honest work.

  • Report this Comment On November 18, 2011, at 8:37 PM, TMFKopp wrote:

    Well, as long as we're telling fish stories...

    An investment banker is vacationing in Mexico and decides to go to the market and buy some fish. He buys some from a local fisherman, cooks it up, and decides that it is one of the best pieces of fish he's ever had.

    The next day, he goes back to find the fisherman. When he finds him he raves about the fish and asks him how long it takes him to catch them.

    "Only a little while," replied the fisherman.

    "Then why not stay out longer and catch more fish?"

    "Because I make enough to support my family."

    "But," replied the shocked banker, "what do you do with the rest of your time?"

    "I sleep late, play with my children, fish a little, take a siesta with my wife, and, in the evening, drink wine and play music with my friends."

    "Listen," said the banker, rubbing his hands together. "what you need to do is spend more of your time fishing and save up your money."

    "What then?"

    "Well, then you could buy more boats and hire men to work for you and catch even more fish and make even more money."

    "What then?"

    "Then you could brand your company, vertically integrate, build massive storage centers, and get refrigerated shipping trucks and airplanes to bring your delicious fish to the finest restaurants in the U.S. and Europe."

    "What then?"

    "Then you can call me and I'll help you do an IPO on the U.S. markets. You'll sell a chunk of your ownership in the company, but become very wealthy."

    "And what then?" asked the fisherman.

    "Well, then, my good friend, you could sleep late, fish a little, play with your children, take siestas with your wife, and, in the evenings, drink wine and play music with your friends."

    Matt

  • Report this Comment On November 19, 2011, at 12:53 AM, Merton123 wrote:

    Matt - I like your story which is very true.

    The real story about Warren Buffet is that he now ownes 10 companies that compose the DOW 30 index. How can he get differentiated returns from the DOW 30 when he ownes 1/3 of the index?

  • Report this Comment On November 19, 2011, at 1:42 PM, sbhanckel wrote:

    WHAT IS THE STATUS OF TMFGX IN THE NEAR FUTURE UP TO ELECTION AND WHAT WILL BE THE IMPACT IF BIG EARS (OBAMA) DOES NOT GET ELECTED;;;;;;I HOPE!!!!!! STUART B HANCKEL sbhanckel@gmail.com

  • Report this Comment On November 19, 2011, at 3:03 PM, Shawnerz wrote:

    OK, I tend to be an fundamental investor, but I do look at the technical side of things as well.

    Here's something I don't understand. Why is BRK-B such a buy?

    P/B is near zero, which is (very) good. It's an indication that it's traiding for what it's worth.

    But why, and how?

    BRK-B has has over 60B in debt with just over 35B in cash. Total debt to equity is over 36.

    With 22B in earnings per quarter, you'd think the cash would be greater, the market cap would be greater, or the debt would be less. Buffet/Munger nortiously do not pay dividens, interest on the debt is what, around 5%. So where's the money going?

    And for a holding company that doesn't produce goods or services, why is it such a buy? What am I missing?

  • Report this Comment On November 20, 2011, at 9:11 PM, TMFKopp wrote:

    @Merton123

    "The real story about Warren Buffet is that he now ownes 10 companies that compose the DOW 30 index. How can he get differentiated returns from the DOW 30 when he ownes 1/3 of the index?"

    I would argue that you only need differentiated returns when the returns of a specific index are not going to be all that hot. I've been railing for a while about how cheap large, blue-chip stocks are right now. Presumably Buffett thinks the same thing.

    And 33% of the index still is far from owning the index, so I'd say that if he's right, there's plenty of room for Berk's stock portfolio to outperform the Dow. Though remember that there's a heck of a lot more to Berk's bottom line than its stock portfolio.

    Matt

  • Report this Comment On November 20, 2011, at 9:31 PM, TMFKopp wrote:

    @Shawnerz

    A few comments:

    "P/B is near zero, which is (very) good. It's an indication that it's traiding for what it's worth."

    Berk's P/B is not near zero. It's currently around 1.2. But you're correct that that's an attractive valuation.

    "BRK-B has has over 60B in debt with just over 35B in cash. Total debt to equity is over 36."

    1) debt-to-equity of 36% is not particularly high.

    2) in looking at Berk's cash position you're completely overlooking its investment portfolio.

    "With 22B in earnings per quarter, you'd think the cash would be greater, the market cap would be greater, or the debt would be less. Buffet/Munger nortiously do not pay dividens, interest on the debt is what, around 5%. So where's the money going?"

    Do you mean $2.2 billion?

    Stock investments, capital spending, acquisitions, and, now, potentially share buybacks.

    "And for a holding company that doesn't produce goods or services, why is it such a buy? What am I missing?"

    I would highly encourage you to learn a bit more about Berkshire's business. You are correct that it's a holding company, but it has many wholly-owned subsidiaries that deliver very real goods and services including GEICO, Fruit of the Loom, RC Willey, Dairy Queen, BNSF Railway, and NetJets.

    To learn more about Berkshire, the company's website is a great place to start (http://www.berkshirehathaway.com/). It has links to Berkshire's subsidiaries, annual letters from Buffett, and all of the company's SEC filings.

    Hope this helps-

    Matt

  • Report this Comment On November 21, 2011, at 1:01 AM, bankruptcom wrote:

    IBM will lose a lot of those suckers for its expensive consultants and overpriced Websphere software. WHen companies and governments have less money they will try other alternatives - why bother with Websphere when Tomcat does the same.

    Ask yourself: name a single well known web entity that uses Websphere = none.

    Why: its a rip-off and does not perform nor is it easy to use. Search for Websphere on any technical website and notice the amazing hatred and condemnation for this family of software.

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