POST OF THE DAY
Berkshire Hathaway
Tech Moats

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By TheSandman
May 2, 2001

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The clarification about not understanding the sustainability of the moats within his time horizon was very helpful for me.


Paul,

I think you're right. Warren certainly does understand technology companies. In fact, as potential investment opportunities, I think Warren understands technology companies better than most people. When Warren talks about not understanding technology, I believe he is referring to the fact that, due to the very dynamic nature of technology, very few tech companies will establish a sustainable competitive advantage. Therefore, the odds are poor for any individual investor being able to consistently predict which tech company will not only survive, but thrive.

Who knows what technological marvel some kid is dreaming up right now? And, tomorrow, which "Gorilla" tech company will be demolished by this kid's dream?

It's interesting to note that Warren's buddy, Bill Gates, seems to agree with Warren on this issue:

GATES: "The technology business has a lot of twists and turns. Probably the reason it's such a fun business is that no company gets to rest on its laurels. IBM was more dominant than any company will ever be in technology, and yet they missed a few turns in the road. That makes you wake up every day thinking, "Hmm, let's try to make sure today's not the day we miss the turn in the road. Let's find out what's going on in speech recognition, or in artificial intelligence. Let's make sure we're hiring the kinds of people who can pull those things together, and let's make sure we don't get surprised."

Sometimes we do get taken by surprise. For example, when the Internet came along, we had it as a fifth or sixth priority. It wasn't like somebody told me about it and I said, "I don't know how to spell that." I said, "Yeah, I've got that on my list, so I'm okay." But there came a point when we realized it was happening faster and was a much deeper phenomenon than had been recognized in our strategy. So as an act of leadership I had to create a sense of crisis, and we spent a couple of months throwing ideas and E-mail around, and we went on some retreats. Eventually a new strategy coalesced, and we said, "Okay, here's what we're going to do; here's how we're going to measure ourselves internally; and here's what the world should think about what we're going to do."

"That kind of crisis is going to come up every three or four years. You have to listen carefully to all the smart people in the company. That's why a company like ours has to attract a lot of people who think in different ways, it has to allow a lot of dissent, and then it has to recognize the right ideas and put some real energy behind them."

BUFFETT: I didn't grasp it at first, but it's huge. The technological revolution will change the world in dramatic ways, and quickly. Ironically, however, our approach to dealing with that is just the opposite of Bill's. I look for businesses in which I think I can predict what they're going to look like in ten or 15 or 20 years. That means businesses that will look more or less as they do today, except that they'll be larger and doing more business internationally.

So I focus on an absence of change. When I look at the Internet, for example, I try and figure out how an industry or a company can be hurt or changed by it, and then I avoid it. That doesn't mean I don't think there's a lot of money to be made from that change, I just don't think I'm the one to make a lot of money out of it.

Take Wrigley's chewing gum. I don't think the Internet is going to change how people are going to chew gum. Bill probably does. I don't think it's going to change the fact that Coke will be the drink of preference and will gain in per capita consumption around the world; I don't think it will change whether people shave or how they shave. So we are looking for the very predictable, and you won't find the very predictable in what Bill does. As a member of society, I applaud what he is doing, but as an investor, I keep a wary eye on it.

GATES: This is an area where I agree strongly with Warren. I think the multiples of technology stocks should be quite a bit lower than the multiples of stocks like Coke and Gillette, because we are subject to complete changes in the rules. I know very well that in the next ten years, if Microsoft is still a leader, we will have had to weather at least three crises.

Good Luck,
Sandman