Just hours after admitting he'd transfer his entire net worth into Wells Fargo (NYSE:WFC) stock at the right price, Warren Buffett and his sidekick Charlie Munger had some equally flattering words for an unlikely company: Google (NASDAQ:GOOG).
The notorious technophobes sounded downright emotional about the search-engine king: "Google has a huge new moat. In fact I've probably never seen such a wide moat," said Munger. "I don't know how to take [the moat] away from them," said Buffett." "Their moat is filled with sharks!" Munger added.
Holy gigabytes!
These are pretty strong words coming from two guys known for their complete avoidance of technology businesses. So rare is the opportunity to hear a tech endorsement from Buffett that some investors will almost certainly draw one of a few conclusions:
- Buffett has realized he's been missing the tech boat for too long and has changed his views.
- Google is the exception to his avoidance of technology investments.
- He's gone absolutely looney bins.
None of these are outside the realm of possibility. All three, however, aren't likely to be the case. It's not a stretch to say there's practically zero chance that Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) will invest in Google anytime soon -- if ever. Several reasons -- besides the most obvious, valuation -- support this conclusion.
Buffett's shown love for tech companies before
Buffett has been buddy-buddy with Microsoft (NASDAQ:MSFT) founder Bill Gates since 1991. Gates actually sits on Berkshire's board of directors, and his foundation is responsible for donating most of Buffett's fortune. Despite this unusually close relationship, Berkshire refuses to invest a single penny in Microsoft, causing scores of investors to criticize Buffett as ineptly behind the times.
Nonetheless, Buffett's public comments about Microsoft have been filled with nothing but admiration of its moat and sheer giddiness over its competitive advantages. Back in 1997, he wrote:
In effect the company has a royalty on a communication stream that can do nothing but grow. It's as if you were getting paid for every gallon of water starting in a small stream but with added amounts received as tributaries turned the stream into an Amazon. The toughest question is how hard to push prices.
Even still, Berkshire refused to invest a single penny.
Why?
It keeps going, and going, and going ...
One reason is the sustainability of moats. No matter how strong a company appears today, its long-term investment viability can be impaired if creative destruction and competition through innovation ultimately erodes that advantage -- Kodak ring a bell?
Here's how Buffett and Munger put it back in 1999:
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.
"Durable" being the keyword there. Buffett's avoidance of companies like Microsoft and Google has less to do with questioning the depth of their moats as it does not having a crystal-clear view of the sustainability of those moats.
So how sustainable is Google's dominance? For the time being, it seems bulletproof, right? Yahoo! (NASDAQ:YHOO) has been trying to break its grip on the Internet for years to no avail. The fortress surrounding its competitive advantage seems completely impenetrable, as Buffett and Munger seem to hint at.
Or is it? Nassim Nicholas Taleb -- author of the The Black Swan -- reminds us in his eminent book just how fragile the competitive advantages of technology companies -- like Google -- can be. In his own words:
At no time in history has a company grown so dominant so quickly -- Google can service people from Nicaragua to southwestern Mongolia to the American West Coast, without having to worry about phone operators, shipping, delivery, and manufacturing. This is the ultimate winner-take-all case study.
People forget, though, that before Google, Alta Visa dominated the search-engine market. The Web causes something in addition to concentration ... [it] enables the formation of a reservoir of proto-Googles waiting in the background. It also promotes the inverse Google, that is, it allows people with a technical specialty to find a small, stable, audience.
That's the kind of uncertainty that likely keeps Buffett and Munger away from actually investing in companies like Google and Microsoft, no matter how dominating they are today. The kind of moats that get Buffett and Munger to actually pony up cash are things like insurance -- an industry that's barely changed since the Chinese first practiced it 5,000 years ago -- or Coca-Cola (NYSE:KO), which has been serving an identical product for over a century, and has virtually no risk of intrusion from innovation.
Even so, when Buffett talks, people listen
What are your thoughts on Buffett and Munger's endorsement of Google? More importantly, how sustainable do you think its moat is? Feel free to share your thoughts in the comment section below.
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