Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) CEO and mastermind Warren Buffett is one of the finest investing minds on the planet. His tried-and-true strategy involves betting big on simple businesses run by fantastic management teams. His favorite holding period is "forever," but only if he understands the target company inside and out.
So when Buffett built a massive position in technology giant IBM (NYSE:IBM) over the last three years, many investors and analysts were left scratching their heads. Buffett prefers investing in traditional industries like banking, retail, or consumer goods. So why would he suddenly want a 5.5% stake in a technology firm -- and a complex one spanning several sectors, at that?
That question burns as hotly as ever. IBM's shares have tumbled in 2014 but Buffett's stake only grew larger. At the latest count, Berkshire owned 8.3% of Big Blue, making it the third-largest holding in Buffett's portfolio.
Doesn't Buffett hate to lose money?
Truth be told, Buffett must be delighted to see IBM's share prices withering. After all, it's exactly what he was hoping for three years ago.
"We should wish for IBM's stock price to languish throughout the [next] five years," Buffett wrote in Berkshire's 2012 letter to shareholders. IBM is known to spend a lot of money on share buybacks, so it only makes sense to wish for lower share prices while that train is rolling.
The combination of IBM's shrinking share count and Berkshire's modest further investments in the stock has resulted in the far higher ownership stake Buffett's company holds today.
"The logic is simple," Buffett wrote in 2012. "If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day's supply."
What a delightfully Foolish perspective. Low share prices only hurt if you're selling. At all other times, investors are better served by low prices. That way, you can afford more shares for yourself, while share buybacks and reinvested dividends achieve their maximum impact. That's pure gold to long-term investors like Warren Buffett, who have no plans to sell anytime soon.
What does Buffett know that I don't?
Beyond Big Blue's financial strength and Buffett's respect for its past and current management teams, IBM actually fits right into his wheelhouse.
As chairman of the Mid-Continent Tab Company in the 1950s, Buffett competed directly with IBM -- and lost a lot of business to Big Blue. He's been reading IBM's annual reports ever since, making him arguably one of the world's leading experts on how IBM does business.
What Buffett's investment thesis in IBM boils down to is remarkably simple. The company's leaders like to set up ambitious long-term goals, published out in the open. With these clear targets in plain view to analysts, investors, and rival businesses alike, IBM then knocks the goals down like clockwork.
That's how you impress Warren Buffett into buying over 70 million shares in your company.
Should I follow Buffett's example?
Now, Warren Buffett is no ordinary shareholder. In order to move the needle for his enormous investment portfolio, he must work on a scale that leaves regular billionaires flat-footed, and ordinary investors can only dream about. That said, many of Buffett's reasons for owning IBM shares apply to regular retail investors as well.
For example, IBM has reduced its share count by nearly 20% since the start of 2011, investing almost $50 billion in share buybacks. That's a boon to every class of investor, as share values rise when the share count falls.
The jury may still be out on IBM CEO Ginni Rometty, who took the helm right after Buffett disclosed his large IBM investment. The market certainly doesn't seem convinced that her chosen strategy is the right one, judging by those plunging share prices.
But then, change is always difficult, especially when the long-term benefits of a new strategy can only come after a few years of seemingly disastrous adjustments. That's the case for IBM right now. As the company distances itself from low-margin hardware systems sales, revenues are stalling. The end result should be stronger profit margins and a healthier business overall, but investors have come to expect a certain sales heft out of IBM -- and Rometty isn't making it a priority.
So IBM's shares are falling on short-term concerns, as the company prepares for a more profitable long-term future. Buffett sure doesn't mind the resulting discount prices on IBM shares, and Berkshire's recent buys show that he still believes in the business model.
If he's right, investors who buy IBM shares at today's low prices will benefit just as strongly as Buffett does.
He just happens to have about $13.4 billion more skin in the game.