Warren Buffett surprised the investing world when he purchased $11.8 billion worth of IBM (NYSE:IBM) stock for Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) in 2011, ending the Oracle of Omaha's long-standing aversion to technology companies. Since then, Apple's (NASDAQ:AAPL) share price dropped from a split-adjusted $100 to $55 before rising to $130, yet Buffett never touched the stock.
While we can't know exactly why he felt secure buying IBM but not Apple, Buffett's many letters, articles, and interviews offer insight into why he stayed away from the iDevice maker -- and why you might want to do the same.
An innovative company
A November 1999 Buffett article for Fortune magazine provides a glimpse at his thoughts on tech stocks during their heyday:
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
Perhaps no other industry experiences change and upheaval of the kind that define the tech sector. The dominant companies of the 1980s were slayed by the newer technology that created the giants of the 1990s. Those giants, too, gave way to Apple, Google, and the other tech masters of the new millennium.
Nobody knows what the industry will look like 10 years from today, but it will almost certainly be much changed. Just 14 years ago, Apple was a struggling company that introduced a new music player, the iPod. Now, the company is the leading consumer electronics company thanks to its iPhones, iPads, Watches, and other innovative devices.
Apple is on top of the tech industry today, but its business and the sector it operates in will change so much in the coming years that it's hard to say if it can remain the leader in the decades ahead. If a company must constantly reinvent itself to stay on top, it likely does not pass Buffett's moat test -- which any technology company would find difficult to pass.
Did Buffett change his criteria?
Buffett wrote that Fortune article 16 years ago, but his IBM purchase occurred just four years back. It's possible he relaxed his investing criteria to make the purchase. Compared to Berkshire holdings GEICO (insurance) and Burlington Northern (railroad), IBM changes a lot. But it is also one of the most predictable companies in the tech sector. Look at IBM's 10-year sales trend and compare it to Apple's:
Apple is growing much faster than IBM, but Big Blue has a much more stable revenue stream while it buys back millions of shares. Buffett wrote in Berkshire's 2011 letter to shareholders that he expected IBM to retain its earning power despite the tech sector's proclivity for rapid change: "We expect the combined earnings of [American Express, Coca-Cola, IBM, and Wells Fargo] -- and their dividends as well -- to increase in 2012 and, for that matter, almost every year for a long time to come."
Clearly, Buffett is still using the same criteria he employed to build Berkshire into the behemoth it is today. The only change is that he sees qualities he likes in a company that operates in a sector that he is famous for avoiding.
Why IBM but not Apple?
The reasons for Buffett's choice of IBM rather than Apple are likely mundane. The chances of severely overestimating the earning power of slow-growing IBM are much lower than the chances of being too optimistic about Apple's future.
Apple's products are updated regularly to remain state of the art, while IBM's product cycle is much slower. It's hard to know what products Apple will be selling in 10 years, much less what it will earn. IBM's relatively slow and predictable path toward cloud computing is much clearer. Buffett has some idea of what IBM will sell and earn a decade from now, while he isn't so sure about Apple. The best investor in the world believes that makes IBM a better investment than Apple; individual investors should consider this possibility as well.