When Warren Buffett, the greatest investor of all time, was quizzed about how, despite his stock picking wizardry, he missed out on super-duper mega baggers like Apple, Cisco, Microsoft, Amazon, Google etc, his candid response was that he does not “understand technology”. Warren’s advice was that investors should stick to their own small “circle of competence” and only buy businesses that they can figure out and understand. “Technology changes so fast that it is difficult to get a grip on the business outlook” Warren explained.
Yet, in a move that caused shock and consternation amongst his devoted followers, Warren Buffett broke his own rule and bought a truckload of IBM, the blue chip technology behemoth.
As of 30th June 2015, Warren Buffett’s Berkshire Hathaway holds 79.57 million shares of IBM. Berkshire is the largest shareholder of IBM. The investment is worth more than $10 Billion (Rs. 65,000 crore).
When Warren Buffett was grilled about why he had done a somersault and bought IBM and that too at a time when it was at its highs, Warren explained that it is because IBM is a “wonderful business”. He also defended his decision to buy IBM at the high price on the basis that he had bought BNSF Railway, a railroad company, in similar circumstances.
Warren Buffett’s analogy between a ‘railroad’ company and a ‘tech’ company was difficult to understand because as he himself explained earlier, the railroad business is easy to understand and is not subject to the vagaries of change while the tech business is hard to understand and subject to rapid change.
Parag Parikh, the late value investor and founder of PPFAS Mutual Fund, had a fascination for foreign stocks. He caused PPFAS to invest 26% of its AUM in foreign stocks such as Google, UPS, Nestle SA, 3M etc. The fund also bought 20,895 shares of IBM. The investment is presently worth Rs. 19.52 crore and comprises of 3.32% of the AUM.
Unfortunately, the decision to buy IBM has not fared well for Warren Buffett and PPFAS. The Company is struggling and is in a steady decline. The revenues and profitability is dipping quarter on quarter. The stock has lost 13% on a YoY basis. Even over the five year period, the stock has lost nearly 3%. Over the past ten years, the stock has earned a princely sum of only 72%.
The worst part is that analysts are unable to see any improvement in IBM’s prospects in the foreseeable future.
Dan Ives of FBR Capital Markets, an expert on tech stocks, called IBM a “Dinosaur” which is “sinking in Quicksand”. He said IBM is trying to sell “Gas guzzling Humvees” to a market which is looking for “fuel efficient Teslas”. He also colourfully described IBM as a “horse buggy” competing against the “Maseratis and Ferraris”.
A similar sentiment is expressed by other experts as well.
Siddhi Bajaj of thestreet.com wondered if Warren Buffett had seen something about IBM that others had missed or whether he is in “plain-and-simple denial” that IBM is a bad call. IBM is “caught in a rut and there is no light at the end of the tunnel” Bajaj concluded.
Brian Wu of investorplace.com pointed out that IBM has fallen out of favor with investors after racking up an unbroken 13 quarter streak of revenue declines, perhaps one of the worst records in the tech sector. He also expressed surprise at Warren’s “counterintuitive move” of buying IBM at a time when other investors are exiting it in droves. Wu also explained that while Warren appears to be counting on the IBM buying back its shares to prop up the share price, IBM has “slammed the brakes” on the buy-back programme. “IBM stock might remain in the doldrums longer than the average investor’s patience can be stretched” Wu warned in a grim tone.
However, Warren Buffett did put up a spirited defence of how IBM is a great buy. He explained that the Company is not banking on “disruptive technology” to survive and that “hybrid cloud computing” will be the thing of the future. He added that technology is not a “winner takes all” game and that even companies that come second or third in the race also have a chance to make big money.