Warren Buffett and Charlie Munger reassess tech sector

Buffett investing in tech shows he's 'either learning or crazy’, says his right-hand man

It was with his traditional glib mannerism that Charlie Munger – Berkshire Hathaway vice-chairman and Warren Buffett's right-hand man – hurled a cavalier remark at the Oracle of Omaha.

Mr Buffett had long avoided investments in the technology sector, focusing on stocks and businesses he understood and could value, a core tenet of what he considers his circle of competence. Then, six years ago, he invested in IBM. In 2016 he followed with a stake in Apple.

“It shows either that you’re learning or you’re crazy,” Mr Munger said on stage in front of tens of thousands of Berkshire shareholders who travelled to Omaha for the company’s annual meeting on Saturday, many of whom came simply to listen to the two men talk. “I hope it’s that you’re learning.”

Over the weekend, the two famed value investors rued several of the tech investments they never made, heaping praise on Amazon founder Jeff Bezos and online search group Google. It was a noticeable shift from a company that owns Dairy Queen, Fruit of the Loom, Lubrizol, Geico and Benjamin Moore.


I was too dumb to realise what would happen . . . I did not think Jeff Bezos could succeed on the scale that he has

Mr Buffett confessed that he had made a mistake not investing in Google and had underestimated Mr Bezos. “I was too dumb to realise what would happen . . . I did not think he could succeed on the scale that he has.”

The reassessment of a maturing technology sector comes at a critical time for Berkshire, which is worth more than $410 billion and has nearly $100 billion in cash on hand to invest. Over the next decade, Mr Buffett or a successor will deploy more capital on acquisitions and investment in Berkshire’s businesses than he has in his entire 52 years at the helm. Businesses that need little in terms of capital investments with scale will be key.

That is a point that the Berkshire chief is well aware of: the only five publicly traded companies with higher market valuations than the sprawling conglomerate are in the technology industry. The coterie – Apple, Google, Microsoft, Amazon and Facebook– is worth more than $2.5 trillion and requires "no equity capital", he says.

“It used to be that growing and earning large amounts of money required investment.” Not any more.

Shy of start-ups

Lawrence Cunningham, a professor at George Washington University who is considered an expert on Mr Buffett, said it was unlikely the Berkshire chief executive would soon invest in a start-up such as Uber or Snapchat. But his growing familiarity with the technology industry could mean a greater focus on the sector.

"It is about his central competence. Once a company has been around for a few cycles, through multiple chief executives and developed a record, you can start to establish what this business will look like in 15 years. You can understand Apple and understand its position as easily as you can Coca-Cola or American Express. "

The detour through an industry Mr Buffett had long avoided followed hours of questioning of the two executives, which opened on the company's investment in Wells Fargo and repeatedly touched on its relationship with 3G Capital, the Brazilian private equity group with which it bought a controlling stake in Kraft Heinz.

Mr Buffett said it would have been a “huge, huge, huge error” if executives at Wells had been alerted to the bank’s brewing fake accounts scandal and failed to act.

“We agree with Mr Buffett’s comments and value Berkshire Hathaway as a long-term shareholder and customer,” a spokesperson for the bank said over the weekend. “We have taken decisive actions to fix the problems.”

Asked about the political risks of being associated with 3G, Mr Buffett offered a full-throated defence of the group and its practices, which several shareholders indicated they believe runs counter to the values typically espoused by Berkshire.

Mr Buffett said that 3G was ready to buy out companies that “really needed change”. “Change is painful for a lot of people and I’d rather spend my days not doing that sort of thing.”

He added that this year Berkshire might consider taking additional losses at the margin to take advantage of higher tax rates, should Congress pass sweeping tax cuts. Losses realised this year can be used to offset taxes on gains in the future.

It was a short-term titbit from a company known for its long-term view on investing.

- (Copyright The Financial Times Limited 2017)