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Why Warren Buffett would steer clear of 99% of tech stocks, and why you as a private investor shouldn't copy Buffett's advice exactly – you'll learn all that in today's video. Enjoy! What you should really be looking for is a company where you can see the future, and that's why we don't buy tech stocks.
I like computers and believe they do many things for our society. How do I value a company that Berkshire Hathaway is acquiring? Well, if someone calls me, the first thing I have to decide is whether valuing that company is within my area of expertise. I do n't know how to value Microsoft. I don't know how to value Oracle.
Let's say Larry Allison calls me, or Bill Gates calls me. I have no idea about biotech. I would n't know how to value something like that. So, I would wish Bill Gates all the best and say, "Yes, I think your company is worth twice as much as you think it is, but I'm just not in the mood to buy anything today." So, it has to be something within my area of expertise – a company I can understand.
And by understand, I don't mean something like understanding how to use a computer. When it comes to computer companies, I'm talking about understanding the company's economic characteristics and what it will really look like in 15 or 20 years. And here we come to the point that is so often misunderstood: Buffett understands the business models of Microsoft or Oracle very well.
He knows that Microsoft sells operating systems and Office solutions. He knows that Oracle develops and sells enterprise software. But he's simply not sure what the business will look like in 15 or 20 years. Precisely because there is so much competition and innovation in the tech sector, he shies away from these companies because it makes it extremely difficult to predict where they will be in five or ten years.
Many are now confused. Buffett bought a huge chunk of Apple shares in 2016. To clear that up, Buffett gave this presentation in the early 2000s, before Apple released the iPhone, before Facebook or Netflix were already big names. Back then, he simply wasn't willing to invest in the big players like Microsoft, Oracle, IBM, or Cisco, not because he didn't understand their business models, but because he found it difficult to predict the future of these technology companies.
Bill Gates will tell you if he If he were to invest, he'd rather buy Berkshire than Microsoft because it's much easier to understand what our company will look like in the future, whereas he's in a company where you really have to change things over time. I know Reclays will be the most popular chewing gum in the country.
I know Snickers will be the most popular chocolate bar in ten years. It's been the most popular for 40 years already. You know, you don't have to be particularly clever to understand that people do n't want to experiment when they're paying 50 cents for a piece of gum to put in their mouths. I mean, we try to look at companies we can understand.
A year and a half ago, I got a call from a man I'd never heard of, from Denver. His name was Craig Ponsio. Craig called me and said he had a company that was my kind of company and he wanted to sell it. He told me the reasons. It had something to do with his time, and he said it was by far the leading company in the custom picture frame industry.
He told me why the company had what I call a sustainable competitive advantage. So let me explain why the company had exactly that. He told me There are 18,000 people in America who frame pictures, little auntie shops, and that's in every city. In some places, there are half a dozen, in Omaha maybe a whole one, and they frame pictures.
So I go there to get a picture framed, I give it to someone and say I'll leave it to them. I say, you know, the most important thing to me is a nice picture frame, and I want the picture back soon. I want fast delivery. Now, with 18,000 people in this industry and tens of thousands of different picture frames, nobody can have a large inventory because they don't make that much sales.
Because this isn't Walmart. Trick Ponsio graduated from a small school up in Wisconsin. After that, he worked for a small company that made these things. Five or six years later, he bought the company when it was making three million dollars a year. Now it's 300 million dollars a year, and now the company completely dominates the custom wooden picture frame business.
But how did it come about? The company dominates in this area because it appeals to these 18,000 people. They have sales staff that I... Eight times a year, the company contacts these corner shops, and the company has 22 factories distributed across the country. In 85% of cases, they supply the picture frames that the corner shop orders.
If you order by 5 PM, you'll get the frame by 3 PM the next day, and that's what the customers want. They don't care if they pay $83 or $88 to get it framed; they have something that needs to be done, and fast. These 18,000 people in the corner shop want satisfied customers, and that means fast delivery, reliability, and so on.
They can't build a distribution system that competes with ours; that should be clear to everyone. Just imagine building such a system from scratch, one that would take our business away. It's impossible. Craig explained it to me in about 15 minutes. I had never thought about the business of custom picture frames, but I've framed pictures myself or had them framed.
I understood the power behind it. That was on a Monday. I said, "I think we can make a deal," so he came to me on Wednesday. He arrived at 9 AM, and He left at 10 a.m. and we had a deal. I haven't seen him since. He received the money shortly afterward, and he wanted to attend the shareholders' meeting last year, but his wife got sick.
He'll probably come this year. He's a good guy. Buffett places extremely high value on a sustainable competitive advantage. This means a company must be able to keep the competition at bay. For example, with custom picture frames, this is achieved through a customer relationship with 18,000 small, local shops across the country.
What defines this customer relationship is reliability and fast delivery, which reminds me a bit of Amazon's moat today. Or it's achieved through a brand with high recognition value, like Coca-Cola sneakers or Ricelse chewing gum. Another example is a unique location, such as for a restaurant in the heart of downtown New York, and this sustainable competitive advantage.
Buffett didn't see this in tech companies for a long, long time until Apple came along with the iPhone, which is now by far his largest holding. He also saw this competitive advantage in Amazon and Google. He's already said that he recognized this moat too late in these companies and that the prices were then no longer attractive enough.
For him, investing in Amazon meant he even had a small position of 10 million shares, which, however, doesn't even represent one percent of his portfolio value. And really, nobody can hold a candle to us in this business. Whenever I buy a company, I tell myself, if I had a billion dollars and could compete with these people, could I outdo them?
If you gave me a billion and told me to knock Snickers off the number one chocolate bar in the country, I wouldn't know how to do it. If you told me I had a billion and was supposed to make sure, or 5 billion, that [brand name] came up on the list of best-selling chewing gums, I couldn't do it. You know, if you gave me a billion and told me to knock all the women 's clothing stores off the left, I'd turn them into mincemeat pretty quickly.
I mean, I have a good company myself, but I could destroy it. And the real test is, can some idiot with a lot of money destroy your company if he wants to compete with you? We try to buy companies that, no matter who tries, have this sustainable competitive advantage. Those are the two. Words that count, and maybe you can make this decision about companies where I ca n't.
For me, they have to be pretty simple. Yes, here comes this mental model, the coat model of Charlie Buffett, namely inverting everything. That means Buffett asks himself how I can make the biggest mistakes when investing, and one answer is by buying companies that are so complex that I can only very difficult to predict the future.
So, companies with a lot of competition, companies in an industry with a lot of change, so a lot of innovation, and he stays away from exactly these huge companies, unless we take the example of Apple. There is a huge moat, which makes the forecast easier again. We recognize that people are attracted to the Apple brand, and no matter what new thing comes onto the market, even if it's the coolest Samsung smartphone with 12 cameras, people still buy the iPhone.
We have Fruit of the Loom underwear. Do you think people will stop wearing underwear? Well, who knows, but we sell 44% of the underwear for men and boys that is sold through Walmart and all these retail chains. We have the lowest costs. Fruit of the Loom is your name, which has been around since 1850 or 60, if you buy three pairs of our underwear, or six pairs, or whatever, for $5.50, and nobody sells them cheaper, why would you buy them anywhere else?
So we profit from it, unless we mess it up somehow. We have a highly effective advertising slogan that sums it up perfectly, or what you should really be looking for is a company where you can see the future. That's why we don't buy tech stocks. I like computers and believe they do many things for our society, but I simply don't know what things will be like in ten years.
Who will sell what to whom, at what prices, and against whom, and all those things. But I do know that people will still be chewing gum in ten years. There are certain things that remain unchanged: Gillette razor blades. You surely know that 70% of the world's razor and blade sales are Gillette, and that's after almost 100 years of shaving.
Everyone knows how a razor blade works, everyone knows how to buy the steel, everyone knows how to sell through Walmart or others. But 70% of the world... that's partly because... Men do n't like change as much; if a man is satisfied with something, he doesn't tinker with it much. Women are more willing to experiment, but $25 a year for something they do every day?
They've had good experiences with Gillette— what more could the world offer? Yes, here I'd like to elaborate a bit more on Buffett's current investment because there's this saying: "Do not do what you say, but what you do," and that only applies to a very limited extent to Warren Buffett. When Buffett had small sums of money, like we usually do as private investors, he made very different investments than he does today.
He focused on small, extremely inexpensive companies, and a long-term competitive advantage was less important to him because he was quicker to sell these small companies to buy the next inexpensive one. Only over the decades, as his money grew larger and larger, did he increasingly focus on quality companies with a long-term competitive advantage.
However, his best performance was achieved in the 1950s with approximately 50% annual returns, and he says that if he only had a small amount of money, he would choose this approach. He also calls it the "cigar-bad approach," meaning investing money in Investing in small, inexpensive companies and selling them again when they reach their fair value – this approach naturally requires significantly more work in my opinion.
It's riskier under certain circumstances, but promises higher returns. And we as private investors have the advantage of being able to invest in companies that fly under the radar of large investment firms, simply because an investment in these small companies would have little impact on the overall assets of the big players.
If you're interested in this approach, the Seeking Alpha platform offers high-quality stock analyses, including those for smaller companies that are largely ignored by major investors. I've been using Seeking Alpha for almost two years and have a watchlist there that I check daily. I receive all the latest company reports and stock analyses for this watchlist.
With the first link in the video description, you get a $140 discount on the Seeking Alpha Premium annual subscription, saving almost 60 percent. Now I'm interested in your opinion. What do you think about BAföG's statements on tech stocks? Feel free to write your thoughts in the comments below.
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