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hey guys tom here from the investing on tom youtube channel welcome back to the channel if you enjoyed today's video hit like hit subscribe and that way you can see future videos as well so this is the first video back from holiday and it's great to be back into sort of a regular routine and back in the regular setting and all that sort of stuff so i hope you guys do enjoy all the videos that will be coming out basically throughout 2021 now this video is going to be about warren buffett and investing in technology and it's going to be probably a little bit different from many of the other videos um along this kind of train of thought that you may have seen we know that warren buffett is famous for really not investing all that much if at all in technology businesses he corrected that somewhat in apple a few years ago it's now his largest position but warren buffett sort of sees apple as more of like a consumer products company rather than a technology company you can argue that back and forth as much as you want but that's kind of how he sees it and we know that the most common reason for warren buffett not investing in many of these businesses is that he simply doesn't understand them he can't predict the future of different software companies or different technology companies and if he can't predict the future all that well he therefore can't value them and he can't invest in them and buy with a margin of safety like he likes to do now although this sort of lack of understanding of technology businesses is probably uh the explanation for most of the businesses that warren buffett sort of passes on in the technology space and and doesn't make an investment in i think there is another angle to it and some of the more eagle-eyed viewers may notice that poor charlie's almanac is not sitting out behind me today and that's because i recently came across sort of um a few paragraphs and and poor charlie's almanac that kind of explained some of warren buffett's thinking uh on this exact topic so i'm going to read a short sort of excerpt from poor charlie's almanac and kind of talk you through an example of where warren buffett had some great technology presented to him and his textile business actually with books hathaway and he really wasn't happy to see it and we'll go through some of his sort of mental processes there on why he wasn't happy to see that technology even though it looked like really really attractive on the surface of things um and we'll see how we can apply that to some of the technology businesses today and even some of the non-technology businesses and the textile company that gets talked about in port charlie's almanac here is really not a high-tech business but nonetheless it has sort of innovations within the industry and they are things that can change the economics of that business quite dramatically so uh let's get into that okay so what i'm about to read is uh sort of a passage from a talk that charlie munger actually gave uh and that talk if you have a reading poor charlie's almanac that's on page 188 and sort of a couple following pages after and the talk is called a lesson on elementary worldly wisdom as it relates to investment management and business there's a snappy title for you and so charlie munger says the great lesson in microeconomics is to discriminate between when technology is going to help you and when it's going to kill you for example when we were in the textile business which is a terrible commodity business we're making low in textiles which are a real commodity product one day the people came to warren and said they've invented a new loom that we think will do twice as much work as our old ones now just take a moment to think for a second what would go through your head if you were the owner of a textile business and someone came to you and said uh we've got this new technology that we think can you know dramatically improve our production we can pump out a whole bunch more textile products for much lower costs and so on how would you kind of interpret that i think probably the typical person would say that's fantastic you know we're going to get all this extra production it's going to be much cheaper we can undercut all our competitors all that sort of stuff and it's not going to cost us that much more money to kind of get this you know improvement up and running well here is what warren buffett uh had to say about it and it may well surprise some of you so uh warren said gee i hope this doesn't work because if it does i'm going to close the mill and he really meant it uh what was he thinking he was thinking it's a lousy business we're earning substandard returns and we're keeping it open just to be nice to the elderly workers but we're not going to put huge amounts of new capital into a lousy business and this explanation of how warren buffett thinks about technology particularly in these commodity businesses goes on for a couple more pages so i won't read all of it um but basically it goes on to say that um with technologies like this particularly when you're in a commodity business like textiles basically all of those extra production improvements and cost reductions almost always get passed on to the customer so what happens if you're in a commodity sort of textile business you spend the money on improving your production you undercut your competitors and you know maybe for a short period of time basically what happens is all your competitors will also take on that same piece of technology and all of a sudden you're back on an even playing field again and you're still earning sort of substandard rates of return uh on the capital that you put towards that business and this kind of stuff happens in so many industries when i start to think of different places that i've invested before and different things that i've looked at investing in before now another one that really comes to mind but isn't perhaps quite as obvious might be something like the traditional auto sector you know um every now and again we have a particular car company make some sort of innovation if we go back a couple decades maybe it was people going from you know sort of the manual windows that you wind by hand to electric windows now uh when a particular car company first makes that innovation maybe they can charge a little bit extra for their cars but a year or two later you know every manufacturer and every car has electric windows and now basically all of that benefit has been passed on to the consumer and there's no real uh extra enduring advantage for the original sort of designer of that particular feature and the cycle just kind of goes on and on maybe first it's electric windows then next it's automatic window wipers then next it's cruise control then next it's a bluetooth radio and all of a sudden uh you've really got all these extra features and the consumer has done great you know they're paying a similar sort of price to what they'll paint a few years ago maybe adjusted for inflation for a car but they're getting all these great new features that the cars of 5 or 10 or 15 years ago didn't have um but still you've got all these auto manufacturers only earning you know five percent returns on invested capital that sort of thing so this kind of stuff happens everywhere and it's a really interesting idea now that i've got it up there in my head to kind of apply to all sorts of different industries and basically manga goes on to say that they were in the textile business for like 20 years uh they kept getting these promises of you know new technology where you'd get your money back in three years and you'd be earning 20 20 to 30 percent now returns on capital you'd continue to do that every three years and then 20 years down the track somehow you've still only earned like four percent returns on capital um so those those uh new technologies may have worked they may have really increased the production a lot in these textile mills but in terms of generating good returns for shareholders since they could not differentiate their product from a textile mill just down the road or a textile mill overseas for example really the returns just never showed up for investors but with all that said there are types of technology that warren buffett will grab and run with because he realizes that they can create uh substantial returns for for investors in particular companies and basically like charlie munger said at the beginning of that excerpt it's all about being able to decide whether a certain piece of technology is going to kill you or whether it's going to really really help you now again in poor charlie's almanac they take um this example of a technology that could really help you and it's almost always in the context of sort of monopoly type businesses or wide moat type businesses it's almost never with commodity companies or the like so they actually give the example of the newspaper business now uh newspapers are definitely not as good a business as they were 20 30 years ago and so on but nonetheless the example i think should still make sense to most of you hopefully so um basically uh newspaper companies were very much sort of monopoly businesses they were sort of local monopolies so generally in each you know town you'd have maybe one or two newspapers um and it was really really hard for a new competitor to come in so you usually had just one or two companies both of which were making really good profits and their particular sort of niche so if a business like that finds a way to bring their costs of production down to and publish their newspapers maybe they have some new technology for printing those papers or whatever it might be that really allows them to become much more efficient in producing their daily newspaper or their sunday times or whatever it might be that is a technology that can genuinely produce really high returns on capital and improve the business another example of this might be another large business within birch hathaway right now which is the railway companies now railway companies have a huge advantage they own a railway and it's really hard for a competitor to come in and build their own rails and you know these things have been around for literally like hundreds of years in some of these companies that that underlie berkshire hathaway now if a railcar company can go in and automate some of the processes of say loading their carriages or they automate the process of billing all their certain customers and they're able to cut out basically people and paying people to do some of these jobs or they can find a way to be much more efficient with making sure they're on time at each stop and they're able to get in more miles of sort of goods being transported around their railways and they're able to make all of these sort of efficiency gains these are things that can really improve the profitability if they don't have a lot of competition in their space uh you know rail is by far and away the cheapest way to transport goods much much cheaper than trucking and you know all that kind of stuff so anytime that they can reduce their costs and make efficiency gains and that sort of thing really they can drop out some costs and they can potentially even increase their revenue if they're able to move more freight with the same you know level of inputs um those can only be good things for margins and good things for profitability so that is a type of technology that can really really help the investor but that's all from me today it was just kind of an interesting learning for me from port charlie's almanac i think we hear a lot about buffett not investing in technology businesses uh just because he doesn't understand them and that's certainly a very very valid reason for not investing in technology businesses but technology and innovation actually turns up in just about every industry imaginable so having this mental model in your head on being able to decide whether that technology is going to help you or hinder you i think is a really important concept to understand so i do hope you enjoyed the video now one final thing i want to mention before i wrap this video up is the investing with tom podcast i mentioned in a video a few weeks ago in my goals video that i want to start a podcast this year and at least experiment with it and kind of see how it goes now recently bought all the sort of audio equipments and everything so i'm going to be recording the first couple of episodes probably very soon so keep an eye out for that i'll be sure to share it on youtube and put links to that podcast once it is all up and running but that's all for me today and i will see you in the next one cheers
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