Tuesday, November 15, 2011

Investing Like Warren


Warren Buffett announced yesterday that he amassed 5.5% of IBM stock over the past few months.

While this is interesting news - Buffett has always said that he doesn't understand technology well enough to invest money in the sector, but apparently IBM is transparent enough - what really caught my eye was the way he went about analyzing the company.

Buffett was interviewed on CNBC yesterday for about 3 hours. The complete transcript of his thoughts can be found on the CNBC website, but several comments stood out to me:
  1. He has been reading IBM's annual report for 50 years. I don't think he was just reading the President's letter - I'm sure he has been studying it from cover-to-cover for half a century. But it was only this year that he began buying stock;
  2. He never met IBM senior management. In fact, at one point in the interview he mispronounces current CEO Sam Palisano's last name. While this is consistent with Buffett's investment style - focusing on the business, not the management - this too is far different than most investment managers;
  3. He was buying IBM stock at near all-time highs, but seemed genuinely unconcerned about the price. Buffett notes in the interview that he bought railroad stocks at their highs also, and has made a bundle;
  4. Buffett re-read former CEO Lou Gerstner's book about IBM Who Says You Said Elephants Can't Dance before buying stock. I wrote about this book a few months ago here on Random Glenings, and now you have Warren Buffett's recommendation as well (!);
  5. He liked the idea that IBM has dramatically reduced the number of options outstanding from 240 million to 30 million today. This, in Buffett's opinion, is a sign of respect for the shareholder.

I could go on, but I think you get the point. The investment genius of Buffett has been earned by more than 50 years of study, and what often seems effortless is actually the result of countless hours of study and preparation.

Finally, I liked this quote from Buffett about where investors should be putting their money today:

{Buying IBM and other large cap stocks}t also means that some great big strong American companies look very cheap compared to investment alternatives. I mean, in the end, you know, you're sitting with money in your pocket. Do you leave it in your pocket, you get zero on, do you put it in a money market fund, you still get zero on it, do you buy 10-year Treasuries and get 2 percent, or do you buy American businesses that are earning very good money, that have high returns on equity, have high returns on incremental capital, are buying in their stock at a rapid rate so that your ownership in the business increases significantly? I love all those things. Now, you measure one vs. the other. But in the end, you have—you know, you do something. Doing nothing is doing something.

http://www.cnbc.com/id/45290263/