Why Not Big Tech?

[james22]

Why are we wondering what BRK's insignificant new Banks, Insurance and Finance purchase is?

 

With the exception of Apple, why aren't we wondering why they don't significantly buy Big Tech?

[yesman182]

I don't speculate about WEB buying big tech because he has articulated his reasoning for not buying it publicly for the last 30 years. 

[UK]

7 hours ago, james22 said:

Why are we wondering what BRK's insignificant new Banks, Insurance and Finance purchase is?

 

With the exception of Apple, why aren't we wondering why they don't significantly buy Big Tech?

 

https://www.cnbc.com/2017/05/06/warren-buffett-it-doesnt-take-any-money-to-run-largest-companies.html

 

I do wonder sometimes. Especially since there were at least a few very good periods to do this (last year or at the start of pandemic) and also these companies are large enough for BRK. But perhaps the simplest answer is that they already own like half of their portfolio in Apple and WB just likes and understands it the best. So no need to diworsify?

[james22]

11 hours ago, yesman182 said:

I don't speculate about WEB buying big tech because he has articulated his reasoning for not buying it publicly for the last 30 years. 

 

But what was responsible 30 years ago seems irresponsible now.

 

I have avoided technology sectors as an investor because in general I don’t have a solid grasp of what differentiates many technology companies. I don’t know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don’t overpay for them. Technology is based o­n change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles. (2005)

 

He hasn't he learned anything since then? 

 

And even if he's learned it's impossible to spot durable competitive advantage, why hasn't he then bought a Tech basket?

[KCLarkin]

50% of their U.S. stock portfolio is Mag7. You want them to add more?

 

Munger's been pretty clear on this. They wanted one tech stock and they chose Apple. No need to speculate.

[coc]

1 hour ago, KCLarkin said:

50% of their U.S. stock portfolio is Mag7. You want them to add more?

 

Munger's been pretty clear on this. They wanted one tech stock and they chose Apple. No need to speculate.

 

In fact he was arguing at the time they should have been buying more AAPL.

[james22]

4 hours ago, KCLarkin said:

You want them to add more?

 

Probably, but really just curious - should our take away be that Big Tech is uninvestable?

 

If BRK doesn't/can't, why should we believe we can?

 

 

Or (as I believe) that we all have our investing preferences. 

[Cod Liver Oil]

Munger already called it out:

https://finance.yahoo.com/news/charlie-munger-says-investors-own-222016544.html

 

spoiler alert: GOOG

 

 

Edited November 20, 2023 by Cod Liver Oil

[Whensthepaintdry?]

Pretty much half of LI Lu’s US holdings. 

[Thelilyinvestor]

18 hours ago, james22 said:

 

But what was responsible 30 years ago seems irresponsible now.

 

I have avoided technology sectors as an investor because in general I don’t have a solid grasp of what differentiates many technology companies. I don’t know how to spot durable competitive advantage in technology. To get rich, you find businesses with durable competitive advantage and you don’t overpay for them. Technology is based o­n change; and change is really the enemy of the investor. Change is more rapid and unpredictable in technology relative to the broader economy. To me, all technology sectors look like 7-foot hurdles. (2005)

 

He hasn't he learned anything since then? 

 

And even if he's learned it's impossible to spot durable competitive advantage, why hasn't he then bought a Tech basket?

 

I think the point he is trying to make are 2: 

 

1) He only invests in what he understands (If he would understand a big tech company he would invest)

 

2) He doesnt like to invest in fast changing industries (if any of the big tech companies would be more slow changing, he could invest in them)

 

He does not having any problem investing in tech, rather than understanding and the pace of change in a industry.

[james22]

46 minutes ago, Thelilyinvestor said:

I think the point he is trying to make are 2: 

 

1) He only invests in what he understands (If he would understand a big tech company he would invest)

 

If Tech is understandable by anyone, it should be understandable by BRK, yeah?

 

46 minutes ago, Thelilyinvestor said:

2) He doesnt like to invest in fast changing industries (if any of the big tech companies would be more slow changing, he could invest in them)

 

If Tech is where the returns are today, that's the game you have to play. Especially if you believe the "second half of the chessboard" argument.

 

46 minutes ago, Thelilyinvestor said:

He does not having any problem investing in tech, rather than understanding and the pace of change in a industry.

 

'It's hard' isn't really a reason to avoid investing. Actually, the more difficult it is should only advantage BRK.

 

They may give up the more sizeable advantage they have over others in spotting durable competitive advantage in other-than-Tech, but so?

 

They should still maintain an advantage in strategizing (index vs basket), timing (market cycle, valuation), position sizing, etc.

[CassiusKing1]

As Smart as Warren is, he's able to "understand" tech.  What they do, why, etc.  But what he is not comfortable with is the moat.  How long will this tech company be on top.  In tech it's much easier to be a disrupter than it is with Railroads, Utilities, etc. 

Sure, Warren may understand Facebook, but who can confidently say that in 5-10 years they will remain dominant.    With AAPL, it's a very sticky product and folks will not give up their iPhone, so he became comfortable investing knowing he has a bit of a runway to do so.

 

Cheers!

 

 

[ValueArb]

On 11/21/2023 at 4:13 AM, james22 said:

 

If Tech is understandable by anyone, it should be understandable by BRK, yeah?

 

Nope. Everyone has a circle of competence and someone who was 50 years old during the rise of the personal computer can be at a huge disadvantage to someone who grew up during that era. I spent the first two decades of my working life thinking about nothing other than software and computers.

 

On 11/21/2023 at 4:13 AM, james22 said:

 

 

If Tech is where the returns are today, that's the game you have to play. Especially if you believe the "second half of the chessboard" argument.

 

Investing is game that's not won by "playing" it on whats hot now, it's won by ignoring Mr Market when he's throwing out ludicrous numbers. Go back to the internet bubble and ask yourself if Buffett missed out not playing the game where the returns were in 1998-1999. If you were fortunate enough to identify Amazon's moat but be unfortunate enough to ignore its reasonable intrinsic value, you lost 95% of your investment over the next three years. You need to read this.

 

https://fs.blog/mr-market/

 

On 11/21/2023 at 4:13 AM, james22 said:

 

'It's hard' isn't really a reason to avoid investing. Actually, the more difficult it is should only advantage BRK.

 

Investing in something you don't fully understand on the off chance you can hurdle a 7 foot bar is a losers trait. Admitting you don't know the moat or value of something and moving on to a 1 foot hurdle you can step over is a winners trait. "its hard" isn't a reason not to investigate an investment, "its too hard" is a reason not to buy it. 

 

On 11/21/2023 at 4:13 AM, james22 said:

 

They may give up the more sizeable advantage they have over others in spotting durable competitive advantage in other-than-Tech, but so?

 

If you are giving up any insight or advantage that you have and the market lacks, why wouldn't you just buy an index fund? You essentially would have zero edge. 

 

On 11/21/2023 at 4:13 AM, james22 said:

 

They should still maintain an advantage in strategizing (index vs basket), timing (market cycle, valuation), position sizing, etc.

 

Buffett doesn't believe he has any timing skills. and his position sizes are forced upon him by a massive portfolio, and they are huge handcuffs. He can't just go out and buy random microcaps for 0.01% of his portfolio, it would be an immense waste of his time. 

[james22]

On 11/24/2023 at 3:27 PM, ValueArb said:

Nope. Everyone has a circle of competence and someone who was 50 years old during the rise of the personal computer can be at a huge disadvantage to someone who grew up during that era. I spent the first two decades of my working life thinking about nothing other than software and computers.

 

I don't believe they are incompetent. Do you?

 

On 11/24/2023 at 3:27 PM, ValueArb said:

Investing is game that's not won by "playing" it on whats hot now, it's won by ignoring Mr Market when he's throwing out ludicrous numbers. Go back to the internet bubble and ask yourself if Buffett missed out not playing the game where the returns were in 1998-1999. If you were fortunate enough to identify Amazon's moat but be unfortunate enough to ignore its reasonable intrinsic value, you lost 95% of your investment over the next three years.

 

Investing is won by playing the right game. 

 

The money today is in Tech, not cigar butts.

 

On 11/24/2023 at 3:27 PM, ValueArb said:

Investing in something you don't fully understand on the off chance you can hurdle a 7 foot bar is a losers trait. Admitting you don't know the moat or value of something and moving on to a 1 foot hurdle you can step over is a winners trait. "its hard" isn't a reason not to investigate an investment, "its too hard" is a reason not to buy it. 

 

How much does it pay to hurdle the two bars and what are the chances of doing so?

 

On 11/24/2023 at 3:27 PM, ValueArb said:

If you are giving up any insight or advantage that you have and the market lacks, why wouldn't you just buy an index fund? You essentially would have zero edge. 

 

1. Returns are what matter, not edge. 

 

2. Your edge is reflected in your decision to buy a Tech index over individual Tech companies or any other other-than-Tech investment.

 

On 11/24/2023 at 3:27 PM, ValueArb said:

Buffett doesn't believe he has any timing skills. and his position sizes are forced upon him by a massive portfolio, and they are huge handcuffs. He can't just go out and buy random microcaps for 0.01% of his portfolio, it would be an immense waste of his time. 

 

So why didn't they buy when Tech swooned last year?

 

They'd identified the Tech they like (Amazon, Google, etc.), they had the cash, valuations were attractive, and they could have bought in significant size.

 

Not a good reason:

 

Warren Buffett Missed The Opportunity To Invest In Amazon Early, Says 'I Blew It' And Was 'Too Dumb' — Now He Refuses To Invest Today Saying, 'I've Probably Got So Many Psychological Problems With The Fact That I Didn't Do It That It's Very Hard to Do It Now'

 

https://finance.yahoo.com/news/warren-buffett-missed-opportunity-invest-165456527.html

[UK]

40 minutes ago, james22 said:

So why didn't they buy when Tech swooned last year?

 

They'd identified the Tech they like (Amazon, Google, etc.), they had the cash, valuations were attractive, and they could have bought in significant size.

 

Not a good reason:

 

Warren Buffett Missed The Opportunity To Invest In Amazon Early, Says 'I Blew It' And Was 'Too Dumb' — Now He Refuses To Invest Today Saying, 'I've Probably Got So Many Psychological Problems With The Fact That I Didn't Do It That It's Very Hard to Do It Now'

 

https://finance.yahoo.com/news/warren-buffett-missed-opportunity-invest-165456527.html

 

Again, my simple understanding: because they already had like half of the portfolio in tech, in Apple, they liked the best.

[james22]

2 hours ago, UK said:

 

Again, my simple understanding: because they already had like half of the portfolio in tech, in Apple, they liked the best.

 

It'd be easier to accept that if they didn't have $137B in deployable cash.

 

Just seems the question of the day is if one bets on Tech or not, and how. Taking a $1B position in Banks, Insurance and Finance seems only a distraction.

 

Understanding compounding, they should understand the accelerating nature of Tech better than most (if not specific technologies or individual tech companies).

 

 

[ValueArb]

5 hours ago, james22 said:

 

I don't believe they are incompetent. Do you?

 

Who said anything about incompetent? I'm just pointing out they aren't likely to have any specific insights that many other investors have about big tech, and are likely at a disadvantage to tech experts. Buffett and Munger grew up before fax machines or mobile phones were a thing. They were both in their 70s before the internet became a thing.

 

5 hours ago, james22 said:

 

Investing is won by playing the right game. 

 

The money today is in Tech, not cigar butts.

 

Buffett hasn't invested Berkshire in cigar butts since the 70s because its portfolio grew too large. Money today isn't "in tech". Tech is just one aspect of the economy, money is being made in all parts of the economy. We get to pick from over 6,000 US stocks, Buffett probably can pick from less than 10% of those, and many are outside of tech, and there are winners in both tech and outside of it.

 

5 hours ago, james22 said:

 

 

How much does it pay to hurdle the two bars and what are the chances of doing so?

 

Odds are a lot lower on the 7 foot bar than the 1 foot bar. Whats your point?

 

5 hours ago, james22 said:

 

 

1. Returns are what matter, not edge. 

 

2. Your edge is reflected in your decision to buy a Tech index over individual Tech companies or any other other-than-Tech investment.

 

If you don't have a unique insight/edge in picking individual stocks you shouldn't do it. Buying an index is fine, but there is no reason to think a tech index will do any better in the future than a more broadly based index. 

 

5 hours ago, james22 said:

 

 

So why didn't they buy when Tech swooned last year?

 

They'd identified the Tech they like (Amazon, Google, etc.), they had the cash, valuations were attractive, and they could have bought in significant size.

 

Not a good reason:

 

Warren Buffett Missed The Opportunity To Invest In Amazon Early, Says 'I Blew It' And Was 'Too Dumb' — Now He Refuses To Invest Today Saying, 'I've Probably Got So Many Psychological Problems With The Fact That I Didn't Do It That It's Very Hard to Do It Now'

 

https://finance.yahoo.com/news/warren-buffett-missed-opportunity-invest-165456527.html

 

He's doing the same exact thing that made him the most successful investor of all time.  He missed out on the Nifty Fifty too, yet somehow averaged 30% annual returns for a couple decades during and after. He missed out on the internet bubble and losing 95% when it burst. He missed out on cheap Amazon in early 2000s when it wasn't making any money.

 

And whether valuations were attractive for "Tech" last year is in the eye of the beholder. My guess is you never factor in Stock Based Compensation when you look at them, or you'd think they weren't quite so attractive. 

[james22]

17 minutes ago, ValueArb said:

Who said anything about incompetent? I'm just pointing out they aren't likely to have any specific insights that many other investors have about big tech, and are likely at a disadvantage to tech experts. Buffett and Munger grew up before fax machines or mobile phones were a thing. They were both in their 70s before the internet became a thing.

 

I don't believe they are at a "huge disadvantage" - they can buy tech expert advice and they've lived experience with exponential growth.

 

17 minutes ago, ValueArb said:

Buffett hasn't invested Berkshire in cigar butts since the 70s because its portfolio grew too large. Money today isn't "in tech". Tech is just one aspect of the economy, money is being made in all parts of the economy. We get to pick from over 6,000 US stocks, Buffett probably can pick from less than 10% of those, and many are outside of tech, and there are winners in both tech and outside of it.

 

Kurzweil's Law of Accelerating Returns and Second Half of the Chessboard argues the winners will be in Tech.

 

17 minutes ago, ValueArb said:

Odds are a lot lower on the 7 foot bar than the 1 foot bar. Whats your point?

 

If the 7' Reward is a lot higher, it might be the better bet.

 

And you can't be limited by your Edge - better to be a mediocre professional basketball player than an elite professional beach volleyball player.

 

17 minutes ago, ValueArb said:

If you don't have a unique insight/edge in picking individual stocks you shouldn't do it. Buying an index is fine, but there is no reason to think a tech index will do any better in the future than a more broadly based index. 

 

Reasons (above) to believe a Tech index will outperform.

 

Is valuation your reason to believe it will not?

 

17 minutes ago, ValueArb said:

He's doing the same exact thing that made him the most successful investor of all time.  He missed out on the Nifty Fifty too, yet somehow averaged 30% annual returns for a couple decades during and after. He missed out on the internet bubble and losing 95% when it burst. He missed out on cheap Amazon in early 2000s when it wasn't making any money.

 

I'm only expecting him to do the same thing he did when he switched from investing in cigar butts to buying wonderful businesses.

 

17 minutes ago, ValueArb said:

And whether valuations were attractive for "Tech" last year is in the eye of the beholder. My guess is you never factor in Stock Based Compensation when you look at them, or you'd think they weren't quite so attractive. 

 

Actually, the market has since told us valuations were attractive then.

 

I just accept I missed the opportunity.

[ValueArb]

19 hours ago, james22 said:

 

I don't believe they are at a "huge disadvantage" - they can buy tech expert advice and they've lived experience with exponential growth.

 

Buffett doesn't "buy" expert advice. He's only going to invest if he feels he truly understands the business himself, and doesn't have to rely on anyone else's judgement.

 

19 hours ago, james22 said:

 

Kurzweil's Law of Accelerating Returns and Second Half of the Chessboard argues the winners will be in Tech.

 

Basic economics tells you that investments are priced on their likely returns.. If tech has higher expected earnings growth then it will be priced higher, making its returns to investors similar to other investments. And we can see that in real life from the very high multiples favored tech companies trade at.

 

19 hours ago, james22 said:

 

 

If the 7' Reward is a lot higher, it might be the better bet.

 

Buffett has been the most successful investor in history looking for one foot hurdles. Not only is he unlikely to change at 93 years of age, but his results are a pretty compelling example that his preference is optimal.

 

19 hours ago, james22 said:

 

And you can't be limited by your Edge - better to be a mediocre professional basketball player than an elite professional beach volleyball player.

 

Reasons (above) to believe a Tech index will outperform.

 

Is valuation your reason to believe it will not?

 

Thinking you can pick outperforming sectors in anything but hindsight is hubris that Buffett doesn't share. Valuation is everything, overpaying for something because it's growing faster is as big a mistake as overpaying for any other reason. 

 

The idea you can just pick a sector and pile in thinking it will outperform has a lot of problems, first being risk and diversification. In tech the other problems are most clearly illustrated by Cathie Woods, who is the high priestess of expounding on the glittering future for tech companies. What has it gotten her investors? Even after this "good year" for her, since ARKK was founded it's trailed the Nasdaq by nearly 100% and the SP500 by 24%. In the last two years she's lost 57% while the indexes are only down 8% and 1%. And most of her investors piled in after her lucky 2021, meaning in terms of dollars invested in ARKK, almost all of it is down by huge amounts. 

 

There are tech companies worth owning. But use reason, not hope, to value them.

 

19 hours ago, james22 said:

 

I'm only expecting him to do the same thing he did when he switched from investing in cigar butts to buying wonderful businesses.

 

He's never switched from value investing principles, even if he's looked for value in different places. He refused to pay a 20 PE for Coke for gawds sake.

 

19 hours ago, james22 said:

 

Actually, the market has since told us valuations were attractive then.

 

I just accept I missed the opportunity.

 

The market doesn't tell you anything about value, and neither does a short swing in prices. The market was telling everyone tech was attractive in 1998-1999, and in 2020-2021. Losing 35% in the next year apparently was the market telling us they were actually overvalued. This is exactly how Buffett thinks about market prices.

 

Lastly, note the one big tech he's bought, Apple. When he first started buying in 2016 was trading around an 11 PE. Revenues had actually declined that year, and have only grown about 9% a year since. Hardly a tech high flyer. But what he identified was an extremely strong moat, and leadership willing to pursue extremely shareholder friendly capital allocation policies. Those policies have increased earnings per share by 17% per year since he first bought Apple, a track record that is easily worth a PE in the 25-30 range. That's all he did, identify the market's mispricing of earnings growth in a very shareholder oriented business with a strong moat. 

 

GOOG grew revenues from 2013-2022 at a 20% clip, and per share earnings at a 19% clip, barely more than Apple. But it was never available nearly as cheap as Apple, in 2022 it bottomed near a 20 PE for a few months before shooting back up closer to 30. That 20 PE probably didn't offer the Margin of Safety he wanted, but even if it was close GOOG had some outstanding issues that maybe he didn't like. First is a question of how much COVID pumped up those earnings and what true long term earnings would look like. Second, was its massive amounts of SBC that caused its free cash flow to be over-reported.  Its pretty clear why he wasn't as eager to hop on Google as he was Apple.

 

[james22]

29 minutes ago, ValueArb said:

Basic economics tells you that investments are priced on their likely returns.

 

If that's true, it won't matter how we invest.

[ValueArb]

13 minutes ago, james22 said:

 

If that's true, it won't matter how we invest.

 

There are three major definitions of efficient markets, weak, semi-strong and strong forms. Most economists today have given up on trying to justify the strong and semi-strong forms and it appears the weak form is the prevalent hypothesis. What that essentially means is that the market incorporates all historical data, such as price trends, so that you can't predict future price movements using technical analysis. But it allows for generating alpha using fundamental analysis.

 

Essentially in the real world markets Buffett or Munger will tell you they believe the market is usually efficient, but occasionally they can find things that are clearly mispriced. Clearly there are factors (illiquidity is a big one) that lead to more mispricings, which is why Buffett's returns were a lot better when his portfolio was a lot smaller. In general, the vast majority of large caps are probably fairly valued, they are heavily researched and covered by lots of liquid funds, unlike small and micro caps. But that doesn't mean they are always fairly valued, there are opportunities like AAPL at an 11 PE where the market clearly doesn't understand it correctly yet. Facebook's huge swing is another example. 

 

But it's pretty unlikely that the average popular big tech stock is undervalued significantly more than the average other stock. Maybe if you find a huge new opportunity the market is undervaluing, like the current fervor over pattern matching, er "AI" algorithms. But often, like in that case, the actually value of the technology ain't quite what the hype would have you believe and there are lot of problems to solve before it can be.

[james22]

I just believe it's hard for investors to wrap our heads around exponential growth and that it might be different this time.

 

And so if we're anywhere near the inflection point, the growth of Tech is underestimated.

 

You're sure it's not?

 

 

[thowed]

8 hours ago, james22 said:

I just believe it's hard for investors to wrap our heads around exponential growth and that it might be different this time.

 

And so if we're anywhere near the inflection point, the growth of Tech is underestimated.

 

You're sure it's not?

 

 

 

I feel like this was the case 10 years ago.  I'm less sure now - 'exponential growth' is a fairly well-established term at this point, and I would suggest is more priced in now.

 

I think there is an element where you need to trust in management to be 'lucky' in terms of new products now, & I mean that in the sense that the more skilful the management, the more likely they are to be lucky.  The obvious example is that in the past no one included AWS in their valuation of Amazon.

 

The FAANG/MAG7 run has been extraordinary - they are incredible companies in oligopolistic situations, BUT we've all known that for years, & personally I thought it was all priced in & I was too late.  This has so far been a big mistake, so I could be wrong again!

 

[scorpioncapital]

I think Berkshire/Buffett is more comfortable in consumer franchises, industrials, financials/insurance.

Apple is sort of cross of tech/software & consumer franchise.

I think he said once that everything is tech. That's not really a business, that's just an input to everything. 

Tech has never been a business. What exactly is tech?

Everything is tech!

Perhaps better to think in terms of end-markets? and applications?

 

[bargainman]

Ultimately you have day 1 companies and day 2 ones.  You also have companies affected by the innovators dilemma that refuse to adjust and disrupt themselves, and they die slowly or consolidate.  I guess some would say that software is tech?  But pure software plays are less frequent these days.  Marc A. famously penned "software is eating the world" to explain.