Lane here is an interesting article that focuses on the same issue as your post...
Warren Buffett's vanishing value
Tech aversion has left value investor behind the curve
Paul Kedrosky
National Post
It has Buffettologists all a-twitter. Darts thrown by drunks at your average newspaper's stock pages turned in 50% returns last year -- yet it was a lousy year for the Oracle of Omaha. Warren Buffett saw his Berkshire Hathaway stock tank in 1999, its first down year since 1990 and one of the worst years in Berkshire's history. It didn't have to happen.
That a buy-and-hold stock picker became one of the wealthiest people in America has made Warren Buffett the hero of retirees and the buy-till-you-die crowd. But for all his $15-billion (US) in wealth -- or maybe because of it -- he isn't without his quirks. Matter of fact, as Roger Lowenstein wrote in a 1995 book, Mr. Buffett is a mess of contradictions.
He has a cordial dislike for Wall Street, except that a few years ago he helped bail out a struggling Salomon Brothers. He is a simple guy ("All Warren needs to be happy is a book and a 60-watt bulb," his wife once said), except that he loves his corporate jet. He lives in Howard Hughes-style seclusion in Omaha, except when he's hanging around with Bill Clinton. And he and his long-time wife are married, except he hasn't lived with her in 20 years. (He lives with someone else, but drops by to see his wife now and then.)
For all his quirks, Mr. Buffett is value investing's greatest disciple and salesman. As outlined by Benjamin Graham, value investing's tenets are straightforward: Find companies whose assets are worth more than the market values of its stock, and buy and hold those companies' stocks. Follow these rules and thou shall prosper, sayeth Graham.
That may be, but prospering by value investing is not for the meek. It may sound simple, but in practice it requires patience, discipline, and a willingness to look foolish when your stocks sometimes languish and every other stock in sight soars.
But value investing has worked for Warren Buffet. Berkshire Hathaway, the company under whose name he does his investing, has gained more than 300,000% since he purchased the company in 1965. In an investment industry awash with funds that get trounced year after year by the major stock indices, Mr. Buffett has been an anomaly, regularly beating the Dow by 10 and even 20 percentage points.
Last year, however, things went awry. Shares of Berkshire Hathaway fell almost 20%, while the Standard & Poor's 500 index gained the same amount. What's more, 1999 was likely the first year the book value of Berkshire's assets fell. And as all readers of his folksy annual reports know, Warren Buffett lives and dies by book value.
So why did it happen? For starters, investors hammered Berkshire over concerns that Geico, Berkshire's wholly owned discount insurer, was getting kiboshed by rising costs. Interest rates also pummelled Mr. Buffett's position in lender Freddie Mac. The list goes on and on: Coca-Cola fell 12%, Walt Disney was flat, and Gillette lost almost 13%. And having a significant chunk of the portfolio in cash at the beginning of the year, $15-billion (US) -- didn't help when the market made like a moon-rocket.
While all of the above hurt Mr. Buffett's performance, you can make a reasonable argument that it didn't have to happen. Why? It may be one of Warren Buffett's quirks. He consciously and almost truculently turns his back on stocks that would juice his performance: growth stocks.
Here is the problem: Mr. Buffett won't buy growth stocks. Okay, technology stocks. He hates 'em. It is accepted wisdom on Wall Street -- can't sell tech to Buffett. It has even become a kind of trendy in-joke for Wall Street technology analysts to write research notes as love letters to him: "Dear Warren ..."
So why won't Mr. Buffett buy technology? He says -- repeatedly -- that he doesn't understand them. Or, as he put it in an interview recently, "I simply can't look at high-tech companies and say with a high degree of assurance where those companies will be in 10 years."
That rings wrong. Mr. Buffett is a smart guy. Many technology companies are no more complicated to figure out than Coke's globe-spanning operations. Arguably easier. And while he regularly complains about growth valuations, that too seems wonky. Sure, some technology stocks are crazily valued, but so is his precious Coca-Cola. If my choice is Coke at 55 times earnings with some missed quarters and negligible growth, or Cisco at 130 times earnings and 50% sales and earnings growth, then thanks, I'll side with Cisco.
The problem, it seems clear, is not that Warren Buffett can't figure out tech stocks. And it's only tangentially that he has valuation problems. Instead, it seems more like a stubborn and quirkily anti-growth belief that he holds, facts be damned. And that, to my way of thinking, is not an investment opinion but a religious view.
So here is the question Mr. Buffett needs to answer in this year's annual report: Is the reason that he won't add growth stocks to his portfolio merely that he thinks one day they'll fall? If it is, then Mr. Buffett is turning into the sort of investor who, as writer Michael Lewis put it recently, puts an awfully high value on one day being able to say, "I told you so."
Paul Kedrosky is a professor of business at the University of British Columbia.
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Paul Kedrosky can be reached by e-mail at paul.kedrosky@ubc.ca |
