Warren Buffett famously missed out on the dotcom boom.
He failed to catch one of the biggest rallies in history and he succeeded in missing one of the markets greatest busts.
Missing the bust is seen as more than excuse enough for the world’s greatest investor for missing the multiyear rally that was a wonder ad made a fortune for almost everyone that beheld it.
Those fortunes were quickly lost and to keep them you need to be great a timing and selling at a great price.
Classically Buffett avoids both timing and selling.
Buffett is meant to buy on price and if possible hold forever.
During the dotcom boom, he stuck to his guns. He claimed not to understand the tech boom and steered clear accordingly, however that made him look.
He didn’t deviate from his proven method.
Why leave the yellow brick road, when the yellow is pure gold, to go off on an unproven tangent and chase something new. It might be glorious to be part of a boom/bubble market but it hugely hazardous. Meanwhile sticking to a, by comparison, a long term pedestrian compounding strategy, makes the comparatively modest returns turn into a glorious and record breaking results. Buffett and technology is a re-run of the Tortoise and the Hare with the old tortoise victorious over generations of sprinting hares.
Buffett is the emperor of value investing. He buys value as expressed by a balance sheet and a check list of company attributes. While being a great purveyor of sizzle himself he doesn’t buy sizzle and short term momentum in companies.
Without doubt Buffett and Berkshire Hathaway are market superstars and up there with the is Apple.
Apple has been for most of its long corporate life, everything Buffett eschews. It’s a company based on narrative, momentum and magic. Even with magic Apple has had a rollercoaster history, rising and falling over the years, at one point skirting bankruptcy. In this millennium it has transformed itself into a new kind of of company, one capturing the imagination of a generation through its superb and ground breaking products. Others companies like Google and Facebook have followed in its footsteps but Apple retains its status with an aura like no other company.
However Apple mojo is under pressure. It is in a period where its suite of mega products are aging fast in the market. The competition is closing the lead it had with the wonder product Steve Jobs forged with his team. The share price is sagging.
Carl Icann, one of the stock markets favorite Apple cheerleader has bailed, then just as suddenly, Buffett’s crew has moved in.
Suddenly the world of Apple and Buffett have intersected and Berkshire Hathaway has invested $1 billion.
That is not actually much for Buffett with his $100 billion plus stock portfolio. It is just a pinch a 1% toe in the water. Value investing and portfolio diversification go together like ham and eggs. The momentum folks go in big putting on positions making up ten sometimes twenty percent or even more of their capital in one company. To a value investor this is the road to ruin, 2.5% of capital in anyone position is more the sort of level they operate at. As such putting on a sub 1% position is no big deal, but when its Buffett and Apple, it is the intent that is interesting.
Apple covers the basic value investor screen. Its P/E is low at 10, it has a dividend of 2% and an ocean of cash. It’s a very real business. It makes things that people buy. These days phones and computers are essentials, more like washing machines than the fanciful expensive toys they started out as.
It makes sense to treat apple as a value investment but is there a flaw?
The potential flaw is, unlike railway’s, soda and candy does Apple has the so-called moat of these businesses.
A ‘moat’ for a business is when they have something you can’t steal. A railway has its lines, coke has its brand and its secret formula. A candy owns the souls of the adults that chewed on it throughout their gilded childhood. Apple has patents, a user base and an awesome brand legacy, or so you might say.
Yet there was a time in the nineties that it was said that apple was just worth the value of Quicktime, its video streaming software, so the key question is does apple have a robust ‘moat.’
I think it does, but it is fragile.
Unlike a rail road track that is hard to break and easy to fix, apple’s ‘moats’ are easy to break and hard to fix.
For me the key Apple ‘moats’ are iTunes and Appstore, software pieces hard to implement in most corporate cultures. Google has failed to compete and if Google can’t do it then who exactly can breech the Apple’s ‘moat’ in these areas.
Only Apple can breach these moats itself. This is where the fragility comes in. a platform like Appstore is only one policy change away or one redesign from disaster. Yet the platforms can’t be left unchanged for long like most value investment ‘moats.’
This autumn is key, because this is when we will discover if Apple can or cannot leap forward with the iphone. If it can’t then Apple will need all the moats it can get to stay at the top of the stock market pile.