When asked why he didn’t invest in technology stocks, Warren Buffett famously replied that he didn’t invest in companies he didn’t understand. He now admits that might have been a mistake.
Through his firm, Berkshire Hathaway, Buffett’s been bulking up on two of the biggest names in tech: Amazon and Apple. Berkshire is now one of Apple’s biggest shareholders, with a stake worth about $40 billion. But Buffett’s change of heart doesn’t just have financial implications. Experts say the famed investor’s reversal is indicative of his learning agility and adaptability, in this case recognizing that the world has changed and adjusting his philosophy to take advantage of it.
“The most effective and innovative leaders have a potent, paradoxical mixture of both confidence and humility,” says Kevin Cashman, global leader for CEO and executive development at Korn Ferry. “Confidence allows us to follow the contrarian view required to innovate and invest with creativity, while humility allows us to admit mistakes, learn, and pivot to changing realities.”
Buffett didn't like investing in tech because, for most of his investing career, the industry has relied on building the digital equivalent of a better mousetrap—always spending money to have the most cutting-edge technology. It wasn't necessarily a sustainable business; anyone could come along and write software or design a chip that could topple a company.
But Apple and Amazon have evolved, of course, beyond just being tech companies. They are firms with powerful brand names and competitive edges beyond tech. To be sure, both tech firms, along with a few others such as Google and Facebook, have been like that for a decade or longer. When viewed that way, says Chad Astmann, a senior client partner and co-head of Korn Ferry’s Asset and Wealth Management practice, Buffett’s positions in Apple and Amazon are actually more aligned with his core investment philosophy than it is a departure.
“His investments in Apple is to gain ownership of the firm’s ability to create brand value as a consumer goods company, à la P&G [Procter & Gamble], and not necessarily for its ability to create groundbreaking technology,” Astmann says.
Apple CEO Tim Cook agrees. “He obviously views Apple as a consumer company,” Cook said in a CNBC interview Monday following his appearance this weekend at Berkshire Hathaway’s annual meeting, a closely followed event among Wall Street titans. Cook described Apple as a consumer products company, saying that though Apple is in the tech industry, technology should be in the background and that the consumer should be at the center of what its products do.
With Apple’s stock price hovering between $205 and $210 per share recently, its shares aren’t exactly a classic value investing play—i.e., an underpriced stock with upside potential. But, Astmann says, the value is in Apple’s proven ability to disrupt the business world over and over again. He contrasts Berkshire’s accumulating Apple shares with the selling of its position in General Electric a few years ago. “That is a telling shift from investing at low prices in good companies to paying high prices for companies that are poised to disrupt the business world over and over,” says Astmann. Other Berkshire holdings include American Express, Coca-Cola, and Wells Fargo.
According to Astmann, investors are realizing that “businesses that will significantly disrupt the world will do so faster and in ways that make other, more traditional companies no longer investable.”