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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 market’s greatest busts.
Missing the bust is seen as more than excuse enough for the world’s greatest investor to miss the multiyear rally that was a wonder and made a fortune for almost everyone that beheld it.
Those fortunes were quickly lost and to keep them you needed to be good at 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 is hugely hazardous. Meanwhile, sticking to a, by comparison, long-term pedestrian compounding strategy makes the comparatively modest returns turn into a glorious and record-breaking result. Buffett and technology is a rerun 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 them is Apple.
For most of its long corporate life,
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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 Icahn, one of the stock market’s favorite Apple cheerleaders, has bailed, then just as suddenly, Buffett’s crew has moved in. Suddenly the world of Apple and Buffett have intersected and
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 10%, sometimes 20% or even more of their capital in one company. To a value investor this is the road to ruin; 2.5% of capital in any one position is more the sort of level they operate at. As such, putting on a sub-1% position is no big deal, but when it’s Warren 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 railways, soda and candy, Apple may not have the so-called ‘moat’ of these businesses. A business’ moat is 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 1990s when 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 railroad 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 App Store, 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 breach the Apple moat in these areas.
Only Apple can breach these moats itself. This is where the fragility comes in. A platform like App Store is only one policy change or one redesign away 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.
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Clem Chambers is the CEO of leading private investors Web site ADVFN.com and author of Be Rich, The Game in Wall Street and Letters to my Broker.
