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Care to explain why you believe this was a mistake? Opinions of IBM's future performance aside, even if he were right we wouldn't know until years from now - va

Care to explain why you believe this was a mistake? Opinions of IBM's future performance aside, even if he were right we wouldn't know until years from now - value-based investing takes a while to pan out.

Someone1234 8y ago
The video in the article explains it pretty well. In essence he over-valued IBM and then ignored their decline for years, even while the company's core business continued to dry up. He finally just exited, taking huge losses in the process. The problem with value investing is that it works great for traditional companies with normal products, but many of the fundamental analysis models fall apart with "tech" companies who's largest asset may be the brand itself. For example Uber, they own few vehicles, have few employees, and no exclusivity. How do you run a fundamentals analysis on that? A lot of traditional models would tell you that company is worth near nothing.
- fwdpropaganda 8y ago
  > For example Uber, they own few vehicles, have few employees, and no exclusivity. How do you run a fundamentals analysis on that? A lot of traditional models would tell you that company is worth near nothing. Don't forget almost no barrier to entry. It's relatively easy to go from nothing to be a local player dispatching cars in a small neighborhood which your friends drive.
- matte_black 8y ago
  Agreed, if Warren Buffet was just starting out today I doubt he would go for a pure value investing strategy.
  - fwdpropaganda 8y ago
    He wouldn't go for "pure value investing" even when he started. He started first with all sorts of arbitrage plays, and later on he put together a partnership where he used his investor's capital to acquire a controling stake in companies and then sell them off (what nowadays is called an activist investor, like Bill Ackman). The folksy pure value investor that we know today didn't appear until much later, in the mid 1970s. To be fair though, this is what made him the most money.
  - valuearb 8y ago
    He wouldn’t change a thing. He hasn’t changed his overall strategy an iota since buying Sees Candy in the early seventies.
- tim333 8y ago
  Probably not huge losses. The author here estimates he was up 5%. The shares fell but paid dividends. https://www.gurufocus.com/news/651725/how-much-did-warren-buffett-lose-on-ibm- https://www.gurufocus.com/news/651725/how-much-did-warren-bu...
  - dmoy 8y ago
    A 5% gain including dividends from 2011-2017 is a pretty bad showing. The market literally doubled on average in that timeframe.
    - gowld 8y ago
      BRK.A has more than doubled in that time frame, so as an overall portfolio strategy, they are doing well.
      - megablast 8y ago
        That doesn't mean they haven't made bad plays, and we can't talk about one of them. This was one. Lets not pretend it wasn't.
        valuearb 8y ago
        If IBM is his biggest mistake, it’s a other testament to his skill.
        tim333 8y ago
        He did worse with Tesco https://www.theguardian.com/business/2015/mar/01/warren-buffett-admits-thumb-sucking-over-tesco-cost-him-444m https://www.theguardian.com/business/2015/mar/01/warren-buff...
        valuearb 8y ago
        “Berkshire’s after-tax loss from this investment was ... one-fifth of 1% of Berkshire’s net worth
- andr3w321 8y ago
  I think you're confusing value investing with looking at a simple Price/Book ratio. Value investing is much more than that. One method of fundamental analysis involves making a prediction about ~10 years earnings/cash flows and comparing that to the 10 year risk free rate (usually the US 10 year treasury). The fundamental analysis models don't fall apart with tech companies, it's just much harder to project revenues for a new, volatile, growing business than an old mostly stagnant or slow growing company.
- stcredzero 8y ago
  many of the fundamental analysis models fall apart with "tech" companies who's largest asset may be the brand itself "Largest asset may be the brand itself," isn't that the definition of a reputation bubble? Sounds like a bubble to me, just a very long term one. There are some who say that the Bay Area/SV startup scene is a combination of real innovation and a bubble caused by ready availability of investment capital, which in turn is the result of governments injecting huge amounts of liquidity into the economy to kick the can down the road on the natural cycles of economic recession.
- valuearb 8y ago
  Some of Buffett’s greatest investments have had much if not most of their value tied up in their brand, Coke, See’s Candies, American Express, etc. Pretty clearly Buffett understands brand values.
- xapata 8y ago
  > no exclusivity They have about the same exclusivity that Facebook does, or any social network. It ain't easy to create a two-sided marketplace.

Someone1234 8y ago

The video in the article explains it pretty well. In essence he over-valued IBM and then ignored their decline for years, even while the company's core business continued to dry up. He finally just exited, taking huge losses in the process. The problem with value investing is that it works great for traditional companies with normal products, but many of the fundamental analysis models fall apart with "tech" companies who's largest asset may be the brand itself. For example Uber, they own few vehicles, have few employees, and no exclusivity. How do you run a fundamentals analysis on that? A lot of traditional models would tell you that company is worth near nothing.

fwdpropaganda 8y ago
> For example Uber, they own few vehicles, have few employees, and no exclusivity. How do you run a fundamentals analysis on that? A lot of traditional models would tell you that company is worth near nothing. Don't forget almost no barrier to entry. It's relatively easy to go from nothing to be a local player dispatching cars in a small neighborhood which your friends drive.
matte_black 8y ago
Agreed, if Warren Buffet was just starting out today I doubt he would go for a pure value investing strategy.
- fwdpropaganda 8y ago
  He wouldn't go for "pure value investing" even when he started. He started first with all sorts of arbitrage plays, and later on he put together a partnership where he used his investor's capital to acquire a controling stake in companies and then sell them off (what nowadays is called an activist investor, like Bill Ackman). The folksy pure value investor that we know today didn't appear until much later, in the mid 1970s. To be fair though, this is what made him the most money.
- valuearb 8y ago
  He wouldn’t change a thing. He hasn’t changed his overall strategy an iota since buying Sees Candy in the early seventies.
tim333 8y ago
Probably not huge losses. The author here estimates he was up 5%. The shares fell but paid dividends. https://www.gurufocus.com/news/651725/how-much-did-warren-buffett-lose-on-ibm- https://www.gurufocus.com/news/651725/how-much-did-warren-bu...
- dmoy 8y ago
  A 5% gain including dividends from 2011-2017 is a pretty bad showing. The market literally doubled on average in that timeframe.
  - gowld 8y ago
    BRK.A has more than doubled in that time frame, so as an overall portfolio strategy, they are doing well.
    - megablast 8y ago
      That doesn't mean they haven't made bad plays, and we can't talk about one of them. This was one. Lets not pretend it wasn't.
      - valuearb 8y ago
        If IBM is his biggest mistake, it’s a other testament to his skill.
        tim333 8y ago
        He did worse with Tesco https://www.theguardian.com/business/2015/mar/01/warren-buffett-admits-thumb-sucking-over-tesco-cost-him-444m https://www.theguardian.com/business/2015/mar/01/warren-buff...
        valuearb 8y ago
        “Berkshire’s after-tax loss from this investment was ... one-fifth of 1% of Berkshire’s net worth
andr3w321 8y ago
I think you're confusing value investing with looking at a simple Price/Book ratio. Value investing is much more than that. One method of fundamental analysis involves making a prediction about ~10 years earnings/cash flows and comparing that to the 10 year risk free rate (usually the US 10 year treasury). The fundamental analysis models don't fall apart with tech companies, it's just much harder to project revenues for a new, volatile, growing business than an old mostly stagnant or slow growing company.
stcredzero 8y ago
many of the fundamental analysis models fall apart with "tech" companies who's largest asset may be the brand itself "Largest asset may be the brand itself," isn't that the definition of a reputation bubble? Sounds like a bubble to me, just a very long term one. There are some who say that the Bay Area/SV startup scene is a combination of real innovation and a bubble caused by ready availability of investment capital, which in turn is the result of governments injecting huge amounts of liquidity into the economy to kick the can down the road on the natural cycles of economic recession.
valuearb 8y ago
Some of Buffett’s greatest investments have had much if not most of their value tied up in their brand, Coke, See’s Candies, American Express, etc. Pretty clearly Buffett understands brand values.
xapata 8y ago
> no exclusivity They have about the same exclusivity that Facebook does, or any social network. It ain't easy to create a two-sided marketplace.