Originally Posted by Marvin
I know a certain company that starts with an "A" Ballmer might come across and it would probably comply with Buffet's margin of safety. Microsoft on the other hand is not a good proposition.
You are absolutely correct Marvin, but Buffet does not buy technology companies. In his characteristically spare language, he claims he does not understand them.
I don't believe that's literally the case, since he is perfectly capable of evaluating Apple or any other company on its fundamentals. So, I've chosen to interpret his statement that he doesn't understand how Apple can grow a business that requires constant innovation - in other words, how do you convince the market to buy a product today, with complete knowledge that those same products will become less expensive and better tomorrow? That never bothered me about Apple, since their potential market had been under-appreciated for years. I think it's more appreciated today, but there remains plenty of room for growth.
There's a lot of uncertainty in it though, Buffet's main return has been from buying early into companies that were likely to rise in value and then using that to invest in products everyone is going to want or need like clothing, drinks, insurance, electricity/gas, transport. The insurance side is yet another of those money-making-money schemes.
Buffett didn't exactly buy Gillette or KO when they were startups. People had already been wearing underwear and shaving and drinking Coke for years, and Acme Brick (later Justin) was a hundred years old when Berkshire acquired the company. These several are textbook examples of the kinds of companies he bought. They were already reliable, staid, well-managed, but underappreciated money machines. Totally boring, not likely to shoot to the stratosphere overnight, but certain to rise in value. Furthermore, it's easy to understand bricks, and underwear, and as Buffet has said, he likes waking up in the morning with the assurance that he and another 100 million American men have to shave.
Berkshire's insurance business (the Government Employees Insurance Company, known to most by the little green guy) preceded these acquisitions by many years. An insurance company is even less sexy but even easier to value.
Another thing to bear in mind was that KO's stock declined a miserable 50% after Berkshire's acquisition. It didn't bother him, since his fundamental reasons for investing in the company remained sound. For those same reasons, it didn't bother me either when AAPL declined 50% at various points in its history. I liked it at $24, and I liked it twice as much at $12
(and I think it split twice since then)
Microsoft goes for market saturation - low profitability and low quality but volume to ensure wide acceptance. They have hit saturation point with Windows because they got in at the right time. In the mobile space, they have gotten lazy and quite honestly I think they're screwed. They haven't a hope in hell of getting close to the market dominance they had on the desktop side because the end to end experience is extremely important in mobile devices and tablets, especially with touch input and they don't have it.
Precisely. They don't have it. Adobe, which used to be a great innovator, also lost "it" as well. Apple has long been recognized for their product quality, have enjoyed high margins on them, and has only recently focused on market saturation. As a company, they're expertly managed, fiscally frugal to the extreme, and enjoy a corporate culture that can't be bought, sold, or implemented at someone's whim.
Based on all that I know about Buffet's investment philosophy, which I've tried to emulate, is that Apple would fit his criteria quite nicely. Except... he doesn't buy tech. I do.
Based on this same philosophy, I have avoided MSFT.
Take a look at your desktop or laptop and then look at your phone. One day that desktop/laptop will disappear and your phone will still be there. The iPad proves this because when you take it apart, it's the same as a phone yet people can make it fulfil most of the needed daily functions of a laptop. Just a phone and a screen dock will suffice. Throw in some cloud computing and most consumers will have everything they need. With multi-core phones eventually, even content creators can turn to this setup. Whoever wins the mobile race or at least stays in it will succeed in the long term. Microsoft is losing.
QFT. We all know who's winning. It's not as if AAPL has no competition, but they're behind the curve and are likely to stay there, just close enough to keep Apple on its toes. Competition is always a good thing - I'm glad it's there.
MSFT was never an innovation company at all. They never had much in common with Apple, and became fat and lazy after Gates left. They've missed whatever opportunity they may have had to become a competitor. They're not going away - they'll have a reliable revenue stream for a long time based upon enormous corporate deployment - but MSFT's future is going to resemble IBM's or UIS at best. They'll have to get their management act together for even that much. What is their business plan anyway? Does anyone know?
Edit: As a company, MSFT's business is fundamentally flawed in that they don't design
the hardware that runs the products it sells. How this philosophy can succeed in the market when MSFT partners with any number of hardware vendors - whose main focus is to build whatever complies with their spec as cheaply as possible - is something that never made sense to me. Given this flaw there's no way MSFT can enjoy end-to-end consistency and quality control. Apple has long been criticized for their "closed" philosophy but that's yet another reason for success. Besides, the App Store essentially opened up their previously closed world to hundreds of thousands of vendors, all of whom work for free (as far as Apple's concerned - and they get to skim a piece of their revenue as well). Their iAds will add to this. As a business model, it's ingenious.