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Megainvestor is known for avoid tech companies, but big blue's diverse business has won him over

Warren Buffett, 81, built his billions in fortune on a principle of only investing in firms he believed would sustain a same strong business model for 15 to 20 years into the future.  As you might guess, this means that Buffet is a notorious detractor on tech ventures -- particularly the internet startup.

I. Buffett Considers IBM a Safe Pic

In a 1998 talk he famously remarked, "I look for businesses in which I think I can predict what they’re going to look like in ten or 15 or 20 years… Take Wrigley’s chewing gum. I don’t think the Internet is going to change how people are going to chew gum… I don’t think it will change whether people shave or how they shave."

But it looks like the world's third richest man has finally picked a horse in the technology stock race -- and no, it's not Apple, Inc. (AAPL).  Mr. Buffett eschewed the fruity giant that's had its share of ups and downs for a far older firm -- International Business Machines, Inc. (IBM).

Currently in its 100th year, the information technology, cloud computing, hardware, and software giant now counts Mr. Buffett as perhaps its biggest investor.  Mr. Buffett has sunk over a sixth of his Berkshire Hathaway, Inc. (BRK.A) fortune into IBM.  His $10.7B dive is worth a 5.4 percent stake.

Warren Buffett blue
Warren Buffett is seeing blue -- Big Blue that is. [Image Source: Mustafa Quraishi/AP/File]

He commented during an interview on CNBC's SquawkBox, "It’s a company that helps IT departments do their job better.  It is a big deal for a big company to change auditors, change law firms."

II. Examining the Heavyweights of the Tech Sector

Despite the interesting play, Berkshire Hathaway shares joined the market at large in a meander downwards on European fears.  IBM, though, bucked the market trend, holding almost steady at close.

IBM has risen 29 percent in market capitalization over the year to rest just behind Apple at the top of the U.S. technology market.  That makes it more valuable than Microsoft Corp. (MSFT), a firm whose operating system drives over a billion personal computers.

Apple made a net profit of $6.62B USD in its third calendar quarter of 2011 [source].  IBM quietly posted a $3.8B USD profit (GAAP) haul in its own recent results [source].  While IBM's profit may sound smaller, it doesn't have to rely upon the fickle consumer market as much as Apple, instead targeting primarily the business sector.

Microsoft still posts bigger profits than IBM -- it hauled in $5.74B USD in profit in its latest quarter [source].  But it's ever the subject of pessimism over whether it can maintain its dominant position amid what some say is a creative vacuum.  Microsoft gets little love from investors, least of all Mr. Buffett.

On the other hand, IBM is outperforming a perennial market darling who dominates web search, web advertising, and the smartphone markets -- Google, Inc. (GOOG).  Google pulled in a modest $2.73B in its latest quarter [source].

IBM is currently in the midst of a leadership change, with Samuel J. Palmisano -- the CEO for the last nine years -- stepping down and being replaced by Virginia "Ginni" Rometty.  Prior to her new role, Ms. Rometty served as IBM's Senior Vice President and Group Executive for Sales, Marketing, and Strategy.  She will be IBM's first female CEO in the company's century-long history.

Ginni Rometty
Ginni Rometty will be leading IBM into its next century as the company's first woman CEO.  Unlike many past IBM CEOs, she comes from a non-technical background.
[Source: Journalist Independent]

The company is a bit of a puzzle for casual observers to wrap their heads around given its multitude of seemingly disparate ventures and futurist projects.  But the company gained a great deal of attention earlier this year for its Watson supercomputer, which used its powerful AI and massive knowledgebase to crush mankind's most successful Jeopardy champions in a charity game.

Source: WSJ



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Government funded Software as a Service
By Shig on 11/14/2011 6:54:14 PM , Rating: 2
IBM outsources their RnD expenses to other tech companies and governments for chip production, hires bright young minds to develop software at minimal cost, then packages it back to large tech companies and governments. Amazing business model.

The Power7 chip was funded by a 244$ million DARPA contract. Sony and Toshiba funded a large portion for the Cell processor, then IBM built roadrunner using it with other commodity processors (first petascale supercomputer) and off the shelf gear. The Watson supercomputer (the one that won jeopardy) was built upon the power7 architecture, a huge amount of ram for its size, and some ingenious algorithms. Watson's tech is now going to one of the most profitable sectors of the economy, medical services.

IBM also has enormous contracts with major cities across the globe including Seoul, New York City, and Rio de Janeiro. They save municipalities millions a year by installing their software as a service to manage lighting, water, and electricity.

This investment marks an inflection point where making the actual hardware itself is no longer profitable enough. Intel and Samsung would be the exception here, but they're essentially monopolies and the last two big companies to control major Fab resources.

Apple vs. Foxconn (the people who actually make the i-gadgets at slave labor wages) is the best example I can think of that exemplifies this. Apple employs 50,000 people while Foxconn employs close to a million people. Apple's stock trades at 379.36$ a share, Foxconn trades at 2.72$ a share. Apple being the consumer side software as a service, while IBM is the government side.




By Zoomer on 11/14/2011 8:07:17 PM , Rating: 2
Welcome to vertical integration. And don't kid yourself, Sony and Toshiba, not to mention AMD/GF, won't partner with IBM if there weren't benefits to them.

$244M to develop the chip? That's not covering it. The IBM z/196 system cost $1.5B - Billion - to develop.


RE: Government funded Software as a Service
By Ammohunt on 11/14/2011 8:57:24 PM , Rating: 3
too bad they are the worst employers! I have had the misfortune of working for them twice. IBMers as they call themselves are next to near worthless for technical purposes outside of IBM. I will never willingly work for them again.


By TakinYourPoints on 11/15/2011 1:43:52 AM , Rating: 3
Heard the same from my friend who quit there last year, it's too bad. My friends at Microsoft and Google are quite happy though. :)


RE: Government funded Software as a Service
By nocturne_81 on 11/14/2011 9:30:16 PM , Rating: 2
Exactly.. Apple stock may get much more attention (for the moment), but doesn't really compare at all to 'real' tech companies like IBM, HP, Intel, and MSFT (as well as Google to an extent) -- but if the world is still here in another century (even in a post-apocalyptic wasteland), IBM certainly will be too.


RE: Government funded Software as a Service
By Samus on 11/15/2011 12:21:18 AM , Rating: 1
"In 2010, IBM employed 105,000 workers in the U.S., a drop of 30,000 since 2003, and 75,000 people in India, up from 9,000 seven years previous."

That right there shows where the talent is. We [USA] are failing.


RE: Government funded Software as a Service
By Spookster on 11/15/2011 1:59:28 AM , Rating: 1
I would not confuse large amounts of outsourcing to India with being where they are finding talent. They [India] work for a third of what engineers here in the US make. But as they say you get what you pay for. My company also is outsourcing to India and it now costs us more to develop software because we have to fix everything they work on after they send it back.


RE: Government funded Software as a Service
By asliarun on 11/15/2011 10:04:33 AM , Rating: 5
Yes, the cost of living and salaries in India is a third of what it is in the US. But please stop it with this old hoary misinformed opinion about cheaper = less talent. Just because this notion *comforts* you doesn't make it true.

By and large, the *average* Indian engineer is probably less skilled than the average American engineer. However, that matters very little since that still leaves a huge number of Indian engineers who are world class. The top of the pyramid is still a very large pyramid. This is the reason why IBM, Microsoft, Google, Amazon, and everyone else has a huge presence in India.

Combine this with the fact that super-large companies like IBM primarily rely on processes and training, which buffers the variance in quality even more.

If everyone was facing the same issues as your anecdotal example, Indian outsourcing would have shut down long ago. The fact is, countries like India and China are moving *up* the value chain in software and hardware manufacturing, not moving *down*. Doesn't matter if they are still below-par today, the rate at which they are moving up means they will come up to par sooner or later, AND at a cheaper cost.

Case in point - many/most of the outsourcing centers in India are now also doing core R&D.


RE: Government funded Software as a Service
By Spookster on 11/15/2011 10:52:00 AM , Rating: 3
Oh please. We have had to work with these less than capable indian engineers for 2 years now and they have made little improvement. They consistently send back software that doesn't meet the requirements and in many cases doesn't even compile. From working with them it seems that they spend all their training memorizing programming languages but don't know how to use them or write coherent code. We are not saving money and fortunately our upper management is starting to come to grips with reality.


RE: Government funded Software as a Service
By nafhan on 11/15/2011 3:11:25 PM , Rating: 2
So, if these were American or British engineers producing shoddy work, it'd be OK? It sounds like your company has been paying someone to do poor quality work for several years. From what you've said here, I'd blame your management rather than "Indians".


RE: Government funded Software as a Service
By Spookster on 11/15/2011 3:19:22 PM , Rating: 2
I at no point did I say I blame the indians so don't put words into my mouth. Our upper management is completely to blame. And if these were American or British engineers I would make the same complaint if we had problems with them. But we work with engineers from several different countries (including US and UK) and there is the occasional problem with engineers from those countries but we have the most and consistent problems with engineers from India. You can't just memorize programming languages and call yourself a software engineer. They need to learn how to "engineer" software.


By nafhan on 11/15/2011 4:42:56 PM , Rating: 2
Gotcha'. No offense intended. This could easily be taken to mean all programmers from India:
quote:
From working with them it seems that they spend all their training memorizing programming languages but don't know how to use them or write coherent code.
which is why I said something.

Most of the Indians I've worked with - and been friends with - are the ones who have been "exported" to the US and are physically working here on contract AND are getting paid similarly to other in country programmers. So... my experience may be atypical.


RE: Government funded Software as a Service
By asliarun on 11/15/2011 5:12:46 PM , Rating: 2
My experience with an Indian outsourcing firm has also been less than satisfactory. But then, my experience with software engineers in Philippines and China was also similar. Again, I'll say one thing here - you are correct in your belief as far as your personal experience goes. But please don't extrapolate it to apply to *all* Indian engineers. Perhaps, your company chose the wrong Indian company to outsource to. By doing so, you are just being biased. Do you extrapolate McDonald's food to stand for *all* fast food?

Try working with a more expensive company - say ThoughtWorks India. I can guarantee you that your experience will be completely different. Those guys are whip sharp.


RE: Government funded Software as a Service
By Spookster on 11/15/2011 7:27:26 PM , Rating: 2
Our company didn't just outsource to a firm there. They opened up a location in India and hired people throughout the local population. We are talking hundreds of locals. They all display the same pattern of just memorizing tools rather than being able to engineer. To me that is representative of the average engineer there and not just me being biased.


RE: Government funded Software as a Service
By nafhan on 11/16/2011 10:11:00 AM , Rating: 2
Again, this sounds like a case where the problem could just as easily be your company's management (in this case, those doing the hiring in India). For instance, if you they aren't advertising high enough salaries, good engineers (i.e. the ones with experience) might not even be applying for the positions.


By Spookster on 11/17/2011 2:36:33 PM , Rating: 2
The hiring managers are also locals. And they as well as the people they are hiring are being paid very well for their location. Once again this is representative of what local applicant pool is.

You can keep trying to point the finger back at someone in the US all you want but facts are facts.


By rudy on 11/16/2011 12:31:17 AM , Rating: 3
The cool thing and the point which most seem to miss is even if the work is not good, the fact is they are learning on a US dollar. They are developing the infrastructure to be at the same level. Meanwhile in the USA our engineers are falling out of the market.

People like to say the USA does not educate enough talented people, but my take is the opposite since i am in a highly educated field. We are educating too many and we do not provide enough jobs for them. As such more and more people are choosing to skip such long and hard eductions because they simply are not worth the ROI. And alot of this has to do with the fact US companies are so keen on outsourcing any and every possible part of the work except of course the executives.


By Ringold on 11/15/2011 11:56:04 AM , Rating: 1
You make a good point. The entire West hasn't come around to the notion yet that the rest of the world is catching up and we have to be competitive -- or suffer. The mentality is the main factor, I feel, behind the deficit of our kids getting useful degrees in the 'STEM' fields.


By Spookster on 11/17/2011 2:40:33 PM , Rating: 2
More BS. keep drinking that koolaid if you makes you feel better. You obviously have never worked with them before or are one of them trying to defend your fellow indians honor. Whichever the case you are clueless to what is really going on.


By LowestCommon on 11/15/2011 12:19:39 PM , Rating: 2
I remember when I was a kid that the adults used to say the same type of things about the Japanese...


RE: Government funded Software as a Service
By TakinYourPoints on 11/15/2011 1:38:24 AM , Rating: 3
AAPL is actually lowly valued by their PEG ratio compared to many other techs. The stock does well compared to the others you mentioned simply because they make more gross revenue and net profit, even with much lower profit margins than companies like MSFT and Oracle.

As for IBM, it has a lot of things going for it. They sold their low margin hardware business to Lenovo and moved into services. They briefly exceeded Microsoft's market cap and there is only about a 1% difference between the two. IBM has grown a lot in the last three years and on top of everything they pay a dividend.

It bears repeating: even if IBM is flat from here, the company pays out a dividend. A stable stock with good management and a healthy dividend are classic criteria for Buffet. It's no wonder this is one of the few techs he's put such a significant stake into. I'm surprised he picked a stock that looks like a "high flier", the chart has gone parabolic since 2008, but given his long term interest it shouldn't mean much in the long run.


RE: Government funded Software as a Service
By idiot77 on 11/15/2011 2:13:39 AM , Rating: 2
Their revenue means almost nothing. Apple doesn't pay out dividends. Their stock holders are just buying hoping someone pays more for their stock than they did.

If they start losing money, their stock will tank very hard since the entire value of the company is in cash and their investments in other companies..
.
Grant it, that's a lot of cash, but still. No dividends makes it pretty crappy stock to buy heavily in if you ask me (for long term).


By nafhan on 11/15/2011 9:22:31 AM , Rating: 2
Also, they're (essentially) a consumer electronics company at this point... that's a much more volatile market than IBM is in.


RE: Government funded Software as a Service
By Ringold on 11/15/2011 12:01:22 PM , Rating: 1
With that mentality, you'd of missed out on owning a fast-growing stock, merely because, what, it doesn't pay a dividend? I think you've lost a little touch with what a share represents. Dividends can even be considered a source of weakness; it can mean the company is slowing down, unable to find more profitable places to invest their money.


RE: Government funded Software as a Service
By Ringold on 11/15/2011 12:04:00 PM , Rating: 2
Not to say dividends are always bad, just saying a lack of dividends is perfectly acceptable when compensated by high growth.

The recent talks been that Apple's growth is going to slow, so people are starting to suggest it start paying a dividend, but the lack of a dividend wasnt a problem till now.


By TakinYourPoints on 11/18/2011 2:36:53 AM , Rating: 2
Yeah, it'll make sense to start paying out a dividend when their ceiling for growth appears, just like what happened with Microsoft in the mid-2000s. It isn't there yet, the markets Apple is in still have loads of room for expansion. I think we're still several years away from them even considering a dividend.


By Da W on 11/15/2011 9:10:49 AM , Rating: 2
Every stock is lowly valued by their PEG ratio in this market. Dividend yields are tempting enough. Anybody with spare cash should go stock shopping, building a nice portfolio of 3%+ dividend yielding stocks planning hold them for the next 10-20 years.

The only thing i find wrong about Buffet's investment is that he's 100 years late.


Another reason for not picking AAPL
By Solandri on 11/14/2011 9:19:16 PM , Rating: 4
Buffet is a big believer in traditional investing. Pick a stock and stay with it for the long haul. Rely on strong dividends from consistent economic performance over many years or decades to generate a return, don't rely on rising stock price as your return.

Apple doesn't pay dividends.




RE: Another reason for not picking AAPL
By Iaiken on 11/15/2011 2:04:45 PM , Rating: 2
This is actually the strategy that I follow as well.

In the current market, some of the dividend payers are absolutely bargains. One of the recent companies I bought into has a dividend rate of staggering 13% now that the stock is down to ~$10 (from $16 in 2007). It's only been 3 years and my money has almost doubled (currently up 70% just on dividends). The dividends are all reinvested and if the company recovers to it's $16 level then I will almost triple up. More importantly, the company has no sign of slowing down and is still actually growing it's business and it's profits despite it's lower stock value.

Had I bought APPL over this same period, I would only be up ~26 assuming a buy-in at the same time and holding till today with a plan to hold 2 more years before re-evaluating.

APPL is not a stock that should interest prudent investors, it lives in the realm of the day-trader and the purchasing computers of wall street.


By Pixelpusher6 on 12/13/2011 4:48:08 PM , Rating: 2
Hey Iaiken would you care mentioning what company you are referring to? I am doing some research for some longer term stocks and you've captured my interest. Have never really been interested in Apple stock either. Also have been considering a big buy of Nvidia before they release their GTX 600 line. It appears that the 600 series will release on time and should offer a significant performance upgrade over the existing 500 series given that TSMC is doing better than expected with the transition to 28nm. Their stock has been stagnant lately and in my opinion is undervalued. In 2012 they have the 600 series release, Tegra 3 and they are making inroads in the HPC market with their Tesla brand. Also the company's management seems fairly competent and they are sitting on a lot of cash. Any opinions? I feel 2012 is going to be a good year for tech.


RE: Another reason for not picking AAPL
By rudy on 11/16/2011 12:39:25 AM , Rating: 2
This is also the best type of investing for everyone. Part of the reason our stock market has been so volitile is because so many people invest for very short periods of time all the way down to day trading. What this means is a company is pressed to perform at ALL times. Sometimes you gotta take a hit as a company so you can get ahead later, but for so many US companies that is no longer acceptable. You try to do that and you CEO is replaced in a couple weeks. Back when my grandpa invested they bought stocks in stable companies they liked and they just sat on them for most of their life and cashed them out when they retired. Few people invest like that now, so few companies look to the long term.


"It's okay. The scenarios aren't that clear. But it's good looking. [Steve Jobs] does good design, and [the iPad] is absolutely a good example of that." -- Bill Gates on the Apple iPad














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