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Comment by jalopy | Hacker News Reader

[edit]Disclosure - I am a Berkshire Hathaway investor and more intense than average follower of the company and it's top management.[/edit]

This is almost certainly a bet by Ted Weschler or Todd Combs - Buffett's chief investing lieutenants.

Buffett has maintained his aversion to tech as he doesn't "understand"[1] it, and I see nothing to indicate he's changed his mind at this stage in the game.

Also - a $1bn investment is relatively small change for Buffett, but fits squarely within the size range of Ted and Todd's reported $8-10b (each) investment warchest.

[1]: Not "understanding" doesn't mean he doesn't or couldn't understand the technology aspects; rather, it means he doesn't have the ability to see which of the participants will survive and thrive in 10 years time to justify an investment today. IBM is a notable exception.

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Buffett actually confirmed[0] that he, personally, did not make this trade, and that it was either Ted or Todd (interesting that he didn't specify which).

[0]: http://blogs.wsj.com/moneybeat/2016/05/16/berkshire-bought-a...

> did not make this trade

Is trade the right word here? It seems like there must have been lots of trades in order to establish such a position...

That depends. If they were buying direct from say Apple (or anyone else with a large block to sell) then they would arrange a "Fill or Kill" order - which is a exchange order type specifically for this large deal (a bit anti-market really) - basically Buffets broker and Apples broker talk on the phone and arrange the deal at a certain price and time. Buffets broker sends in an order to the exchange asking for 1.3m (or whatever) shares in Apple at 600usd and the exchange will only fill orders that take the whole - that is it does not sit there getting a 100 shares at a time, but is waiting for someone else to fill the whole lot. The other sides broker then takes the whole order about 30 seconds later and they all go to the pub.

Source: listening to people who actually know what they are talking about. I may have mis-listened.

My understanding is that Fill or Kill doesn't require a single fill, merely that the entire volume is instantaneously filled.

So, if I send FoK Buy 100 shares @ 500$, then I could end up with 100 fills of size 1, or 1 fill of size 100. It makes no difference (except occasionally in commissions/costs depending on exchange). However if there were only 99 shares it would not partially fill, and would simply cancel unfilled.

Immediate or Cancel would allow you to get "up to 100 shares at a price of 500" and cancel instantly once available volume was consumed.

That's the same for pretty much any large stock transaction. There will almost never be a buyer big enough to take the other side in the size that you want.

A 'trade' is also parlance for 'taking a position or bet' in finance.

I suspect that IBM fits his understanding because he views it as a services company, rather than a hardware or software company. Services he does understand. I think he also likes that they give most of their cash back to the shareholders. (Which makes them a value play rather than a growth play) I was still surprised by the investment though.

Agree on these points. Also, across the dozens of businesses fully owned by Berkshire Hathaway, he has unique insight into the tech vendors that those businesses rely on. The rumor is that he polled a significant portion of the managers of these businesses which helped to inform his decision that IBM would be around for a long, long time.

Interesting. The challenge is that tech companies can become obsolete very quickly. I don't think IBM is as sticky as he gives them credit for.

This is funny because IBM is the best possible example of a sticky tech company. The company was originally founded in 1911 and made punch-card-operated tabulating machines.

Indeed, but I don't people are as locked in their services as they used to be. They've been resiliant, but it isn't like the 80s or 90s when a decision to buy IBM was a 20 year commitment.

Now the decision to buy IBM is more around software and services. Outsourcing contracts have long lives, but software and implementation less so.

This is where the Growth investor looks at something different than the Value investor. The growth investor says, "They're technologically irrelevant. They're still hawking Lotus Notes!" [0] The value investor says, "Their PE is 11, and they're buying back every share in sight." [1]

[0] http://www-03.ibm.com/software/products/en/ibmnotes

[1] http://www.google.com/finance?cid=18241

I'm not overly familiar with IBM Global Services, but from the contact I've had with them in the enterprise world I think you're undervaluing the stickiness substantially. For context, if I'm looking at the right numbers, IBM has ~USD$80B in revenue with ~USD$60B from services?

IBM realized a while ago that the actual machines were replaceable, but the expertise needed to do integration on the scale they operate at less so. And given the poor success rate of major upgrade/integration projects, I expect "hire IBM" is still a fairly safe decision at the C/VP level. Whether legacy enterprises* are running mainframe or fail-tolerant distributed infrastructures, most of them are more than happy to throw money at someone to reliably turn the crank and keep them working.

Edit Side note: Does Amazon actually not have a services org to build on top of AWS? Seems like they could create one just from IBM layoffs and start helping some of these sorts of customers migrate to AWS.

*Excludes the vast majority of companies mentioned on HN

Considering they do $60B worth of business in services, and given the poor success rate of major upgrade/integration projects, I'd say IBM is one of the culprits here.

I'm a BH investor, and frankly I don't like them going into this space.

Amazon has pop-up lofts (though, the one I've seen was in a very fixed looking building) where you can consult with Architects or take various technical workshops.

IBM is dying, http://www.cringely.com/2016/03/08/whats-happening-at-ibm/

I hope their Apple purchase isn't an indicator of the same.

Yeah that guy wrote a book about how IBM is dying a few years ago and ever since then keeps writing blog posts about it.

Whether it is dying or not I would not listen to him.

A behemoth like IBM takes a while to die. I've read a bit about IBM. They are toast, the market for mainframes, server racks and expensive enterprise service packages is disappearing.

Read history, whenever an industry gets too distasteful for IBM they sell it. E.g. Desktops/Laptops and more recently servers to Lenovo. The products might be supported by a lot of services, a mainframe might not be cheap but nor are mainframe consultants. A lot of large corporates still use mainframes and some probably have no plans to get rid of them.

Edit: Grammar mistake

IBM is a master at reinvention. They regularly discard unprofitable businesses and expand into profitable ones. In 2014, they disposed of businesses representing $7b in revenue but -$500m in profit.

Managing to the future by getting rid of the dead weight is the only way you can survive to be a 100+ year old company in the technology space.

Except watson, patents, their financing arm, 99 year contracts with governments globally...

... Have you ever tried to use Watson for anything?

The aspect of dying is a forward looking thought which presumes that growth has ceased within the organization and the best they can do is to maintain their current state. I think that's a fairly accurate depiction of IBM's business although the recent performance notes I've seen of the Power chipset with PG_SQL are pretty encouraging.

I estimate about 60% of IBMs patents are invalid after the recent Alice v. CLS Bank decision. Just no one has call them out on it yet.

Yeah but of the 75mill iphone sold per quarter, how much are to old customers and new?

Be careful! at 95% world-wide saturation for smartphones the answer is very different now than it was in 2009...

Apple is not even close to the #1 selling smartphone in China or India, both with the largest populations on Earth. So I don't follow why this is a bearish case for Apple. At the macro level, yes there are economic headwinds but compared to mature markets like North America and EU, there are still some ways to go for these two markets. Which is why Tim Cook is spending time there.

I'm fairly bullish on Apple, but both "smartphones are a saturated market" and "there's tons of market room in China and India" are overly simplistic.

China's median income is maybe $8,000/year or so.

India's median income is $1,600/year.

They're big countries, but they aren't that big. Each is about 4x the size of the United States, or about 2x the size of all of Europe. And obviously with those kind of incomes, the addressable market at anything vaguely close to US/European prices is a small fraction of the total population. And China at least is pretty protectionist.

At the same time, yes, everyone in the US/Europe already has a smartphone, noted. And yes, perhaps the upgrade market is getting a bit softer -- but still, it's not THAT soft. There are plenty of people in the US or Europe who will happily buy an iPhone every year or two for the next several iPhone generations, and a larger contingent who will buy every three or four years, but that's far from nothing. And Apple can at any time it feels like it wants to cut some margins and fight with Android for market share, in whatever judicious way it wants to.

Apple in 2015 was a unique company at the pinnacle of a unique moment in technology. It's may never be the company it was in 2015 again. But it turns out that there's a hell of a lot of value in a company that's not quite what Apple was in 2015.

He could have bet on Apple purely on fundamentals that fit his thesis: well-known brand, moat/protected market, solid management, nothing complicated on the books, solid investor returns/dividends, 40% ROE, in a bit of a dip (both YTD and peak), low-ish PR PE P/FCFE, etc.

It can be evaluated as a value stock like many of his other investments rather than a crazy infinity/100+ PE stock that requires understanding if the tech is viable or not

My knowledge of Buffett is that he always wants to understand the companies he invests in, on a much deeper level than fundamentals. From memory, a few of his early winners were found by touring the company's facilities and noticing the company's physical assets (minus debt of course) were worth much more than the market cap.

If Apple continues to strategically invest in startups e.g. Didi then it could also be seen as a VC firm.

> he doesn't "understand"[1] it

This! is exactly what made tech such an easy investment growth. Mainstream (2008) investors use three things to size a company: Industry and Market, Challenges, Production. Mainstream didn't get it. Underground did. And they were able to get in early on the action.

In virtually every traditional industry, production is simple and easy to measure, like coal mining for example. "See how quickly you can mine coal and compare that to how quickly you are mining coal."

But in Tech, every new product is a different raw material. The market is tested each time a new raw material is introduced. (Nobody knew the first iPhone was going to be a hit until the day the iPhone was sold, and THEN Apple's stock went up.)

For traditional investors, they don't understand what the question is when a new product is introduced (ex. Kevin O'Leary). The user however does understand. And that is what makes an investment a no-brainer.

However, these days, the traditional investors are not investing in Apple because they get the tech. Instead, they are betting on Apple specifically as a machine for tech production, regardless of product. I still don't think they get it.

But in Tech, every new product is a different raw material

More like you've gone up 1 level in the tech tree, and tech level n-1 items are the crafting components of level n. (I'm writing a game with a procedurally generated tech tree like this.)

But in Tech, every new product is a different raw material.

This is not just exclusive to tech. Board games, books, Toyota are all are their own 'raw material.'

I hadn't heard of Ted and Todd! That's interesting. What would you recommend for further reading?

The annual shareholder letters.

http://www.berkshirehathaway.com/letters/letters.html

> Buffett has maintained his aversion to tech as he doesn't "understand" it

I'm not for sure Tim Cook does, either.

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