Buffett Case Study on IBM

Do you understand Buffett’s reasons for investing in IBM?  What are the financial characteristics of IBM that are attractive to Mr. Buffett? Look at IBM’s annual report provided in the link below.

From a CNBC Interview

BECKY: Wait. Wait a second, IBM is a tech company, and you don’t buy tech companies. Why have you been buying IBM?

BUFFETT: Well, I didn’t buy railroad companies for a long time either. I—it’s interesting. I have probably—I’ve had two interesting incidents in my life connected with IBM, but I’ve probably read the annual report of IBM every year for 50 years. And this year it came in on a Saturday, and I read it. And I got a different slant on it, which I then proceeded to do some checking out of. But I just—I read it through a different lens.

JOE: What’s the different lens? What’s the different slant?

BUFFETT: Well, just like—just like I did with—just like I did with the railroads. And incidentally, the company laid it out extremely well. I don’t think there’s any company that’s—that I can think of, big company, that’s done a better job of laying out where they’re going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they’ve laid out another road map for 2015. They’ve done an incredible job. First, Lou Gerstner, when he came in, he saved the company from bankruptcy. I read his book a second
time, actually, after I read the annual report. You know, “Who Said
Elephants Can’t Dance?” I read it when it first came out and then I went back and reread it. And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things.
 And also, I read very carefully what Sam Palmisamo…

BUFFETT: …Palmisano, yes, has said about where they’re going to be and he’s delivered big time on his—on his—on his first venture along those lines.

BUFFETT: The other thing I would say about IBM, too, is that a few years back, they had 240 million options outstanding. Now they probably are down to about 30 million. They treat their stock with reverence which I find is unusual among big companies. Or they really—they are thinking about the shareholder.

JOE: But you’re buying this after it’s really broken out the new highs this year, new all-time highs.

BUFFETT: We bought—we bought railroads on highs, too.

JOE: Yeah? They sent it—you know, stocks at new lows that, you know, can hit new lows where they…

BUFFETT: Right. I bought—I bought control of—I bought control of GEICO at its all-time high.

BUFFETT: No, I never talked to Sam. I’ve never talked to Sam. I’ve got this—I competed with IBM 50 years ago, believe it or not. I was chairman of a company, had, and I testified for IBM in 1980 when the government was attacking about on the antitrust situation. But I’ve never—I have not talked to Sam or now Ginni.

BECKY: You—this is the second time in the last several months that you’ve told us about a purchase you’ve made of a company you’ve been the reading annual reports for years.


BECKY: Bank of America was the first.

BUFFETT: Right. I read those for 50 years.

BECKY: Read those for 50 years and you’re looking at companies a little differently. You never really bought tech stocks before. You had always said you don’t understand technology stocks.


BECKY: Does this mean that this is a new era and you’re going to be looking at a lot of tech stocks and I guess chief among them, would you consider Microsoft?

BUFFETT: I—well, Microsoft is a special case because Microsoft is off bounds to us because of my friendship with Bill and if we spent seven months buying Microsoft stock and during that period they announced a repurchase or increase of the dividend or an acquisition, people would say you’ve been getting inside information from Bill. So I have told Todd and Ted and I apply it myself that we do not ever buy a share of Microsoft. I think Microsoft is attractive but that—but we will never buy Microsoft. It—people would just assume I knew something and I don’t, but they would assume it and they would assume Bill talked to me and he wouldn’t have. But there’s no sense putting yourself in that position.


BUFFETT: I can say I’ve never met Sam but I can’t say I’ve never met Bill.

BECKY: But does this change the rules of the game that you would actually look at technology stocks now?

BUFFETT: I look at everything but most things I decide I can’t figure out their future.

BUFFETT: Yeah, it’s a—it’s a company that helps IT departments do their job better.

JOE: Yeah.

BUFFETT: And if you think about it, I don’t want to push the analogy too far because it could be pushed too far. But, you know, we work with a given auditor, we work with a given law firm. That doesn’t mean we’re happy every minute of every day about everything they do but it is a big deal for a big company to change auditors, change law firms. The IT departments, I—you know, we’ve got dozens and dozens of IT departments at Berkshire. I don’t know how they run. I mean, but we went around and asked them and you find out that there’s—they very much get working hand in glove with suppliers. And that doesn’t—that doesn’t mean things won’t change but it does mean that there’s a lot of continuity to it. And then I think as you go around the world, IBM, in the most recent quarter, reported double-digit gains in 40 countries. Now, I would imagine if you’re in some country around the world and you’re developing your IT department, you’re probably going to feel more comfortable with IBM than with many companies.

JOE: Well…

BUFFETT: I said I competed with IBM 50 years ago. Go here: http://csinvesting.org/2011/09/17/buffett-investment-filters-and-cs-on-mid-continent-tabulating-company/

BECKY: Yeah.

BUFFETT: We actually started—I was chairman of the board, believe it or not, of a tech company one time, and computers used to use zillions of tab cards and IBM in 1956 or ‘7 signed a consent decree and they had to get rid of half the capacity. So two friends of mine, one was a lawyer and one was an insurance agent, read the newspaper and they went into the tab card business and I went in with them. And we did a terrific job and built a nice little company. But every time we went into a place to sell them our tab cards at a lower price and with better delivery than IBM, the purchasing agent would say, nobody’s ever gotten fired from buying—by buying from IBM. I mean, we probably heard that about a thousand times. That’s not as strong now, but I imagine as you go around the world that there are—there’s a fair amount of presumption in many places that if you’re with IBM, that you stick with them, and that if you haven’t been with anybody, you’re developing things, that you certainly give them a fair shot at the business. And I think they’ve done a terrific job of developing that. And if you read their reports—if you read what they wrote five years ago they were going to do and the next five years, they’ve done it, you know, and now they tell you what
they’re going to do in the next five years, and as I say, they have this terrific reverence for the shareholder, which I think is very, very important.

And I want to give full credit, incidentally, to Lou Gerstner because when he came in, I was a friend of Tom Murphy’s and Jim Burke’s, and they were on the search committee to find a solution when IBM was almost broke in 1992, and everybody thought they were going pretty far afield when they went to Lou Gerstner. And look what…

BUFFETT: Well, you don’t have to think of—you don’t have to think of another one, Joe. And if you read his book, you know, “Who Said Elephants Can’t Dance?” it’s a great management book. Like I said, I read it twice.

ANDREW: What was it when you’re reading the report? I mean, most investors who are trying to invest like you, they’re reading annual—what is it in the report that you said, ah, I missed it?

BUFFETT: Well, it was—it was a lot of interesting facts and you know, I
recommend you read the report, you know. Go here: http://www.ibm.com/annualreport/2010/
And I didn’t look at the pictures and I’m not sure there were any pictures.
I kind of like that, too. But there were—there were lots of things in that
report but the truth is, there were probably lots of things in the report a
year earlier or two years earlier that you say, why didn’t I spot it then? And
I think it was Keynes or somebody that said that the problem is not the new
ideas, it’s escaping from old ones. And, you know, I’ve had that many times in
my life and I plead guilty to it.

BUFFETT: I will tell you one very smart thing that Thomas Watson Sr. said. I knew Thomas Watson Jr. just a little bit. Tom Watson Sr., this applies to stocks. He said, “I’m no genius but I’m smart in spots and I stay around those spots.” And that’s terrific advice.

One response to “Buffett Case Study on IBM

  1. John, thanks for sharing this conversation about IBM. This is a $200 billion plus company. Buffett also bought it($170) at not-so-cheap price. I cannot help but wonder what could be the upside from here? But just like KO when he bought it. It grew many times over his cost. I guess there is a lesson for me here. It is optimism about the world. That prosperity will continue. Can we imagine a world in the future in which big Blue can be a trillion dollar co? Buffett talked about IBM’s position with IT departments. Below is another perspective about IBM’s strength in emerging markets. I copied below from a Barron’s article in 2009.
    For a value guy like me, often trapped in the quantitative world, Buffett is stretching me again.
    MARKETS isn’t lost on any big enterprise, let alone IBM. Tech-data tracker IDC figures developing markets
    will grow 8% to 13% in 2010, versus 3% for the developed markets. Last year, IBM broke out its growth-markets
    group, which includes every country outside the developed world, including swiftly growing markets like
    Vietnam and South Africa.
    IBM is spending heavily on research and resources to create products and services for these areas. In 2008,
    growth markets made up under a fifth of IBM’s top line but delivered 50% of its revenue growth.
    expected to kick in 60% of revenue growth over the next five years, meaning the developing world could add $2
    billion in revenue a year. IBM’s long history in these countries is a plus. It’s been in Brazil for 95 years, nearly as
    long as it has been a public company. “We’ve been in and out of China longer than our competitors have
    existed,” says Palmisano. Despite India’s vaunted outsourcing industry, IBM is that nation’s biggest IT-services
    “If you are an emerging country and you are building your infrastructure, there is only a handful of people out
    there you trust,” says Toni Sacconaghi, an analyst at Sanford C. Bernstein. “No government will be fired for
    hiring IBM.”
    Some of IBM’s biggest fans in the developing world are those
    companies with the biggest ambitions. Here, IBM’s own global
    narrative of restructuring and renewed profit growth is an
    important sales tool. “Haier [1169.HongKong], Lenovo
    [992.HongKong] and Huawei all want to go global. How do we
    help them transform?” says Shirley Yu-Tsui, IBM’s head of
    strategy for Greater China.
    One satisfied client is Huawei (000793), the Shenzhen, China, telecom-equipment outfit that’s giving Nokia
    (NOK) and Cisco (CSCO) a run for their money. Huawei first hired IBM in 1998 to help redo its
    productdevelopment strategy and to improve quality control and capital spending; because of IBM’s work, it
    was able to offer a lowercost solution in the European 3G smartphone market. It also enlisted IBM to help it
    enhance purchasing planning and supply management. Now IBM is helping Huawei with financial services and
    human resources.
    “IBM practices many of the same methodologies,” says Eric Xu, senior vice president of Huawei, in an e-mail
    interview. “We have learned so much. Our 10-year collaboration with IBM has been an extraordinary journey
    and a win-win partnership.”
    POSSIBLY THE MOST INTRIGUING opportunity is the one that arises as the world becomes more
    urbanized: Palmisano figures some 70% of the global population will live in cities by 2050: “Two billion people
    enter the middle class between now and 2030. What does that mean? It creates the next level of growth
    opportunity called “smart.” ”
    IBM’s Smart Planet strategy is an ambitious program to embed information technology into infrastructure —
    either aging (as in the developed world) or greenfield (as in IBM’s growth markets), and the company reckons it
    expands its potential market by 40%. Tracking all that data for roads, utility grids, sewers and the like
    automatically creates demand for IBM software, research, consulting, hardware and IT services. Coincidentally,
    about $2.8 trillion in government-stimulus spending has been announced in the past year. Thus, in the third
    quarter, even as IBM’s service revenue undershot expectations, revenue from government spending jumped.
    Expect more of the same.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.