What Can We Learn from IBM?

PS: I may not post the See’s Candies case study until tomorrow….backed up with work. Until then, tackle this:

Why did Buffett buy IBM?

IBM_VL    Don’t cheat! Look at the Value-Line and write what Buffett sees in IBM. (Disclosure: I own IBM along with BDX, BCR, CSCO, LXK, NVS, TESCO, ORI, etc. and I will not announce if and when I sell. I may be incorrect in the assessment of those businesses either in price paid or assessment of value.)

What do you think of IBM’s growth? Is this a good business? What might be driving returns for shareholders? How would you classify this company?  A rapid compounder? Value trap?

How can a company as well-known as IBM become mis-priced?

Hint: For those who wish to start your own fund….research the studies on horse track betting where favorites are SYSTEMATICALLY under-bet (under priced) while long shots are SYSTEMATICALLY over bet or over priced.

Notes:

Betting on Favorites

See research:Favorite_Longshot_Bias

http://www.gogerty.com/blogpersonal/2012/09/

One of the common criticisms I (Investor lecture at Columbia GBS) hear about this type of investing is that it is akin to betting on favorites at the race track. Once you have identified a company that is so obviously superior, how likely is it to be undervalued since the whole world will have perceived that it is an extraordinary company? The stock won’t have a margin of safety and may be persistently over-valued. The stock may be over-loved and overvalued.

Let me back up a second. As part of my misspent youth, I spent a lot of time in horse racing and handicapping. In fact, bettors in aggregate in pari-mutual betting are, in fact, very good at picking winners at the racetrack. Favorites do win races. But betting on favorites does not make you money; it loses you the least amount of money. Because there is a tremendous track take. So the horse racing/handicapping is a minus 20 percent on typical betting. If you just put money down on favorites as a mechanical system, the record shows that you will lose over time only 2%, 3% or 4%. If you bet on long shots, you will lose 20+% of your money.

Now in the case of the stock market over a long period of time, it has been a plus 9, plus 10, plus 11% game so it is very much more favorable business than horse betting. But betting on favorites, betting on quality as opposed to junk is a winning bet, as long as the valuation discipline is appropriate.

Prize awarded: Boom, Gloom, and Doom Report for the BEST reply.

Ok, now take a look at these articles: http://tech.fortune.cnn.com/2011/11/14/warren-buffett-ibm/

and  http://seekingalpha.com/article/510371-what-does-warren-buffett-see-in-ibm

Lessons learned?

If I can stress anything–and it took me TEN years to learn and I fall off the wagon occasionally–keep things simple!