Awhile ago I wrote some articles on IBM (IBM, Financial), which you can find here and here.
If you are a Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) shareholder, you should hope IBM's stock price will be as low as possible during the five-year purchase window. We will see revenue growth from IBM either in late 2016 or 2017 based on the math. Someone posted a video on YouTube in which Warren Buffett answered some of the questions Becky Quick had on IBM. I thought the video was worth sharing. I also took some notes that I thought were worth sharing. Hopefully the readers will find them useful.
Here is the video:
Becky Quick: Why are you buying more IBM?
Buffett: This company is doing exactly what I like ever since we first started buying it. There were about 1.6 or 1.7 billion shares outstanding, and there were a fair number of options out there, maybe 40 million shares. Now the shares have been reduced to 990 million.
I actually wrote a couple of years ago when we bought it that the best thing that could ever happen to it is the stock does nothing for the next five years because [IBM] was going to buy a lot of stocks. The lower the prices, the more it could buy. People have this misconception that when we buy a stock, we’d like it to go up. But that (the stock price goes up) is the last thing we want to happen. But when we like it, and particularly when the company we like is buying back its own shares as most of our companies are, our interest in the company just increases day after day. And if the company is buying it, we are not laying out a dollar (to increase our ownership in the company). And if we are buying it and we are buying it cheaper, we increase our ownership at a cheaper price.
Becky Quick: But IBM’s revenue is declining and the company is borrowing money to buy back shares.
Buffett: Well we expected the revenue to be going down, and we particularly expected the foreign exchange was going to take a big whack of the revenue, and it also disposed of $7 billion of revenues of last year. There have been no surprises at IBM since we started buying it a few years ago. The pleasant surprise is that the stock has gone down. That’s why they’ve reduced the shares to 990 million. If the stock were $200 a share, there would’ve been more than 1 billion shares outstanding.
Becky Quick: You often said you don’t understand technology. What makes you think you understand IBM’s competitive moat?
Buffett: There’s no question that I don’t understand technology as well as I understand the railroads or insurance. But I don’t understand every aspect of insurance.I understand some of the key economic characteristics of insurance. The same with railroads, I know a lot of things about parts of the railroads industry which lead to an economic conclusion. But there are a lot of things that I don’t understand. And that’s true industry after industry. I was the chairman of a company that competed against IBM for 10 years in the 1960s, and I didn’t understand all of IBM’s businesses back then, but we actually did very well competing against IBM in the tab card business. I think I know enough about IBM to make an investment decision.
The business changes over time. There was one time they didn’t change when change was needed and they almost went bankrupt. Then they made great progress under Lou Gerstner. I think now Ginny Rometty has done a great job fostering the change but it doesn’t happen overnight.
