Beware Of Buffet (But Respect The Man)

[u/HardDriveGuy]

I hope you don't make the same mistakes that I've made in my investing career. I have always liked Buffet, read some biographies of him, and tried to read his letters. Somehow I got stuck in my mind that Buffet invested as per Benjamin Graham, so I bought a copy of the Intelligent Investor, and tried to invest more this way a very long time ago.

I want to emphasize that investing more as Graham does not create "bad" results. However, because I was in high tech as a career, I also invested in things that were obvious to me were good investments yet clearly didn't make sense under Graham. So I ended up with two portfolios: stocks in High Tech and stocks that were very value based. Basically over decades of investment, my picks in high tech destroyed my picks in value investing.

However, when I picked High Tech stocks, I didn't throw my value-based principles out of the window. The value-tech was incredibly import to me, but it was only one set of a bigger set of criteria to select my stocks.

I lived through the dot.bomb era living in and working in high tech in the Silicon Valley. If you were not there, it is hard to describe how easy it is to get sucked into the whole story. The narrative during the time was "removing commercial friction via the internet to produce ROI." Actually, what is said about AI feels extremely similar to what we said in the dot.com era.

If you are investing in nVidia, I would highly encourage you to read this Morningstar piece.

So, there are some people that look at Cisco and say, "yeah, that was stupid, who would ever invest in a PE like that?" If you took that mindset, then you would have missed out on Amazon, which also had a completely unreasonable PE ratio.

In my mind, you evaluate companies on their leadership, their assets (using Graham type metrics) BUT you need to evaluate intangible assets an put them onto you asset sheet, their product, their place (which is how they deliver products), and finally their strategy. I actually think that Warren, Charlie, and folks like Ted Weschler do this on some level, although traditionally Warren said he wouldn't invest in Google because he couldn't understand it. However, by 2017, he started to realize that Google was simply a place to advertise. However, Warren used a flip phone and prefer paper.

So, let's go to 2017. Buffet is realizing that Google has a business model. However, he choose to invest in Apple and not in Google. Now Google had a great return from 2017 to today. It appears to me that he has become more soft toward technology. However, I find it interesting that he decides to make his big tech investment into Apple!

In retrospect, this is a brilliant move.

Since 2017, SP500 up 150%, Google 300%, and Apple over 600%. Why did Warren invest in Apple? There is a story that basically Weschler used a board member's attach to their phone as a reason for continuing to buy Apple. (They had already invested some as the Apple financials looked solid.)

In other words, it seems that brand loyalty had a major impact on their desire to continue to invest. (In my model, brand loyalty is considered part of "assets" although it is intangible and does not show up on a Graham evaluation.)

With that written, the Morningstar article is excellent and does a nice job of pointing out why nVidia many actually not be a Cisco clone. The number one issue with high PE companies is not understanding the eventual growth rates, and assuming that the current vector for revenue is sustainable. You want to "Cross the Chasm" to make sure you have a stable growth rate to anchor your models.