Warren Buffett is the most successful stock market investor of all time. And what’s most impressive is that the guy doesn’t buy high-risk penny stocks, use margin financing or toy around with options to earn incredible returns … he doesn’t need to.
His formula is simple: Buy high-quality, undervalued blue-chip stocks, then hold them “forever.” It has worked pretty well for him so far, so when Buffett’s Berkshire Hathaway (BRK.A, BRK.B) bought $10.7 billion worth of IBM (IBM) stock in 2011, Wall Street took notice.
Buying IBM stock was a curious move, especially since the Oracle of Omaha had famously avoided technology companies altogether on his path to becoming an investing legend.
As a devout believer in only buying stocks when they have a built-in “margin of safety” — meaning they trade at an obvious discount to their intrinsic value — it’s clear that Buffett believed IBM stock at $170 was a steal.
Unfortunately, the only thing that trade stole was Berkshire’s money, since shares of Big Blue trade for around $140 today, four years later.
So why does Buffett remain committed to the money-losing IBM stock purchase?
It’s About More Than Just Value
Sure, Buffett wouldn’t remain invested if he thought IBM stock was a rip-off. It trades at a price-to-earnings ratio of just 9.7, and despite losing about 20% since Berkshire’s initial purchase, Buffett’s real return isn’t quite that bad, as shares divvy out a 3.8% annual dividend.
Management is also fond of buying back shares — in 2014, IBM spent $17.9 billion on stock buybacks and dividends, despite posting net income of just $12 billion.
But in a recent interview with Yahoo (YHOO) Finance, Buffett talked about how vitally important improving efficiency is to economic growth. Without overtly referencing Big Blue, he touched indirectly on why he’s a fan of IBM stock. On why Berkshire frequently partnered with 3G Capital, which often acquires companies and immediately slashes their workforce, he said:
“You can’t have progress without increasing productivity per capita and the way you increase productivity per capita is you figure out ways to do more efficiently. I take my hat off to them for finding ways to turn out the same output with less people. That’s what we try to do. The only difference is we buy companies where it’s already been done and they buy companies where it needs to be done.”
It struck me that the modern-day IBM is all about facilitating efficiency. It’s currently hyper-focused on Big Data, analytics, artificial intelligence and cloud computing — all areas that can streamline the way the world’s companies, institutions, research centers and universities function.
IBM’s ambitious projects within its Watson Health unit could hold the key to more personalized, effortless medical care; it could also help life sciences companies dramatically reduce the time it takes them to become FDA-compliant. Faster compliance means faster medical innovations, which ultimately increase the length and quality of life.
If that doesn’t make society more productive, I don’t know what does.
The point? I wouldn’t be surprised if Buffett viewed IBM stock as a wager on future productivity gains.
Throw in the fact that IBM shares trade at dirt-cheap levels and pay a hefty dividend, and it starts becoming more difficult to think of why you shouldn’t buy IBM.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
