Missing the forest for the trees
What we can learn from Warren Buffett who missed investing in Google early on despite having a front row view of its growing dominance in advertising.
Somewhere in 2009 , Eric Schmidt , the existing CEO of Google, takes Larry Page and Sergey Bin to meet Warren Buffett. The trio were so impressed by Berkshire’s success of managing a humongous corporation with multiple success levers- small headquarters,autonomy to business CEO’s, minimal bureaucratic oversight -all of which led to the seeding of Google’s own restructuring into Alphabet in 2015.
Here is Larry speaking about the same:
Despite meeting the Google founders and a close view of Google’s business (via GIECO which did a lot of online advertising), Buffett failed to invest in Google. This has been also echoed by Charlie Munger, Warren’s partner and long time friend - “ We just sat there sucking our thumbs -I feel like a horse's ass for not identifying Google earlier.”
During the annual shareholder’s meeting at Omaha in 2017, responding to a question around technology investments, Buffett said the following:
Google I should have had some insight into, because Geico was a heavy user very early on. . At that time …. we were paying $10 or $11 a click for something that had no cost of goods sold, and we were gonna keep doing it. I mean we could see that. So I should have had more insight into that.
Despite having missed on Google and a lacklustre performance of Berkshire’s IBM investment, Buffett took everyone by surprise by investing in 1 Bn $ Apple in 2016. From 2016 to 2018, Berkshire invested nearly 35 Bn $ whose current value has close to 104 Bn $ currently!
So what led Buffett, who used to shy away from technology stocks and reeling from the IBM blunder, proceed with the Apple investment in 2016 when it reported its first ever sales decline since 2001?
The answer might lie in a little bit of ‘candies’ history around of the evolution of Berkshire Hathaway and Warren Buffet as an investor.
Warren Buffett used to initially follow a “Cigar butt” type of investing from his teacher Benjamin Graham- picking up businesses selling below intrinsic value. It was Charlie Munger who nudged Buffett into paying up a little extra for quality businesses.
A great business at a fair price is superior to a fair business at a great price
- Charlie Munger
This led to the famed investment of See’s Candies in 1972 which fueled Buffett’s quest for lapping up more quality businesses over the years.
When we bought See’s Candies, we didn’t know the power of a good brand. Over time we just discovered that we could raise prices 10% a year and no one cared. Learning that changed Berkshire. It was really important….So in a sense, there is untapped pricing power—it is not price dependent.
- Warren Buffett
Buffett’s deep understanding of consumer brands, their preferences for associating themselves with brand, latent pricing power led him to invest massively in Apple. For him, Apple is a consumer brand which is also a technology company.
Apple doesn’t resemble IBM … It resembles See’s Candy way more. I mean, it is a incredibly useful product for people ..
I don’t think of Apple as a stock. I think of it as our third business..It’s probably the best business I know in the world. And that is a bigger commitment that we have in any business except insurance and the railroad.
- Warren Buffett
Very often , amateur investors get uncomfortable of having to face gaps in understanding or get troubled by temporary setbacks in their owned businesses.
It takes variant perception and second order thinking to overcome this shortcomings. In addition, one has to be patient enough with the investment to reap commensurate rewards.
There is a hidden reward on your investment journey - the best part of investing is the compounding nature of wisdom collected- which enabled Warren Buffett to make the jump for Apple investment at the right time.
So don’t worry and enjoy your investment journey , while occasionally you might miss the forest, but you will find your Apple.
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