A:

Warren Buffett has often said that he avoids investing in the technology sector because he does not like to own stocks in companies whose business he does not understand. Even during the dot-com Internet boom, Buffett shied away from buying stock in hot Internet companies. However, his approach changed in 2011 when Berkshire Hathaway began amassing a large position in IBM. While some have characterized Buffett’s avoidance of the sector as his inability to understand technology, there may be a solid reason from a value investing perspective.

Back during the dot-com boom, Buffett identified two specific reasons why he generally avoids investing in the tech sector. The first reason is technology companies have limited the moat as a competitive advantage. The moat concept is a principle of Buffett’s style of value investing; it refers to the competitive advantage a company has in its business that allows it to generate long-term profits and continue growing market share versus competitors. The moat serves as a buffer of protection for continued profitability. The second reason is Buffett believes it is difficult to pick winners in the technology sector early on and build a position at reasonable prices. Even a general survey of companies from the dot-com boom shows how some companies that appear to be unstoppable are capable of falling apart. Thus, there appears to be some truth in what Buffett is saying.

Still, Buffett has not completely avoided technology companies. As of 2014, Berkshire Hathaway owned a nearly 8% interest in IBM. Buffett has been impressed with management’s turnaround of the company after facing bankruptcy 20 years ago. He also cited the company’s strong financial management and flexibility. Another strength is that IBM publicly published certain goals and road maps for the company’s future, many of which it was able to meet.

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