Warren Buffett is notorious for avoiding investments in the technology sector. The legendary value investor steers clear of any business he doesn't acutely understand. Even at the height of the dotcom bubble, Buffett shied away from hot internet plays. When asked why, Buffett gave two primary reasons for his reluctance to invest in tech. This article takes a closer look at those reasons.
- Value investment guru Warren Buffett is known for his reluctance to invest in the technology sector.
- Buffett steered clear of dotcom stocks, even during the height of the tech boom in the late 1990s.
- Buffett believes most tech plays lack "economic moats," which are sets of competitive advantages allowing companies to prosper in the long run, including patented products and high barriers to entry for competitors.
- Buffett is also reluctant to invest in tech names because their valuations are inherently unstable.
- Buffett has made rare exceptions, taking positions in Apple and IBM.
The Economic Moat
First and foremost, technology companies lack economic moats, a term Buffett coined in a 1999 interview with Fortune to describe a collection of competitive advantages companies must have in order to remain profitable over the long haul. Economic moats may include patents on products that are essential to a particular service, as well as high barriers to entry. Without these advantages firmly in place, a company may struggle to grow its market share in a crowded field.
Buffett said the following:
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.
Hard to Pick Winners
The second reason is Buffett is leery of tech stocks is because he believes it's difficult to reliably pick winners. Furthermore, it's challenging to determine if valuations will hold strong—even for seemingly attractive stocks. Even thriving dotcom plays can suddenly experience sharply declining valuations. In other words, the tech landscape is intrinsically unpredictable and unstable.
Economic moats are named after the protective water barriers that protected medieval castles from attackers.
Despite his anti-tech posture, Buffett has made a few rare exceptions and invested in technology. But even in these situations, only the largest and most well-established companies caught his attention.
At the end of 2019, Buffett's investment company Berkshire Hathaway held 250.87 million shares of Apple, or 5.7% of the company, a stake valued at approximately $73.67 billion. This investment ostensibly replaced the company's 2011 tech sector investment when it bought 64 million shares of IBM stock, which were subsequently sold throughout 2017 and 2018.