Warren Buffett has often said 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 dotcom boom, Buffett shied away from buying stock in hot internet companies. While some have characterized Buffett’s avoidance of the technology sector as his inability to understand technology, there may be a solid reason from a value investing perspective.
The Economic Moat
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 economic 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.
Hard to Pick a Winner
The second reason is Buffett believes it is difficult to pick winners in the technology sector early on and build a position at a reasonable price. Even a general survey of companies from the dotcom boom shows how some that seem 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 May 2018, Berkshire Hathaway owned 165.3 million shares in Apple, valued around $42.5 billion. This investment seemingly replaces the company's 2011 investment in the tech sector when it bought 64 million shares of IBM stock, which were subsequently sold in 2017 and 2018.
(For related reading, see "How Warren Buffett Made Berkshire Hathaway.")