For anyone fascinated by Warren Buffett and his extraordinary investing career, Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life is a must read. At over 800 pages, it adds much detail to the scattering of facts that most people have about Buffett’s life.
Any attempt to summarize this book in a few paragraphs would be hopelessly superficial: he was young, then middle aged, and then old. So, I’ll focus on one aspect: the perception that he is a simple folksy person who doesn’t know much about newfangled things like computers and the internet.
In some ways this perception is accurate. He does tend to live simply, except for flying around in private jets to meet the rich and famous. He also has the ability to explain things simply and briefly. However, the work he puts into his investing is neither simple nor brief.
He has spent most of his life consuming and analyzing financial data. He is well-known for avoiding technology stocks. He explains that he doesn’t understand them and has to stay within his circle of competence. I think that many people misunderstand this explanation.
Given the time that Buffett puts into his investing work, it is inconceivable that he hasn’t examined technology companies. It may not be a big fraction of his time, but the total amount of analysis would be considered high for other people. It’s not so much that Buffett can’t understand what these companies do; it’s more that he can’t understand why any of these companies have any durable competitive advantage.
Maybe the reason he can’t understand this is because none of these companies really has a durable competitive advantage. It seems very likely that Coke will continue to earn profits for the next 20 years. But how confident can we be that the same will be true of Microsoft, Intel, IBM, Google, or any other technology company?
I’m not saying that technology companies are necessarily bad investments. They just don’t fit Buffett’s search for a margin of safety. Although Buffett’s public remarks contribute to the impression that he is a simple guy who doesn’t understand technology, the truth is more subtle.