Warren Buffett’s long march to investment immortality started very differently from how it is ending. The Oracle of Omaha bought his first stock in 1942. He is now universally considered the greatest value investor of all time. And yet, one of his last acts as CEO was to buy Alphabet, one of the ultimate growth stocks.
Some found that decision puzzling, but those who look closer will see in that decision a testament to Buffett’s growth as an investor over the decades.
After 60 years as the CEO of Berkshire Hathaway, the longest-ever tenure of a leader of an S&P 500 company, Buffett is retiring this month. He will then turn the reins over to Greg Abel, his handpicked successor. Prior to his departure, he bought 17.85 million shares of Google’s parent company, worth $4.3 billion. The trade, revealed in filings in November, surprised his most ardent followers: Buffett long maintained an aversion to technology companies, for which he feigns a lack of proper understanding.
Buffett’s success was built on an impressive early track record of buying cheap stocks with limited regard to the quality of the underlying business. That strategy worked beautifully, until it didn’t. To stay successful over long periods of time, investors must evolve their thinking to adapt to constantly changing market environments and set of circumstances. Including Buffett.
Charlie Munger, Buffett’s late investment partner, is primarily responsible for guiding his younger collaborator through the process of evolving his investment strategy. Munger encouraged Buffett to focus more on stocks that still had value at their core but that represented higher-quality companies with great management. This shift can be seen in Berkshire toward portfolio companies like American Express, Coca-Cola, and Apple in recent decades.
If you listened closely over the years, you could hear the echoes of Munger nudging Buffett to invest in technology stocks. The topic of Google and the company’s ongoing disintermediation of the advertising business arose at Berkshire’s annual meeting in 2019. Buffett commented that Geico was gladly paying $10 per click, for advertising that was working very well, which had a marginal cost to Google of exactly zero.
While Buffett deliberated tech stocks, Munger was eating his own cooking and personally investing in Chinese tech companies, such as Alibaba Group, an e-commerce powerhouse, and BYD, an electric-car company. Munger claimed the latter as his best investment ever.
Berkshire largely missing tech, the best-performing sector over the past 40 years, is an omission that Buffett still talks about to this day. That Berkshire’s annualized return for the past 60 years has been about 20%—roughly twice the return of the S&P 500—without technology stocks is astonishing.
Buffett’s first job was delivering newspapers for the Washington Post in the early 1940s. As he walked through the streets of Washington delivering the morning paper, imagine how fantastical the idea of a company like Google would have been: news and information sent through the ether to computers, phones, and robots capable of replacing humans in many aspects of life.
These were more analog times. Before he set out on his route, Buffett paid a distributor for the papers upfront in cash. He assumed the risk of whether customers would pay him back.
Buffett would later invert that payment model, in what became the defining pursuit of his investment career—capitalizing on the insurance industry. Customers pay premiums upfront, producing float, which, if invested correctly by a skilled capital allocator like Buffett, is a magical asset akin to the bank paying you to borrow money. At the end of the most recent quarter, Berkshire Hathaway reported float of $176 billion, an all-time record.
Buffett still loves the newspaper business. Yet he has adapted to the reality of markets. The objective of the value investor like Buffett is to make money over the long term, but the manner in which this is accomplished is also in perpetual motion. It is a quantitative and qualitative analytical work in progress.
In his Thanksgiving Day letter to Berkshire shareholders this year, Buffett touched on the importance of being open to a change in one’s thinking. He offered this advice: “Don’t beat yourself up over past mistakes—learn at least a little from them and move on. It is never too late to improve. Get the right heroes and copy them.”
Munger was Buffett’s hero, long before Berkshire’s recent purchase of Alphabet. Buffett believes in Alphabet and the amazing technological advancements the company is developing. But one can’t help but think the investment is a metaphor for Buffett and Munger’s unique business partnership and friendship that spanned more than half of a century.
Let’s hope that the technologies that Alphabet and other leading companies are developing don’t replace what makes the world go around: human relationships full of friendship, loyalty, and love. Time will tell. Buffett’s epic posthumous hat tip to Munger is a poignant act from an extraordinary man, one that will forever be remembered as the swan song of a legend.