buffett's peekaboo with technology

Warren Buffett has always said that he does not understand technology, and that's why he does not invest in that business. More famously he has mentioned that if anyone puts a value to an internet company, he would flunk. Well, times change, don't they? 

Buffett has invested in Intel and IBM in the past. And now he is too enthusiastic about Apple. Recently, Berkshire Hathaway bought a 3.5% ownership in the Indian technology company Paytm for $350 m. He had his standard response: he was not involved. There was a similar response when the company first purchased Apple shares. May be Buffett is slightly embarrassed to have backed out of his own cooking. After all, he is human too. In fact it is time, the world acknowledges that he is all too human. 

Buffett's justification these days for buying Apple is that iPhone as a product is sticky, and therefore it is quite underpriced. He never realized Microsoft's windows and office have been the stickiest for a long time, and he could not figure this out despite Bill Gates being his close buddy. He said in the past that he does not understand technology, therefore Microsoft. I don't see any change in facts in the past, now, and the future regarding the internet and technology businesses. Even Keynes would have noted that no facts changed, and therefore, there was no need to change mind. Yet, Buffett did. It is always difficult to predict the future of technology. You can't even do it with a broad brush. If he is playing peekaboo, well, we got him.

I reckon the real reason Buffett did not buy Microsoft in the past, and is buying into technology now is this: Earlier he had plenty of other undervalued businesses to buy, and there was no need to look at the technology firms. His cash was fully allocated. Technology stocks were for the dumb. Today the story is different. There aren't too many businesses he can buy considering the size of his capital. This is troubling him, and he is under pressure to stand up to his reputation. He doesn't want to distribute cash. How can he continue to earn excess returns? Voila, let's enter the uncharted territory: the technology, and let's make a validating story. Suddenly the technology stocks are for the smart. 

I have seen different versions of Buffett over the years. He is a very smart man is indeed an understatement. His investment records show what he is capable of. But if he feels that he can tell a story that people will soon forget to hear a different version of it, he is mistaken. I have been his admirer, no doubts about it. But I know what to pick, and what not. He has been making and unwinding stories in the past at least on four occasions: In 1955 when he wanted to retire at 25. In 1969 when he closed the partnerships saying stocks were too expensive, and sighted personal goals as incentives. Immediately thereafter when he took control over Berkshire Hathaway and made it into an investment holding company. And the fourth time he made his story believable was when he started buying technology companies. Oh yeah, he has also been advertising for soda and sugar; people who completely surrender to this thoughts believe that coke is actually good for health. When you are a shareholder of coke, you will find incentives to promote it. Well, to each his own as they say. 

As per this report, Paytm had revenues of Rs.8.28 b (2017) compared to Rs.5.97 b (2016), and incurred losses of about Rs.12 b in each of the years before exceptional items. As a technology firm operating in digital payments and retail business, it will continue have heavy expenditure on research, technology, and advertising. It also has a solid backing from Softbank and Alibaba. When it raised $1.5 b from Softbank in May 2017, Paytm had an implied valuation of $7 b. Now Berkshire's investment puts a value of $10 b for the firm. 

Paytm was founded by a smart person, and probably has the ingredients to scale up, and do well. It has also got the funding available from the global investors. But how much the firm is worth as of now, or how much it will be in the next decade or so is anybody's guess. Should we say, Buffett flunked his own test by implying a value on the technology business?