Until 2011, Warren Buffett (Trades, Portfolio) famously avoided investing in the tech sector.
Up until that point, every time he was asked about investing in tech stocks, Buffett replied that he did not understand the sector and therefore wanted to avoid these investments entirely.
However, in 2011, Buffett made his first sizeable tech-sector bet: he bought shares of International Business Machines Corp. (IBM, Financial).
Buffett and IBM
This investment turned out to be a bit of a disaster for Buffett and Berkshire Hathaway's (BRK.A, Financial) (BRK.B, Financial) investors.
According to my calculations, between the first quarter of 2011, when Buffett started buying IBM, and his final purchase in 2016, Berkshire acquired 81,232,000 shares at an average price of $173.6 per share.
According to Securities and Exchange Commission filings, he disposed of this position at prices between $174 and $153 throughout 2017. Including dividend income received during the period, I calculated Buffett earned a total return of 5% over the whole holding period.
Since getting rid of IBM, Buffett has snapped up a range of other tech bets, including Apple (AAPL, Financial), which is currently Berkshire's largest stock holding.
What's interesting is that Buffett was relatively good at predicting online trends as far back as the late '90s. When asked about the impact the internet might have on Berkshire's businesses at the 1999 annual meeting of shareholders, the Oracle of Omaha replied:
"The internet is going to have an important impact on retailing. It will have a huge impact on some forms of retailing. Change them and maybe revolutionize them...there are a number of retailing operations that we think are threatened. And we do not think that's the case in furniture retailing...
You've seen other forms of retailing where you're already starting to see some inroads being made. But it's just started. The internet is going to be a huge force in many areas. But it'll certainly be a huge force in retailing.
Now, it may benefit us in certain areas. I would expect the internet to benefit Borsheims in a very big way...Now, you might say in jewelry retailing, you know, with millions of things that you can click onto, 10 years from now, you know, who is going to be important in terms of online retailing of jewelry?
I would argue that two firms have an enormous advantage going in. I would argue that Tiffany has such an advantage. We don't own any Tiffany. But I would say that because of their name — brand names are going to mean very, very much when you have literally, you know, thousands and thousands of choices."
Buffett then went on to say that Geico would also likely benefit massively from the internet as it would be able to reach many more customers.
Predicting trends
It's fascinating that Buffett was predicting these trends 20 years ago, and they've since turned out to be mostly correct.
The internet has strengthened certain brands while hollowing out other retailers which did not have a competitive advantage.
This knowledge didn't help Buffett choose internet-focused businesses, but it did help him stay away from companies that might have been disrupted by the internet. So, while Buffett has been saying he does not understand the tech sector, the reality is that he does understand it as it relates to the functions of retailers, and he's used this knowledge to protect Berkshire's portfolio from disruption.
His understanding of the online world is pretty similar to his understanding of the rest of the investment world. A strong brand is required to be successful in any business arena and stand out amongst the thousands of other businesses all competing for customers.
Buffett not only predicted the disruption the internet would bring to retailers, he also warned about the impact on real estate in 1999:
"If you substitute 5% of the retail volume via the internet, where real estate is essentially free, you know, you can have a store in every town in the world through the internet without having any rental expense."
Disclosure: The author owns shares of Berkshire Hathaway.
Read more here:
- Why It Is Important to Follow Charlie Munger and Break Down Your Ideas
- Buffett and Li Lu: Using a Punch Card to Beat the Market
- What We Can Learn From Michael Burry's Investment Style
 Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
