Why Warren Buffett Bought IBM

BECKY: Wait. Wait a second, IBM is a tech company, and you don’t buy tech companies. Why have you been buying IBM?

BUFFETT: Well, I didn’t buy railroad companies for a long time either. I—it’s interesting. I have probably—I’ve had two interesting incidents in my life connected with IBM, but I’ve probably read the annual report of IBM every year for 50 years. And this year it came in on a Saturday, and I read it. And I got a different slant on it, which I then proceeded to do some checking out of. But I just—I read it through a different lens.

JOE: What’s the different lens? What’s the different slant?

BUFFETT: Well, just like—just like I did with—just like I did with the railroads. And incidentally, the company laid it out extremely well. I don’t think there’s any company that’s—that I can think of, big company, that’s done a better job of laying out where they’re going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they’ve laid out another road map for 2015. They’ve done an incredible job. First, Lou Gerstner, when he came in, he saved the company from bankruptcy. I read his book a second time, actually, after I read the annual report. You know, “Who Said Elephants Can’t Dance?” I read it when it first came out and then I went back and reread it. And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things. And also, I read very carefully what Sam Palmisano has said about where they’re going to be and he’s delivered big time on his—on his—on his first venture along those lines.

JOE: Incredible.

BUFFETT: But anyway, we bought about 64 million shares and it cost us about $10.6 or 7 billion.

BECKY: How much of the—how much of the company do you own?

BUFFETT: We own about 5 1/2 percent of the company.


BUFFETT: The other thing I would say about IBM, too, is that a few years back, they had 240 million options outstanding. Now they probably are down to about 30 million. They treat their stock with reverence which I find is unusual among big companies. Or they really—they are thinking about the shareholder.

JOE: But you’re buying this, Warren, you’re buying this on a high, which is really—most people think you got to buy things when they’re down. They look at 52-week high and lows, say, oh, I’m not going to buy it, it’s on a high, but stocks that are on highs hit new highs. I don’t know how many Dow components are at all-time highs, but IBM is one, maybe McDonald’s.


JOE: But you’re buying this after it’s really broken out the new highs this year, new all-time highs.

BUFFETT: We bought—we bought railroads on highs, too.

JOE: Yeah? They sent it—you know, stocks at new lows that, you know, can hit new lows where they…

BUFFETT: Right. I bought control of GEICO at its all-time high.

JOE: Have you talked to Sam or to—or to Ginni, the new CEO?

BUFFETT: No, I never talked to Sam. I’ve got this—I competed with IBM 50 years ago, believe it or not. I was chairman of a company, had, and I testified for IBM in 1980 when the government was attacking about on the antitrust situation. But I’ve never—I have not talked to Sam or now Ginni.

JOE: And you have a view on the…

BECKY: Wait a second. The company’s finding out right now that you own 5 percent of the company by…

BUFFETT: Yeah, 5 1/5, yeah, yeah.

BECKY: …5 1/2 percent by you talking about this right now?

BUFFETT: Yeah, right, right. I have not talked to the company.

BECKY: We’ve been watching the stock and it’s been—it’s been jumping on this. It’s up about 1 percent right now. I’ve seen it up as much as 1.5 percent. Would you continue to buy more?

BUFFETT: Yeah. No, I wouldn’t be talking about it if we weren’t pretty much done. I set out to buy about $10 billion worth and we bought a little more than that. We started in March. I got the annual report I think very early in March and then I did some work and then we started—we bought a little in the first quarter and more in the second and third quarter. And we bought some in the fourth quarter. We bought some in the—our report that we will file tonight will not show the whole 64 million. Probably show 57 million or something like that because we bought some in October.

BECKY: Because you bought more since this quarter. So, how do you keep that hidden that you’re buying that much stock over that long of a period of time?

BUFFETT: I avoid talking to you.

BECKY: No, really, how do you—how do you hide that?

BUFFETT: Well, it’s important to us that we do. And what’s very interesting is here in a—what is it, seven-month period or something like that, eight months, maybe, we buy 5 1/2 percent of the company. At the same time, the company bought pretty much an equal amount. So here you have 11 percent of a huge company change hands and all kinds of people who’ve owned IBM forever. I mean, it’s an old—it’s an old company, it’s a big company, it’s amazing to me how much turnover there is in stocks, which means that, you know, investment has kind of gone by the boards and people just basically look at stocks as things to speculate in. But if you can buy 11 percent of a wonderful company in eight months or have that much trade just the two buyers without—of course, who knows how much we affected the price. We try not to affect the price. We usually buy a given percentage of what trades every day.

BECKY: You—this is the second time in the last several months that you’ve told us about a purchase you’ve made of a company you’ve been the reading annual reports for years.


BECKY: Bank of America was the first.

BUFFETT: Right. I read those for 50 years.

BECKY: Read those for 50 years and you’re looking at companies a little differently. You never really bought tech stocks before. You had always said you don’t understand technology stocks.


BECKY: Does this mean that this is a new era and you’re going to be looking at a lot of tech stocks and I guess chief among them, would you consider Microsoft?

BUFFETT: I—well, Microsoft is a special case because Microsoft is off bounds to us because of my friendship with Bill and if we spent seven months buying Microsoft stock and during that period they announced a repurchase or increase of the dividend or an acquisition, people would say you’ve been getting inside information from Bill. So I have told Todd and Ted and I apply it myself that we do not ever buy a share of Microsoft. I think Microsoft is attractive but that—but we will never buy Microsoft. It—people would just assume I knew something and I don’t, but they would assume it and they would assume Bill talked to me and he wouldn’t have. But there’s no sense putting yourself in that position.


BUFFETT: I can say I’ve never met Sam but I can’t say I’ve never met Bill.

BECKY: But does this change the rules of the game that you would actually look at technology stocks now?

BUFFETT: I look at everything but most things I decide I can’t figure out their future.

JOE: Warren…

BUFFETT: Their economic future.

JOE: This is more of a…

BUFFETT: And I decided…

JOE: Do you look at this more of a—almost as a service company now rather than a hardware/software company, though?

BUFFETT: Yeah. It…

JOE: It’s almost not…


JOE: It’s not high-tech anymore, almost.

BUFFETT: Yeah, it’s a—it’s a company that helps IT departments do their job better.

JOE: Yeah.

BUFFETT: And if you think about it, I don’t want to push the analogy too far because it could be pushed too far. But, you know, we work with a given auditor, we work with a given law firm. That doesn’t mean we’re happy every minute of every day about everything they do but it is a big deal for a big company to change auditors, change law firms. The IT departments, I—you know, we’ve got dozens and dozens of IT departments at Berkshire. I don’t know how they run. I mean, but we went around and asked them and you find out that there’s—they very much get working hand in glove with suppliers. And that doesn’t—that doesn’t mean things won’t change but it does mean that there’s a lot of continuity to it. And then I think as you go around the world, IBM, in the most recent quarter, reported double-digit gains in 40 countries. Now, I would imagine if you’re in some country around the world and you’re developing your IT department, you’re probably going to feel more comfortable with IBM than with many companies.

JOE: Well…

BUFFETT: I said I competed with IBM 50 years ago.

BECKY: Yeah.

BUFFETT: We actually started—I was chairman of the board, believe it or not, of a tech company one time, and computers used to use zillions of tab cards and IBM in 1956 or ’7 signed a consent decree and they had to get rid of half the capacity. So two friends of mine, one was a lawyer and one was an insurance agent, read the newspaper and they went into the tab card business and I went in with them. And we did a terrific job and built a nice little company. But every time we went into a place to sell them our tab cards at a lower price and with better delivery than IBM, the purchasing agent would say, nobody’s ever gotten fired from buying—by buying from IBM. I mean, we probably heard that about a thousand times. That’s not as strong now, but I imagine as you go around the world that there are—there’s a fair amount of presumption in many places that if you’re with IBM, that you stick with them, and that if you haven’t been with anybody, you’re developing things, that you certainly give them a fair shot at the business. And I think they’ve done a terrific job of developing that. And if you read their reports—if you read what they wrote five years ago they were going to do and the next five years, they’ve done it, you know, and now they tell you what they’re going to do in the next five years, and as I say, they have this terrific reverence for the shareholder, which I think is very, very important.

And I want to give full credit, incidentally, to Lou Gerstner because when he came in, I was a friend of Tom Murphy’s and Jim Burke’s, and they were on the search committee to find a solution when IBM was almost broke in 1992, and everybody thought they were going pretty far afield when they went to Lou Gerstner. And look what…

JOE: I know, a McKinsey guy. That’s like the most successful McKinsey guy in history, I think.


JOE: I try to think of one other one and I can’t. Leo Mullin, I can’t think of…

BUFFETT: Well, you don’t have to think of—you don’t have to think of another one, Joe. And if you read his book, you know, “Who Said Elephants Can’t Dance?” it’s a great management book. Like I said, I read it twice.

JOE: I would think, Warren, that HP is in a similar sort of situation in terms of being a service company, and if once you’re in with HP you might stay with them. Oracle is trying to do the same. Would this open up your eyes and the potential of looking—I think Becky was trying to get out that whether this is actually going to be where you start to embrace technology more, or is IBM that unique vs. because there’s…


JOE: …three major alliances with these guys trying to service all the IT needs and even Dell or something. But IBM is unique, you think?

BUFFETT: Sure. Well, it isn’t that but it’s—if you compare it to HP or—I wasn’t smart enough to do it when Lou first came in. In other words, I—everybody says they’re going to do it. I was smart enough, if you want to call that, we’ll find out whether it’s smart or not, but to recognize that after it’s been done, and then way too late. I was—it was the same way with the railroads. I mean, I—something I should have spotted years earlier, you know, finally be—just hit me between the eyes and it was there.

ANDREW: What was it that you read that…

BUFFETT: But I had this…

ANDREW: What was it when you’re reading the report? I mean, most investors who are trying to invest like you, they’re reading annual—what is it in the report that you said, ah, I missed it?

BUFFETT: Well, it was—it was a lot of interesting facts and you know, I recommend you read the report, you know. And I didn’t look at the pictures and I’m not sure there were any pictures. I kind of like that, too. But there were—there were lots of things in that report but the truth is, there were probably lots of things in the report a year earlier or two years earlier that you say, why didn’t I spot it then? And I think it was Keynes or somebody that said that the problem is not the new ideas, it’s escaping from old ones. And, you know, I’ve had that many times in my life and I plead guilty to it.

BECKY: You know, IBM is another Dow component, too, and you’ve been making some major purchases of Dow components. Is this another indication of the change in the investing style? You’ve got so much cash on hand, you have to look for big, big purchases and that means looking at big, big companies.

BUFFETT: Well, but it also means that some great big strong American companies look very cheap compared to investment alternatives. I mean, in the end, you know, you’re sitting with money in your pocket. Do you leave it in your pocket, you get zero on, do you put it in a money market fund, you still get zero on it, do you buy 10-year Treasuries and get 2 percent, or do you buy American businesses that are earning very good money, that have high returns on equity, have high returns on incremental capital, are buying in their stock at a rapid rate so that your ownership in the business increases significantly? I love all those things. Now, you measure one vs. the other. But in the end, you have—you know, you do something. Doing nothing is doing something.

BECKY: You have been buying a lot of stock and you made that point. I think you told Charlie Rose earlier this year, September, a day in early September you bought more than you had at any day to that point.

BUFFETT: Yeah. I think I bought $200 million worth that day. That was practically all IBM, maybe a little Wells Fargo.

BECKY: Are you still buying equities like that? If it’s—you said you’re about done with IBM but are you still buying other stocks like that?

BUFFETT: We bought—we bought another stock last week.

BECKY: A new one?

BUFFETT: Not a new one last week.

BECKY: You added to a position of another stock last week?

BUFFETT: Right, right.

JOE: All right, what’s a clue?

BECKY: A stock we know about?

JOE: What’s the clue?


JOE: (Unintelligible)

BUFFETT: I’ve given you one. I mean…

JOE: (Unintelligible)

BUFFETT: No, it’ll show up in our—we bought more Wells Fargo just month after month, year after year. I mean, it’s a good business and I like the price and, you know, doesn’t mean it’s going to go up or—I—the stocks I’m talking about have got just as much chance of going down tomorrow as up tomorrow. But we like the businesses over a five or 10 years stretch.

JOE: Warren, it’s…


JOE: …interesting with IBM—sorry, Beck—it’s interesting with IBM how many times I’ve read that their top-line growth, they haven’t had any for 10 years, and the only way they get earnings per share to go up, they’re buying back stock so they’re reducing the number of shares outstanding. So EPS goes up and it’s all financial sleight of hand. They’ve moved some facilities offshore so they’ve got a lower tax rate. Every time they beat expectations or had higher earnings, I always saw the analysts say, yeah, but it was because there’s fewer shares outstanding and because of a lower tax rate. It was—and it’s amazing that after all that, here we are with you at this very bullish case.

BUFFETT: Yeah. And, Joe, there’s nothing wrong with fewer shares outstanding.

JOE: No.

BUFFETT: If they get it down to where there’s 64 million shares outstanding, I’ll be very happy.

JOE: Yeah, and you got a 3 percent yield. That’s 50 percent higher than you got on the 10 year plus upside with the stock. I see it. But that was a—that was a crummy clue, Harold. If you had given us HAL, I’m still—not one emailer got it, by the way. But if I—if I—if I had thought HAL, I think I would have gotten it. I’m hurt that I didn’t, you know, because we talk about that movie all the time.

BUFFETT: I was going to say, did you see the movie?

JOE: Oh, of course.

BUFFETT: Did you—yeah.

JOE: When Watson was on “Jeopardy!” I made all kinds of comments…

ANDREW: Right.

JOE: …about how this evil Watson is eventually going to be like “Terminator.” It’s going to take over—and IBM got mad because I was saying that Watson is going to be the rise of the machines from HAL. And we play HAL sound and all this stuff. So I’m a little—I take it a little personally that I was unable to come up with that.

BUFFETT: Yeah, but you’ll zing me some other way, don’t worry.

BECKY: You know, Warren, you said that you’ve been buying big American companies and that’s the place to go. There was a report recently from some European analysts saying come to Europe, we’ve got some great deals over here, too. Have you been looking abroad and at Europe specifically?

BUFFETT: Sure. I look around the world but we have to look at big things by there—just because to move the needle at Berkshire we need big investments. But I think there’s some very attractive stocks that are outside the United States. But I happened to like IBM and Wells better in the third quarter when we were buying them. But there are attractive stocks outside the United States. We all—you know, this is a matter of record. But we own and bought a little, because they announced it, Tesco, for example.

BECKY: Right.

BUFFETT: But there’s lots—there are a lot of attractive stocks. I can’t think of a lot of attractive bonds and I certainly can’t think of a lot of attractive currencies to stick in my pocket.

BECKY: All right. Wow, you want to tell us any more or is that all you…


JOE: I want another clue.


JOE: I want another clue.

BUFFETT: I shouldn’t get up this early in the morning.

BECKY: Yeah, no. We like the—we like the quiz, we like the games.

JOE: I want another clue.

BECKY: And we want—we want to feel smart instead of having to be told this stuff.

JOE: Yeah.

BECKY: I think we have to take a break very quickly.


JOE: I don’t think Watson would have gotten it, Becky, I really don’t. I think you could have plugged this into Watson and there wasn’t enough. Harold—Harry—Harold could be Harry. It’s not necessarily HAL even. I mean, this is—I’m—I don’t know.

BECKY: We’re trying to make ourselves feel better for not figuring it out.

BUFFETT: I will tell you one very smart thing that Thomas Watson Sr. said. I knew Thomas Watson Jr. just a little bit. Tom Watson Sr., this applies to stocks. He said, “I’m no genius but I’m smart in spots and I stay around those spots.” And that’s terrific advice.

CNBC: Warren Buffett Explains Why He Bought $10.7B of IBM Stock,14 Nov 2011