Greetings from San Francisco! ๐
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Last week, we discussed the rise of the โMagnificent 7.โ
Big tech has emerged as a formidable force in the past 15 years. From digitization to cloud migration to artificial intelligence, they represent what is changing in our society.
Investors who favor tech companies tend to seek exposure to disruptive innovation and their potential to challenge the status quo. They offer new opportunities and market expansion.
Conversely, some investors place their bets firmly on the status quo. People who invest in things that are unlikely to change. They want to find already successful businesses and bet their success wonโt be disrupted anytime soon.
Warren Buffett and his partner Charlie Munger are the ultimate representation of investors betting on the status quo. Their portfolio at Berkshire Hathaway has been historically focused on the defensive category:
๐ Railroad (BNSF Railway).
๐ฆ Big banks (BofA, Citigroup).
๐ก๏ธ Insurance (Ally, Aon, Geico).
๐ฅค Food & Beverage (Coca-Cola, Seeโs)
โฝ Energy (Chevron, Occidental Petroleum).
๐ณ Financial services (Amex, Visa, Mastercard).
Why? Historically known for his preference for value investing, Buffett focuses on companies with consistent revenue streams and strong economic moats that make them unlikely to be disrupted.
He uses a basketball analogy:
โI'm like a basketball coach, and If I walk down the street, the first thing I'm looking for is seven footers. Once I find the seven-footer, I still gotta figure out whether he is coordinated or not and whether I can keep him in school and all those things.
But if some guy comes up and says, you know, he's 5'6," and he says, wait until you see me handle the ball and all that. I'm not looking for those guys.โ
Buffett wants to be extremely certain about the competitive advantage of the business, the integrity and ability of management, and have a good grasp of future cash flows. Itโs not that he's averse to tech, but he finds it more susceptible to disruption and believes it offers less visibility on future earnings.
Apple was more than half of Buffettโs portfolio at Berkshire at the end of June. While it might seem like a deviation from his strategy, we need to look closer (more on that in a second).