Why Warren Buffett Keeps Buying IBM

After reading about the company for 50 years without making a move and shunning the entire tech sector for the majority of his career, Warren Buffettsuddenly picked up over $10 billion in shares of IBM (IBM) recently for his company, Berkshire Hathaway (BRK.A)(BRK.B). Buffett said in Nov. 2011 on NBC when he announced owning a stake in the company that “he would not be announcing it if he were not pretty much done” buying shares. But over the next three quarters he has found the stock attractive enough to continue buying, making it the second most-bought stock in his portfolio, and causing investors to ask why. 

Purchasing History

Buffett began to buy IBM shares in the first quarter of 2011, with 4,517,774 shares for a price of $159 on average. Purchasing became more aggressive in the second and third quarter when he cumulatively bought more than 82.2 million shares for $167 and $173 on average. From the fourth quarter of 2011, to the third quarter of 2012, he made smaller purchases at average prices ranging from $185 to $197. 

By the end of the third quarter, he owned a total of 67,517,896 shares, which equals 5.98% of IBM’s shares outstanding. It also made the company an 18.6% weighting in Buffett’s portfolio. 

Why He Likes It

On CNBC in Nov. 2011, when he revealed the stake, Buffett discussed several of the reasons he chose the company: 

1. Management – Five-year business objectives met

2. Moat

3. Requirements for good business met

4. Share repurchases

Management – Business Execution

Buffett praised IBM CEOs Lou Gerstner and Sam Palmisano in his 2011 annual letter for rescuing IBM from the brink of bankruptcy 20 years ago and making it into a successful business today. In addition to their “extraordinary” operational accomplishments, “their financial management was equally brilliant,” Buffett said, “particularly in recent years as the company’s financial flexibility improved. Indeed, I can think of no major company that has had better financial management, a skill that has materially increased the gains enjoyed by IBM shareholders.”

IBM consistently uses “Road Maps” to create targets for the future and measure progress in the present. Buffett was impressed that the company had met its benchmarks for a plan introduced in 2007 called the 2010 Road Map, and in 2011 proved it is on its way toward the goals set forth in the 2015 Road Map that replaced it. In 2010, the company surpassed its 2007 goal of $10 to $11 in earnings per share by reaching EPS of $11.52 in 2010. 

The company’s 2015 map focuses on the major drivers of its earnings per share performance: operating leverage, share repurchases and growth strategies. Specifically, according to the company’s 10-K, highlights of the metrics it is aiming for include: 

· $50 billion in share repurchases

· $20 billion in dividends

· $20 in EPS (non-GAAP)

· $100 billion in free cash flow

· $20 billion spending on acquisitions

· Software becoming about half of segment profit

· Growth priorities:

1. Growth markets unit accounting for 30 percent of segment revenue by 2015 (it was 21 percent in 2010)

2. Analytics growth to $16 billion in revenue

3. $7 billion in revenue from cloud computing

4. Smarter Planet solutions to grow to $10 billion in revenue

In 2011, the company had achieved the following progress toward its 2015 goals:

· $3.473 billion paid in dividends (9.32% increase year over year)

· $15.05 billion in share repurchases

· $13.44 in diluted operating (non-GAAP) earnings per share (a record)

· $16.6 billion in free cash flow (a record)

· $1.8 billion for five acquisitions in software

· Software and services was 44% of segment profit

· Growth Priorities:

1. Growth markets accounted for 22% of geographic revenue (an 11 increase from 2000)

2. 16% revenue growth year over year

3. 200% revenue growth year over year

4. 50% revenue growth year over year

IBM said 2011’s positive financial performance resulted from the transformation it began year ago to shift the business “to higher value areas of the market, improving productivity and investing in opportunities to drive future growth. These changes have contributed to nine consecutive years of double-digit earnings per share growth.”

Some of the changes involved in the transformation include exiting its PC and hard disk drive businesses in time for the dramatic slow-down that would take place in those industries. It also introduced new businesses like products, services, skills and technologies into the mix. 

The focus on growth and investment in innovation allowed the company to enter new markets and delve into new waves in the technology sphere such as business analytics and cloud computing. 

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Here’s Why Warren Buffett Keeps Buying Wells Fargo

To start this off right, I’d like to point out that Warren Buffett is extremely optimistic about the future of America. “Tomorrow’s always uncertain,” he mentions while on CNBC this morning. “But the future, the longer future, is always very certain. And that’s what you have to keep your eye on.”

It’s this very attitude that allows Mister Buffett to continue building astronomical stakes in businesses that he feels are worthy through the best of times and the worst of times. But how does Warren Buffett choose these particular companies to begin with? Let’s look at Wells Fargo, and find the evidence in this stock which he continues purchasing the most.

Wells Fargo
Wells Fargo has entered into Warren Buffett’s portfolio way back in the 1990s, and it is a great representation of his philosophy of long term investing. Plus, you can see a steady trend of continual buying of this stock since the first quarter of 2009. From that point until the present day, Berkshire Hathaway has bought 1 million 119,940,333 shares of Wells Fargo. This has brought the total position up to more than 422 million shares in all.

Warren Buffett made three very important moves in his portfolio during 2011, and Wells Fargo was one of them, along with Bank of America and IBM purchases. He provides shell holders several different reasons why this was important during his annual letter: “the banking industry is back on its feet, and Wells Fargo is prospering. Its earnings are strong, its assets solid and its capital at record levels.”

Wells Fargo is also extremely large – since it currently serves about one out of every three households in the United States of America from its 12,000 ATMs, it’s 9000 branches and their website. They are also prominent in 35 different countries. This company is also the first in market value of its common stock out of all of the United States banks, and the fourth in assets.

Even though Warren Buffett requires a high ROI from a bank, he also insists that the return on investment be gained in a conservative manner. This is great, because Wells Fargo has a very well maintained and controlled operating environment. It has excellent ground rules in place to manage credit risk, and they monitor their loan portfolio performance very closely. It also has set ranges for its interest rates and market risks in its liabilities and assets, while it is able to fuel growth with ample capital levels and liquidity.

In addition, Wells Fargo will continue to remove nonperforming loans from its assets. During the third quarter of 2012, loans that were 90 days past due or more totaled in the amount of $1.5 billion. This is down a half $1 billion from the $2 billion at the end of 2011.

Some Sales Tips From Warren Buffett

When the Oracle of Omaha puts together a deal, it usually happens fast, just like the deal he made for purchasing Nebraska Furniture Mart. The 89-year-old Rose Blumkin who owns and founded the company told Warren Buffett that she no longer wanted a fight with her children in regards to running the company, and she also wanted to slow down. “Rose, I’ve always told you that when you are ready to sell, I would buy. What’s your price?” Replied Buffett.

Within an hour’s time, he and Rose shook hands on the deal and he also gave her a check that he wrote for $55 million, as she requested. There were no lawyers, no fuss and no muss – and both parties got what they wanted in an excellent deal.

Since Warren Buffett is so successful at making deals, to authors by the name of Henry DeVries and Tom Searcy thought it would be a good idea to share Warren’s Buffett’s approach would salespeople. “If you want to know about making big deals, Warren is still the guy to watch,” they shared with us in their book How to Close a Deal like Warren Buffett.

The main thing is you need to know the other person’s money. Warren Buffett understands how a company makes money, and he also knows how a company will spend it. Salespeople are often too busy trying to sell their products and services, but they forget to focus on helping improve the numbers of any company they are pursuing.

Tom Searcy and Henry DeVries recommended process that they named “the triples” which should help improve the salesmanship of your service or product.

Triple #1 – The Three Problems of Your Prospect
The first thing you need to do is find out and write down the three biggest issues that your prospect will face. Then you need to determine how your service or product is going to help them. This puts you in alignment with the interests of your buyer.

Triple #2 – The Three-Part Solution
Now you have to carefully think about how you are going to be able to solve their three problems. As you write out a plan to present your client, try and avoid any type of generic language like using the words “better,” “improved,” and “big difference” because this language really isn’t all that compelling. You need to provide them with specific numbers and mentioned specific points of pressure in which you focus so that you can prove you’ll be able to help them achieve a new outcome that’s desirable.

Can You Really Invest Like Warren Buffett?

(Reuters) - For as long as I can remember, the investment maxim that most evokes a mix of adulation and performance anxiety is "Invest like Warren Buffett."

How can mere mortals emulate an investing deity? In truth, most of us will never come close to "the Sage of Omaha." He's done all the things a stellar investor should do: He buys when there's blood in the street, finds solid companies at great prices and keeps them "forever." Lacking Buffett's phenomenal verve and mettle, though, most of us won't do this. But that doesn't mean we're doomed to failure.

Fortunately, the multibillionaire chairman and chief executive of Berkshire Hathaway Inc. has been generous with his wisdom and two recent books published in November compile and analyze it elegantly: "Tap Dancing to Work" by Carol Loomis, a long-time Fortune writer and Buffett friend and "Think, Act and Invest Like Warren Buffet" by Larry Swedroe, principal and director of research for Buckingham Asset Management, LLC.

What key advice resonates most?

1. Stick with index funds
Although you probably won't get the returns of Berkshire Hathaway with index funds, you can still get pretty close to market returns without having to be an oracle yourself.

If individuals "aren't going to be an active investor - and very few should try to do that - then they should just stay with index funds. Any low-cost index fund," Loomis quotes Buffett as advising. "And they should buy it over time. They're not going to pick the right place and time."

2. Don't play Buffett's game
Although Buffett is often able to time his purchases brilliantly, chances are, you won't. In fact, research shows that most individual investors' records on timing the market successfully are dismal.

One of the most important Buffett shibboleths is acknowledging that you won't be able to predict the market. If you take his advice on index funds and stay the course, "the only way an investor can get killed is by high fees or by trying to outsmart the market", he said in 2008.

No big secret here. When you find good stocks, buy them at low prices and hold them. For those buying individual stocks, this means dollar-cost averaging - fixed investments every month - and reinvesting the dividends. Most large companies offer dividend reinvestment plans for this purpose.

Swedroe reinforces Buffett's advice by citing academic studies that actively managed mutual funds show "no evidence of the ability to persistently generate outperformance beyond what would be randomly expected". So a passive strategy can work for most investors.

Most individuals also get scorched on transactions and trading costs.