Buffett shunned technology stocks in his early years, and the rule was not broken until later in life. Moreover, Apple Inc is not Buffett's first technology stock to invest in. In 2011, Buffett abandoned the consistent principle of "not investing in technology stocks" and invested heavily in IBM and became the largest shareholder. Later, Buffett briefly invested in Intel Corp. Buffett's Berkshire Hathaway began to build positions in Apple Inc shares in 2016 and has been increasing its holdings ever since.

On Aug. 8, Buffett's company Berkshire Hathaway announced its second-quarter results. Data show that as of the second quarter of 2020, 71% of Berkshire Hathaway's stock investments were concentrated in four companies, including $91.5 billion in Apple Inc shares, $22.6 billion in Bank of America Corporation shares, $17.9 billion in Coca-Cola Company shares and $14.4 billion in American Express Co shares.

Apple Inc's share price has risen 52.17% from the beginning of the year to Aug. 7, and Buffett has made $37 billion on Apple Inc so far this year. Moreover, for the first time in history, Buffett's technology stocks surpassed finance to become the largest weight, accounting for 38.24%, followed by financial stocks with 35.22%.

However, there is no need for investors to regret missing Apple Inc, but should learn from Buffett's self-breaking investment wisdom in his later years. Buffett invests in technology stocks, there is also a gradual transformation and learning process, and combines his previous moat theory and financial stock investment experience. In this process, Buffett broke through the self-shackles of investment thought step by step, and combined with new things, realized the optimization and upgrading of the investment system.

The logic behind Buffett's investment in technology stocks

Before analyzing Buffett's technology stock investment, it is necessary to understand Buffett's investment thought system, and the idea behind his technology stock investment still belongs to this system.On the face of it, technology stocks are sectors that Buffett is not good at, but in fact Buffett only needs to grasp the nature of technology stocks. Once a technology stock meets Buffett's evaluation system and enters a reasonable buying point, he will attack quickly.

Buffett's investment system has evolved all the way, and it is not rigorous to call him a "value investor". Buffett's investment thought system originated from the value investment in the Graham period, and then absorbed Fisher's growth stock idea and improved it; it seems to be more appropriate to call it "value growth stock" investment.

In the early days, Buffett followed Graham's principle of investing in value stocks, that is, buying when the market price of the stock is below book value, and hoping to return to the value and get the spread. In Graham's time, the stock market experienced the impact of the Great Depression, and in many cases the market price was below book value. In other words, if you buy this broken net stock (provided the financial analysis is correct), you might as well hope that the company will go bankrupt as soon as possible, so that you can earn a steady price difference without worrying about the level of management at all.

Entering the era of booming US stocks in the 1950s and 1960s, there were few opportunities for such cheap stocks. During this period, growing stocks began to be elated. Buffett's money under management is getting bigger and bigger, and he is increasingly unable to invest in troubled reversals, cyclical stocks and cheap cigarette butts, because the impact costs are so high that they need to be held for as long as possible. So from growth stock investment master Fisher, he gradually developed the investment concept of large-scale high-quality growth stocks with a moat of safety.

For long-term investors like Buffett, the following are crucial:

1. The intrinsic value of stocks and the interest rate of long-term treasury bonds change in reverse.

2. The higher the future growth rate of corporate profits, the higher the intrinsic value of stocks, and vice versa.

3. The lower the uncertainty of corporate earnings growth, the higher the intrinsic value of stocks, and vice versa.

4. Buy and hold for a long time when the market price of the stock is lower than its intrinsic value.

The first is easy to understand that an increase in risk-free interest rates will reduce the attractiveness of the relative returns of all risky assets. The second point means that assets that continue to earn cash returns in the future are more attractive, even if the returns are lower now. The third point is the most crucial: the guarantee of sustained profit growth is the so-called moat. The moat ensures high profit margins and is the key to investing in value growth stocks. This can not be seen in the corporate financial report.

The core of Buffett's investment methodology is to find out the stocks whose profit growth is relatively certain in the long term, use the interest rate of long-term treasury bonds and the growth rate of free cash flow to calculate the intrinsic value of stocks, and find out a margin of safety.The moat theory can be written in a separate book, which can be summed up as follows:Brands with patent advantages, economies of scale, cost advantages, switching costs and network effects.

Large moat companies that meet one of these conditions (Berkshire Hathaway is too big to choose these elephants) can ensure that high profit margins and profit growth are not eroded, and Buffett can roughly calculate the intrinsic value and the margin of safety. As long as it is not too expensive to buy and hold for a long time, the final share price will reflect the intrinsic value, that is, the growth of earnings per share, while the impact of valuation factors is not significant.

Any kind of enterprise, even technology stocks, in line with the above principles, is in line with Buffett's investment principles.Buffett did not invest in technology stocks before, is not sure whether future profits can be guaranteed, when he understands the moat of the enterprise, he will take action.

Moat of IBM and Apple Inc: conversion cost

IBM was a hot technology stock earlier than Apple Inc, and it was also the giant Jobs wanted to bring down in his early years. Buffett did not participate in the brilliant decades of IBM. When he invested in IBM in 2011, it baffled many Berkshire Hathaway shareholders. But Buffett believes that "IBM's competitive advantage in finding and retaining customers is like an aura hitting the brow, which suddenly enlightens him." "

Buffett once said when explaining why he bought Apple Inc, "Apple Inc's consumer business is unparalleled and the ecosystem is unparalleled." let me put it another way,Apple Inc products are a very powerful guest tool, at least at the psychological and spiritual level, people are very, very locked in the products they are using. Apple Inc is a case in point.」

This is the conversion cost.

Growth stock investment guru Fisher wrote "conservative investors rest easy" in the great bear market of American stocks in the 1970s, in which he put forward the concept of conversion cost. That is, the cost for buyers to choose alternative products is the key to whether enterprises can maintain high profit margins. For example, for the purchase of key components, the new purchasing manager often follows the rules, because once the problem is changed, the problem is his own business, not the predecessor's.

The same is true of consumers. Buffett invested in IBM, the information industry technology company, because it is a growing defensive industry. In the high-tech industry, the hardware sector is more cyclical, while the service sector has steady growth prospects. The IT industry is more flexible because the source of revenue is large companies and government agencies, and their budgets do not change significantly.

Before Buffett invested in IBM, IBM had spun off the unprofitable hardware industry and focused on higher-margin information services. Gain the moat advantage of economies of scale and conversion costs, and its profits should be guaranteed for a long time in the future (but this investment was later unsuccessful due to better-than-expected technological advances that undermined IBM's moat advantage).

The same is true of Apple Inc.Around Apple Inc mobile phones and other simple products, Apple Inc company has formed an ecological circle, once consumers leave this circle, they will have to pay a lot of conversion costs.The consumers who chose Apple Inc's products are very sticky, which ensures Apple Inc's high profit margin. The recent outbreak has done little to damage the moat.

In fact, no matter what kind of industry enterprises, or different sub-industries under the technology sector, understand this essence in order to understand Buffett's investment ideas.

Important guarantee of investment success rate: share buyback

For value growth investors like Buffett, the success rate is very important, and he has repeatedly stressed the importance of not losing money. So when he pulled the trigger, he had done more insurance to make sure it was foolproof.

Buyback is a corporate financial skill that Buffett pays close attention to.The main reason why he likes financial stocks is the high profits of financial stocks and the love of large funds to buy back shares. Share buyback is a more effective way for companies to feedback shareholders' funds than dividends. For the same amount of money, dividends need to be deducted, and the time should be fixed on the earnings day; buybacks should be much more flexible. Once the stock price falls sharply, it can be bought back at any time. This will increase the shareholding of the remaining shareholders and increase earnings per share. Once the company's future earnings grow, due to fewer shares, earnings per share will rise very quickly; if the valuation remains the same, the stock price will rise with the rapid rise of EPS.

More importantly, companies can even buy back shares by issuing bonds, as long as the cost of issuing bonds is lower than the stock return, that is, the reciprocal of the price-to-earnings ratio: earnings per share divided by share prices can also lead to an increase in earnings per share. In an environment of low interest rates, this goal can be easily achieved.

Buffett in the choice of these two technology stocks, a very important reason is that they both have large capital buyback plans.IBM has a plan to buy back $50 billion when Buffett invests, and Apple Inc is also the company with the highest share buyback in FAANMG in the past two years.

Buffett often says that he is very happy to see the share price of the stock fall. The lower the share price, the more shares companies buy back, and the higher Buffett's share of profits. Under the advantage of corporate moat, the return will be higher when profits grow in the future.

The essence of Buffett's investment is "invincible".

Buffett's technology stock investment, Apple Inc is the most successful one. IBM's investment is still facing a big challenge. Due to the impact of the industry, the IBM moat held back its profits until five years after the investment. However, Buffett has said that the decline in IBM's share price for a period of time did not make him nervous because it also made IBM buybacks more attractive. In addition, IBM pays out a quarterly dividend of $1.40, equivalent to an annual interest rate of more than 3%, which is much higher than the interest rate on U.S. Treasuries.

In addition, Buffett has also invested in Intel Corp and Amazon.Com Inc, but the proportion is very small; the specific reason is difficult to judge, there is no big plan for the stock buyback plan may be a reason for Buffett not to rest assured. In fact, Amazon.Com Inc, who has no buybacks and dividends for the past five years, has more potential for growth stocks, because the money earned is immediately invested in new and more profitable projects. If companies can continue to find high-return projects, they do not need to return profits to shareholders, this is Fisher's view.

但Buffett's greatness is that he recognizes the boundaries of his abilities and is as invincible as possible.Mathematically speaking, it isExpected profit maximization: judging correct and wrong expected returns multiplied by the sum of probability maximizationIn the first place, he is not good at understanding the technology industry, which is the leader of the current era. If you do not participate, it will not be easy for Berkshire Hathaway to outperform the market; if large investment losses, it will affect the performance for a long time.

So, strike a balance between enterprise and security:Do not seek to maximize profits and ensure that there is enough cash for large share buybacks, rather than investing in more uncertain projects.This is how Buffett combines his past experience to invest in technology stocks. He is not good at technology stocks and may not be as good as many of us, but this comprehensive balance is well worth learning for long-term investors.

For A-share investors, after moving to US stocks, it is easy to bring some bad habits, such as like short-term stock prices to catch up and fall. In addition, many investors also ignore the dividend and repurchase policies of high-quality companies in mature markets, both of which plus capital gains are the comprehensive returns. If you only look at the stock price trend, you are likely to miss gold.