If you follow Warren Buffett at all, you will know that one of his main investing philosophies is to buy companies with a wide moat, or a major defensive position in their industry which blocks competitors from grabbing market share. It seems second nature to want to invest in such stocks, however, research suggests they may not perform as well as one would think. The reason why is that wide-moat stocks are often very popular, which means they get overpriced as investors pile in. Because of this, companies that consumers love often have returns that lag lesser companies. “Great companies don’t always make great investments”, says the CIO of retirement for Morningstar Investment Management.
FINSUM: This is a really a matter of timing. At some point these popular companies see a big run up in their stock, so it is more a matter of buying them early than saying they underperform.
Warren Buffett has just doubled down on his investment in IBM, the legendary but embattled computers goods maker. Buffett previously owned 5.5% of the company, but he has recently increased his stake to 8.3%. Most analysts have a bearish outlook for IBM, whose core computer hardware business is faltering. The company is trying to turn itself around with cloud computing, security, and big data, but many are skeptical. The piece says that those who would buy IBM right now are classic “value” investors, or those who buy companies they think are undervalued by the market. IBM’s shares have been hammered in recent years, down 28% since Berkshire Hathaway bought it in 2011. Sales at the company have fallen for 14 straight quarters. The piece says Buffett believes that IBM has excellent financial management.
FINSUM: This seems a risky bet, but the piece says Buffett appears to really believe in the company’s management. Will be interesting to see if it pans out.
Source: Wall Street Journal