IBM
Company Overview
IBM (International Business Machines) is one of the world's largest technology and consulting companies, founded in 1911. Berkshire's large IBM position — initiated in 2011 — was surprising given Buffett's long-stated reluctance to invest in technology companies, and the eventual exit was among the more honest public revisions of investment thesis Buffett has ever made.
Investment Story
2011: Surprising accumulation. During 2011, Berkshire quietly accumulated a large IBM position worth approximately $10.9 billion — representing roughly 5.5% of IBM's shares. Buffett disclosed the position in a November 2011 filing, having shielded the accumulation through an SEC confidentiality request. He explained that he had read IBM's annual reports for 50 years but only recently concluded that its customer relationships — deep IT outsourcing contracts with Fortune 500 companies — represented a genuinely durable competitive position.
The investment thesis. Buffett argued that IBM's clients had enormous switching costs — migrating entire enterprise IT systems is extraordinarily costly, disruptive, and risky. This created revenue predictability and pricing power. Additionally, IBM's aggressive share repurchase program would reduce share count dramatically, increasing per-share earnings even if total earnings grew slowly.
2013–2017: Disappointing execution. IBM's revenues declined for 22 consecutive quarters as clients shifted workloads to cloud computing (Amazon Web Services, Microsoft Azure) rather than IBM's traditional mainframe and services model. The switching costs proved real but insufficient to prevent clients from stopping new business with IBM while existing contracts ran off; the new cloud competition was so cost-advantaged that IBM could not follow clients to the cloud profitably.
2017: Partial sale and thesis revision. By mid-2017, Berkshire had sold approximately one-third of its IBM position. Buffett was unusually candid: he had been wrong about IBM's competitive position and acknowledged that the cloud disruption was more significant than he had anticipated. Berkshire sold virtually all remaining IBM shares by the end of 2018.
Buffett's Own Words
For example, in that same year earnings of IBM were $28 million (now $2.7 billion), Safeway Stores, $10 million, Minnesota Mining, $13 million, and Time, Inc., $9 million. But, in the decade following the 1955 merger aggregate sales of $595 million produced an aggregate loss for Berkshire Hathaway of $10 million. By 1964 the operation had been reduced to two mills and net worth had shrunk to $22 million, from $53 million at the time of the merger. So much for single year snapshots as adequate portrayals of a busi
*O of Exxon Corp.; Walter Wriston, then CEO of Citicorp; Frank Cary, then CEO of IBM; Tom Murphy, then CEO of General Motors; and, most recently, Paul Volcker. (They are in good company.) The Blumkin blood did not run thin. Louie, Mrs. B’s son, and his three boys, Ron, Irv, and Steve, all contribute in full measure to NFM’s amazing success. The younger generation has attended the best business school of them all - that conducted by Mrs. B and Louie - and their training is evident in their performance. *
(Thomas J. Watson Sr. of IBM followed the same rule: "I'm no genius," he said. "I'm smart in spots - but I stay around those spots.") Our purchases of Wells Fargo in 1990 were helped by a chaotic market in bank stocks. The disarray was appropriate: Month by month the foolish loan decisions of once well- regarded banks were put on public display. As one huge loss after another was unveiled - often on the heels of managerial assurances that all was well - investors understandably concluded that no bank's number
In the 2006-2007 school year, 35 university classes, including one from IBMEC in Brazil, will come to Omaha for sessions with me. I take almost all – in aggregate, more than 2,000 students – to lunch at Gorat’s. And they love it. To learn why, come join us on Sunday. We will again have a reception at 4 p.m. on Saturday afternoon for shareholders who have come from outside of North America. Every year our meeting draws many people from around the globe, and Charlie and I want to be sure we personally greet thos
IBM. In the face of these factors, earnings would have evaporated had World Book not revamped distribution methods and cut overhead at headquarters, thereby dramatically reducing its fixed costs. Overall, the company has gone a long way toward assuring its long-term viability in both the print and electronic marketplaces. Our only disappointment last year was in jewelry: Borsheim's did fine, but Helzberg's suffered a material decline in earnings. Its expense levels had been geared to a sizable
Investment Lessons
Switching costs are necessary but not sufficient competitive advantages. IBM's clients did face real switching costs — but those costs applied only to existing deployments. For new workloads, clients chose AWS and Azure because cloud economics were dramatically superior. Switching costs create a 'harvest' moat: protecting existing revenue while preventing growth. When a business has only harvest moats (no ability to win new business), its intrinsic value declines over time even if current revenues are stable.
Circle of competence boundaries are not obvious in advance. Buffett explicitly stated he felt comfortable analyzing IBM's business model — enterprise IT services and outsourcing — as similar to the consumer franchise and industrial businesses he understood well. He was wrong: the specific dynamics of cloud transition and enterprise IT decision-making required deeper technological expertise to anticipate correctly. This experience reinforced his subsequent caution about technology investment and his reliance on his investment managers (Combs and Weschler) for technology-sector analysis.
The share repurchase thesis requires stable or growing earnings. IBM's aggressive share repurchase program — spending $50+ billion buying back stock over 2011-2017 — appeared compelling when earnings were growing. When earnings declined, the buybacks merely converted excellent capital into shares of a deteriorating business. Repurchase value creation requires not just disciplined price execution but underlying earnings stability that IBM proved not to have.