Why the next Warren Buffett will be a tech investor
Who dares to follow in the famed investors footsteps?
A lot of people (myself included, but in a former life) steer clear of investing in technology stocks because, in short, they grew up idolizing Warren Buffett and the great investor famously did not invest in tech stocks. While this proved to be prescient (avoiding the dot-com bubble) twenty years ago, the world has changed, let’s take a look.
“When the facts change, I change my mind. What do you do sir?”
— Charlie Munger
There’s a few key reasons Buffett did not invest in tech stocks:
Historically, tech stocks did not have economic moats. Today’s hot new winner might be tomorrow’s loser (the whole dotcom crash, Betamax, solid state hard drives, etc)
Buffett is famously tech averse. In his own words "If there's lots of technology, we won't understand it”. It’s not in his circle of competence
Tech stocks of yesteryear were not the type Buffett would like - with free cash flow, strong brands and distribution, and a “license to print money”
However, if you look under the hood, a lot of the strategies that Buffett used to become the GOAT of investing directly applies to technology investing today. Here’s why:
Economic moats from branding / advertising
Buffett may not “know technology”, but he knows advertising. His companies (and biggest holdings/subsidiaries) are some of the largest advertisers in the world: Coca Cola, American Express, GEICO to name a few.
Buffett loves these companies, because branding/advertising is a game of scale - ABC Cola can never compete with Coca Cola because it doesn’t have the advertising dollars to compete. Buffett also used to love newspapers for the same reason, because their brands and network effects historically made them impervious to competition.
As we all know, the internet not only wreaked havoc on newspapers, they completely changed the advertising landscape. Every year, more and more eyeballs and hours are spent on the internet / phones and less on traditional television (and print, obviously) media. The tech companies (collectively) dominate this new advertising landscape, and it’s why yesterday’s investing strategies don’t work in today’s environment, unless you update your strategy to take advantage of this new era where DTC and word of mouth are more important ever.
More economic moats: distribution, network effects and entrenchment
Buffett also made billions investing in companies with economic moats from distribution advantages. A canonical example, GEICO can undercut its competitors because it doesn’t pay a middleman (insurance agents), and is in many ways the original DTC company long before Warby Parker, Allbirds and Shopify came on the scene.
While the dotcom stocks of the past didn’t fit this mold, today’s tech giants, and not just FANG, exhibit tons of Buffett-friendly characteristics. If you’ve written your codebase around Twilio/Sendgrid’s API, you’re very unlikely to switch unless there’s a very good reason to — and it’s not just about pricing, there’s also reliability and scalability.
Shopify is another great example that boasts the trio of economic moats:
Direct relationship with customers
Network effects: ecosystem of add-on apps, greater scale of customers means more developers to build features / provide support
Entrenchment: if you’ve built a store on top of Shopify, ripping and replacing that is, to say the least, non-trivial
You know how these new tech companies grow? It’s almost never because they buy TV commercials or hire an army of sales people (at least not in the first ~5 years). It’s because a developer loves the product and tells other developers about it. This is virtually impossible to compete with once an incumbent has reached scale unless the incumbent really drops the ball.
Stripe, Snowflake and GitLab (and AirBnb of course) are some other likely soon-to-be public companies that exhibit similar economic moats where, in a relatively short period of time, they’ve built incredible businesses on the strength of building a product that dominates a critical piece of technology infrastructure (payments API, version control + dev ops, and cloud data lake/warehousing) that virtually every company needs.
Software is eating the stock market
I struggle to think of many companies that have grown in sub-$5B market cap to $25-$50B range (or add a “0” for the FANGs) in the last 10 years that were not tech stocks. but it’s easy to name several tech stocks off the top of my head that have done so — and in my opinion, while there will be ups and downs, those companies are here to stay.
Why? Because the great tech companies of today can come in and disrupt traditional industries, with scalable and sustainable competitive advantages, the way the GEICOs of the past used to do. And that, my friends, is why I believe the next Warren Buffett will be primarily a tech investor (and obviously, we’ve already seen Berkshire start to do more tech investing, most famously Apple).
I’ve listed below a few articles on possible candidates: Chamath, a tech-focused Bill Ackman and Lee Fixel, but it’s also possible the “next Buffett” will be someone that most people have never heard of.
Plug for Next week:
I’ll be writing about some of my current “unicorn” investments, and a few I think have a very good shot at getting there. Please sign up for the rebase.vc newsletter to get this delivered to your inbox!
Some “Next Buffett” candidates
https://fortune.com/2020/06/26/chamath-palihapitiya-wants-to-be-the-warren-buffett-of-tech-investing/
https://markets.businessinsider.com/news/stocks/bill-ackman-boosts-blank-check-spac-ipo-target-billions-acquisition-2020-7-1029392640
https://www.forbes.com/sites/alexkonrad/2020/07/01/lee-fixel-raises-1-billion-fund-addition/