Why Warren Buffett is betting big on IBM (and not Google, Microsoft or HP)

The billionaire investor finally takes the plunge into technology stocks

Warren Buffett didn't become a billionaire and arguably the world's most successful investor by betting on technology stocks. That's because he's always avoided tech investments, finding the long-term business models anywhere from speculative to dubious.

Until this year. In an interview Monday on CNBC, Buffett revealed that his investment firm, Berkshire Hathaway Inc., has purchased $10.7 billion in shares of IBM (NYSE: IBM) since March, giving the company a 5.4% stake in Big Blue. According to the Wall Street Journal, Berkshire's stake in IBM makes it the "second-biggest shareholder at Sept. 30, after investment firm State Street Global Advisors."

Buffett has made this massive and gradual investment despite IBM shares continually hitting record highs throughout the year. (IBM was trading late Tuesday morning at 186.07, just off the 190.53 all-time high set on Oct. 14.) Clearly Buffett has chosen to ignore warnings that IBM shares won't be able to sustain their altitude.

He also bought up the 64 million shares likely knowing that IBM reportedly was on the verge of a change in the corner office. As early as last June, CEO Sam Palmisano was rumored to be looking for a successor (whom he eventually found). That's a lot of potential uncertainty.

So what made the legendary billionaire investor lay down a huge bet on Big Blue? It all started when he read IBM's annual report this year -- something Buffett says he has done every year for the past 50 years. This time, though, he had an epiphany. From the CNBC Squawk Box transcript:

"I don't think there's any company that's—that I can think of, big company, that's done a better job of laying out where they're going to go and then having gone there. They have laid out a road map and I should have paid more attention to it five years ago where they were going to go in five years ending in 2010. Now they've laid out another road map for 2015. They've done an incredible job. First, Lou Gerstner, when he came in, he saved the company from bankruptcy. I read his book a second time, actually, after I read the annual report. You know, "Who Said Elephants Can't Dance?" I read it when it first came out and then I went back and reread it. And then we went around to all of our companies to see how their IT departments functioned and why they made the decisions they made. And I just came away with a different view of the position that IBM holds within IT departments and why they hold it and the stickiness and a whole bunch of things. And also, I read very carefully what Sam Palmisano...said about where they're going to be and he's delivered big time."

Some of the above is vague -- indeed, many of Buffett's comments in the interview are -- but really what he's talking about is IBM's effective long-term planning, stability and consistency:

"[I]f you read their reports—if you read what they wrote five years ago they were going to do and the next five years, they've done it, you know, and now they tell you what they're going to do in the next five years, and as I say, they have this terrific reverence for the shareholder, which I think is very, very important."

Buffett essentially sidestepped questions about whether he intended to invest in other tech stocks, but I'll answer for him: No. Well, maybe Oracle at some point, but don't count on Berkshire buying large positions in, say, Microsoft, HP or Google any time soon.

He uses his friendship with Bill Gates as an excuse why he won't touch Microsoft shares, but you have to think that Redmond's slow-footed response to emerging technologies over the past few years, not to mention the gradual disintegration of its core business (computer software), are the real disincentives for Buffett to invest in the FUD kingdom's future.

(Also, could anyone possibly watch this video and say, "Hey, you know what? I want to invest $10 billion in the company run by that guy!")

And HP? Compared to IBM, HP is a train wreck. (In fact, compared to a train wreck, HP is a train wreck.) The company is on its fourth CEO since 2005 and lurches from one strategy to another (and sometimes back again).

As for Google, who can predict with any certainty where Google will be 10 years from now. It could be the next Yahoo. Or Myspace. That can happen to an Internet company because, as Buffett would say, there's no "moat" to ward off competition. Allegiances to websites and services can be fleeting, and the cost of conversion low to non-existent. Try to build an enduring business in that environment.

That he's already seen a 12% gain in his investment in IBM probably means little to Buffett because he's in this for the long haul. And he sees Big Blue as the tech firm best-positioned for long-term success, regardless of its current stock price. It's hard to argue against him.

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