In today’s Money Morning…big buyer of big tech…more opportunities to come…don’t get too caught up in the whole inflation and interest rate fixation…and more…
It seems as though the Oracle of Omaha himself, Warren Buffett, is living up to his contrarian ideals.
Both the Fed and the RBA have made dramatic rate rises this week — decisions that have been a long time coming in terms of market expectations.
It wasn’t a case of if rate hikes were going to happen, but when.
That’s why we’ve been seeing so much volatility for much of 2022. Markets have been trying to gauge and price in these policy shifts.
For American tech stocks, in particular, as we saw last week, this has been a challenge. Investors are clearly wary of how these changes will impact ongoing growth. So when a slew of quarterly results failed to impress, we saw billions wiped out by fleeing traders.
Not Buffett, though…
Filings from his investment firm — Berkshire Hathaway — show that he’s been on a buying spree. Nearly a third of the company’s US$147 billion cash stockpile was finally put to work, as Buffett committed roughly US$41 billion to equities.
And perhaps the biggest shock of all is that he’s buying a whole lot of tech. It’s a sign that clearly suggests Buffett and his company believe there are a lot of bargains to be found at the moment.
Big buyer of big tech
It’s no secret that Buffett is a big fan of Apple. After all, the stock has been one of his best decisions in terms of return on investment. To this day, 40% of his firm’s total portfolio is still made up of AAPL stock.
But with the company now firmly trading at a US$2.69 trillion market cap, it’s hard to imagine there’s much more growth to come. That hasn’t deterred Berkshire, though, with Buffett confirming that he recently bought another US$600 million of AAPL shares.
The funny part is that he wanted to keep buying but had to stop. In his own words:
‘Unfortunately the stock went back up, so I stopped. Otherwise who knows how much we would have bought?’
Clearly Buffett believes he was getting these shares for a good deal. That is the whole crux of his value investing approach.
It wasn’t just AAPL that caught his attention either. He’s bullish on game developer Activision Blizzard as well, jostling to buy shares at market prices for less than the proposed bid from a recent Microsoft takeover. It’s a relatively easy way to potentially net some decent returns.
As a result, Berkshire is now likely the company’s largest shareholder, with a 9.5% stake.
Then there was last month’s purchase of 121 million HP shares — a US$4.2 billion deal that saw Buffett become a key investor in the PC and printing hardware maker. Again, a move that seems motivated by an understanding of the ‘deep value’ of the stock rather than speculative growth.
And that, dear reader, is the key point to keep in mind.
Despite tech’s affiliation with high valuations and rampant speculation, there is value to be found.
More opportunities to come
Now, while Buffett’s moves are interesting, it doesn’t mean you should copy him either.
A big reason for his success and strategy is because of the enormous capital he controls. When you’re trading billions of dollars, finding ways to invest in stocks without blowing up the share price can be tough.
If he could, though, Buffett would be diving deep into much smaller companies. That’s how he made a name for himself in the first place, after all. As he conceded way back in 1999, as the dotcom boom was unfolding:
‘If I was running $1 million today, or $10 million for that matter, I’d be fully invested … It’s a huge structural advantage not to have a lot of money … The universe I can’t play in has become more attractive than the universe I can play in. I have to look for elephants. It may be that the elephants are not as attractive as the mosquitoes. But that is the universe I must live in.’
Never forget this fact because it’s your biggest edge over the big traders like Buffett.
You can and should be looking at smaller companies for bigger opportunities. Not just because they have the potential for greater growth than an established stock, but because they are often overlooked by a lot of the market.
It is only once these companies make a name for themselves, like Apple, Activision, or Amazon, that the big money starts to come in.
After all, back in 1999, when Buffett made his remark about the ‘mosquitoes’ of the investing world, Apple, Activision, and Amazon were all just that. These were the small caps of the past that have become the cash-making juggernauts we know today.
So don’t get too caught up in the whole inflation and interest rate fixation. Because while it is still certainly a factor to consider, it doesn’t detract from the huge gains that can be found in tech.
Regards,
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Ryan Clarkson-Ledward,
Editor, Money Morning
Ryan is also co-editor of Exponential Stock Investor, a stock tipping newsletter that hunts down promising small-cap stocks. For information on how to subscribe and see what Ryan’s telling subscribers right now, click here.
