Why does Warren Buffett avoid technology stocks?

• Warren Buffett prefers to invest in companies which operate in fairly stable and certain environments. Technology sector is the last place to look for certainty.
• He values certainty of returns more than the potentially huge but risky returns.
• He believes predicting the economics of the fast paced technology sector is far beyond his competency, probably a strong reason for his avoidance of the sector.

Warren Buffett has often been in the news for avoiding investments in the technology sector, which has been viewed by many investors as a highly lucrative sector. The Oracle of Omaha has his reasons for this approach. We look into reasons for his avoidance of the hot stocks.

Warren Buffett has historically preferred investments in sectors or companies which are unlikely to experience major changes. In his 1996 letter to shareholders he stated,

“We are searching for operations that we believe are virtually certain to possess enormous competitive strength ten or twenty years from now.  A fast-changing industry environment may offer the chance for huge wins, but it precludes the certainty we seek.”

Warren Buffett loves to have certain but stable returns over potentially huge but risky returns.  In the same letter he also states:

“Obviously many companies in high-tech businesses or embryonic industries will grow much faster in percentage terms than will the inevitables.  But I would rather be certain of a good result than hopeful of a great one.”

It shouldn’t be assumed that Mr. Buffett despises change. He is only averse to change when evaluating as an investor. In his own words:

“Charlie and I welcome change: Fresh ideas, new products, innovative processes and the like cause our country's standard of living to rise, and that's clearly good.  As investors, however, our reaction to a fermenting industry is much like our attitude toward space exploration:  We applaud the endeavor but prefer to skip the ride.”

In his 1999 letter to Shareholder’s Mr. Buffett highlights the fact that he and his partner Charlie prefer to operate within their level of competence and identifying a durable competitive advantage in the technology space is beyond their combined expertise. In Buffett’s words,

“Our problem -- which we can't solve by studying up -- is that we have no insights into which participants in the tech field possess a truly durable competitive advantage. Our lack of tech insights, we should add, does not distress us. After all, there are a great many business areas in which Charlie and I have no special capital-allocation expertise.  If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter.”

Has Warren Buffett’s stay out of the technology sector impacted the returns of his investments? Well let’s look at the numbers over the last two decades.  The chart below compares the 20 year CAGR of the S&P 500, Berkshire Hathway’s (NYSE:BRK.A) book value per share and Berkshire Hathway’s Market value per share.

20 year CAGR in S&P 500 and Berkshire Hathaway share price and book value

Berkshire’s book value per share has grown at a CAGR of 14.6% over the last 20 years (1993-2013) while the Market price per share has grown at a CAGR of 12.7%. This growth has solidly beaten the S&P 500’s 20 year CAGR of 7.1%. It is clearly seen that Buffett’s decision to stay away from the technology world hasn’t hindered the performance of his investments. And what is the secret of the Oracle of Omaha?

Warren Buffett has this great quality which investors often call ‘Discipline.’ It is clearly evident in his avoidance of the technology sector, even during the boom of late 1990’s, when every other person was investing to set up a business which had something to do with internet. Though in hindsight Buffett had the last laugh, non-entry into what appeared to be a highly lucrative sector is a proof of the Oracle’s discipline. There are notable exceptions in the technology world, where stocks like Apple & Google have created tremendous value and returns for shareholders. Apple stock price has grown at a 10 year CAGR of 36.7% while Google stock has grown at a 10 year CAGR of 27%. While critics could view these as Buffett’s big misses, we view it as a proof of his disciplined approach to investing. Sticking to your rules is hard to do and that is something every wannabe successful investor needs to learn from the Oracle of Omaha.

In conclusion, Warren Buffett side stepped the tech boom for the following reasons: Buffett was uncomfortable investing in companies operating in rapidly changing environments; He could never find the competitive edge in any technology companies that he felt was durable; and as he admitted, forecasting the long term business economics of internet companies was beyond his competency.

We at Amigobulls live in the exciting world of technology stocks. While we salute the Oracle of Omaha for his discipline and wisdom, we will continue to make our humble attempts to apply his principles in the technology sector and pick value stocks from this sector. We invite our readers to let us know their experiences with technology stocks. Happy investing with Amigobulls.

Source: http://amigobulls.com/articles/why-does-warren-buffett-avoid-technology-stocks

5 Risk Management Mistakes To Avoid

I’ve been mentoring a junior project manager and we were reviewing the risks on his project last week. We went through all the risks on the log and we talked about good practice and what he should be actively doing to manage the risks. Then he asked me a question. “What mistakes should I be looking out for?” he said. I thought this was a great question. Too often we focus on what we should be doing and forget about what we should avoid doing! That’s when mistakes creep in as we haven’t been focused on stopping them from happening. So here is my list of 5 mistakes to avoid when you are carrying out risk management on your project, which I shared with my colleague.

Mistake 1: No Risk Owner

Your notes in your risk management software should always include who is responsible for owning the risk. That means writing down the name of the person who will ensure that the risk management tasks are carried out. That individual doesn’t have to do all the work themselves, but they should coordinate the people who are actually doing the work and make sure that the risk log is updated with progress and that you get status reports as required.

Don’t be tempted to record your own name as the risk owner for every risk. Many risk management plans would be better off led by a subject matter expert and this can also be a useful development exercise for a more junior member of the team who wants to take responsibility for a small, manageable piece of work.

Mistake 2: No Action Plan

Each risk should have a documented action plan. This sets out exactly what is going to be done to prevent the risk from happening. Sometimes, of course, you will be taking no action and are prepared to accept the risk without doing anything about it. If this is the case, make sure that you record in your risk log that you have considered what actions are required and have actively decided to do nothing. And sometimes it will be a positive risk and you’ll want it to happen!

Whatever the approach you want to take, it should be documented so that you know exactly what is going to be done and can track progress against it. Remember to go back to your action plans regularly and update them with what actions have been completed and what new tasks have been identified.

Mistake 3: No Risk Analysis

When you’ve got a lot of risks it can be tempting to skip the analysis phase and not spend time working out which area of the project it will impact or how serious the problem will be if it happens. You shouldn’t do this – it isn’t appropriate to treat every risk in the same way and you’ll only know how much time and effort to invest in addressing it if you properly carry out some analysis to assess the impact and likelihood of each of the risks.

Review each risk and establish how likely it is to happen, and what impact it will have on the rest of the project if it does happen. Get the whole team involved as they will probably identify other impacts and have some useful information to feed into the analysis exercise. This will enable you to focus your risk management budget in the right places by targeting the most serious risks first.

Mistake 4: No Timescales

When do you need the risk resolved by? Or when will it stop being a problem if nothing happens? Risks don’t last forever, so you should also be recording a timescale for the risk in your log.

For example, if there is a risk of bad weather delaying the delivery of some equipment to your building site, then this will pass on a particular day – the day that the equipment is due to be delivered. If you don’t note down this date in your log and then update the risk entry once the date has passed you could be including the mitigation plans or reporting on this risk for far longer than you really need to. Also make sure that any actions related to your risk management plans have dates against them.

You’ll want to monitor that they are being dealt with in a timely manner so you can be sure that enough appropriate action has been taken in time to offset any impact should the risk occur. Otherwise you may be working on actions and find that you are too late!

Mistake 5: No Risk Priority

Use your risk analysis and timescale information to give each risk a priority. Those that are likely to have an impact quickly are obviously more important to deal with than those that may not cause any problems until next year. Those risks that will have a huge impact are more important than those that won’t cause many issues.

Each risk should be given a priority and then you can tailor your work plans to ensure that the important ones are dealt with first. You can also use risk priorities for reporting purposes as generally stakeholders will only be interested in knowing more about the high priority risks. You won’t bombard them with information about all risks if you can tailor your reports to only give them the most important data about the highest priority problems that the project is facing. “Thanks for these pointers,” my colleague said. He had made lots of notes and went away from our mentoring session feeling a bit more confident about handling risk management on his project (or at least, I hope he did).

What other mistakes have you encountered when it comes to managing risk? Let us know in the comments below if you are prepared to share your experiences!

Source: http://www.projectmanager.com/5-risk-management-mistakes-avoid.php