Last year, Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) made a big investment that seemed out of place to many investors who follow the company and its chairman, Warren Buffett, closely. The company bought about $4 billion worth of Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL).
The size of the investment suggested Buffett, who historically avoids technology stocks, was behind the purchase. Since Greg Abel took over as CEO at the start of the year, he has made Alphabet one of Berkshire's largest investments, putting another $23 billion (or more) into the stock. So, it was reasonable to think Abel had used his influence to initiate the position last year.
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But Buffett put any speculating to rest. "I initiated it," he disclosed in a recent interview with CNBC. And while he dodged further questions on his investment thesis on Alphabet, he provided an indication of what he's looking for in an investment. Here's what he likes about Alphabet.
Warren Buffett's investment strategy boils down to buying wonderful businesses at a fair price. There are two key components to that: 1. identifying a wonderful business, and 2. determining a fair price.
Buffett shared exactly what he thinks makes a good business. "The trick is … to find businesses that are going to earn high returns on capital for an extended period of time."
Buffett calls out several of Berkshire's longtime holdings as examples. American Express earns a much higher return on equity (which is often what Buffett's referring to when he says "return on capital") than other banks. Buffett points out that Amex achieves its 34% ROE without taking on additional risk relative to other banks that generate returns in the low teens on average.
For a long time, Buffett and his longtime vice chairman, Charlie Munger, said they wouldn't buy Google, as the company was known before it changed its name to Alphabet. The two explained at Berkshire's 2012 shareholder meeting that they just didn't understand the business well enough to invest in it.
"I made a mistake," Buffett said with a wry smile when asked why he didn't like the company back then. "But Charlie … he just pounded the idea that it wasn't a good business just because it was doing sexy things or whatever it might be but it wasn't earning real cash or be expected to do it in a very short period of time."
Source: Yahoo Finance Top News — This article was automatically imported from the source. Read full article at original source →
