Warren Buffett's emphasis on 'simple and understandable' businesses: Did it cause him to miss the biggest tech wave of the last two decades? Should this be seen as a regret or a triumph of discipline?
The Core of Buffett's Investment Philosophy: Adhering to "Simple and Understandable"
Warren Buffett has repeatedly emphasized in his shareholder letters that investing should focus on businesses one can comprehend, a principle rooted in his value investing approach influenced by Benjamin Graham. He believes investors should only act when they can clearly assess a company’s intrinsic value, economic moat, and long-term prospects. This led him to consistently avoid many tech stocks, as the rapid changes and technical complexity of the tech industry fell outside his "circle of competence."
Did He Miss the Tech Wave?
Over the past two decades, the tech wave swept the globe, with companies like FAANG (Facebook, Apple, Amazon, Netflix, Google) generating staggering returns. Buffett indeed missed these opportunities:
- He didn’t invest in Apple until 2016, missing its early explosive growth.
- For Amazon and Google, he publicly admitted lacking understanding of their business models, leading Berkshire Hathaway to underperform during the tech bull market.
- Statistics show Berkshire’s returns could have been higher had Buffett invested more aggressively in tech post-2000. Yet, the company still achieved a compound annual growth rate of ~9–10%, outperforming the market average.
This represents a genuine "miss," especially during a tech-dominated bull run where Buffett’s conservative style seemed out of step.
Regret or Victory of Discipline?
The Case for Regret
- Opportunity Cost: The tech wave created countless wealth creation stories. As a standard-bearer of value investing, earlier involvement could have amplified Buffett’s legendary status. Critics argue his "circle of competence" was overly narrow, ignoring tech’s economic transformation and causing him to miss era-defining gains.
- Evolving Times: Investment philosophies should adapt. Buffett himself reflected on avoiding tech (e.g., during the 1990s dot-com bubble) in shareholder letters but held firm—a stance some view as stubbornness rather than wisdom.
The Case for Disciplinary Victory
- Risk Avoidance: Tech stocks are highly volatile. Buffett sidestepped the 2000 dot-com crash and multiple tech meltdowns. His discipline helped Berkshire avoid traps like WeWork and Theranos.
- Long-Termism: Buffett’s returns stem from sustainable compound growth, not short-term speculation. Holdings like Coca-Cola and American Express in "simple" businesses generate steady cash flow. Despite missing tech, Berkshire’s overall performance still surpasses most fund managers.
- Philosophical Consistency: Buffett stresses in letters, "Never invest in what you don’t understand"—a guardrail against emotional decisions. Charlie Munger concurs: Better to miss an opportunity than make a mistake. This embodies value investing’s core: margin of safety first.
Overall, this is better seen as a victory of investment discipline. Regrets exist, but Buffett’s principles have stood the test of time, growing Berkshire’s market cap from $19 million in 1965 to over $800 billion. While the tech wave dazzled, not everyone could navigate it; Buffett proved that staying within one’s circle fosters enduring success—not chasing trends.
Lesson for Modern Investors
Investors should assess their own "circle of competence." Tech stocks may tempt, but understanding the business remains paramount. Buffett’s late investment in Apple exemplifies expanding this circle wisely, showing discipline and flexibility can coexist. Value investing doesn’t reject tech—it demands rationality.