Why Warren Buffet Averts From Tech Stocks

Technology stocks have been one of the generally successful sectors in the financial market. Since its introduction in the 20th century, tech stocks have enjoyed a largely fruitful life in the market thanks to the rise of the internet and the proliferation of smartphones, laptops, and other gadgets. The dotcom boom saw the peak of tech sector. It even came to a point where any stock which you would prefix with “e-” or suffix with “.com” will instantly increase market value. Of course, the collapse followed. However, most tech stocks still recovered and regained traction. Despite its overall okay performance, Warren Buffett has mostly refrained from investing in the sector. Here are his reasons why.

 

1) Warren Buffett Does Not Invest In Anything He Himself Doesn’t Understand

According to experts, the famous investor says he does not want anything to do with investments that he does not understand. Technology stocks are understandably difficult to completely grasp if haven’t had any formal education about it. It also doesn’t help if you did not grow up with technology as most senior investors have.

 

2) Technology Stocks Have Limited Economic Moat

An economic moat is a company’s capacity to maintain competitive advantages over other companies in the same industry. This ensures the company’s long term profits and market share which is what Warren Buffett is looking for. It is actually his principle. Buffett believes in value investing to find companies to invest in that have moats as a protection from sudden bankruptcy.

 

3) The Volatility of Technology Stocks Is Discouraging

The sudden boom of technology stocks has a downside to it: they are prone to abrupt drops as well. This characteristic of stocks in the technology sector has become both the gift and curse that traders of the sector receive. Some of them have experienced instant wealth while others find themselves at a sudden loss. Buffett finds it hard to scrutinize tech companies because even the best one who was deemed stable and at its peak is still prone to collapse.

 

While Warren Buffett generally avoids tech stocks, he has not completely shied away from it. He has stocks on IBM amounting to an approximate of 8% of his conglomerate company, Berkshire Hathaway. He indicated his satisfaction in IBM’s solid but flexible financial management. So, in the end Buffett’s principle wins over. Find a solid company with a good performance and stay with them for the long term.