Some things are only obvious in hindsight. Especially when it comes to investing. That uncertainty creates volatility, which is why the stock market is sometimes viewed as a form of legalized gambling.
I would not disagree with that assessment in the short run. From one day to the next, anything can happen. But in the long run, the stock market can be a reliable source of solid investment returns.
That is why Warren Buffett is one of the wealthiest people in the world. He has stuck to his value-based approach to owning stocks for the past sixty years, and it has served him well.
I got to thinking about that when I watched a 60 Minutes story about International Business Machines (NYSE: IMB). The company is developing a quantum computer that could set a new standard for speed and complexity.
In 2011, Warren Buffett’s investment holding company, Berkshire Hathaway (NYSE: BRK.A), bought 64 million shares of IBM at an average price of $170. That works out to nearly $11 billion.
Seven years later, Buffett acknowledged that he made a mistake. While IBM struggled to grow revenues, the rest of the tech sector blew by it.
He sold his IBM holdings in 2018 for a loss and reinvested the proceeds in Apple (NSDQ: AAPL). That was a good move, given Apple’s four-fold rise since then.
But since Buffett abandoned IBM, it has performed pretty well, too. Over the past five years, it has delivered a total return (share price appreciation plus dividends paid) of about 80%.
Apple > France
With the benefit of hindsight, we can confidently say that Buffett’s timing on IBM was bad while his timing on AAPL was good. That is the easy part of this exercise.
Here comes the hard part. Over the next five years, will you better off owning IBM or AAPL from a total return perspective?
The safe bet is AAPL. It is the most valuable publicly traded company in the world with a market cap of roughly $3 trillion.
To give you an idea of scale, last year the GDP (gross domestic product) for France was $2.8 trillion. That makes it the seventh largest economy in the world, just behind the United Kingdom at $3.1 trillion.
IBM has a market cap of about $150 billion. That would place it between the GDPs for Ukraine ($161 billion) and Morocco ($134 billion) in terms of economic value.
However, economic size does not always equate to growth potential. Eventually, the base becomes so large that it becomes nearly impossible to keep growing it a high rate.
That is why rumors surface periodically about Apple entering the electric vehicle (EV) market. Its share of the global smartphone market has stalled out around 20%.
That means Apple must raise prices to increase smartphone sales revenue. But sooner or later, it will not be able to raise prices fast enough to maintain its historical growth rate.
Warren Buffett once said that the genius of Apple is that you could lay out all of the products it sells on your dining room table. They don’t beat their competitors with size, they beat them with superior products.
As a longtime iPhone user, I would agree with that assessment. But as an investment analyst, I’m not confident that strategy will work as well in the future as it has in the past.
You’re Gonna Need a Bigger Table
That brings me back to IBM, which is taking the opposite approach to expanding its product line. I suppose you could lay out all its products on your dining room table. That is, provided your table is big enough to support the largest quantum computer in the world.
In short, IBM is going all-in on artificial intelligence. It can’t get there overnight, but it thinks it can get there in five years.
That’s when its new quantum computer is expected to come online. Thus far, the company says it knows of no reason why that timeline will not be met.
We’ll see about that. But if that prediction proves true, then buying IBM now could prove to be a wise investment.
Of course, that will only be apparent in hindsight. Five years from now, IBM’s foray into supercomputing could turn out to be a bust. On the other hand, if IBM is successful then it may have an economic value in excess of all but the largest countries in the world.
I have held IBM in the Personal Finance Growth Portfolio since 2015. At times, I have been tempted to sell it as Buffett did and be done with it. But now, I am convinced IBM’s long-term upside potential is too vast to ignore. Only time will tell.
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