Billionaire investor Warren Buffett is famous for a few things.
His stock-picking prowess over the course of decades has seen him build tremendous wealth, not just for himself but for many fellow shareholders in Berkshire Hathaway (and, before that, his private partnership).
Buffett is well known for sticking to well-established industries. Some have been around for centuries if not millennia already, like insurance and retail.
He portrays himself as having little understanding of tech, which is why for most of his life it played no meaningful role in his massive portfolio.
New industry, old principles
But wait.
Is this the same Warren Buffett whose huge Apple (NASDAQ: AAPL) stake – in fact, Berkshire’s single biggest shareholding – has made his company tens of billions of dollars in profit?
Yes, the very same Warren Buffett!
So, what is going on?
Well, although Buffett portrays himself as something of a Luddite when it comes to technology, his investment in Apple is actually entirely consistent with his career prior to putting money into the tech giant. It also offers some useful principles I am applying when considering AI stocks I could potentially add to my portfolio.
While tech may be a fairly new industry, the Warren Buffett approach to investing is not specific to an industry. It has worked spectacularly well for him in tech with the Apple stake – and I believe it also has relevance for me in the fast-emerging AI space.
Sticking to basics
This becomes obvious when considering Buffett’s Apple investment.
The Sage of Omaha likes an industry where demand is high and likely to stay that way or even grow over time. Computers and mobile phones fit that bill – and I think AI does too.
He also likes businesses that have competitive advantages that can give them a ‘moat’ to keep competitors at bay. Apple has many, from its strong brand to a large installed user base.
The same applies to some AI firms. Nvidia, for example, has a strong brand, large customer base, and proprietary technology, in the same way Apple does.
Warren Buffett likes brands because they can help a company differentiate itself from rivals without necessarily needing to keep spending lots of money to do so. Berkshire’s portfolio is stuffed with famous brands as well as Apple, from American Express to Coca-Cola.
Show me the money!
Sales are one thing, but profits are what excites Buffett.
Apple’s net income fell last year for the second year in a row. It is battling challenges from tariff costs to increased competition from lower priced Asian rivals. Still, at $94bn, the firm’s net income was huge.
Some AI companies are also massively profitable, such as Nvidia. But many are not yet making money. In the style of Warren Buffett, that typically puts me off them, as I prefer to invest in firms with a proven business model and profitability.
I do not own Nvidia, just as I do not own Apple, even though I like the investment case for both.
Why? In a word, valuation.
Warren Buffett tries to buy into great businesses – but only when he can do so at what he sees as an attractive price. That is one investment principle I think is well worth remembering.
