Date
22 August 2017
Warren Buffett’s move on IBM may involve reasons other than investment return. It could have been politics, according to observers . Photo: Bloomberg
Warren Buffett’s move on IBM may involve reasons other than investment return. It could have been politics, according to observers . Photo: Bloomberg

Who’s sorry now? Why Buffett must be crying over IBM bet

Warren Buffett invested US$10.7 billion in IBM in November 2011 to become its largest shareholder.

Within a week, he lost more than US$1 billion in his first ever major bet on the technology sector after IBM’s share price plummeted on poor third-quarter results.

Does that mean Buffett must be wishing he had never made the bet?

Most people would probably think so. Forbes commentator Peter Cohan asked whether Buffett should stick to his longstanding principle not to touch technology stocks which the investment guru used to describe as hard to understand.

But Buffett’s move on IBM may involve reasons other than investment return.

When Buffett bought IBM shares three years ago, the United States had just come out of a financial tsunami.

He had been giving his vote of confidence to the US economy by voicing out “Buy America” after the crisis.

But why IBM and not any other industrial stock in which he used to invest?

The official answer he gave to the public is that he saw a bright future in the company.

However, rumors began to spread that his real motive was to support US President Barack Obama.

Buffett has been known to be an Obama mentor since the former Illinois senator won the White House in 2008. Buffett is also a supporter of Democrats.

Wealth and the stock market have a great impact on US presidential politics.

Bill Clinton’s famous quote during his election campaign in 1992 — “It’s the economy, stupid” — said it all.

The Dow Jones Industrial Index is a price-weighted average of 30 components, meaning that pricier stocks carry more sway in its up or down cycles.

In other words, pushing up the most expensive stock could give the biggest boost to the index.

In fact, IBM was the priciest stock in the benchmark during 2011 to mid-2013.

The stock hit a record high of US$215.80 in March 2013 while the index had risen more than 22 percent during the same period.

That’s why some were guessing that there was more or less political reason behind Buffett’s bet in IBM.

In the end, the Dow Jones rose and Obama went on to win reelection.

– Contact us at [email protected]

RA

EJ Insight writer

EJI Weekly Newsletter

Please click here to unsubscribe