Would Buffett Consider Google a Great Investment?

Some recent fussing over Google (GOOG) has followed from an unlikely source—the Berkshire Hathaway (BRK.A) annual meeting. During a Sunday press conference, Charlie Munger quipped that “Google has a huge new moat. In fact I’ve probably never seen such a wide moat.”

Unfortunately, Charlie’s brevity and the reporters’ lack of curiosity leave the reader to surmise what he really means. Warren Buffett kindly filled a bit of the gap when he added that Google’s search-linked advertising is “incredible.”

At a basic level, their observations are hard to dispute. Any time a brand name enters our common lexicon, one can assume that their product has attained sufficient “share of mind” to command pricing power. Even the most ardent Yahoo-er (YHOO) would not be so uncouth as to “yahoo” the web for an answer.

As if seeking confirmation, many leaped to conclude that Buffett and Munger now find Google a great investment. Yet a wide moat does not a great investment make. And I can think of no better criteria for an investment than those which have served Buffett and Munger so well over the years, and which are annually reproduced in Berkshire’s annual reports. An investment must have:

1. demonstrated consistent earning power,
2. earn good returns on equity while employing little or no debt,
3. have honest and able management,
4. operate in simple businesses, and
5. be available at a fair price (somewhat below its intrinsic value, to provide a margin of safety).

Given these criteria, Google couldn’t pass as a viable investment for two reasons—it is too difficult (likely impossible) to forecast what the “search” market will look like in ten years, and Google’s equity currently sells at a premium price. One only needs to look back ten years ago to see a Google with no “share of mind.” For Buffett and Munger, Google’s moat—like Microsoft’s (MSFT)—is extremely wide, but its durability is unknowable.

Disclosure: I, and persons whose accounts I manage, own shares of Berkshire Hathaway at the time of this writing.

Comments

[jerry w.:]

It looks like a good time to short goog. Sell, sell, sell.

May 31 01:15 PM

[modelportfo...:]

Buffet never buys tech stocks so Munger's comments and Buffet's clarification are noteworthy and positive about Google because a wide moat is one of Buffet's investment criteria.

Reason Buffet never buys tech is that he says he is unable to understand technology and likes to invest in the simple businesses he can explain.

I think to extrapolate that Buffet would find Google unattractive as an investment for the spurious reasons given by this author is like saying Pluto is made of cheese....no one can disprove it.

May 31 04:14 PM

[LA Tech:]

Reasons three and four are very good rational for me never again to invest $$ in Google.

Google is not a simple business.

Google has no honest and able management.

Jun 01 04:47 PM