Why Warren Buffett Has No Professional Services Firms

This one struck me as a bit odd.  How come the most prolific investor of our time does not appear to own any Professional Services firms.

While people will say that he owns 10% of IBM - After all, Big Blue has more in common with many other boring value stocks in Buffett's portfolio, such as Johnson and Johnson and Coca-Cola, than sexier tech stars like Dell and VMWare.  

Fundamentally he bought IBM as it was cheap, lacked an activist investor, and was getting a new CEO when he bought in 2012.  It went up 64% in 2 years before crashing again to about its 2012 price.  And just when you think Buffett should have gotten out, he buys another $3bn (approx) worth.  While its his only credible Professional Services investment, its also worth wondering if he sees something we do not.

That is because he does not own very much Tech Stock - and nothing that would appear to be in the Professional Services core of businesses.

On the tech side, its easy enough to understand.  Buffett never buys anything that will not wipe its own face.  Much like a property investor buying an apartment for a retirement income - Buffett looks at what will yield enough to pay any debts if it has to be 100% leveraged.  The main stocks in the tech area do not do that - trading at up to 200 times earnings.

Another thing that keeps Buffett out of our space is that he does not invest in Innovation based businesses.  All his core companies sell things that have been made for 30+ years (think IBM Mainframe).  Mr Buffett believes that Innovation can not be defended for long, or give competitive advantage over any sustainable period.

 So for a Professional Services firm, its hard to see how you could win over a Warren Buffett to invest in you business - especially if you feel you are winning business on the basis of a technical or innovative advantage.

However, what Mr Buffett does buy into is Sustainable Competitive Advantage.  So companies that are "Owning" the client relationship are long term potential targets for the kind of investor that Mr Buffett is.