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Posted at 06:00 AM ET, 11/22/2011

Warren Buffett and why IBM is just like a railroad

Warren Buffett, widely acknowledged as one of the world’s most savvy investors, has famously avoided any investment in the high-tech sector, preferring instead to invest in stodgy industrial companies with more predictable earnings. That appeared to change, when, on Nov. 14, Buffett acknowledged that he had been steadily accumulating $10 billion in IBM stock throughout the year, giving him a more than 5-percent stake in the company and also making him one of the biggest investors in IBM. Experts lauded the move as Buffett’s first-ever technology investment, yet IBM only derives a relatively tiny sliver of its revenue from technology and software. So was there something else behind Buffett’s investment that we’re missing?

Under its Smarter Planet initiative, IBM has extensively built out its ability to use digital technology solutions to modernize national infrastructure. They can help save energy through smart grid technologies, reduce traffic congestion in urban areas via digital sensors and deliver better public services by re-thinking infrastructure. One of the showcase projects on the Smarter Planet Web site, in fact, looks at how IBM re-imagined the underground water system in Washington, DC.

The types of smart infrastructure solutions that companies like IBM make possible are also a big deal in rapidly-growing, emerging markets — places like China where massive urbanization efforts are placing a major strain on the nation’s infrastructure. If IBM can participate in the enormous upside of these markets without getting bogged down with the local government bureaucracy, the earnings potential is also enormous. Not surprisingly, The Economist recently called these “smart systems” “the next big thing” in the world.

Buffett likes to invest for the long haul. With IBM, he gets the chance to invest in a 100-year-old company with an impeccable track record, as well as a company uniquely positioned to profit from global growth, wherever it happens in the world. The technology aspect aside, this is classic Buffett.

The closest parallel to Buffet’s IBM investment is his $34 billion investment in the Burlington Northern Santa Fe railroad back in 2009. Railroads just a few years ago were viewed as a stodgy, less-than-glamorous area in which to invest. Yet, Buffett held true to his investment vision, choosing to view railroads as a play on the nation’s infrastructure and as a proxy for U.S economic growth. If you want to invest in the future of America, then invest in railroads. In real life, as in the board game Monopoly, railroads are valuable properties.

Buffett, of course, earned his billions and his moniker "The Oracle of Omaha" by investing in exactly the types of non-glamorous industrial companies that others ignore. He likes companies that are easy to understand and generate stable cash flows over long periods of time. IBM may not be a newfangled tech company like Google or Facebook, but it’s also a lot easier to see how investing in the future of a Smarter Planet may ultimately have a bigger impact on his investment portfolio and his legacy than investing in an Internet company forced to pivot every couple of months.

Read more news and ideas on Innovations:

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By  |  06:00 AM ET, 11/22/2011

Categories:  Dominic Basulto, Business, Energy, Health, Morning Read, Technology, Video

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