Intelligence

Buffett embraces fintech, kind of

Reporter: Vested staff

This week’s Vested Suggested features stories that the team at Vested is reading and thinking about to begin the week.

Names making news: The Wall Street Journal’s Nicole Friedman reported that Berkshire Hathaway has made significant investments in two financial technology companies, Paytm and StoneCo. So does this mean that Warren Buffett is finally making a move into early-stage technology, a sector he has long said falls outside of his comfort zone, value stocks?

Well, kind of, but not exactly.

First, it was not Buffett, but rather Todd Combs, one of Berkshire’s two portfolio managers, who led on the deals. Moreover, both Paytm and StoneCo have strong appeal in emerging markets. Paytm is India’s largest mobile-payments service, and it claims to have more users than does PayPal. And StoneCo, a Brazilian payments processor that went public last week, has “phenomenal top-line growth at an accelerating rate along with the improvement in margins,” which led to its sweet IPO valuation of 22 times annual revenue.

Opportunistically obtaining positions in two credible companies that dominate their regional markets is a theme that does seem to fit The Oracle of Omaha’s investment philosophy. In this instance, those two companies just happen to do payments.

Related: Here are 10 quotes from Buffett that will never get old.

Big deals: IBM is buying open-source software distributor Red Hat for $34b, at $190 per share in cash.

The likely ramifications of this deal for the financial services industry are deeply technical. But, to generalize it a bit, IBM is investing in cloud computing infrastructure, probably on the belief that products, services, and data analysis will continue to be moved to the cloud. This is what Red Hat does — it implements and services cloud infrastructure, which is essential for practically anything a bank might do that either requires or creates data. All commercial banks in the Fortune Global 500 use Red Hat, according to the company’s marketing material.

Financial products: Annuities are coming back, with sales totaling nearly $60b during the second quarter of the year, the highest since late 2015, and are expected to remain strong through at least the rest of the year.

This is fantastic news for those who sell annuities, but not for many of those who have them. “The boom shows how Washington’s push to roll back financial regulations is giving new life to products that industry watchdogs say aren’t always good for investors,” Lisa Beilfuss at The Wall Street Journal reported. “The annuities resurrection stems from the demise of the Labor Department’s fiduciary rule, an Obama-era proposal that would have required brokers who oversee retirement savings to act in their clients’ best interests.”

Contrarianism: Value investing is a contrarian strategy, and “the recent losing streak is testing the value faith. Perhaps the strategy has stopped working because it is so well known. … [Or] perhaps the flaws lie with book value.”

Credibility check: It should shock no one to learn that many sites that cover digital currency do not have sterling ethics when it comes to journalism. Still, one outlet asked 22 crypto news outlets if they’d take money in exchange for coverage, and most of them said yes.

Resource guarding: Like a dog standing next to its food bowl and growling at anyone who walks by, U.S. companies are getting even more aggressive when it comes to hoarding their cash.