Warren Buffet warns against investing in social networks

Warren Buffet has spoken, and when Buffet speaks, people listen. Specifically, the CEO and founder of Berkshire Hathaway, and one of the most prolific and successful investors the world has ever known, has spoken out on investing in social networks. According to Bloomberg, Buffet is warning investors to be wary of initial valuations of popular social networking sites.

Most of them will be overpriced…It’s extremely difficult to value social-networking-site companies. Some will be huge winners, which will make up for the rest.

In other words, there are probably one or two sites that are indeed worth their initial valuation, but by no means are all valuations accurate. These comments come after Facebook was recently valued at $85 billion, and Twitter at $5 billion.

Buffet, who also was cautious of the .com bubble before it was a well-known phenomena, has traditionally shied away from investing in the technology sector, opting instead for placing his chips on industry, financial, and consumer goods. The sometimes non-tangible nature of technology holdings are on one hand attractive to investment dollars and on the other hand a risky proposition. Some have gotten rich off of it (see early Google investors), and many have seen their money disappear.

While we don’t think that the allure of Facebook stock will be lessened very much by Buffet’s opinion, it’s an opinion coming from a very high profile financial leader, and one that shouldn’t, and won't, be ignored.

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29 Comments

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etempest said,
A change in thinking / behavior by upcoming generation can wipe out any existing social network.

Hm, true. I would have liked to add that comment to my above statement.

Facebook with fall just like MySpace did. Something new will come along and people will go to that. Facebook will end up like MySpace within 3-5 years.

Dusco25 said,
Facebook with fall just like MySpace did. Something new will come along and people will go to that. Facebook will end up like MySpace within 3-5 years.

I doubt that. Facebook improvised, its a lot better than My_____ . FB will go down only if someone else comes up with a better UI that appeals more to the masses.

Dusco25 said,
Facebook with fall just like MySpace did. Something new will come along and people will go to that. Facebook will end up like MySpace within 3-5 years.

MySpace never even got close to 500 million users. Yes, empires fall every time. But if Facebook were to fall, it would never compare to the humiliating downfall of MySpace.

WiCkeD SaM said,

I doubt that. Facebook improvised, its a lot better than My_____ . FB will go down only if someone else comes up with a better UI that appeals more to the masses.

Considering how many people there are in the world trying to get rich, it's certainly easy to imagine that someone will design a better UI. People also get tired and bored with something old and practically beg for someone to come up with something newer and shinier. Facebook worth $75 billion, no way!!!!!!!

He is right, this is not about him not understanding technology, it is him understanding that these tech companies\fads do not usually have long term stability to be worth investing in. In the short term it is also a crap shoot to say the least.

At one time Myspace was a complete powerhouse in social networking and now they are dead a mere few years later. Who know what over night sensation may come about and render facebook and twitter useless.

Its hard to say here because he is an older fellow but may be behind the curve a bit. Not to say he is dumb but (generally speaking) older people dont understand technology and newer advances as well as the younger crowd. I dunno really...

este said,
Its hard to say here because he is an older fellow but may be behind the curve a bit. Not to say he is dumb but (generally speaking) older people dont understand technology and newer advances as well as the younger crowd. I dunno really...
Yes you don't know really. As the article says, when someone like Buffet speaks, people listen. Hell I agree with him. This is another bubble ready to burst.

este said,
Its hard to say here because he is an older fellow but may be behind the curve a bit. Not to say he is dumb but (generally speaking) older people dont understand technology and newer advances as well as the younger crowd. I dunno really...

In this case I think it is quite the opposite. He is not speaking against technology because he doesn't understand (he may or may not but I don't believe that to be the issue), he is advising against it because of the inherent unpredicability. This type of investment in no more predicatable to a young person that understands this market.

este said,
Its hard to say here because he is an older fellow but may be behind the curve a bit. Not to say he is dumb but (generally speaking) older people dont understand technology and newer advances as well as the younger crowd. I dunno really...

Between Warren Buffet's investment advice and yours, guess whose I'd take?

He may not understand all the technical intricacies that the younger generations do, but he's got an eye for spotting trends for the long haul.

este said,
Its hard to say here because he is an older fellow but may be behind the curve a bit. Not to say he is dumb but (generally speaking) older people dont understand technology and newer advances as well as the younger crowd. I dunno really...

I think its pretty EASY to say he knows what he is talking about.

este said,
Its hard to say here because he is an older fellow but may be behind the curve a bit. Not to say he is dumb but (generally speaking) older people dont understand technology and newer advances as well as the younger crowd. I dunno really...

Saying old people don't know technology as a generalisation is ignorance really. Some would claim they probably know more about technology than the generation that is literally engrossed in it, or addicted to it. MySpace is a classic example of what he is talking about, and probably every other regular people/school boys/lower to middle class based social network shared the same fate when Facebook exploded in popularity.

And one have to wonder if FB is actually at their peak value now.

este said,
Its hard to say here because he is an older fellow but may be behind the curve a bit. Not to say he is dumb but (generally speaking) older people dont understand technology and newer advances as well as the younger crowd. I dunno really...

Older fellows like who? Bill Gates? Steve Jobs? Larry Ellison? Woz? Eric Schmidt? Yeah those people don't understand anything. Man I wish we could have teens running the tech industry.

Artillery said,

Older fellows like who? Bill Gates? Steve Jobs? Larry Ellison? Woz? Eric Schmidt? Yeah those people don't understand anything. Man I wish we could have teens running the tech industry.

Granted, Buffet is a successful man but he is not tech savvy like Gates or Jobs. with something like this its just hard to predict what will actually happen. Who knows, Facebook can become the most powerful internet company ever eventually.

SuperHans said,
They don't exactly look like the 2nd and 3rd richest people in the world Or whatever rank they are nowadays...

Well, I imagine that watch cost a pretty penny...

Tzvi Friedman said,

Well, I imagine that watch cost a pretty penny...

Knowing of Warren driving his own car, doing work himslef, etc, it was probably a gift from family / friend, or affordable.

SuperHans said,
They don't exactly look like the 2nd and 3rd richest people in the world Or whatever rank they are nowadays...

Warren does not live extravagantly at all. He's quite a modest fellow.

Cheese Whiz said,
He's right. mindshare != revenue
The valuation of these companies has been hyped beyond any reasonable metric.

True, there is also rapid rise-rapid fall that occurs in the internet age; anyone remember when MySpace was the darling, that crashed and burned pretty quickly.