Warren Buffett says Alphabet bet was his call, admits ‘I made a mistake…’ | Why Berkshire is betting billions now?

Warren Buffett said that the decision to build Berkshire Hathaway's massive stake in Alphabet was his own, and incoming CEO Greg Abel had no role in it. "I initiated it," Buffett told CNBC in the first public explanation of how Alphabet became one of Berkshire's biggest technology holdings.

“I am not doing anything that he doesn’t approve of. He’s not doing anything I don’t approve of. We talk all the time, but he is the decider,” the Berkshire chairman added, referring to his CEO successor Abel.

Berkshire Hathaway added nearly 40 million shares of Alphabet stock in the first quarter, spending an estimated $13 billion. In June, Abel negotiated another deal to buy 28.6 million shares through a $10 billion private placement. Although Berkshire bought the shares at a discount, the stock subsequently sank below that level. This meant Abel could have bought even more shares in the open market at the same price

Mistake not investing in Alphabet sooner: Buffett

Buffett acknowledged in the interview that he “made a mistake” by not investing in Alphabet sooner.

At the 2012 Berkshire Hathaway annual meeting, Warren Buffett and the late Vice Chairman Charlie Munger were asked whether they would consider investing in companies like Apple and Google (now Alphabet). While Buffett spoke highly of both businesses, he said, "I would not be at all surprised to see them be worth a lot more money 10 years from now, but I wouldn't want to buy either one of them."

"I think we can fairly say that other people will always understand those two companies better than we do," Munger added. "We have the reverse of an edge."

Buffett later reconsidered Apple as its stock became much cheaper. He stopped seeing it as just a technology company and instead viewed it as a consumer brand with strong pricing power. Between 2016 and 2018, Berkshire invested about $36 billion in Apple stock.

Speaking about Alphabet, he expressed regret for missing the company’s early rise. In 2018, he said he witnessed the strength of Google's advertising business through Geico, one of its early customers, but was unsure whether Google would remain the long-term winner

Berkshire is investing in Alphabet for 2 reasons: advertising and cloud computing

Advertising: Alphabet's advertising business is anchored by Google Search and YouTube. Despite all the jitters that AI platforms would hurt Search, Google has remained the go-to platform for online searches. In fact, AI has helped improve Search, a Motley Fool article explains

Meanwhile, YouTube continues to dominate ad-supported online video.

Cloud computing: Like the advertising business, cloud computing is also straightforward. Alphabet builds capacity and rents it to customers.

Alphabet is seeing strong demand for its cloud business, with its contracted backlog doubling from $230 billion to $460 billion by the end of the first quarter.

‘AI race is the challenge now’

Buffett said that Alphabet and its rivals face a major challenge now: they need to spend heavily to stay competitive in the AI race.

“The real question with Google and all of its competitors now, because they’re all laying out hundreds of billions, and that’s real money,” Buffett said. “That’s the game they’re playing now. They weren’t playing that game with computer software.”