Howlikelyisitthatfirmswillfindundervaluedstocksand
bondstoinvestin?Itdependsonhowefficientmarketsare
and how good the managers of the firm are at finding
undervaluedsecurities.Inuniquecases,afirmmaybemore
adeptatfindinggoodinvestmentsinfinancialmarketsthanit
is at competing in product markets. Consider the case of
Berkshire Hathaway, a firm that has been a vehicle for
WarrenBuffett’sinvestingacumenoverthelastfewdecades.
Attheendofthesecondquarterof1999,BerkshireHathaway
had$69billioninvestedinsecuritiesofotherfirms.Among
itsholdingswereinvestmentsof$12.4billioninCoca-Cola,
$6.6billioninAmericanExpress,and$3.9billioninGillette.
While BerkshireHathawayalso hasrealbusiness interests,
including ownershipofa well-regardedinsurance company
(Geico),investorsinthefirmgetasignificantportionoftheir
value from the firm’s passive equity investments.
NotwithstandingBerkshireHathaway’ssuccess,mostfirmsin
theUnitedStatessteerawayfromlookingforbargainsamong
financial investments. Part of the reason for this is their
realizationthatitisdifficulttofindundervaluedsecuritiesin
financialmarkets.Partofthereluctanceonthepartoffirmsto
make investments canalso be traced to a recognition that
investors in firms like Procter & Gamble and Coca-Cola
investinthembecauseofthesefirms’competitiveadvantages
inproductmarkets(brandname,marketingskills,etc.)and
not for their perceived skill at picking stocks.
Strategic Investments
During the 1990s, Microsoft accumulated a huge cash
balance.Itusedthiscashtomakeaseriesofinvestmentsin