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Pythia And The Two-Legged Pig

The great temple of Apollo stands at Delphi on Mt. Parnassus. Centuries ago, an elder priestess at this temple, yclept Pythia, was an oracle, offering prophecies to those able to correctly interpret her words.  Today, Warren Buffett, whose Berkshire Hathaway is IBM's largest shareholder, is called the Oracle of Omaha.  Buffett looks the part, resembling a benign grandma.  He has more money than all of Greece, although right now plenty of people enjoy that distinction.  Like Pythia the Oracle, Buffett can be baffling; less gifted people cannot understand why Buffett is up to his ears in IBM stock.

Delphi Temple
The Temple At Delphi
These ruins mark the spot where the Oracles of Delphi dispensed auguries that greatly influenced the classical world

It's been nearly five years since early 2011, when Berkshire Hathaway took a big stake in Big Blue.  Currently, Buffett's outfit is IBM's largest shareholder, with close to 9 percent of the company's shares, acquired at a cost of more than $13 billion.  In November 2015 those shares were worth more like $11 billion.  Buffett's company had, on paper, lost around $2 billion or 15 percent of its stake.  Undeterred by what the investor must believe is a temporary downturn in the stock price, Berkshire Hathaway bought another million shares during this year's third quarter, even as it was selling other holdings to raise cash for a planned acquisition of Precision Castparts.

A skeptical observer would say that Buffett is in a trap.  If he tried to lighten up on IBM shares, other investors might overreact, causing the stock price to plummet.  In addition, Buffett's company, deservedly known for its astute investment strategy, would have to tell its own shareholders that it seems to have made a big mistake.  By contrast, during the most recent quarter Berkshire Hathaway reported a gain of $4.4 billion on one deal alone, its stake in Kraft Heinz, which soared in value as food giants Kraft and Heinz merged their interests.  That gain is a heap of money, and it is more than twice the hypothetical loss Buffett's company has taken on its IBM investment.

Pythia The Oracle
The lead priestess at Delphi was called Pythia; it was as much a title as a name

As an investor, Berkshire Hathaway is almost always in it for the long haul, so if IBM shares spend a couple of years in the doghouse Buffett won't get rattled.  He has apparently braced for the poor performance expected to be reported by IBM during the remainder of 2015.  It's probably too early for anyone, even Warren Buffett, to guess how IBM will do in 2016.  But right now it's seems fair to say that Berkshire Hathaway is not only IBM's biggest investor, but also one of the company's most optimistic.

Buffett has said he's happy that IBM shares have fallen, giving his company a chance to build its stake at a lower price and reduce its average cost per share.  Whether outsiders take that literally or figure there's not much else Buffett, always in the public eye, can say no matter what he's really thinking remains a complete mystery.

This makes Buffett, even though he is not a priestess, some kind of oracle, and just as inscrutable.

The real Oracle of Delphi is justifiably renowned for her legendary wisdom.

From well before 500 BC, perhaps as far back as a thousand years earlier, everyone who was anyone visited Delphi to get at the wisdom of Pythia the Oracle.  The priestess who took on that role is said to have reeled off her prophesies while in some kind of trance.  Her throne was said to be above a crevice in the earth, and volcanic fumes rose all around it.  The fumes may have included vapors of ethylene, which can produce vivid visions and hallucinations.  This theory is in some ways consistent with the tales of Pythia written or carried via oral history for the past 3,500 years.

It's completely a matter of conjecture just what the Oracle of Delphi actually said, but some of the mythical or apocryphal statements attributed to her have been passed down through the ages to intrigue, amuse and inform us to this very day.  Among other things, around 450 BC the Oracle of the day said Socrates was the wisest of all the Greeks.  This didn't help the great philosopher live to a ripe old age, but reinforced the immortality he achieved by virtue of his sheer brilliance.

Revenue and EPS
Revenue And Earnings
IBM's financial results are disappointing compared to those expected
by many investors such as Warren Buffett

Another divination, said to have been offered some 50 years later, was advice to the great Spartan general Lysander, warning him to watch out for a dragon.  Lysander might have dismissed this prediction as completely preposterous, at least until he was slain by a soldier who had a dragon painted on this shield.

And some 40 years after that, Philip II of Macedon consulted Pythia and was told that whoever could ride a very difficult colt Philip happened to own would conquer the world.  The horse seemed to get along with only one person, Philip's son Alexander, who was called the Great when he conquered the known world.  Alexander was the last Westerner to hold power in Afghanistan; the name of the city Kandahar is derived from Alexander's moniker in the language of its ancient time and place.  The Oracle's role lasted for a long time thereafter.  The Roman Emperor Hadrian is said to have visited Delphi around 100 AD to get some advice.

It's clear that the sobriquet "Oracle" isn't applied lightly, particularly in the case of Warren Buffett, one of the wealthiest people on the planet.  Buffett generally doesn't comment on the practices of companies in which he invests, nor on the postures or proclamations of their chief executives.  But in the case of IBM, whose chief executive Ginny Rometty has wound down nearly all the company's remaining manufacturing operations, intending to replace the revenue from this dwindling segment with intake from software and services, Berkshire Hathaway shareholders, IBM customers and other interested parties might well wonder what the Oracle is thinking.

It has become increasingly difficult to avoid wondering whether IBM can prevail in the equipment business, notwithstanding the extraordinary quality of its hardware products and the loyalty of customers who have been with IBM not merely for computer generations, but for human generations.

The part of IBM that manufactures computing equipment, these days confined to mainframes, Power servers and storage subsystems look to be in a precarious position.  The current line of big iron began reaching customers at the beginning of 2015.  But the end of the year, IBM will have delivered new machines to most of its best customers and the rate of shipment will decline.  IBM hopes to boost sales by adding new models, such as dedicated Linux servers, to the mainframe line and it could yet add additional configurations aimed at its smaller customers.  IBM's small mainframe users are still pretty substantial companies by any reckoning, so if IBM really hit its target, it would enjoy a boost in revenue even as sales from the largest boxes it makes tails off.

Warren Buffett
Buffett, through his company Berkshire Hathaway, is IBM's largest investor
and perhaps its most disillusioned one as well

A similar pattern may be occurring in the Power market, where IBM has fleshed out its Power 8 line and already picked a lot of the low hanging fruit.  While IBM continues to enrich its Power range, particularly in the case of high performance systems, and regularly announces innovative improvements in its hardware, it is not getting great results.  Lately, the best IBM seems to be able to do is to sell as much equipment as it did a year ago or perhaps a little more.  The portion of the Power market running IBM i software remains loyal, but IBM doesn't seem to have a marketing strategy that might bring it significant growth.

In disks, IBM has been suffering lately.  And now that Dell is planning to absorb EMC, the situation will only get more difficult.  Privately held, Dell can compete on price in ways that are pretty much impossible for any publicly held company, such as IBM.  At the same time, Hewlett-Packard, having bisected itself, will probably be given a lot of latitude by investors, at least for the next year or so.

IBM cannot avoid conflict with Dell and HP Enterprise, among others.  Having abandoned the market in ubiquitous X86 servers and related equipment, IBM is obliged to share the glass house with its most ardent adversaries.  These rivals may not enjoy IBM's profitability, which shareholders like Berkshire Hathaway are bound to admire, but they have a lot more to offer when it comes to the size and scope of their hardware.

IBM's customers, whether loyal because they admire Big Blue and its products or because they feel they are irretrievably invested in their mainframe, Power or IBM i apparatus, are increasingly concerned about the future.  They wonder how long they can continue to rely on IBM.  A lot of them used to count on IBM's X86 servers and IBM's help integrating these machines with IBM's bigger iron.  Some of them remember IBM printers, or IBM PCs, or even IBM computer terminals.  Even if IBM mainframes, Power boxes and IBM i platforms might persist for quite a while, as did the institution of the Oracle of Delphi, not long ago IBM's customers believed the company's hardware lines would last not merely a long time but forever.

It's kind of like this:

A tourist driving through the countryside realized he had gotten completely lost, so when he came to a farmhouse, he decided to stop and ask directions.  As he walked toward the front door of the house, a pig with two real legs and two wooden legs ran in front of him, went to the door and, using its nose, vigorously knocked.

When the farmer answered the door, the wanderer explained he needed directions.  But first, he said, he was curious about the clever two-legged pig that had welcomed him.

"That pig is the most amazing pig in the land, son," the farmer said.

"Last year, our house caught fire when we were all asleep.  That pig ran in and woke us all up one by one and saved our lives!"

The visitor was impressed.  "That sure is one special pig," he said.

The farmer replied, "That's not all.  This past summer that pig jumped into the pond and dragged my drowning son to the shore."

"Why does the pig have only two legs?" the tourist asked.  "Is it from the fire?"

"No, son," responded the farmer.  "A pig like that you just don't eat all at once."

— Hesh Wiener January 2016

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