Warren Buffett Watched Alphabet's Stock Price Climb 9,000% Before He Decided to Invest. Here's Why He and Greg Abel Are Making It One of Berkshire Hathaway's Biggest Investments Now.

Nearly 10 years ago, Warren Buffett told Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) investors that he had made a mistake for not buying Google when he had the opportunity many years earlier. He had become quite familiar with the business because GEICO, Berkshire's consumer insurance company, was paying $10 or $11 per click for advertising on the search engine owned by Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). At the 2017 shareholder meeting, Buffett said he'd missed the opportunity, but he wouldn't bet against Google.

The stock climbed significantly while Buffett sat on the sidelines. He finally pulled the trigger on the stock in the third quarter of last year. Since then, he and newly appointed CEO Greg Abel have plowed tens of billions into the stock, making it one of Berkshire's biggest investments. But Buffett arguably missed out on a 9,000% gain by not buying into the stock sooner.

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Google wasn't a stock Buffett would buy

It's hard to blame Buffett for not buying Alphabet, then known as Google, when it made its initial public offering (IPO) in 2004. Buffett historically avoids both IPO stocks and tech stocks.

Buffett thinks IPOs are typically overvalued, at least relative to many other stocks, because underwriters are incentivized to secure the highest possible price for the company issuing shares. An IPO like Google's also comes with a lot of hype and media attention that can drive prices higher without any fundamental basis.

Buffett sees tech stocks as more prone to disruption than many other industries, making it harder to establish long-term competitive advantages that can sustain high profit margins for years. In 2004, Google was less than six years old. It had just turned profitable three years prior, and while it was exhibiting strong operating earnings growth, its operating margin was contracting.

But Alphabet consistently delivered a high operating margin for its core search and display advertising business throughout the 2000s and into the 2010s. At the same time, its dominance of the digital advertising market became cemented across search and video with YouTube. The early 2010s were a prime opportunity for Buffett to buy into the company his insurance business had been using to advertise to consumers. But he didn't act.