We were pleased to learn in November 2011 that Warren Buffett had made a major investment in IBM. Indeed, Mr. Buffett was recently quoted as saying that he was “late to the IBM party,” but even so he has committed a good deal of money to it. He now owns 6% of the company.

We made IBM our #1 U.S. Stock of the Year in our Wall Street Stock Forecaster newsletter in 2010. The price was $126—yet it has risen over 60% since then.

We think IBM will go still higher in years to come, and it appears Warren feels the same way.

IBM has moved away from its earlier stress on manufacturing and toward a business model that combines equipment, software and service. This gives the company steadier revenues and safer growth, because its customers don’t like to change service providers when they update their equipment. In addition, IBM has a couple of key advantages in the fast-growing area of cloud computing (the general term for shifting software and data storage off of users’ machines and onto service providers’ machines, via the Internet).

First, IBM has some of the best cloud-computing technology available; second, it has one of the most trusted business names on the planet. When you commit your data “to the cloud”, as they say, you won’t trust just anybody with it.

You’ll sometimes hear an old saying about the company: “Nobody ever got fired for buying IBM”. Many investors think the saying originated among investment managers in the soaring bull market of the 1960s, when IBM and many other top stocks went up consistently for a number of years. In fact, the saying goes back a decade earlier.

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Blue chip stocks: High quality is better than a low price

In the early post-war years, information-technology purchasing agents routinely chose IBM equipment, despite its high cost. They recognized that IBM’s dependability mattered much more than the slightly lower prices or slightly more advanced capabilities promised by its competitors. The same thing is true in the stock market. High quality is generally a better choice than low prices.

To return to Mr. Buffett and his admission that he was a little “late” getting on board with IBM. His critics were dismissive of the fact that he got in when its price/earnings ratio was a “high” 13.0, and its dividend yield a “low” 1.6%.

That’s typical of a lot of today’s investment thinking. But you won’t hear long-time investment achievers like Warren Buffett say that they owe their success to a strategy of waiting to buy on a price dip.

We certainly didn’t wait for any price dips to recommend IBM to our readers.

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