It is Real Money

IBM is the owner of one of the most resilient business models in information technology. Over the past few decades, it has gradually transformed from a hardware company to a software and service focused company. It is also the business model the likes of HP and Dell aspire to. No wonder it has become one of the few tech companies found in Warren Buffett's portfolio.

On Friday, the stock of IBM was down over 8% after a less than stellar earnings report. The disappoints came mainly due to the effect of a weaker yen and delayed software sales. CNBC published an article detailing the amount of loss at Berkshire due to IBM.

It's been a tough week for Warren Buffett's big investment in IBM (IBM).

Big Blue's stock plunged 8.3 percent Friday to $190 per share after the company reported disappointing first quarter revenues.

According to its most recent portfolio filing , Buffett's Berkshire Hathaway (BRK-A) owned 68.1 million IBM shares as of the end of December.

Assuming Berkshire's stake is still around that size, Friday's slide cut the value of those shares by $1.168 billion to $12.94 billion.

That's on paper, of course. Berkshire won't actually lose any real money until it sells the shares, and given Buffett's buy-and-hold track record that won't happen until years from now, if it happens at all.

When the price of a stock one owns trades down, that is often called "paper loss." When a stock is sold at a loss, that is called "realized loss." However, both forms are losses of real money, as real as if your bank accounts had been hacked and as real as if Warren Buffett had lost his wallet containing $1.2 billion. In Behavioral Fiance, the term anchoring refers to making decisions based on irrelevant information. It is precisely a commitment of anchoring when investors allow the purchasing price to effect one's sell decision. Long term investing involves the assessment of a company's intrinsic value. When the intrinsic value is above the current price of a stock, the long term investor would sell. Short term investing involves the study of a company trading momentum and technical factors. The purchasing price is relevant in neither process.