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Warren Buffett 1997 Email Exchange on Microsoft [pdf]
- sfblah 6y agoIt’s a good one, but not really relevant in today’s new era of investing, is it?
- bb2018 6y agoI don't see how it is less relevant. Warren says he understands how much Microsoft is getting off of royalties for Windows but is unsure about his confidence in a 20 year bet compared to a company like Coke which sells Cola. Warren turned out to be very wrong in investing in Coke over MSFT. However, his reasoning wasn't awful. The entire e-mail pleading the case to him is about how great of a business selling the OS is. However, if Microsoft had stuck to that the stock would not be doing so well now. Perhaps he and the person pleading MSFT's case were wrong to view Microsoft's business as operating system related instead of tech and computing more generally. I'd say both were about the same levels of wrong but one had a better outcome.
- blackflame7000 6y agoVery few cash-cows last forever which is why it is important to look at how a company is reinvesting in alternative streams of income when forecasting the long term
- dcolkitt 6y agoI'm gonna disagree with you. Very few companies manage to successfully pivot to a line of business that's substantially outside their original area of core competence. The reality is that different organizations have ingrained cultural DNAs that's usually both optimized for their specific niche and painfully difficult to change. When an industry reaches its inextricable decline, most companies would do better to gracefully return money to shareholders (either in the form of dividends or buybacks). 9 times out of 10, that produces a better outcome for investors than a desperate attempt to reinvent themselves. We tend not to realize this because of survivor bias. But for every Apple, Western Union or AT&T, there's a dozen companies like Polaroid, Sears and DEC littered across history's dustbin.
- eru 6y agoFunny enough, companies that follow this sensible advice often get a lot of flak. Matt Levine had some examples.
- rocqua 6y agoThing is. Whilst doing stock buybacks and dividends is best for the stockholders, it isn't best for the employees. Nor is it good for other stakeholders in the company. In our modern state of stockholder supremacy, that doesn't tend to matter much. But I think it should matter more.
- eru 6y agoShareholder capitalism is an aspiration. We have never really tried it. In practice, companies are run for the benefit of management and other insiders. > Whilst doing stock buybacks and dividends is best for the stockholders, it isn't best for the employees. Nor is it good for other stakeholders in the company. Stockholders can invest the money returned to them again in more profitable ventures.
- blahbhthrow3748 6y agoFinancial capitalism where everything needs to be consolidated, bundled and sold as an investment vehicle seems like a pretty modern invention. To go to an extreme, look at It's a Wonderful Life. Something like a community bank in the early 20th century was not run aggressively for the sole benefit of shareholders, there was a notion of community involvement. If anything financialization since the 70s has created the fiction that corporations are soulless machines designed to optimize profits at the expense of all others.
- eru 6y agoI would be careful about citing a fictional example of an American bank. I'm not even objecting to the fiction. But more that American unit banking was extremely weird. Basically, many states banned banks from having more than one branch. The result was the world's most fragile financial system. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for a comparison of 19th / early 20th century Canadian and American practices.
- sangfroid_bio 6y agoAt that time software's AT&T style winner-take-all and network effect lock-in was still not that obvious. The PC was not yet the golden standard for desktop hardware and words like minicomputers and mainframes were not uncommon terms.
- postexitus 6y agoIn 1997, what else was there for desktop hardware? Ok, I was an Amiga buff and waiting for Blizzard PPC to come out - but I was under no impression that mine was the golden standard for desktop hardware.
- dtech 6y agoIt was certainly dominant at the time, but not for that long, mostly early 90's. The decades before saw - by today's standards - rapid switching of dominant home, business and server hardware and corresponding OSses. So it was not a safe bet in 1996 that Windows and Microsoft would still exist and be a big market player in 2020.
- Kronen 6y agoYou can say the same for 2040 then...
- dtech 6y agoFor Windows you can, but Microsoft is diversifying risks and running their software on other OS and hardware, and Office is a major windows-independent revenue stream. So I'd say 2020 -> 2040 Microsoft is a safer bet than 1996 -> 2016 Microsoft.
- ralfd 6y agoI think it is riskier. Microsoft in 1997 had virtually no competitors. That is not the case anymore.
- 6y ago
- nabla9 6y agoBuffet attributes his success into being able to stay within his circle of competence. He is perfectly aware that he is letting many golden opportunities pass, but he is not concerned about that. Unless it falls into his circle of competence, he is not touching it. Today when Berkshire has two younger Vice Chairmans and Todd Combs and Ted Weschler are handling investments the portfolio is changing a little.
- sleavey 6y agoTo add to your point, he didn't even say it wouldn't be a good investment; in fact he said if someone pointed a gun to his head he would choose to invest. His problem was he couldn't assess the exact likelihood of success (which he nevertheless reckoned was "high"), and he only goes for investments he considers 100% winners.
- BMSmnqXAE4yfe1 6y agoHe was wrong on MSFT. But at the time there were maybe 100 companies like MSFT, for example Worldcom, Enron, PET.COM etc. So if you average over those 100 companies that he didn't understand and didn't invest in, maybe he was right not getting into unfamiliar waters. There were a lot of risks that he could not foresee - potential rise of a competing OS, the rise of mobile phones (which even BillG did not foresee), anti-monopoly lawsuits etc etc.
- tom-thistime 6y agoNew era! Somebody should use that!
- sumanthvepa 6y agoI'm curious as how this private communication got released. Was it due to discovery in a court case?
- breck 6y ago"I sent one e-mail in my life. I sent it to Jeff Raikes at Microsoft and it ended up in court in Minneapolis, so I am one for one." https://piersmorgan.blogs.cnn.com/2013/11/08/warren-buffett-on-cell-phones-email-and-material-goods-2/ https://piersmorgan.blogs.cnn.com/2013/11/08/warren-buffett-... It was the Microsoft anti-trust case: https://www.wsj.com/articles/SB107947771352857209 https://www.wsj.com/articles/SB107947771352857209
- eis 6y agoThat is an interesting quote given that at the very end of the supposedly sole email he sent in his life he talks about how he feels whenever he is sending e-mails. "As a beginner I always feel that when i send off any e-mail, it is going to vanish into the ether and i would hate to have that happen with everything i know."
- omega3 6y agoBuffett cultivates his image very carefully.
- _red 6y agoYes, Buffets long-term shtick has been "grandfatherly simpleton". He intentionally plays that up for maximum effect. What I find interesting is that now Gates is aping Buffet in that regard. Gates now exclusively appears wearing sweaters and speaking in simple truisms. Selling vaccines must require it?
- nolok 6y agoI think the dichotomy is because he separates emails he sends to friends or family, and "business emails". As in "I sent one business minded email where I detailed my investment thinking and strategy to a third party".
- nodesocket 6y agoFun fact, if you invested $10,000 into MSFT on August 22nd 1997 [adjusted closing price $10.98] the next day after Warren's reply, you'd have $183k today. Not as big as a return as many would have thought, still amazing annualized 2X S&P return for 23 years. ROI 1,730.00% Annualized ROI 13.47%
- deleted 6y ago[deleted]
- refurb 6y agoDoes that include dividends?
- nodesocket 6y agoBelieve so. Used Yahoo Finance[1]. Adjusted close price adjusted for both dividends and splits. [1] https://finance.yahoo.com/quote/MSFT/history/ https://finance.yahoo.com/quote/MSFT/history/
- ido 6y agoFor anyone interested the same source[0] reports apple going from 0.67 to 370.46 in the same time frame (55,192% increase ). Of course not quite a fair comparison as it was closer to the high point of MS and close to the low point Apple. [0] https://finance.yahoo.com/quote/AAPL/history?period1=872208000&period2=1595808000&interval=1mo&filter=history&frequency=1mo https://finance.yahoo.com/quote/AAPL/history?period1=8722080...
- nodesocket 6y ago$10,000 to $5.5M in Apple. Yup, that's absolutely insane.
- ido 6y agoYou could have probably gotten some similar/greater gains investing in some of the dotcom "stars" (even "real" companies like Qualcomm/Broadcom/Sun/etc rather than Pets.com) & exiting before the bubble burst! Easier to say in hindsight of course. I remember my brother convinced my parents to buy stocks (something like a few thousand $s) in a company making broadband internet modems in the mid 90s (this was high-tech future-like stuff at the time when most people were on dial-up internet - ISDN was considered fast) and they ended up going out of business shortly thereafter. So even if you have good insight & bet on the right trajectory of technology it's not that easy to get it right without the benefit of a time machine or crystal ball.
- shayas 6y agoWarren's wisdom is timeless
- forgingahead 6y agoWhat's more interesting to me was that the first third or so of the email was just banter/chit-chat about sports and family updates. Good reminder that business is always about relationships, and while cold hard factual analysis (which is the latter part of the email) is important, the social and relationship building elements are key.
- DrAwdeOccarim 6y agoThis is so true, even relationships within your organization. These are the networks and skills the current WFH era is going to lack. Similar to how kids are missing out not on learning facts while out of school, but really missing out on learning how to build social bonds and networks because ultimately that's what helps you succeed in life. Twenty years from now the sociological studies on this era are going to be fascinating.
- everdrive 6y agoWhile I completely agree with you, it's also a good indication that the executives running these businesses are in some sense immature. They should not care about ego and other personal things. They should care about effectiveness. If they rely on a personal rapport before acting, it seems to be that they are incapable of acting objectively.
- Blackstone4 6y agoSo everyone at the top is a robot? The reality is that we are human and it is important to communicate effectively...part of this is building relationship with others. I've met billionaires and 100's of millions in financial services and they are all great with people. This isn't because they are great guys....some are narcissists...its because it works!
- everdrive 6y agoThis is clearly an unpopular opinion, but yes. If you need socialization to do business, then you're building a social network, or a social club. I don't think that generals in the army make small talk before giving orders. Yes, of course, there is going to be some personal chatter, but the ability to give orders does not depend on it. They can get down to brass tacks, and can work well with people they dislike personally. I understand that businesses are NOT the military. But, I'm perplexed that business leaders are seeking out peoople they have a good rapport with rather than people that are effective. These will not always be opposites, of course, but I would think that effectiveness would always matter more than rapport. Perhaps the problem is that in business there is no higher calling. It's all just about making money, and so there is generally not something worth setting aside your ego for.
- sradman 6y ago> In effect the company has a royalty on a communication stream that can do nothing but grow. In hindsight, the desktop OS business reached saturation and it started to look like the automobile industry which is sensitive to the replacement rate of a long lived good. The introduction of SSD drives was probably analogous to the introduction of quality rust proofing in the early 90’s.
- lostlogin 6y ago> In hindsight, the desktop OS business reached saturation and it started to look like the automobile industry which is sensitive to the replacement rate of a long lived good. If wish you could get a good car for free. My first, second and third choice OS are all free. Helpfully, we are also at a time where old computer hardware has some very attractive elements too (replaceable bits, helpful ports etc).
- nextaccountic 6y agoBut the computer itself isn't free, right?
- sleavey 6y agoMaybe in the future cars will asymptote towards the upper limit of mechanical efficiency (for each given class, like the school run, city trips, long distance, etc.), allowing users to keep them on timescales similar to homes, so the only profitable innovation will then be on the software. Then we might see "car-OS wars" and the beginnings of open source driving systems in parallel.
- unnouinceput 6y agoNobody is stopping you to start those free open source "car-OS" right now. Considering this is actually embedded it's actually easier then writing a general purpose OS like Linux or Windows.
- drtillberg 6y agoRaikes incidentally pointed out that tech business leadership is inherently unstable. Writing of Lotus 1-2-3 and WordPerfect: > They were the leaders and they could have chosen to cannibalize themselves. But they didn't act fast enough and were scared that investing in the new paradigm would open the door for us-- ironically it was their slow pace that opened the door. No business voluntarily cannibalizes it's core revenue stream. That snippet explains succinctly how monoline dominance in technology is inherently unstable, and also tends to explain the "Amazon" (ha!) approach from major technology companies of massively diverse investment and M&A to overcome this effect and maintain their core dominance.
- scaraffe 6y agoI could be wrong, but didn't apple cannibalize its ipod business with the release of iPhone?
- Seanambers 6y agoYes Apple does cannabalize its own products, iPod-> iPhone & notebooks -> iPads for instance. From what I remember this was also how Jobs et al. at Apple views it. Basically if you want to be a innovator you can't worry about eating your own. Incidentally Tesla has done the same with Model 3 / Y eating up S / X sales.
- DaiPlusPlus 6y ago> with Model 3 / Y eating up S / X sales. Eeehhhhh. Not really. They did discontinue the low-end S editions, yes - but the number of people who could have afforded to buy an S who opted for a 3 instead aren’t that many people. Tesla opted to remarket the S/X as flagship cars instead of being their mainstream offering. It would be cannibalism if Tesla launched an extended wheelbase/station-wagon/estate/shooting-brake version of the Model 3/Y while still getting the S/X around. Actually - I will concede that the Model Y probably is eating into sales of the X.
- inigoalonso 6y agoiPhones are just fancier iPods that consumers are willing to buy again every other year, instead that once a decade. It seems to me that iPods cannibalized the phone market.
- dredmorbius 6y agoTIL: Buffett bottom posts.
- Jolter 6y agoEveryone did, in 1997. It was the default for all mail readers I’ve seen except Outlook (Express).
- dredmorbius 6y agoThere were different standards, And I don't believe Microsoft Mail or Outlook Express defaulted to this at the time -- Outlook certainly changed practice and dated from late '97 / early '98 ("Office 97" refers to the nominal release year). But other platforms/ communities differed, with Lotus Notes (big in some corporate accounts) being an especially notable case with its own butt-ugly quote/reply convention. In the Unix world, Usenet, and among derived / affiliated tools (Eudora Mail, Netscape Mail, others), yes, bottom-posting dominated.
- rjkennedy98 6y agoAnyone else weirded out by the tone of Warren's email. His casual references to Coca Cola possibly causing cancer (when Coca Cola is probably the single biggest cause of disease in this country via obesity). Also, the way he framed Microsoft as being a toll on a water stream reminded me of Bill Burr's talking about Nestle trying to own the water supply https://www.youtube.com/watch?v=w_pb6r8VNWk https://www.youtube.com/watch?v=w_pb6r8VNWk. Idk the most I hear of these oligarch's the more I'm terrified of them.
- monkeynotes 6y agoI imagine that when you are playing at the top of your game, everything seems like a game and that's the way you talk about it. Buffet is solely focussed on winning bets, that's how he got to where he is. People like Buffet fill a slot that is at the very foundation of capitalism. If you are terrified of rich, powerful business people you are in the wrong economic model. So far we are yet to find a better model, IMO.
- sukilot 6y agoI'd you think the purpose of economics is to make the most money and not the most utility for human society, you say you are in the wrong economic model. Tumors are the best growing parts of a body; that doesn't mean cancer is the ideal form of life
- monkeynotes 6y agoWho said it was the best economical model? Human society is made up of individuals. Capitalism, as opposed to socialism puts the power of utility in the hands of the individual. Thus individuals strive to make the most of the economic landscape and this often means making as much money as they can. Again, I am not saying it's perfect but it's worked pretty well for western values.
- pdm55 6y agoIs Warren upset that he went ouside his sweet spot when he bought major shares in American, Delta, Southwest and United airlines? His analysis showed that investing in airlines last century would have netted him precisely zero dollars. However, this century's tourism boom seems to have persuaded him that now was the time to set aside that analysis. So in he went. THEN the coronavirus pandemic hit. And out he scampered for a $7 billion dollar loss! I wonder what an experience like that does to one's psyche.
- yufeng66 6y agoWell, they got the husker-husky game wrong ;) Husker won the game and end up splitting the national tile with Michigan that season.
- OldHand2018 6y agoThey were worried about Scott Frost being able to throw, but Nebraska played football the way Nebraska plays football and ran all over them. > The Huskers smashed any doubts about their ability to be a major player in this season's national-championship chase with a 27-14 victory that left the country's second- and third-ranked team battered, bruised and bewildered. "We knew what they were going to do," Washington linebacker Jason Chorak said. "We just couldn't stop it." https://dataomaha.com/huskers/history/game/1997-9-20-washington https://dataomaha.com/huskers/history/game/1997-9-20-washing...
- swyx 6y agohe was right about Coke lasting longer than Windows.