Warren Buffett 1997 Email Exchange on Microsoft [pdf]
sabercapitalmgt.com
sabercapitalmgt.com
Whether we're talking about Buffet or in general, this is a pretty dim view of work and of the world. Most of us spend the majority of our time at work. For many (for most, I hope), building relationships at work isn't the bizarre lifehack game I so often see it characterized as here. Instead, those human connections are intrinsically fulfilling and they help give meaning to the work and to our lives, which can sometimes feel arbitrary and meaningless.
I was fired from my first internship in college. An internship. And the reason apparently had to do with these really subtle ways I interacted with the high level employees that nobody told me about. For example, it appeared to be that getting up and leaving at lunch break while a C-level is talking about his vacation to Cancun without saying "I'm leaving, it was nice to see you, thanks for the chat about Cancun" was a firable offense. So offensive, apparently, that immediately after my manager pulled me into a room and absolutely grilled me for it in the most direct, robotic language he could. The point was clear. Don't just get up and leave if a C-level is making small talk, even if it's on break. I should mention that this was a company that prided itself on its "startup mentality".
At the time this scared the shit out of me. My college age self started to believe: is this just how the real world works? You think all is fine until it isn't, because nobody told you their specific rules for what is acceptable to do or what they really think of you?
By the time they told me it was my last day I completely failed to be surprised. This was what they actually wanted to tell me to my face for so long. But the only place and time they were going to tell it to me was five minutes out of their busy schedule out of the sight of all the people programming and shooting the shit about Cancun and having a good laugh together. Building relationships with each other. Tangible, valuable relationships. "Real" relationships.
Today, with some added experience I more or less understand: Yes, that org was dysfunctional if that's what it came down to, all those unwritten social rules I had no way of understanding if nobody was going to tell me I would be fired for breaking them. I contrast this with my current job where this kind of thing would not be tolerated in the slightest, and instead their policy is tolerance of absolutely everyone and their thoughts and feelings, so long as they aren't disruptive.
But how was that manager talking to me before that lunch break?
With great rapport. I had found him very likeable up to that point. He guided me through the steps to set up my devenv and introduced me to the members of the team who he gave nicknames and shot the breeze with them and me and laughed and talked to me about his opinions on marriage and having children and appeared to be having a nice time with me, until he apparently started believing I was dead weight because of whatever unspeakable thing I did and the subsequent lack of any programming-related direction or input from him, leaving me stranded doing essentially nothing on clock time and a better case for firing, I guess.
Yet from his positive tone and the way he was talking about social things and such, I would hardly guess that if I crossed a line at some point that that would be the end of our relationship, and my relationship with the company, period.
So my understanding is that business relationships are different from completely social relationships with no strings attached. If you're perceived to be not fulfilling the duties that your manager expects, then no matter how much rapport or friendly conversations you have with them there will come a point where the gloves will come off and they have to speak in a completely functional manner, because that's what the business wants in order to optimize, and ultimately that's the most important thing when it comes to business relationships: getting things done and saving face, as opposed to being social and speaking from the heart, without pulling punches.
Here is my failing: this causes me to stray away from rapport, especially with higher ups, because my thought process cynically declares "it doesn't matter what emotions or expressions they use with you. If it comes down to it, they'd fire you in the end in spite of it all." I end up thinking because I am strictly in a business relationship with my coworkers, that trying to make social progress is futile, because I'm there to do work, and what I am mainly being judged for in going to work is how much effort I put in to solving the problems the org has and my abilities to actually accomplish the things they want, not how many witty stories I tell or small talk about hobbies I have. I am not saying it doesn't have its place, on break or even any time there is a meeting. It's just that I believe the only reason such social rapport is possible is because I'm still employed, and that is because I'm good at my job, not my social skills.
I don't really mean people who are assholes can get away with it, because they impact productivity. I just never felt the need for something that was putting on airs and obscuring the real reason I'm at work.
I don't think this means that personal relationships at work are futile, just that there is another component to them. The business and structure of the business come first. Coming out of college, this is a bit confusing because when you're young nearly everything is personal, there is no professional life. Kids have to learn these boundaries, and, I'm sorry your lesson was harsher than it should have been.
This is a bit unrelated to the point you were making, but not unrelated to the story: the truth is that a lot of executives become executives solely (or at least primarily) for the prestige and respect the positions attract. Although I might not think there's anything impressive about being an executive in a company, many people do. And enough people do, that it effectively becomes the truth. It's something to look out for in future jobs:
- Do the executives use their captive audience to inflate their egos?
- Are employees afraid of the executives?
If so, you're not in a business, but in a social hierarchy. And one where people enjoy that they have power over others.
This was part of the point I was originally intending to make: why would the executive care that you left during his story? You'd think all he would care about is that you were an effective employee. But in your case he did not become an executive to improve the business. Likely he became one to attain status. This is what I mean: his status shouldn't have anything to do with the effectiveness of the business. But of course, the effectiveness of the business is not truly his primary concern. (if it were, he wouldn't hold a bunch of employees hostage talking about his stupid fishing trip.)
If a person should come in that room, though, and make the case that they are the child, you start to get this sort of dysfunction. And when you wield a lot of authority, it's easy to fall into a child's mindset and never get called on it, and there is nothing innocent about what happens in those scenarios. You can pathologize it with various terms of the psyche, call them predatory or whatnot, but the underpinning of it is that these people are good at turning people into doting chaperones, and they will seek out such wherever they go and twist the rules as needed so that their own mistakes are "oopsies" while those of others are "unforgivable".
The only counterbalance I know of is to be so committed to an idea of your own that you immediately drive away anyone looking to engage you in this way. Then you will be bad at "socializing", but good at finding others similarly committed to ideas.
As well what I've found is that the ones that view themselves as striving towards being devoid of emotion and purely rational end up being some of the less rational ones because they are also the most unaware of their irrational/emotional blind spots.
Usually the ones that accept their irrationality are more successful becsuse they try to understand and account for it - not mistakenly think they can eliminate it.
We are all human - we have inherent flaws, biases, and irrational behavior. Success comes from acknowledging, understanding and managing them - not thinking we can eliminate them.
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.
You can both be effective and build rapport with people. It's both/and, not either/or.
In fact, building a rapport is actually an important part of being effective. Esprit de corps is a real thing (and a military concept, to boot), and you do not get it by treating people like robots.
However, you can't hack being kind and attentive. It only provides stat boosts if pursued as its own intrinsic good. Humans are really good at detecting false fronts - only world-class manipulators can consistently fool people into believing they're cared for.
Given all that, an effective analyst like Buffett will understand that he should look for people who are effective and personable. They're out there, and they're better economic bets than the ones who hobble themselves by pretending emotions, kindness, and taking an interest in others for their own sake are irrelevant (I hobbled myself this way for years).
Great relationships and trust results in higher efficiency.
Ironically the truth is the opposite - there's a good reason for saying "all business is personal".
SAAS businesses are about optimising. Billion dollar deals are about relationships (and not always positive ones).
I'm amused that often the same people screeching that Trump is incompetent will also deride him for going "on and on" about relationships.
If you approach every transaction as mix-max, you'll get pwned by the long game.
Not caring about ego or personal things would be more efficient. But it is not usually more effective when dealing with human relationships.
> 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.
What you have uncovered is that successful cannibalization in a product area in retrospect can seem like product continuation and improvement. But at the time - absolutely not.
To make the example clear think if Blockbuster had released a streaming service back then before Netflix. Obviously would've cannibalized their successful video store rental business. But assuming they won out, it would've just seemed like an evolution in video rental.
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.
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.
ROI 1,730.00%
Annualized ROI 13.47%For fun, I checked out what the maximum leverage would be that you could run, if you rebalanced your investment every day to reach your exact target leverage (an assuming no transaction costs and no interest on your margin loan) without you going bankrupt.
Under those conditions that's mostly governed by the what's the largest single day loss. The S&P 500 had a really bad day on 2020-03-16. Microsoft's worst single day loss was on 2000-04-24 when the dot com bubble burst.
All data from yahoo finance adjusted closing price.
My simple analysis suggests that you would have made the most money with 1.8x leverage on Microsoft. And with 1.9x leverage on the S&P 500. Both starting at August 22nd 1997 up to 2020-07-24.
That 'optimal' leverage would have multiplied your initial investment by 4.888 for S&P 500 and 35.956 for MSFT over those years.
I would have expected the optimal leverage to differ much more. But the pandemic really did a number on the S&P 500 for a while without hitting Microsoft nearly as hard.
(There are probably some bugs in my code. And in practice you'd probably want to vary your leverage based on observed volatility. You also wouldn't want to rebalance every day.)
Under some suitably broad efficient market assumptions, the expected return for all stocks is basically the same (after adjusting for risk). So variance automatically means going up and down compared to that expected return.
But, don't know if he accounted for dividends, which may have added another 1% annually.
A coke is probably 2-3x more expensive today ...
[yes, I realise that wasn't the point - I just find it fascinating how much people are paying for old soda cans]
The pound inflated a little more on average, to £18k, but nowhere near that 95p inflation.
That rent figure is based on "Raw Consumer Price Index data from U.S. Bureau of Labor Statistics for Rent of primary residence"
Clearly that can vary by city/state
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=8722080...
There's an awesome talk with Steve Jobs where he goes into it - it's been posted on Hacker News many times.
The drama "Pirates of Silicon Valley" covers MS & Apple from their founding in the 70s till the late 90s (the movie was made in 1999) and I believe it ends in that scene (I've last seen it when it was new so it may end a bit later but that definitely appears in the movie).
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.
Final value: $165k Annual return: 13.03%
Idk the most I hear of these oligarch's the more I'm terrified of them.
To quote:
"I feel 100% sure (perhaps mistakenly) that I know the odds of this continuing - again 100% as long as cola doesn't cause cancer."
In fact, we've know about this, the Warburg hypothesis, for a long time.
Could you expand on this point? My background is in physics, and I think I've got a fair understanding of how PET scans work, but I think I'm missing the connection.
Once you get a positive cancer diagnosis, or sometimes before, you give someone a PET scan to see if it's gone metastatic.
A PET scan will "detect cancer" down to a few mm in resolution. It will only miss cancers smaller than that. It detects all cancers, though there is noise.
What is it detecting? Positrons. From memory you dope glucose with decaying fluoride. You inject this or drink it after fasting.
Fasting clears out (some or most) your blood glucose and some glycogen in your muscles and other places. So you get a rush of this glucose and it goes straight to the tumors. There, it emits higher amounts of positrons due to concentration (and maybe metabolization, I forget).
So why does glucose go straight to tumors? Because tumors exclusively process glucose. The other pathway to ATP, fat (triglycerides to ketones etc) is broken.
That's why a PET scan works. Sugar. The stuff in coca cola. Although today there's a lot of fructose too (fun fact, fructose is a poison just like alcohol).
To go further, human beings didn't used to eat nearly the quantity of sugar or at the frequency we do today. You can become much healthier by fasting and avoiding carbs (which are in some ways one and the same thing).
A similar analysis of dentistry will lead to the same conclusions.
Cancer cells are essentially just cells that outcompete other cells, which becomes a problem. They do this in a few different ways, accelerating their cell growth, and preventing the normal apoptosis process that would stop these cells from growing.
Accelerated cell growth means a higher concentration of glucose is required. This means there is a very strong concentration of glucose in cancer cells, because cancer cells gather glucose to fuel their growth. This doesn't mean that if you get some healthy cells and expose them to higher than normal concentrations of glucose they will be more likely to become cancerous.
In fact, that sounds like a well defined experiment. I'd be surprised if it hasn't been carried out.
But anyway, your point about causation, that's why I said originally that it depends on your definition of causal here.
We absolutely know that low carb and fasting leads to better outcomes. I'm not saying glucose magically turns cells cancerous, but it is the fuel - the only fuel - they can use. So in a sense our massive use of sugar is causal.
There's even historical accounts of introducing sugar to cancer-free populations and they all get diabetes, cancer and bad teeth. See
https://www.amazon.com/Cancer-disease-civilization-anthropol...
For a great example.
If we change my hypothesised experiment to be add high glucose concentration to cells and look for a cancerous tumor that is greater than $size after $time, I think you'd find an effect (you can read about the effects of hyperglycaemia on cancer, and given that a cancer is present, it will grow more quickly in the presence of more glucose).
I guess I wanted to clarify that glucose doesn't cause cancer, but I think I understand your point now, and I think we're in agreement.
Or alternatively, without glucose, world they mostly stop spreading?
Fetuses can upcycle ketones to ATP, tumors can't.
See
https://www.amazon.com/Cancer-Metabolic-Disease-Management-P...
For an introductory text.
It strikes me as ironic too given the recent of essays on thought police and cancel culture.
We need a new kind of social media perhaps where different subs (like subreddits) can have some rules like only able to vote if you're over 14 years old and this is verified. Or can only downvote if you haven't downvoted lately. Let people experiment with rules like that. Maybe we will find better communication methods by letting people play with those kinds of rules...?
The second post you made in reply to someone asking you to clarify is thought provoking and fact intensive. the first post you made is very unclear and its meaning is not obvious. I think you got downvoted because it was more easily (mis)interpreted as sarcasm or as a troll.
HN does have a little bit of thought policing, but I dont think this was it.
EDIT: specifically, the phrase "If you think long and hard" is rhetorically redundant and shifts the tone from helpful/discussional to condescending and patronizing. IMO, anyway, but also probably in the opinion of others as you got downvoted by others.
Tumors are the best growing parts of a body; that doesn't mean cancer is the ideal form of life
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.
https://piersmorgan.blogs.cnn.com/2013/11/08/warren-buffett-...
It was the Microsoft anti-trust case: https://www.wsj.com/articles/SB107947771352857209
"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."
As in "I sent one business minded email where I detailed my investment thinking and strategy to a third party".
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.
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).
> 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-washing...
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.
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.
Today when Berkshire has two younger Vice Chairmans and Todd Combs and Ted Weschler are handling investments the portfolio is changing a little.
So it was not a safe bet in 1996 that Windows and Microsoft would still exist and be a big market player in 2020.
There's an argument they're not. Now obviously windows still dominates the laptop (and desktop) OS market (and I'm not gonna claim Microsoft is doing badly or anything), but it isn't the dominant overall OS due to the rise of mobile and Android.
At wave of computing so far, from mainframes to minicomputers, from minicomputers to PCs and from PCs to mobile, the dominant market leader has been unseated. If viewed in this light, Warren's reticence is prescient.
So I'd say 2020 -> 2040 Microsoft is a safer bet than 1996 -> 2016 Microsoft.
In '96 people were still talking about how Microsoft had failed to understand the importance of the internet, and whether Windows '95 would fix that. The '95 DOJ consent decree also looked set to potentially severely reign them in. Apple still looked like a possible contender.
OS/2 still looked like a possible contender - I remember being at trade shows at the time and seeing how hard OS/2 was pushed, at a time where Microsoft was still a small upstart that had only bypassed Commodore in revenues a few years prior (and speaking of Commodore, even in 95-97, several years after their bankruptcy, people were still looking at whether Escom and then Gateway would manage to resurrect Amiga), and there were lots of people convinced IBM would swat Microsoft away like a fly.
In the corporate space, options like DEC, Sun and SGI were still pushing into the workstation space at high pace and making inroads downwards into more regular workstations - I saw this first-hand in computer labs filled with cost reduced SGI Indy's and a bunch of DEC workstations at work, and lots of SUN workstations at places I contracted in those years.
Non-Windows, non-DOS machines were still everywhere in those years. It was unusual to find an office without a non-MS OS, because if nothing else there'd by a Mac for Quark Express or the like. And the presence of beachheads of non-MS OS's like that meant that whether or not MS could maintain its position was still not obvious.
More importantly: Giants had stumbled many times before. Most notably IBM, but the years before were littered with computer companies that had either died entirely or were shells of their former selves.
If you'd have said in 1997 that the most valuable companies in the world would include Google, Facebook and Amazon you'd have been laughed out of the room, when you then said that failing toy company apple would top the list
Even outside the world of IT, if you'd have told people in 1997 that a new car company would emerge and become one of the most valuable car companies in the world, given it had been 30 years since the previous car company had gone public, you'd have been equally mad.
In 1997 the most valuable companies in the world included Shell, Exxon, Toyota and Coca-Cola.
Predicting 20 years away is hard.
Sure you could have gone all-in on Amazon at IPO (ooh an online book cd sales company, with MP3s on the horizon), but you could easilly have gone all-in on Pets.com.
You could have invested in yahoo, after all that was the place that ran the web in the 90s - if you weren't on yahoo you didn't have a business. You could have piled into things like friends reunited, myspace, napster, all of which were just as likely to succeed as facebook, yahoo, or apple music.
Even dying companies like Blockbuster and Kodak took far longer to wipe out shareholder value than some new flash-in-the-pan companies.
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.
In our modern state of stockholder supremacy, that doesn't tend to matter much. But I think it should matter more.
I think you did adroitly mention down thread that there are labor market frictions to consider. And I definitely agree with that. Obviously stable employment is definitely one social consideration. And certainly long-lived companies make for more stable labor markets.
But all in all, I still think that overall most people would prefer faster rather than slower turnover among large firms. Younger companies (as in those founded more recently) tend to be more innovative, deliver better customer service, have more satisfied employees, engage in less lobbying, and have fewer environmental and safety issues.
It might be a less efficient allocation of capital. But it could reduce a lot of friction in the labor economy, and incurs less overhead from building an organization from scratch.
And, for example, I don't want coal companies try to stay relevant. They have coal managers and coal workers who know how to run coal mining.
I'd rather they give the money to shareholders, so that the shareholders can invest it in a different venture, or consume 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.
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.
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-can... for a comparison of 19th / early 20th century Canadian and American practices.