It’s a good one, but not really relevant in today’s new era of investing, is it?
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.
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.
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.
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.
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.
So it was not a safe bet in 1996 that Windows and Microsoft would still exist and be a big market player in 2020.
So I'd say 2020 -> 2040 Microsoft is a safer bet than 1996 -> 2016 Microsoft.
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.
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.
Today when Berkshire has two younger Vice Chairmans and Todd Combs and Ted Weschler are handling investments the portfolio is changing a little.