[Fortune] Bill and Warren Wax Philosophic.

I Find Karma (adam@cs.caltech.edu)
Wed, 12 Aug 1998 11:00:37 -0700

Interesting little Fortune article about a discussion between Bill Gates
and Warren Buffett in front of 350 UW business students:


I'm including the snippets I liked below but there's more in the article
if you want to read more.

Warren and Bill explain how they became richer than God (Rohit, pay
attention to paragraph 3):

> Buffett: I thought I ought to start this off by announcing that Bill and
> I have a small bet as to who would get the most applause. I suggested
> that I bet my house against his. We settled on a small sum, but
> evidently it isn't such a small sum to Bill, because just before we came
> out he gave me this Nebraska Cornhusker shirt to wear, and then he puts
> on this purple University of Washington shirt himself.
> They've asked us to start out talking, the two of us, about what got us
> here, but then it's on to your questions. How I got here is pretty
> simple in my case. It's not IQ, I'm sure you'll be glad to hear. The big
> thing is rationality. I always look at IQ and talent as representing the
> horsepower of the motor, but that the output--the efficiency with which
> that motor works--depends on rationality. A lot of people start out with
> 400-horsepower motors but only get a hundred horsepower of output. It's
> way better to have a 200-horsepower motor and get it all into output.
> So why do smart people do things that interfere with getting the output
> they're entitled to? It gets into the habits and character and
> temperament, and behaving in a rational manner. Not getting in your own
> way. As I said, everybody here has the ability absolutely to do anything
> I do and much beyond. Some of you will, and some of you won't. For the
> ones who won't, it will be because you get in your own way, not because
> the world doesn't allow you.
> So I have one little suggestion for you: Pick out the person you admire
> the most, and then write down why you admire them. You're not to name
> yourself in this. And then put down the person that, frankly, you can
> stand the least, and write down the qualities that turn you off in that
> person. The qualities of the one you admire are traits that you, with a
> little practice, can make your own, and that, if practiced, will become
> habit-forming.

How do you define success, personally? (Hey, what's wrong with saving up
sex for my old age?)

> Buffett: I can certainly define happiness, because happy is what I am.
> I get to do what I like to do every single day of the year. I get to do
> it with people I like, and I don't have to associate with anybody who
> causes my stomach to churn. I tap-dance to work, and when I get there I
> think I'm supposed to lie on my back and paint the ceiling. It's
> tremendous fun. The only thing in my job that I don't like--and this
> just happens every three or four years--is that occasionally I have to
> fire somebody.
> They say success is getting what you want and happiness is wanting
> what you get. I don't know which one applies in this case, but I do know
> I wouldn't be doing anything else. I'd advise you that when you go out
> to work, work for an organization of people you admire, because it will
> turn you on. I always worry about people who say, "I'm going to do this
> for ten years; I really don't like it very well. And then I'll do
> this...." That's a little like saving up sex for your old age. Not a
> very good idea.
> I have turned down business deals that were otherwise decent deals
> because I didn't like the people I would have to work with. I didn't see
> any sense in pretending. To get involved with people who cause your
> stomach to churn--I say it's a lot like marrying for money. It's
> probably a bad idea under any circumstances, but it's absolutely crazy
> if you're already rich, right?

When is the best opportunity to start a new company? (Rohit, see
paragraphs 3 and 4)

> Gates: When I started Microsoft, I was so excited that I didn't think of
> it as being all that risky. It's true, I might have gone bankrupt, but I
> had a set of skills that were highly employable. And my parents were
> still willing to let me go back to Harvard and finish my education if I
> wanted to.
> The thing that was scary to me was when I started hiring my friends, and
> they expected to be paid. And then we had customers that went
> bankrupt--customers that I counted on to come through. And so I soon
> came up with this incredibly conservative approach that I wanted to have
> enough money in the bank to pay a year's worth of payroll, even if we
> didn't get any payments coming in. I've been almost true to that the
> whole time. We have about $10 billion now, which is pretty much enough
> for the next year.
> Anyway, if you're going to start a company, it takes so much energy
> that you'd better overcome your feeling of risk. Also, I don't think
> that you should necessarily start a company at the beginning of your
> career. There's a lot to be said for working for a company and learning
> how they do things first. In our case, Paul Allen and I were afraid
> somebody else might get there before us. It turned out we probably
> could've waited another year, in fact, because things were a little slow
> to start out, but being on the ground floor seemed very important to us.
> At first you'll run into some skepticism. If you're young, it's hard
> to go lease premises. You couldn't rent a car when you were under
> 25, so I was always taking taxis to go see customers. When people would
> ask me to go have discussions in the bar, well, I couldn't go to the
> bar.
> That's fun, because when people are first skeptical, they say, "Oh,
> this kid doesn't know anything." But when you show them you've really
> got a good product and you know something, they actually tend to go
> overboard. So, at least in this country, our youth was a huge asset for
> us once we reached a certain threshold.

How do you as businessmen take your companies global? (Since when do
soda pop and razor blades represent an improvement in living standards?)

> Buffett: [At Berkshire Hathaway] we don't take our businesses global
> directly. Our two largest commitments are Coke and Gillette. Coke has
> 80% of its earnings coming from abroad, and Gillette has two-thirds of
> its earnings coming from abroad. So they are participating in a
> worldwide improvement in living standards, and we go global by
> piggybacking on them. I can sit in Omaha and let Doug Ivester [CEO of
> Coca-Cola] fly all over the world.

Any comments on China? (Rohit, BillG does exactly the same thing you do
in a new country: look for the Mickey Dees...)

> Gates: We went to China for a lot of reasons. Partly to relax and have
> fun. We found a few McDonald's there, so we didn't feel too far away
> from home. It was also exciting to go and see all the changes taking
> place, to see different parts of the country, and to meet some of the
> leaders.
> China is a market that Microsoft had already been investing in. We've
> upped that a lot since then. As a percentage of our sales, though, it's
> tiny--well under 1%--and so even though it will double every year for
> the next five years, it's really only by taking a ten-year view that we
> can say it's worth the emphasis we're putting on it.
> Although about three million computers get sold every year in China,
> people don't pay for the software. Someday they will, though. And as
> long as they're going to steal it, we want them to steal ours. They'll
> get sort of addicted, and then we'll somehow figure out how to collect
> sometime in the next decade.

Gates on surprises: (creating crises is inspired leadership?!)

> Gates: Sometimes we do get taken by surprise. For example, when the
> Internet came along, we had it as a fifth or sixth priority. It wasn't
> like somebody told me about it and I said, "I don't know how to spell
> that." I said, "Yeah, I've got that on my list, so I'm okay." But
> there came a point when we realized it was happening faster and was a
> much deeper phenomenon than had been recognized in our strategy. So as
> an act of leadership I had to create a sense of crisis, and we spent a
> couple of months throwing ideas and e-mail around, and we went on some
> retreats. Eventually a new strategy coalesced, and we said, "Okay,
> here's what we're going to do; here's how we're going to measure
> ourselves internally; and here's what the world should think about
> what we're going to do."
> That kind of crisis is going to come up every three or four years. You
> have to listen carefully to all the smart people in the company. That's
> why a company like ours has to attract a lot of people who think in
> different ways, it has to allow a lot of dissent, and then it has to
> recognize the right ideas and put some real energy behind them.

Gates on how people should be paid according to their intelligence:

> There will be this shift where, instead of your income level being
> determined by what country you are from, it will be determined by your
> education level. Today, a Ph.D. in India doesn't make nearly as much
> as a Ph.D. in the U.S. When we get the Internet allowing services and
> advice to be transported as efficiently as goods are transported via
> shipping, then you'll get essentially open-market bidding for that
> engineer in India vs. an engineer here in the U.S. And that benefits
> everyone, because you're taking better advantage of those resources.
> So the developed countries will get the early benefit of these things.
> But in the long run, the people in developing countries who are lucky
> enough to get a good education should get absolutely the biggest boost
> from all this.

Buffett on looking for the predictable, not the Internet:

> Take Wrigley's chewing gum. I don't think the Internet is going to
> change how people are going to chew gum. Bill probably does. I don't
> think it's going to change the fact that Coke will be the drink of
> preference and will gain in per capita consumption around the world; I
> don't think it will change whether people shave or how they shave. So we
> are looking for the very predictable, and you won't find the very
> predictable in what Bill does. As a member of society, I applaud what he
> is doing, but as an investor, I keep a wary eye on it.

Gates on competition:

> Gates: The key role of competition law is to protect consumers and to
> make sure that new products get created and that those products are very
> innovative. And you can look at different sectors of the economy and
> ask, "where is that happening very well?" No matter how you score it,
> there's no doubt that one sector of economy would stand out as
> absolutely the best, and that's the personal computer industry. I don't
> say the computer industry at large, because you have to remember that
> before personal computers came along, the structure was very different.
> People were stuck. Once you bought a computer from Digital or IBM or
> Hewlett-Packard or anyone else, the software that you created only ran
> on that computer.
> The vision of Microsoft was that all of these computers would work the
> same. The reason for that is that if you want to get a lot of great
> software, you have to have a lot of computers out there--millions and
> millions of them. So you've got to make them cheap, and make them so you
> don't have to test the software on all the different ones. The goal of
> the PC industry was to have every company competing to make the most
> portable one, or the fastest one, or the cheapest one. That would be
> great for consumers, and it would spark a big software market.
> The price of computing before the PC came along was going down at a
> certain rate, and since the PC came along it's gone down at an
> incredible rate. The variety and quality of software has also increased
> at a phenomenal rate. We're absolutely at the peak of that today. The
> number of new software companies being started, the number of new jobs
> being created, the level of investment, the number of companies going
> public, you name it. It's way beyond even what it was three years ago.
> So consumers are doing very well.
> Part of the PC dynamic is that instead of asking software developers to
> duplicate one another's work, we take anything that's typical in all
> those applications and put those features in Windows. So for things like
> connecting to the Internet, instead of everybody having to do that
> themselves, we put that in. That's been the evolution--graphical user
> interfaces came in, hard-disk support, networking support, now Internet
> support, including the browser.
> I think antitrust laws as written are fine. There are people who will
> debate whether they should be weaker, but that's of academic interest.
> When I come in to do business, I'm very careful to check with our
> lawyers to be sure we're steering a hundred miles away from anything
> that would be questionable. So it is somewhat of a surprise to find
> ourselves in an antitrust controversy. Thank goodness for the judiciary,
> which is an environment in which facts are tested and people can see if
> competition worked in the way it should and has been beneficial to
> consumers. There's no doubt in our minds where that is going to come
> out.

Gates on buying other companies: ("on their own [they] probably wouldn't
have made it" -- because we would have crushed them :)

> General Motors was created out of a restructuring of the automobile
> industry from a specialized orientation to companies that did the
> whole job. And anybody who missed that was basically wiped out.
> We've bought a lot of small companies, and I'd say that's been vital to
> us. These are companies that on their own probably wouldn't have made
> it, but when their abilities are combined with ours, both of us were
> able to create a much better set of products than we could've otherwise.

On decision successes and failures:

> Gates: We were talking at breakfast this morning about which of all
> Warren's investment decisions was the worst one. They're tough to find
> because his track record is unbelievable. But we decided that, by some
> metric, buying the one that his company is named after--Berkshire
> Hathaway--was probably his worst investment decision.
> Buffett: That's true. We went into a terrible business because it was
> cheap. It's what I refer to as the "used cigar butt" approach to
> investing. You see this cigar butt down there, it's soggy and terrible,
> but there's one puff left, and it's free. That's what Berkshire was when
> we bought it--it was selling below working capital--but it was a
> terrible, terrible mistake.
> I've made all kinds of bad decisions that have cost us billions of
> dollars. They've been mistakes of omission rather than commission. I
> don't worry about not buying Microsoft, though, because I didn't
> understand that business. And I didn't understand Intel. But there are
> businesses that I did understand--Fannie Mae was one that was within my
> circle of competence. I made a decision to buy it, and I just didn't
> execute. We would've made many billions of dollars. But we didn't do it.
> Conventional accounting doesn't record that, but believe me, it
> happened.
> Gates: In my case, I'd have to say my best business decisions have had
> to do with picking people. Deciding to go into business with Paul Allen
> is probably at the top of the list, and subsequently, hiring a
> friend--Steve Ballmer--who has been my primary business partner ever
> since. It's important to have someone who you totally trust, who is
> totally committed, who shares your vision, and yet who has a little bit
> different set of skills and who also acts as something of a check on
> you. Some of the ideas you run by him, you know he's going to say, "Hey,
> wait a minute, have you thought about this and that?" The benefit of
> sparking off somebody who's got that kind of brilliance is that it not
> only makes business more fun, but it really leads to a lot of success.

Gates on why Microsoft is a company where employees can keep moving up:

> Buffett: I will keep working until about
> five years after I die, and I've given the directors a Ouija board so
> they can keep in touch. But if the Ouija board doesn't work, we have
> outstanding people who can do what I do. People are not going to stop
> drinking Coca-Cola if I die tonight, they're not going to quit shaving
> tonight, they're not going to eat less See's candy, or fewer Dilly Bars,
> or anything of the sort. Those companies have terrific products, they've
> got outstanding managers, and all you'll need at the top of Berkshire is
> someone who can allocate capital and make sure you have the right
> managers down below. We've got the people identified to do that, and the
> board of directors of Berkshire knows who they are.
> In fact, I've already sent out a letter that tells what should be
> done, and I've got another letter that's addressed that will go out at
> the time, and it starts out, "Yesterday I died," and then tells what the
> plans of the company are.
> Gates: My attitude is a lot like Warren's. I want to keep doing what
> I'm doing for a long, long time. I think probably a decade from now or
> so, even though I'll still be totally involved with Microsoft because
> it's my career, I will pick somebody else to be CEO.
> Buffett: I see some hands in the audience here.
> Gates: That's a long time hence, and our top managers are always
> sitting down and talking about succession in general, because we want to
> make sure that we're giving people the opportunity to move up. We don't
> want to ever create a situation where they feel like it's clogged and
> they have to go off somewhere else to get big challenges. Our growth
> helps a lot. We're able to spawn off very, very big jobs for people.
> Picking that next person is something I give a lot of thought to, but
> it's probably five years before I have to do something very concrete
> about it. If there was a surprise, well, there's a contingency plan.

And finally, Bill and Warren explain why they'll give away 99% of their
wealth ... someday. (Hey, wait, Warren is currently worth $50 billion
and Bill $61 billion, so giving away 99% still leaves them at $500m and
$610m, respectively. That's still more than the combined net worth of
all of FoRK, according to my calculations...)

> Buffett: We believe in a meritocracy when it comes to athletics and
> all sorts of things. Now, why not have a meritocracy in terms of what
> you go out into the world with in terms of the productive goods? Let
> the resources flow to those who use them best, and then I believe they
> should give them back to society when they get through.
> Gates: That's a great philosophy, not to mention that passing along a
> lot of money can be bad for the people who receive it.
> Buffett: You'd better not put it to a vote.

And finally, Buffett on the "ovarian lottery." Man, he loves this
story. He recited it word-for-word when Rohit and I saw him last
October in Pasadena...

> Buffett: Let me suggest another way to think about this. Let's say
> that it was 24 hours before you were born, and a genie appeared and
> said, "You look like a winner. I have enormous confidence in you, and
> what I'm going to do is let you set the rules of the society into which
> you will be born. You can set the economic rules and the social rules,
> and whatever rules you set will apply during your lifetime and your
> children's lifetimes."
> And you'll say, "Well, that's nice, but what's the catch?"
> And the genie says, "Here's the catch. You don't know if you're going
> to be born rich or poor, white or black, male or female, able-bodied or
> infirm, intelligent or retarded." So all you know is that you're going
> to get one ball out of a barrel with, say, 5.8 billion balls in it.
> You're going to participate in what I call the ovarian lottery. It's the
> most important thing that will happen to you in your life, but you have
> no control over it. It's going to determine far more than your grades at
> school or anything else that happens to you.
> Now, what rules do you want to have? I'm not going to tell you the
> rules, and nobody will tell you; you have to make them up for yourself.
> But they will affect how you think about what you do in your will and
> things of that sort. That's because you're going to want to have a
> system that turns out more and more goods and services. You've got a
> great quantity of people out there, and you want them to live pretty
> well, and you want your kids to live better than you did, and you want
> your grandchildren to live better than your kids. You're going to want a
> system that keeps Bill Gates and Andy Grove and Jack Welch working long,
> long after they don't need to work. You're going to want the most able
> people working more than 12 hours a day. So you've got to have a system
> that gives them an incentive to turn out the goods and services.
> But you're also going to want a system that takes care of the bad
> balls, the ones that aren't lucky. If you have a system that is turning
> out enough goods and services, you can take care of them. You don't want
> people worrying about being sick in their old age, or fearful about
> going home at night. You want a system where people are free of fear to
> some extent.
> So you'll try to design something, assuming you have the goods and
> services to solve that sort of thing. You'll want equality of
> opportunity--namely a good public school system--to make you feel that
> every piece of talent out there will get the same shot at contributing.
> And your tax system will follow from your reasoning on that. And what
> you do with the money you make is another thing to think about. As you
> work through that, everybody comes up with something a little different.
> I just suggest you play that little game.

One little bonus for Rohit -- Gates on the "this above all, to thine own
self be true" philosophy:

> Gates: You have to be careful, if you're good at something, to make sure
> you don't think you're good at other things that you aren't necessarily
> so good at. I come in every day and work with a great team of people who
> are trying to figure out how to make great software, listening to the
> feedback and doing the research. And it's very typical that because I've
> been very successful at that, people come in and expect that I have
> wisdom about topics that I don't.
> Buffett: You can learn a lot by studying Microsoft and Bill. And you can
> learn the most by studying what it is he does year after year. But if he
> devoted 5% or 10% to what he's now doing, and then spread the remainder
> of his attention over a bunch of other things, well, society would be
> worse off, in my view.


Well, it may be all right in practice, but it will never work in theory.
-- Warren Buffett on how the academic community regards his investment