During their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Why Buffett Passed On $MSFT. Here’s an excerpt from the episode:
Bill: John Huber posted on December 19th of 2019. He recently tweeted about it, about Warren Buffett’s 1997 email exchange on Microsoft. Notice how I’m on my phone now and not like this, folks. I’ve learned and the iPad is down.[laughter]
Tobias: Yeah, that was funny.
Bill: That was actually funny.
Jake: How are you going to eat that meatball sub though? [chuckles]
Bill: I don’t know. I won’t be able to hide it, although the shirt will if I dropped anything on it. Anyway, like Buffett said– basically he goes through like why he’s so certain about Coke winning, going forward. And he says your analysis of Microsoft, why I should invest in it and why I don’t could not be more on the money. In effect, the company has a royalty on a communication stream that can do nothing but grow, dot-dot-dot, whatever. He said– but forced to make– sorry, something about like, if I were to calculate the probability with a degree of certainty of 80% or 55% for a 20-year run would be folly. If I had to make such decisions, I would do my best. But I’d prefer to structure investing as a n called strikes game.
To me, where I do think that there is a legit knock on Buffett’s strategy for a certain personality, not for Buffett, because he has his lens that he sees the world through. But if you have a 55% shot at being right on Microsoft, and you think that it’s that nascent in the game, in my opinion, you swing. You maybe don’t need to take a 10% position. But if you really think the right tail is that long, the right tail makes that probability set reasonably– like a decent bet. I guess that where I think you can get yourself into a lot of trouble is you can convince yourself that everything is a right tail event. I do think you’ve got to be really, really specific about what you’re looking for in the right tail. But what I think– I mean he has admitted. He was early advised into Microsoft. He saw Google early, and I think he needs to be more certain than at least my personality wants to invest in the way that I think that I can invest. Now, he’s the greatest of all time and I’m some schmuck, so take it with a huge grain of salt.
Jake: The Microsoft one is a perfect example of what makes this game hard, especially if you were managing other people’s money at that point and you bought Microsoft maybe a couple years later, let’s say–
Tobias: What vintage was it? Can you just remind us of the date?
Jake: He said 1996.
Bill: Well, that was ’97 when that was first described him.
Jake: So, two years later, let’s just use that as a jumping-off point, and you were to buy Microsoft then, you didn’t go anywhere for what 12, 14 years, I think.
Tobias: That’s right.
Bill: The business went a long way.
Jake: The business went a long way but the other people’s money you’re managing, they don’t give a shit about the business changing. Their account value hasn’t changed in a decade. What are you doing here? I’m trying to point out how much patience is required, and you have to be right about the business analysis too that Microsoft is going to be so good for so long. That’s a really hard game to play.
Bill: Yeah, well, this is my buddy, The Science of Hitting Investing, and I joke about this a lot. People will shit-post on banks, and he’ll like send, “Well, this is book value per share,” but nobody wants to hear it right because the multiple fade has destroyed the growth in book value per share. But it’s if you actually look at the business, no, it’s not some software compounder, no one agrees that. We all get it, but they’re not nearly as bad as the stock price drives narrative story.
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