Financial Times
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May 1, 2015 11:50 am
Stephen Foley
Woodstock of Capitalism’s odd couple
Bill Gates is not expecting to triumph in his table tennis match this weekend. The Microsoft founder will once again be pitted against the US Olympic team member Ariel Hsing, in what has become one of the rituals at Berkshire Hathaway’s annual meeting, where Mr Gates and Warren Buffett mingle with Berkshire shareholders, play a few rounds of bridge under the gaze of television cameras, and “soften up” Ms Hsing for any other visitors who want to put her skills to the test. They do not commonly score a point against her.
Among all the oddities of the annual “Woodstock of Capitalism”, when 40,000 Berkshire shareholders congregate in Omaha, Nebraska, the oddest is surely the sight of the two richest men in the US larking about together.
In the 24 years since Mr Gates was introduced to Mr Buffett — reluctantly, expecting he would have little in common with a man 25 years his senior who “just buys and sells stuff” — the pair have become fast friends and confidantes.
“The number of things I’ve sought Warren’s advice on is pretty incredible,” Mr Gates says.
Over that time, the two men have bounced the number one slot on the rich list between them like a ping pong ball, and drawn each other more deeply into each other’s embrace, thanks to an arrangement unique in billionaire philanthropy.
Mr Buffett is handing over much of his fortune to the Bill and Melinda Gates Foundation, rather than attempting to make his own donations — an arrangement he describes as akin to his picking expert managers for Berkshire subsidiaries.
The Gates Foundation has received parcels of Berkshire shares worth about $2bn each year since 2006 and though it sells them over time, it still holds 6 per cent of the company’s “B” shares, which have fewer voting rights. Mr Buffett has a seat on the foundation board of trustees; Mr Gates has been a Berkshire board member since 2005.
Their first meeting on July 4 weekend 1991, at the Gates family’s getaway outside Seattle was engineered through a chain of connections from Mr Buffett’s friend Katharine Graham, publisher of the Washington Post, to Mary Gates, and while Mr Gates had told his mother he would entertain only a short conversation, the two billionaires were still talking well into the evening.
“I met him and he asked me, ‘why hadn’t IBM done what we’d been able to do, and what were the competitive dynamics, was it the people, the technology?’” Mr Gates recalls. “He asked all the questions that I’d been thinking about so intensely to create the strength of Microsoft.
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“Warren created a career starting with this lens of, ‘is this thing undervalued, therefore should I buy it and make money for myself and my partners?’ Using that lens over a period of many, many decades he ended up learning about people, about types of businesses, about honest long-term accounting. He learnt an immense amount even though he started with this, you might say, purely capitalistic, narrow view of things.”
Along the way, Mr Buffett has created one of the five largest companies in the US by market capitalisation, and this weekend’s meeting marks the golden anniversary of his control of Berkshire. It has completed a transformation from investment vehicle to fully fledged conglomerate. Its operations include railways, insurance, utilities, retailing, big food brands, manufacturing, real estate agencies, home finance and car dealerships, so it is reaching into more and more Americans’ daily lives.
That may bring controversy, but the company is diverse enough to withstand inevitable challenges, Mr Gates says.
“Berkshire is not an oil or a coal company, but you can imagine eventually the climate change crowd saying cars and utilities have something to do with CO2 emission. You’ve got animal slaughter equipment. You’ve got rail cars and the question of, should they be double-walled when they’re transporting oil? Insurance — can you rate people according to various characteristics and not other characteristics? There’s no end of potential controversy.
“Does the self-driving car 30 years from now affect the auto insurance business? Almost everybody is exposed to the winds of technological change. I can’t think of any other company of the size that is as diverse,” Mr Gates said.
As Berkshire has evolved, Mr Buffett’s investment philosophy has remained remarkably consistent, and consistently profitable, and he has increasingly taken on a public teaching role. Since Mr Buffett’s golden anniversary letter to Berkshire shareholders was published in February, Mr Gates has been repeatedly recommending it to anyone “if you are ever going to read 20 pages about business”.
For his own part, Mr Gates recalled how Mr Buffett helped him navigate Microsoft’s antitrust lawsuit from the Department of Justice and the overvaluation of its stock during the dotcom bubble.
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“He and I talked a lot about using stock options as a form of compensation when you get highly volatile technology stocks, and the idea that you are overpaying people wildly in some period of time and underpaying them during other periods of time and it is arbitrary,” Mr Gates said. “I was the first significant technology company actually to move towards pure share grants as opposed to option grants.”
And what of Mr Gates’s influence on his friend? The IBM that the pair discussed at that very first meeting is now 7.8 per cent owned by Berkshire. IBM executives will even be at the shareholder meeting exhibiting Watson, its artificial intelligence computer, competing for shareholder attention with dozens of other Berkshire brands, and shopping opportunities, and activities — and table tennis.
Can Mr Gates be credited with getting Mr Buffett over his famous reluctance to invest in technology shares with the IBM investment?
“No, IBM became less of a technology company,” Mr Gates says. “It’s really sad. It turns out, at least so far, Warren was wrong. Even with the enterprise customers, the cloud has not been saleable for them. I’m biased. IBM is a wonderful company but because I competed with them for many, many decades I have to say, I don’t see their future as brightly as people who are long on the stock.”
Sage advice
If you had invested $1,000 in the S&P 500 when Warren Buffett took over Berkshire Hathaway in 1965, it would have swelled to more than $110,000 now. That may sound impressive, but $1,000 in Berkshire shares would be worth about $18m.
The Financial Times asked high-profile investors to reflect on what they had learned from following Mr Buffett’s career and their first meetings with the Sage of Omaha.
Jack Bogle, whose asset management group Vanguard turns 40 this year, remembers approaching Mr Buffett in a California hotel lobby one morning in 1991. “After half an hour the papers came in and I said, you know, Mr Buffett, I’d like to buy a paper for a billionaire. So, I went over and bought him a New York Times and Wall Street Journal and I felt very proud of that.”
Jeff Ubben, founder of activist hedge fund ValueAct, met Mr Buffett for the first time this year, at a ceremony to celebrate a gift from his sister Doris Buffett to Northwestern University. Mr Buffett posed with Mr Ubben’s daughter and let her hold his wallet. “I credited him face to face with his influence,” Mr Ubben said.
Prince Al-Waleed bin Talal of Saudi Arabia tells the story of his first exchange of letters with Mr Buffett, after he came from Omaha to stay at the Plaza Hotel in New York, which was part-owned by the prince. When the prince wrote that he had been called “the Buffett of Arabia”, Mr Buffett wrote back that, “in Omaha, I am known as the Al-Waleed of America”.
As Berkshire has evolved, Mr Buffett’s investment philosophy has remained remarkably consistent, and consistently profitable, and he has increasingly taken on a public teaching role. Since Mr Buffett’s golden anniversary letter to Berkshire shareholders was published in February, Mr Gates has been repeatedly recommending it to anyone “if you are ever going to read 20 pages about business”.
For his own part, Mr Gates recalled how Mr Buffett helped him navigate Microsoft’s antitrust lawsuit from the Department of Justice and the overvaluation of its stock during the dotcom bubble.
And what of Mr Gates’s influence on his friend? The IBM that the pair discussed at that very first meeting is now 7.8 per cent owned by Berkshire. IBM executives will even be at the shareholder meeting exhibiting Watson, its artificial intelligence computer, competing for shareholder attention with dozens of other Berkshire brands, and shopping opportunities, and activities — and table tennis.
Can Mr Gates be credited with getting Mr Buffett over his famous reluctance to invest in technology shares with the IBM investment?
“No, IBM became less of a technology company,” Mr Gates says. “It’s really sad. It turns out, at least so far, Warren was wrong. Even with the enterprise customers, the cloud has not been saleable for them. I’m biased. IBM is a wonderful company but because I competed with them for many, many decades I have to say, I don’t see their future as brightly as people who are long on the stock.”
Sage advice
If you had invested $1,000 in the S&P 500 when Warren Buffett took over Berkshire Hathaway in 1965, it would have swelled to more than $110,000 now. That may sound impressive, but $1,000 in Berkshire shares would be worth about $18m.
The Financial Times asked high-profile investors to reflect on what they had learned from following Mr Buffett’s career and their first meetings with the Sage of Omaha.
Jack Bogle, whose asset management group Vanguard turns 40 this year, remembers approaching Mr Buffett in a California hotel lobby one morning in 1991. “After half an hour the papers came in and I said, you know, Mr Buffett, I’d like to buy a paper for a billionaire. So, I went over and bought him a New York Times and Wall Street Journal and I felt very proud of that.”
Jeff Ubben, founder of activist hedge fund ValueAct, met Mr Buffett for the first time this year, at a ceremony to celebrate a gift from his sister Doris Buffett to Northwestern University. Mr Buffett posed with Mr Ubben’s daughter and let her hold his wallet. “I credited him face to face with his influence,” Mr Ubben said.
Prince Al-Waleed bin Talal of Saudi Arabia tells the story of his first exchange of letters with Mr Buffett, after he came from Omaha to stay at the Plaza Hotel in New York, which was part-owned by the prince. When the prince wrote that he had been called “the Buffett of Arabia”, Mr Buffett wrote back that, “in Omaha, I am known as the Al-Waleed of America”.
David Rubenstein, a founder of private equity group Carlyle, was surprised that when he was invited out to dinner in Omaha, Mr Buffett drove his guests to the restaurant himself. “I have recognised from him that no matter how much you achieve you should put it in perspective,” Mr Rubenstein said. “If you are successful, that is great, but don’t try to make it sound as if you have reinvented the earth.”
