Tuesday, September 29, 2009

Letting a wave pass-by: story of Warren Buffett’s non-investment in Intel and Microsoft

In the past few articles on “strategy as surfing a wave” (see part 1, 2, 3 and 4), we looked at how a big wave like Internet hits people like Gorssman and Patrick. And how they surfed the wave. Well, do you really need to surf every wave coming? Can you choose not to surf a wave? How do wise men let a wave pass by? Let’s explore these questions using the story of Warren Buffett who chose to be a by-stander to both the PC and the Internet waves.

Let’s rewind to 1967 and zoom into the campus of Grinnell College which sat like a tiny radical island in the middle of the farming hamlet of Grinnell, Iowa. Its liberal-minded students tended to go into social services after graduation, and the school was focusing its funding on increasing its African-American enrollment. One of Grinnell trustees, Joe Rosenfield had become a friend of Warren and Susie Buffett. In October 1967 Warren attended a fund raising convocation and was moved by an electrifying speech by Dr. Martin Luther King, Jr. For the first time in his life, Warren felt in Susie’s words, “Perhaps there is more to life than sitting in a room making money”. After King’s speech, Rosenfield easily recruited Buffett to become a Grinnell trustee. Naturally, he went straight into the finance committee. And guess who the chairman of the committee was? An ex-Grinnell student Bob Noyce who at that time ran a company called Fairchild Semiconductors.

In 1968 Buffett showed up for a meeting at Grinnell College to find his fellow trustee Bob Noyce itching to leave Fairchild and start a new company. Joe Rosenfield and the college endowment fund each said they would put in $100,000, joining dozens who were helping to raise $2.5 million for the new company – which was soon to be named Intel, for Integrated Electronics. Out of regard for Rosenfield, Buffett signed off on a technology investment for Grinnell. As far as he was concerned, “We were betting on the jockey, not the horse”. It goes without saying that Buffett did not put any money from Buffett Partnership into Intel. Now, let’s fast forward 23 years to 4th July 1991 onto Bainbridge Island, a half-hour ferry ride from Seattle, where his friend Kay Graham dragged him to attend a party on a long holiday weekend.

And guess who were there at the party? Mr and Mrs Gates along with their son Bill Gates. It was the first time Buffett met Bill Gates. Buffett immediately asked Gates whether IBM was going to do well in the future and whether it was a competitor of Microsoft. Computer companies seemed to come and go, why? Gates started explaining. Buffett remembers, “We talked and talked and talked and talked and paid no attention to anybody else. He’s a great teacher and we couldn’t stop talking”. Gates told Buffett to buy two stocks: Intel and Microsoft. Buffett did not buy either – at least seriously. Why?

To get a glimpse of the answer, we need to understand two of the three pillars of Buffett’s business philosophy. The first one is “margin of safety”. It means having sufficient confidence in protecting your investment over long enough period. And why wouldn’t Buffett have confidence in the competitive position of Microsoft or Intel? There comes the second pillar: “Circle of competence” i.e. sticking to an area that you understand better than most others. In his own words, “I don't know what the world will look like in 10 years, and I don't want to play in a game where the other guy has an advantage over me."

In case you are wondering what the third pillar of Buffett’s philosophy is – It is “exploiting Mr. Market vagaries” i.e. exploiting the irrational behaviour of market investors. You may also want to check out: Warren Buffett and disruptive innovation. (source for Buffett stories: The Snowball by Alice Shroeder).


  1. Hi Vinay,
    really like this blog site. A lot of ideas about process, technology, business and planning. Every new article of yours inspires me, and i always look forward to the new postings...keep up the great work.
    I remember that our people's president "Abdul Kalam" once adviced newspapers to print inspiring news and how it inspires indians... i feel the same reading your articles.
    I was a sasian once and we met by chance

    srikanth konjeti

  2. Thanks, Srikanth. I am glad you enjoyed the articles.

  3. Not only Shrikanth , I also Enjoy the Article..