Circle of Competence

I came across a terrific article today detailing Bill Gates’ step down from MIcrosoft.  It seems that Gates is entering philanthropy with the same zeal as he once had for personal computing.  He and his wife, Melinda, are targeting issues such as world health and education with decabillions in firepower.

The article today from Fortune speaks to Gates’ intellectual curiosity and assiduity, something I propose that investors could do well to learn from.  In addition, there is a wonderful quote from Gates about his first encounter with Warren Buffett, one that attests to Buffett’s true focus in investing.

Here are the great quotes:

It’s as if he’s still trying to make up for dropping out of Harvard.

“Accordingly, Gates, who has been spotted on Seattle freeways reading a book while driving himself to the office, covets knowledge. It’s as if he’s still trying to make up for dropping out of Harvard, as he spends just about any spare waking minute reading, studying science texts, or watching university courses on DVD.”

He is always interested in looking at big systems in the world and understanding them at every level that he can.

“Unlike most benefactors, he doesn’t merely want to eradicate malaria and AIDS; he wants to understand the nuances of immunology. He wants to learn about what happens on a molecular scale when a plant’s genes are altered to improve hardiness. He insists on knowing the precise legal reasons women in developing countries are robbed of their estates when they become widowed.

“Here’s how Bill thinks,” explains Myhrvold. “He is always interested in looking at big systems in the world and understanding them at every level that he can. As an example, I got this e-mail from him today as part of this whole discussion on corn prices and crop yields and shortages resulting from ethanol production, and at the end Bill says, ‘I really need to understand phosphates more.’”

He wanted to understand the dynamics of the industry. To me it was way far away from, “What is your company worth?

“One of the most important experiences that jostled him out of his single-mindedness was his first meeting with Buffett, on July 5, 1991. As Gates tells the story:

‘My mom called me at the office to come out to Hood Canal for a Fourth of July barbecue because she wanted me to meet Warren Buffett. And I said, “Mom, I’m working.” But she insisted. So I took a helicopter so I could spend my couple of hours there and then get back quickly and work on software.

Then I met Warren, and I thought, “Oh, wow, this guy isn’t just about buying and selling stocks and businesses. He is thinking about how the world works.” And he asked me questions that I always wanted somebody to ask me, about why hadn’t IBM (IBM, Fortune 500) been able to do what we had done, and how software gets priced, and why does one company have a defensible position. He wanted to understand the dynamics of the industry. To me it was way far away from, “What is your company worth?”

Then he explained to me about how Wal-Mart (WMT, Fortune 500) had not only changed things in its business, but how it had an effect on newspapers because they thought of their advertising differently than individual local stores had. And he talked about how banking really worked in terms of credit risk. The whole time all I could think was, “Hey, I’ll be smarter about running Microsoft after I talk to this guy.” And so I stayed the whole day.’”

It’s all about rational responsibility, not grand idealism.

“As outgoing Gates Foundation CEO Patty Stonesifer puts it, “The Gateses by nature believe that the unexamined life is the one that’s worth living. They don’t like to talk about themselves. It’s all about rational responsibility, not grand idealism.”

Rationality, curiosity, and a thirst for knowledge.  These sound like the traits of a successful intelligent investor to me.

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