Software is eating the world, and other ideologies

A couple weekends ago I left one bubble to visit another. At the Berkshire Hathaway annual shareholder meeting, Warren Buffet and Charlie Munger discussed markets, investments and economics, and in the process showed me just how deeply ingrained I have been in the tech world’s ideology.

Andreessen is famously attributed the quote, “Software is eating the world.” Implied within is the ideology that technology (and technologists) will disrupt everything (and every incumbent) – it is only a matter of time. And if software is eating the world, you want to be the ones writing the software, not the ones getting eaten. According to this ideology, software will displace existing ways of value creation. What matters in this world is having the engineering chops to write software, and the audacity to take on incumbents.

Software IS Eating the World

It’s clear that technology drives an increasing amount of value creation. Technology is changing how things get done, that is uncontroversial. It is also clear that whoever is behind a new pieces of technology that captures/creates new markets will get an outsized return. Superstar technology companies give its investors 10x or 100x returns, far more than the 15-30% year-over-year returns that Berkshire built its fortune on.

…but it is not Sound Investing

When you’re not the technologist, however, investing in technology is dicey. Venture Capitalists, as a class of investors, do not out perform the market. Technology ventures are full of uncertainty. Software is eating the world implies that some technologists are going to win, but it doesn’t tell you which one. Most start-ups fail, and thus from a straight up asset management point of view, most start-ups are not worth investing in. VC’s only (sort of) work because they invest in start-ups as an asset class, being clear eyed about the risk-reward ratio and adjusting for it.

So does Berkshire actually short the future?

The short answer is no.

The longer answer is this. Mr. Buffet is an asset manager, and he is in the game of efficiently allocating capital, not maximizing potential return. He does not like volatility, and if he has to leave the black swan upsides of VC-style investing, so be it. That discipline is Berkshire’s strength.

Giving up black swan upsides is not shorting the future

When you actually listen to Buffet explain the logic of value investing, it’s hard to disagree with. Save the “bet on great companies in well understood industries” bit, what Buffet talks about are foundational principles that would apply to start-up’s just as much as anyone else e.g.

  • Form ideas based on evidence and first principles, not other people’s opinions
  • Systematically remove your ignorance
  • Be picky about finding great people, then trust and invest in them
  • Design incentive structures carefully to bring the best out of people
  • Prioritize

Berkshire Hathaway is an optimistic company that bets on growth, and bets on teams of managers that will foster that growth. While software may be eating the world, at the end of the day people will still run it.

At the shareholder meeting a question about self-driving cars came up, asking about how the technology will affect Geico, Berkshire Hathaway’s auto insurance business. Buffet and Munger’s responses was essentially:

  • Yes, self-driving cars will affect Geico’s business
  • No, we do not see it happening soon
  • No, we’re not worried, because,
    • A. Where there’s risks, there will be demand for insurance
    • B. We believe in our managers, they are on top of it, and no doubt will handle it properly

Which isn’t so far from what a VC might say. Ultimately, you’re investing in your people.