Stig Brodersen  4:43  

Yeah, perhaps. It says here that he was actually in the 10th grade. I think that he met Bill, when he was in eighth grade, but I don’t know the age difference. The thing to understand here is that Bill Gates, he might be 14 when he was introduced. But he looked like he was, as you said, Preston, 7, 8 years [old] perhaps.

Preston Pysh  5:00  

You’ve got to see some pictures. It’s hilarious. The thing that I liked so much about this is Bill Gates was spunky at that age. He might have looked like he was seven or whatever, but I mean, he was really kind of bossing around Paul Allen around as a tenth grader, and just really kind of authoritative and almost dictator-like at such a young age. All those stories kind of came out. It was pretty awesome to hear these first hand accounts of this back and forth of this young like little torpy Bill Gates.

Stig Brodersen  5:32  

Yeah, I was impressed about how Paul Allen recalled some of the conversations that they had because Paul Allen, who was into all the technical stuff. That was all that he talked about, and then what Bill was talking about was, “Well, I just read this and Fortune magazine, and I have this plan of how we can hire 35 programmers and eventually turn into a Fortune 500 company.” And this was a kid. I mean, he was in eighth grade. He almost had a business plan on how to build a Fortune 500 company. He was just so much ahead of his time. I was thoroughly impressed by this.

Preston Pysh  6:05  

Well, I think it goes back to one of these major themes that we see on this show. This kid was thinking not big, he was thinking enormous. At 13 or 14 years old, He’s talking about owning a Fortune 500 company. How many kids at that age do you think are saying that kind of stuff or even thinking it? I bet none. This is how this guy was thinking right from the start. 

As for Paul Allen, Stig nailed it. He was the technical guy. He’s talking about assembly language like how he can program ones and zeros, because that’s where his interest was. He had this real interest on how a person could literally communicate with a computer through assembly language, whereas Bill Gates was thinking much more bigger picture: “How could I write a program that I could monetize and sell, then build a business?” And so, you can see how these two went together like peanut butter and jelly.

Stig Brodersen  6:55  

Yeah, Bill might come off like he was the businessman. That was all he could do, but he was an amazing programmer. I have two things I want to mention here. The first thing is that at that time, whenever you were educating yourself, you needed to be an efficient programmer because there was no memory on these computers. You couldn’t waste any memory at all, because you have to be so efficient. Also, he said there was a huge advantage that his generation had compared to later generations. 

Another thing was that Bill Gates basically wrote a language for the Altair machine in five days. That was something I was thoroughly impressed about. He said he needed time to think about the architecture or how he was doing it. He actually called Paul, and we’ll probably get to this story later. He actually called Paul and said, “I figured out how I want to write it. I’m locking myself into a hotel room.” Then, he spent five days. He sent the files to Paul and said, “Debug it. Present it to the management.” That was it, and it worked. How amazing is that? I just want to put that up for the record. It’s like Bill Gates, a gifted programmer if you ever saw one.

Preston Pysh  8:00  

Now, if you hadn’t heard one of our previous episodes with the Malcolm Gladwell book, he did a really interesting discussion about how Bill Gates and even Paul Allen at this point had put in so many hours at a point in time. How many people at their age had this kind of access to this kind of computer that was just brand new on the market, where you could start programming? 

These guys were putting in hundreds upon hundreds of hours of learning at such a developmental stage in their life that they were literally just a landslide ahead of anybody, when it came to competing with them while they were in their 20s. They were just lightyears ahead of people because of this, and there was a great highlight in his book that talked about how much of an advantage they had.

Stig Brodersen  8:49  

Definitely, so if people want to check that out, it’s Episode 24 on The Investor’s Podcast. I don’t want to deviate too much from actually the book here, but I think it’s a great point that it’s about how fast you can get to those magical 10,000 hours, where you really master a skill. 

Paul Allen and Bill Gates could do that pretty fast because they had the access, when almost no one had that. Another thing was that this is just like a side story that I found really amusing was that they actually didn’t have unlimited time because they knew to use the punch cards, but they actually hacked the system, so they had unlimited time.

Preston Pysh  9:23  

When they looked at the logs, they said, “These guys are literally living on these computers. They’re not even getting off of them.” This is like 24 hours a day that these two were sitting on these computers because it was expensive. It was really expensive to get even a sliver of time on these servers, and these two hacked the information. I can’t remember exactly how the story went, but they dove into a dumpster where they were able to pull some paperwork from a company to basically use the account access from some of the people when they were at home not using their allotted time, and these two were logging in. Oh, boy! And then they got in all sorts of trouble. 

Then, it happened again when Gates went to Harvard. Paul Allen talks about how he literally moved to Boston to be out there by Bill Gates. Gates had access to some of the computer labs there at Harvard. Well, Gates gave Paul Allen his passwords and his access to get into the Harvard campus to basically use the computer time that Gates had when he wasn’t using it. And so, these two were continuing. Literally, they moved across the entire country together to continue their programming habits because they were so addicted to programming. For me, I just freaking love this story. I found it just so entertaining to hear some of these first hand accounts of these two and how obsessive compulsive they were over programming. It’s unbelievable. So anyway, they’re there at Harvard. I want to say he was in his third year at Harvard. Do you remember when they got the deal here with the MITS deal?

Yeah, probably even sooner than that. The way the story goes was that they wrote this programming language basic for the Altair machine. It needs to be pointed out, they actually haven’t had access to the hardware by then. They actually just wrote it, and it worked.

Well, they wrote a simulation for the computer in order to simulate the computer that they are writing the software for. They basically adjusted some of the code and wrote a simulation program, and then wrote the program and put it into the simulation too, so they had never been able to test it out on the actual device that they were programmed, which I find absolutely amazing. Their intellect at this level was remarkable. They’re 20-21 years old at this point.

Stig Brodersen  11:39  

Yeah, and it was a funny story because they actually called up the owner of MITS. They said that they can actually do this, and they actually had like a language ready for them, but they didn’t. It was just like a way to test the system. This was the issue here, Paul at that point, he actually grew a beard. He was like the old one, and Bill Gates, he wasn’t old enough to meet people at bars back then. 

You typically would meet people at a bar and restaurant, but he wasn’t old enough to drink. Thus, they actually arranged that only Allen should go because he was the one that actually looked like he was an adult. It was just so many entertaining stories because they were like two youngsters, teenagers in their early 20s, who were behaving like there were 12, and meeting up with grownups. That was just another part of the story that I thoroughly enjoyed.

Preston Pysh  12:29  

Paul Allen was going to call down to the MITS company to talk to Ed Roberts, who was the guy who basically needed the basic software for his new computer. However, Paul couldn’t muster up the courage to basically call it down there and pretend like they actually had a company or even pretend that they had a program because they hadn’t even written anything. 

Thus, Paul Allen said, “Bill, you’ve got to talk to them. You’ve got to do the talking because you can sound all official and you’re actually a real businessman.” Bill decided, “Okay, I’ll do that.” He called, and they basically said, “Yeah, come on down here and show it to us.” Then, that’s when they made the decision that Paul now had to go and actually represent Bill Gates’s voice because he looked like he was old enough to actually own his own company. 

Paul got down there and didn’t have enough money for his hotel room, which was funny. They were a mess, but they pulled it off. They got down there. Like we said, they wrote a computer program for a device that they didn’t even have. They go down there to Texas where they had to fly down to Milan. [They] go down there with the code, and they run it, and it works the first time. They were able to print out, what was it? 2 + 2 = 4. He printed “2 + 2 = 4,” and the gentleman admitted who was going to pay them for the software. [They] looked like “Holy mackerel! This thing just did a math problem. That is totally insane!”

So, really cool story! Hearing all this stuff firsthand is just amazing. All right, so after they got this contract, they worked on building the basic software for this newer personal computer that had come out. They really saw this as a huge opportunity that needed to be capitalized on, and so Bill Gates made the hard decision that he was going to drop out of Harvard. Basically, [he would] take a leave of absence, and that he would go back and finish out his degree. [That] is what he had told his parents because he had to take advantage of this opportunity, and this was a once in a lifetime opportunity. That’s exactly what they did. 

Thus, these two left. They continued the program just like they were back when they were in middle school [and] in high school at their private school together. They just continued to write more and more code and work licensing deals and all sorts of things as they expanded. And this really shows you the brilliance of Bill Gates. 

So, when they were writing the contract with this company, how many kids, let’s just call them 21 at this point, would have the knowledge to retain the proprietary piece that they could license this to other companies? Outside of the Mitts Company that gave them the initial contract to put it on their personal computer, but that’s where Bill Gates was at. 

Now, let me caveat that with Bill Gates, his dad was a lawyer. So you know, he was getting some type of advice from his dad, who was obviously a smart person, but still to have that business sense to be thinking through. Most people, they’re so darn excited, they got a deal that they just jump out and then figure things out later. This guy was more concerned about having certain clauses in the contract for growth than anything else, and I mean, he was savvy. He was ridiculously savvy.

Stig Brodersen  15:37  

Also, in another area where he was savvy was when they formed the partnership contract because it really was a partnership. You would think that it was 50/50. However, Bill Gates, his argument was that since Paul Allen was getting a salary from MITS working in his company at this point in time. He said, “Well, since I’m dropping out I should have at least 60%. Also, because I wrote the code for this.” Paul Allen said, “Yeah, that’s probably fair.” I think in some ways you might think it’s fair, but that was probably also where the dynamic of the partnership really changed, because it’s weird if it’s not really a 50/50 partnership. 

It messes up things, and Bill Gates had even gone out to change the agreement at a later point in time, where he wanted 64%. Preston, you could just sense how bitter Paul was with it. With all the billions of dollars he had if he could have more billions. I don’t think it was because of the money, though. It was like the principle of he was feeling that his contribution was diluted, not in terms of shares necessarily, but I guess what the shares represented.

Preston Pysh  16:47  

The book was written by Paul, so it’s his opinion. You’re really getting that bias as you’re reading this, because you really get drawn into the story. For me, he was very likable in the story. 

However, when I was reading this, I got the impression, “Wow, Bill Gates is really greedy. Really not a team player at this point in his life, when he was doing those kind of deals. He was in his 20s.” I just got a sense that he was very greedy, just all about himself, and not really looking at this as a 50/50 partnership with his longtime friend and partner. 

I’m sure there’s the Bill Gates side to this. You know what I mean? I’d love to hear how Bill Gates thought through this and why he felt that he needed an extra 4%. To me, that was just crazy for him to be arguing with this guy that he’s been in the trenches with since day one. To want another 4%, that’s crazy. Crazy greedy. Bill Gates might look at it today, if you’d ask him about and be like, “Yeah, that was wrong.” I don’t know what he would say. Who knows? But that’s how it was displayed in the book.  I think it’s worthy of mentioning.

Stig Brodersen  17:52  

Also, I think that one should not just look at Paul Allen as the naive tech guy and not like the savvy business person. He’s actually talking about where he’s considering whether or not they should be in Seattle or if they should move out to California. He actually had this idea that he would rather be in Seattle because there were less distractions. He was talking about, “It was raining more and raining was good because that meant that the program would sit more indoors,” and they can actually put in more hours. 

I just also want to put out for the record that Paul Allen, he seemed like a super nice guy, but he was also a very cynical and tough businessman, when he needed to be. I guess it was not just Bill Gates, who was also really tough running the show and then Paul Allen not having any business sense at all, or that he could make the tough decisions or think in terms of money. He’s definitely capable of doing that.

Preston Pysh  18:46  

And just as a highlight, the reason that they were thinking of moving back to Seattle was the reasons that Stig mentioned. This is also where they grew up. This is also where they went to school through high school and everything, so they had an interest in going back there for family reasons as well. 

As this matured, so Microsoft was a 50-person company. It was a 100-person company. They worked dynamic deals with IBM. I think a lot of their brilliance was really understanding what their competitive advantage was through that growth period, and they were always the guys leading the pack. They were never behind the power curve. They were always thinking, “What is the next product that we need to basically lead the market into?” 

From the book, and again, this is very biased. It seemed like Paul Allen led a lot of that innovation and thinking, and Bill Gates was more of the guy that was in the execution mode to make it happen. He was more of the guy that gets it done. And that’s why I think the title of the book is Idea Man is because I think that’s how Paul really wants to be remembered as he was the guy that was kind of feeding that innovation that needed to happen. Based on a lot of the information he provides in the book, I think He justified that opinion and backed it up pretty well. 

Later on when Microsoft became pretty big, Bill Gates had a longtime friend from Harvard that he brought into the company. This was Steve Ballmer, and Paul Allen highlights from his perspective, how all that went down. It was not a pretty scenario from Paul’s vantage point, because they had come to an agreement on a certain amount of equity that Steve Ballmer was going to receive by coming into the company. And then, Bill Gates basically doubled it, and never even told Paul and made him the offer of double the equity that they had previously between Paul and Bill had to come up with what they thought was reasonable. 

And so, Paul felt completely stabbed in the back over the way that the deal went down. Then, Ballmer comes in as basically the operations officer. It really seemed like that relationship between Ballmer and Bill Gates matured to the point where it was really pushing Paul Allen more and more out of the company as far as his duties and responsibilities of what he was contributing. It seemed to be more of the Bill Gates and Steve Ballmer show. I think that left a very bad taste in Paul Allen’s mouth. 

When I was reading this, I got the sense that Paul has a lot of respect for Bill, even to this day. I think that he really respects him, and I think that he has an admiration for Bill Gates. I think that he feels like Bill Gates screwed them at certain points in his life, but I still think that they have a reasonable relationship with each other. That’s the impression I got from the book. Now, this book was written in 2010. There’s some things in here that’s said about Bill Gates that are definitely not something that I think anyone would want said about themselves. I’d be really curious to know how this was received by Bill Gates and how their relationship matured after this.

Stig Brodersen  21:55  

I watched this interview that was published not long after the book. I think it was in 60 Minutes, and they asked Paul Allen, “So, what did Bill think about the book?” He said, “I don’t know. I know that he will read it, but I actually don’t know.” And then, they reached out to him. Apparently the response was that Bill Gates said that he was really glad that it was highlighted that Microsoft was a partnership because he didn’t feel like Paul Allen was giving the respect that he was supposed to have from Microsoft. I know this was perhaps also the politically correct answer. I don’t know, but I thought that was a really warm response. I think that whenever Bill Gates, when he’s looking back, he can probably also see some of the mistakes that he made. 

I want to say a few things here. The first one is that not all of them. A lot of things Paul Allen and describes about Bill Gates is at a very young age. If you literally are the smartest guy in the room, and I guess that Bill Gates usually wears that. You’re in your early 20s or late teens. Yes, you’re probably obnoxious and would like to tell [people] about how awesome you are all the time. I don’t think anyone can see past that. 

I think it’s also some of the situations that occur later in terms of Paul Allen being very sick at some point in time, and Bill Gates trying to buy him out. I think that was not nice to read, but again, as you said, Preston, that was one side of the story. Bill Gates might have experienced differently.

Preston Pysh  23:20  

Let’s talk about some of the stuff that Paul Allen did after he left Microsoft. At this point, he was a billionaire in his 30s. I think his current net worth is around 18 billion. Somewhere around there. It’s pretty high. He had all this money after he left Microsoft, because he still had an enormous portion of the equity.  How much did he have when he left?

Stig Brodersen  23:42  

He had 28%. He had originally 36%, but then they sold something to a VC company. Also, as you said, Paul also got some equity.

Preston Pysh  23:55  

He had an enormous part of the equity and Microsoft. He had a huge sum of money, and so what does someone do after they have that large amount of money and aren’t working for the company anymore? Well, what Paul Allen did is he went out and bought a professional basketball team. He goes out and he buys the Blazers, and he got deeply involved in being an owner of a professional sports team. Some other things that he did was he got all involved into the XPRIZE in doing this privatization of space and made huge capital investments. I forget how much ownership he had of the spacecraft that actually won the XPRIZE. 

Then, you had Richard Branson, who I didn’t realize that this is the way that this work, but Richard Branson came in and worked the deal with them at the very end, after they knew it was successful, to basically brand the spacecraft with the virgin name. See, I thought that Branson was involved with that from the very beginning and like it was his brainchild. But it was actually not his project at all. It was something that he kind of swooped in and basically paid to put his name on. I didn’t know that, so that was a really interesting discussion. That was a whole entire chapter, Chapter 16, on that entire development of that thing. It was amazing.

Stig Brodersen  25:12  

Yeah, and it’s interesting, Preston, that we’ve read Elon Musk’s book about SpaceX and also Richard Branson’s book. And now, we’re getting a third perspective of what really happened, which is probably somewhere in between. It was really interesting to get that perspective as well.

Preston Pysh  25:26  

Yeah, and you could even add Jeff Bezos in there as well with The Everything Store. All these guys seem like after they make a billion, you have to start your own space company. It’s part of the requirement. This was another really interesting dynamic to Paul Allen, but I think this shows you how robust this guy’s repertoire is. Not only is he probably one of the best programmers on the entire planet, but he also goes out, and he owns a sports team and he’s doing that successfully. He then does the space thing successfully. 

Then, he has this obsession with Jimmy Hendrix, and he plays the electric guitar like a theme. And so, he goes out, and he basically creates this entire museum around Jimmy Hendrix. It’s a really interesting story about how the family that owned all the Jimi Hendrix music got basically bamboozled into giving away the copyrights to all his music and stuff like that. 

And then, Paul Allen kind of helped the family get the copyrights back and built this museum around it, because he’s just a huge Jimmy Hendrix fan. He has this music side to him. He has this really creative side and this programming side. It’s just amazing, all the stuff that this guy has done. 

We’re going to just hit on this real fast, Stig, but this Wired World, Chapter 18, was also interesting, where he invested huge sums of money in a cable company, and this ended up being disastrous for him in the long run. That whole discussion, and it’s a very long discussion in the book. I think it’s very worth your time to read this book simply for this discussion, wherein you’ll see how he was making some enormous mistakes. 

Also, something else that I gained from this chapter was I think he really gained an appreciation for Bill Gates’s talent as a manager and an executive, who executes, mitigates risks, and does real firm understanding of what to value and what not to value, because that was what Bill Gates was adding in this relationship. I don’t think Paul Allen really understood that until he went through this experience with trying to own this cable company and just being a total disaster for him.

Stig Brodersen  27:33  

It’s actually interesting when you look at what Paul Allen did after Microsoft. He actually didn’t really manage to make money after that. At some point in time, I think he was the third richest man in the US, something like that. It’s not that he lost all his money, but he had a really hard time accumulating his capital, which was actually something that was really interesting. He had a really hard time for the business ventures that he set up to monetize them. 

Yes, he did the space program that was successful and his teams won a lot of gains, but in terms of setting up his own company with Paul Allen in the driver’s seat, actually making money and compounding his capital, as far as I know, ever since [the start], he actually didn’t manage to do that successfully. A lot of critics have been saying that he really needed a Bill Gates to pull it off, and he always says, “No, no, no, that’s not the problem. There’s been all kinds of other problems.” However, he actually didn’t manage to do that, even though he’s invested in a ton of companies with him in operations, really, to pull something through. I think that’s interesting.

Preston Pysh  28:34  

All right, Stig, so after reading this book, we both liked it. What was your number one takeaway that you think you learned from reading this?

Stig Brodersen  28:42  

Paul’s reflections about the future of Microsoft, I felt that was really insightful, and especially his discussion about how he felt that Microsoft lost a lot of opportunities in social media in terms of search engines and how the world is transitioning away from personal computers. That was actually something that he already predicted in 2010. 

He said that, basically, he saw the personal computer in many ways to be obsolete. It’s really interesting when you look at Microsoft’s business segments, how they’re making money, and where they’re making money. It’s interesting to see that it’s really still a personal computer company. I’m not saying that this is not the future, and the future looks bleak for Microsoft or anything like that.

However, I think it’s interesting if you really break down where they’re making money that it’s in the operating systems for personal computers. And then, you have a division here in Cloud, which might be the future. 

Then, they have a division, the business processes, which is for the [MS] Office package and the types of software that they have. I think it’s interesting that the three areas that he really pinpoints are the social media, the user experience, and the search engines. Those are still areas where Microsoft is struggling. 

The way that Paul talks about this in the book is that he feels it’s a very big problem. They’re losing to Apple in terms of the smartphones in terms of the user experience. He was transitioning away from the PC. He’s talking about how they’re trailing Google. 

Google’s global market share for searches in AdSense is 5%, Microsoft’s browser, actually second, but it’s only 8.4. So, the defendant is still way behind and probably expect to be doing so for quite a while, and service assertion media. This was also one of the things that Paul mentioned. 

I know I’m deviating a bit here from the book, but when I see the recent acquisition of LinkedIn, $26.2 billion, they are paying $196 per share and earnings per share for LinkedIn is negative 1.18. I know that the people of Microsoft are super smart, but it seems to be a very expensive acquisition. For something that they want to add to that portfolio rather than build on their existing competencies, and especially when you look at the price, but the thing is, I’m not sure that it’s so much of a problem that they might be trailing. Call it Apple, Google, and Facebook. I mean, they have their own niche. And it’s not necessarily a bad thing that other people have a huge market share in, in other parts of the market, if that’s not where the main focus is.

Preston Pysh  31:31  

So this was my main takeaway from this book. Without Allen, this doesn’t happen. Also, without Gates, this doesn’t happen. And I think when you look at both of these guys love programming, but beyond that common interest. Paul Allen was the guy that was really seeing the direction that things were going, he was the guy who had the foresight. He was the idea guy. He was the one coming up with all these creative ideas on how to do [things]. 

Bill Gates was the guy that could actually do it. He was the guy who could execute. He’s the guy who could give the orders to make it happen. And you can’t have one without the other and build success. You can go out and you can study every single book in the world, but if you don’t know how to actually put it in the application and execute on that information in those ideas, the knowledge and the ideas are totally worthless. 

If you’re the person who just goes out there and just starts running, and starts executing, but you have no knowledge or no foresight, you’re just running down the wrong path. You have to combine those two skill sets in order to get the excellence that you see that these two produced for decades, when they were developing Microsoft, and that’s the thing I really captured and took away from this book. You’ve got to have both, you just can’t have one or the other. 

Okay, at this point on the show, we are not going to answer a question from the audience. Instead, we want to highlight an outstanding member of our community, who  has been making numerous contributions in a couple different areas. He goes by “G man” on our forum, and G man has been making tons of contributions. 

In addition to that, he’s setting up a local investor’s podcast chapter in Singapore. And so, G man, we just want to give you two things from Stig and myself, and that’s a free subscription to Stig chapter by chapter, Intelligent Investor video course that we have on our website on the TIP Academy. 

Also, we’re going to give you a free subscription to our ETF video course. Both of these courses are a paid course that we have on our site, so we’re giving those to you completely for free for everything that you’re doing. We can’t thank you enough for all your contributions to the community. It really means a lot to us.

Stig Brodersen  33:53  

Okay, guys! That was the end of this week’s episode. We will see each other again next week.

Outro  33:57  

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