Fun fact, if you invested $10,000 into MSFT on August 22nd 1997 [adjusted closing price $10.98] the next day after Warren's reply, you'd have $183k today. Not as big as a return as many would have thought, still amazing annualized 2X S&P return for 23 years.
However, the S&P 500 had a lower variance. So to compare the two investments on a risk adjusted level, you'd have to load up the S&P 500 with leverage, or mix your MSFT investment with something risk free.
For fun, I checked out what the maximum leverage would be that you could run, if you rebalanced your investment every day to reach your exact target leverage (an assuming no transaction costs and no interest on your margin loan) without you going bankrupt.
Under those conditions that's mostly governed by the what's the largest single day loss. The S&P 500 had a really bad day on 2020-03-16. Microsoft's worst single day loss was on 2000-04-24 when the dot com bubble burst.
All data from yahoo finance adjusted closing price.
My simple analysis suggests that you would have made the most money with 1.8x leverage on Microsoft. And with 1.9x leverage on the S&P 500. Both starting at August 22nd 1997 up to 2020-07-24.
That 'optimal' leverage would have multiplied your initial investment by 4.888 for S&P 500 and 35.956 for MSFT over those years.
I would have expected the optimal leverage to differ much more. But the pandemic really did a number on the S&P 500 for a while without hitting Microsoft nearly as hard.
(There are probably some bugs in my code. And in practice you'd probably want to vary your leverage based on observed volatility. You also wouldn't want to rebalance every day.)
Variance is a funny thing. For example, a stock that went up every day by 1%, would have higher variance, and thus more "risky" than a stock that went 0.1% up every odd day and 0.1% down every even day.
Yes. Though when you assume something like an efficient market, variance becomes more meaningful.
Under some suitably broad efficient market assumptions, the expected return for all stocks is basically the same (after adjusting for risk). So variance automatically means going up and down compared to that expected return.
I suspect the parent used yahoo finance or the like to get historical stock prices. Historical stock prices are usually re-adjusted when a split happens so you get a clean history.
Berkshire Hathaway doesn’t track Warren Buffett’s actual performance very closely over shorter (less than a decade) periods. It was trading at nearly 2 times book value during that period, probably the worst time to buy it you could find.
Actually the real investment for Microsoft wasn't the stock purchase but the commitment to keep Office on the Mac for X number of years. Without that, the Mac probably would have tanked before the iMac ended up saving Apple. Retaining Microsoft at that time was key to retaining legitimacy.
There's an awesome talk with Steve Jobs where he goes into it - it's been posted on Hacker News many times.
Yes - that's why I said it's not quite a fair comparison as that was probably more or less the best time in history to make an investment in Apple. Maybe akin to investing in Amazon in 1994 or in Google in 1998.
The drama "Pirates of Silicon Valley" covers MS & Apple from their founding in the 70s till the late 90s (the movie was made in 1999) and I believe it ends in that scene (I've last seen it when it was new so it may end a bit later but that definitely appears in the movie).
You could have probably gotten some similar/greater gains investing in some of the dotcom "stars" (even "real" companies like Qualcomm/Broadcom/Sun/etc rather than Pets.com) & exiting before the bubble burst!
Easier to say in hindsight of course. I remember my brother convinced my parents to buy stocks (something like a few thousand $s) in a company making broadband internet modems in the mid 90s (this was high-tech future-like stuff at the time when most people were on dial-up internet - ISDN was considered fast) and they ended up going out of business shortly thereafter.
So even if you have good insight & bet on the right trajectory of technology it's not that easy to get it right without the benefit of a time machine or crystal ball.
