Hello! This is Deep Pockets #10. This is the newsletter you need to read if your goal is to be a billionaire or… a trillionaire. And if you think becoming a “trillionaire” sounds like a crazy science fiction concept that will take 500 years for someone to achieve, it most certainly is NOT.

Don’t believe me?

Microsoft is the greatest generator of private wealth in human history. Hands down. Microsoft turned more than 10,000 employees into multi-millionaires. Over a thousand Microsoft employees have earned $100+ million fortunes. Several became billionaires. Two have become $100+ billionaires. One of those $100+ billionaires, company co-founder Bill Gates, was the richest person in the world, uncontested, between 1997 and 2017.

As impressive as those stats are, something is missing. Microsoft absolutely 100% could have and should have turned Bill Gates into a trillionaire. Unfortunately, he decided to attend a barbecue in 1991…

DEEP DIVE: Blowing A Trillion Dollar Fortune

Bill Gates co-founded Microsoft in 1975 with his high school friend Paul Allen. At the time, “computers” were the size of entire rooms. They cost hundreds of thousands of dollars and were exclusively purchased by very large companies and governments.

In 1981, IBM (whose $30 billion market cap made it the most valuable company in the world) released the world’s first personal computer. The price of the IBM PC when it hit stores in 1981 was $1,565. That’s around $5,300 in today’s dollars.

Here’s what it looked like:

IBM built the physical computer you see above but decided to outsource the operating system software. Having worked with Microsoft previously, IBM reached out to Bill Gates to see if his little Seattle company (30 employees at the time) had an operating system (OS) it could license.

Bill said yes. That was a lie.

Microsoft didn’t have an OS. Coincidentally, a competitor called Seattle Computer Products, whose corporate headquarters was just down the road from Microsoft, DID have an OS. They called their OS “QDOS” which was an acronym for “quick and dirty operating system.”

After lying to IBM, Gates convinced Seattle Computer Products to sell him the right to re-license QDOS to hardware manufacturers. The price for this re-license option? A one-time fee of $25,000. Microsoft changed the name from QDOS to MSDOS, and that’s what they licensed to IBM.

A few months later, Microsoft paid an additional $50,000 to fully acquire QDOS from Seattle Computer Products.

Here’s the most important point to understand about how Microsoft became the greatest generator of wealth in history:

The IBM MSDOS licensing deal was not exclusive. Microsoft retained the right to license MSDOS to any other PC makers that eventually popped up.

After the IBM PC was released, an entire industry of copycat PC makers was born. Tens of millions of PCs were sold in the next few years. And every single PC came with MSDOS by default. And every sale earned Microsoft a big fat royalty for no additional work.

In other words, for a combined $75,000 Microsoft bought a piece of software that single-handedly would go on to generate hundreds of billions of dollars in value and revenue. That’s not an exaggeration. All thanks to a Bill Gates bluff.

Bill Gates Becomes A Billionaire

Microsoft went public on March 13, 1986. It finished its first day as a public company with a market cap of $780 million.

On the day of the IPO:

• Bill Gates owned 45%

• Paul Allen owned 25%

• Steve Ballmer owned 8%

Therefore, at the end of its first day as a public company, 31-year-old Bill Gates’ 45% stake gave him a paper net worth of $350 million.

Less than a year later, his net worth topped $1 billion for the first time.

By the end of 1990, riding high on the smash-hit success of Windows 3.1 Bill’s 45% stake in Microsoft gave him a paper net worth of $2.5 billion.

The Worst 4th of July BBQ Ever

That’s how the world looked for Bill Gates on a fateful Fourth of July weekend in 1991. That weekend, Warren Buffett happened to be in Seattle meeting with a friend. That friend knew Bill Gates’ parents. Bill’s parents invited Warren to join them for a barbecue at their house. Their 36-year-old son would also be in attendance.

Bill had less than zero interest in meeting Warren Buffett. In his view, investors like Buffett were parasites who exploited imperfections in the stock market for their own personal enrichment without adding any value to the world.

As it turned out, Bill was extremely impressed by the 61-year-old Warren Buffett. Warren didn’t ask about Microsoft. He didn’t pretend to understand the tech world. He didn’t press him for insights into the burgeoning software industry to improve his own stock-picking skills.

Instead, as Bill would later recall:

“He asked me amazingly good questions that nobody had ever asked."

Considering Warren’s obsession with diversification and what Bill did immediately after, one of those “amazingly good questions” was almost certainly something along the lines of:

“How are you planning to diversify your wealth? Your entire net worth is on paper and it’s entirely made up of Microsoft stock. That’s dumb.”

Bill had never considered that question before. One major downshift in the software industry and he would be wiped out. So, following Warren's advice, Bill immediately enacted a plan to drastically diversify his fortune by selling off massive amounts of Microsoft shares. Simultaneously, he launched a private investment company called Cascade Investments. He would use the cash generated by Microsoft share sales to acquire large stakes in hundreds of other companies.

By 1997, Bill had reduced his stake from 45% to 26%. At this point, even after selling nearly half his Microsoft shares, his $40 billion net worth made him the richest person in the world for the first time, a title he held pretty much undisputed for the next two decades.

But he never stopped selling Microsoft shares. By the time Bill stepped down as CEO in 2000, he had reduced his stake to 14%.

Today, Bill Gates owns just 1.3% of Microsoft. Amazingly, even just a 1.3% stake in Microsoft today is worth around $45 BILLION. And that represents roughly a quarter of Bill’s current net worth.

What Could Have Been

As a reminder, Bill Gates owned 45% of Microsoft the day it went public in 1986.

Today, Microsoft’s market cap is north of $3.3 trillion.

Even if Bill had just slightly reduced his stake, he still could have been very diversified. For example, had he chosen to reduce his stake to 35%. Today, a 35% stake in Microsoft would be worth…

$1.155 trillion

In other words, because of Warren Buffett and that unfortunate barbecue in 1991, Bill Gates squandered his chance to be the world’s first trillionaire. And since he probably would have given that trillion dollars to charity, Warren Buffett really screwed all of humanity if you think about it.

And that’s not all. Today, Bill’s 35% stake would generate around $8 billion per year in dividends.

Now, if you’re thinking it sounds totally insane that a founder would hold on to such a large stake in their own company for 4+ decades, consider the example of Larry Ellison. Larry Ellison’s company, Oracle, went public ONE DAY before Microsoft back in 1986. Larry still owns 42% of his company today. As I type this story, Larry Ellison’s net worth is $150ish billion, the majority of which comes from his stake in Oracle.

Or consider Steve Ballmer. For decades, Ballmer, who Bill Gates hired five years after Microsoft was founded, barely sold any of his 8% IPO stake. His biggest share sale occurred in 2014, so he could buy the Clippers for $2 billion. Today, he still owns 4% of Microsoft, nearly 4X more than his former boss, Bill Gates! In July 2024, Steve actually surpassed Bill in terms of net worth. At that point Steve was worth $157 billion and Bill was worth $156 billion.

So what’s the lesson here?

If you want to be a trillionaire someday, follow these four simple steps:

• Step 1: Borrow the most valuable product in history from a competitor.

• Step 2: License that product to the largest company in the world and every copycat clone that comes along.

• Step 3: IGNORE ALL OF WARREN BUFFETT’S ADVICE.

• Step 4: Become a trillionaire.

FINAL WORD

On the next edition of “Deep Pockets,” we’re going to tell you the story of a Nuclear-expert NASA engineer who made a fortune off a very silly invention that you almost certainly owned in the 1990s.

Thanks for reading! Deep Pockets is brand new, and I appreciate you being part of it. I want it to be the best newsletter you’ve ever read. Every day.

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