Original question from Quora:

Why doesn’t Bill Gates just buy everything?

Why doesn’t he buy Twitter, Facebook, Instagram, google? He can anyway and this would just make his wealth quadruple in no time.

My Answer:

The thing is, it doesn’t really work that way. Most investing relies on the Pareto Principle (the 80/20 principle), wherein most investments don’t pan out, and the few that work well make outsized returns.

Let me explain…

Facebook is currently worth about $335 billion dollars. A few years ago it was worth significantly less and yes Bill Gates could have bought Facebook when it was worth millions instead of billions.

It would have been a good investment in hindsight.

However, Bill Gates doesn’t have hindsight. Instead, he has something far worse…

Near infinite choice.

Look at this list: List of social networking websites

That is a list of social networking websites that I found on Wikipedia. I doubt it’s comprehensive and there probably thousands of would be Facebooks out there. You only hear about a small fraction of the winners and far fewer of the losers.

But, there is probably one loser you’ve heard of before - MySpace. When Facebook was getting big, MySpace was already huge. Hell, I remember Gary Vaynerchuck, the king of social media marketing talking about how Facebook is just for college kids and didn’t make sense for his wine selling or business marketing brand.

At that point Facebook was starting to take off, but it still didn’t look as good ad MySpace, which sold for like $200 million to News Corp.

Years later, MySpace is just a shell of its former self and basically nobody cares about MySpace. It’s worth approximately $0.

Add in the fact that during the web 2.0 bubble, there were hundreds of social network startups that were invested in. Look at crunchbase and see how many millions of dollars were poured into startups whose value is now $0 and they don’t exist.

There are only a few companies that made it out of the hundreds that even still exist, probably < 1% exist and a fraction of those are making significant money.

So, close your eyes and imagine that you have 500 people with social networking businesses come up to you and ask you for even $1 million dollars. Could you guess which one to put the money on knowing that only say 3 out of 500 will be a profitable investment?

I couldn’t.

Now, imagine that out of the three, only an even smaller fraction will ever be worth billions. So, maybe 1% of the companies that are profitable are going to be worth billions.

So, out of 100 profitable companies, only 1 will be worth something close to Bill Gates’ fortune.

Back that out and you are looking at like one in 16,500 opportunities might return something in the billions of dollars. In fact, the real number is probably 1 in 500,000 or something even higher.

Now, given those odds, even if you were far better than average at guessing the future, you have to make a lot of VERY GOOD GUESSES to make a return on that kind of money because making something worth billions is so unbelievably rare.

So, once you have billions of dollars, it is nearly impossible to make a good return on your money.

To the question of why Bill Gates doesn’t just buy everything? Most things just aren’t a good investment and will never return the money. By most I mean 99.99% of opportunities are a waste of money for Bill Gates.

He would be better off lighting the money on fire or buying a lot of cars or helping make the world a better place for people in need. All of those things are a better return on billions of dollars than buying most companies.

-Brian

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