Larry moved to California, to the Berkeley area in his early 20s. Then he started working as a computer programmer. There he attended multiple colleges but didn’t graduate from any of them. 

In 1979, Larry read a research paper while he was around the Berkeley area that was written by IBM on something called relational databases. IBM was not executing and building a product on this idea of relational databases. However, when Larry read this research paper, he thought he could build a product using this technology that he read about and that he could build it quicker than IBM because he had a small business with a couple of friends. He felt that he could build a product there and go to market. 

Long story short, Larry started selling the software, which he hadn’t even coded yet to government organizations who needed the capability to access large amounts of data and a quicker way than what the current technology existed. He created that product. 

Eventually once he got on contract, he created this product and delivered. After he delivered the product, this put Oracle on the map. He started making some very decent money for the company. 

This continued to progress but by the mid-90s, Oracle hit a rough patch. They weren’t really growing at that point. He went through this transition of how can Oracle remain competitive. What you saw was he started developing this strategy by the 2000 timeframe, where he was actually conducting mergers and acquisitions with other companies. 

One of the things that kind of really allowed Ellison to continue to grow his company, his own personal net worth, was his ability to make that transition of just building a product early on. Then becoming an expert at mergers and acquisitions particularly in the software space, where he would see strategic opportunities to buy a company and merge that with some of his other products. This is so he can own the intellectual property around key streams of how data is being stored and transmitted between different types of protocols over the internet. 

So, really it’s quite a fascinating story. When you look at everything that he’s accomplished, everything that he’s done. You look at his personality, it is drastically different from… we’re huge fans of Warren Buffett. We like his personality. We think that he has a good ethical message, not that Larry Ellison isn’t ethical. It’s just that his approach to achieving what he has done is drastically different. It’s a very aggressive winner takes all type mentality. 

It’s just really quite fascinating to see two people with very different personalities that also achieve very high level business accomplishments in their life. 

Alright, so for the first question that we’re going to play here, Larry was asked how would you deal with criticism and this was how he responded.

Larry Ellison  5:02  

There is an enormous number of people in the world who really want standard answers. They want everyone to wear their hair the same way and everyone to conduct business the same way. They want everyone dressed the same way and everyone to go to the same church. 

If you wander outside of these norms, people are highly critical because it’s threatening to them, because they’re living their life one way only. They believe their way of living is the proper way to live their life. If you live your life a different way and you answer questions differently, that makes them feel very uncomfortable. They say, “Well, this person is different from I am.” 

Then they speak a little further and they say, “This person is different and wrong. I’m different and right.”

It takes a certain amount of strength not to succumb to the *inaudible*. I try to think things through and I try to always ask two questions about my personal policies in life. Are they fair? Are they morally correct? Do they work? 

If other people… if someone has a logical criticism and could explain to me why what I’m doing is wrong and they can convince me, then I’ll change. If they will give good reasons, I’ll just alter my behavior. 

I love it when people point out that I’m wrong and then explain to me why I’m wrong. That’s great. I don’t want to be wrong. I would love to be right. If I am wrong, I love when people stop me.

Stig Brodersen  6:13  

I think that was a very insightful comment. It’s a great chance to talk not only about criticism, but also really about tolerance, how we view people who are different from ourselves. 

We have this tendency to think that we’re very different from people we surround ourselves with. For example, “Hey, I’m a dentist. My friend works at a bank. We are so different. I live in an apartment. My best friend lives in a house.”

Generally though, we just tend to surround ourselves with people who are very similar to ourselves and we attract those people who are very similar to us. 

For example, we read the same news and we listen to the same podcasts. Whenever we have disagreements, because we have these shared values, we tend to focus on what we do have in common and instead of what we disagree upon. We’re not looking for the truth. 

What I see right now is this is not really talking about politics. I definitely don’t want to take sides or anything but you have one group and they’re watching CNN. They know the truth and they know that people who are watching Fox are wrong. 

Then you have people watching Fox who know that they have the truth and people watching CNN are the ones who are  wrong. By definition, that can really be possible. I think it’s a dangerous development you have for society. 

Really, the last thing I want to say about this is where Larry Ellison is talking about the truth, like the truth seeking. We want to prove other people wrong and to be proven that he is also wrong. I think it sounds good. I think that’s probably a good way to live for a lot of people. 

I think it’s also very important that if you do want to live that way, which I found very inspiring, you need to have a social contract in place. Say, for instance, Preston and me, I can’t remember if we explicitly told each other that we can be very honest with each other and disagree, but I feel we have that kind of relationship. It’s something that develops over time. It is also something that you can feel whether or not you have it. If you want to live the way that Larry Ellison is talking about, you need to have that social contract in place.

Preston Pysh  8:24  

All right, the next question here, Larry was talking about his friendship with Steve Jobs. This was what he had to say.

Larry Ellison  8:30  

Apple was in severe distress. It had gone steadily downhill during the 10 years of Steve’s absence. The problems were now so serious that people were wondering if Apple would survive. It was all too painful to watch and to stand by and do nothing. 

The purpose of that particular hike through the Santa Cruz Mountains on that particular day was to discuss taking over Apple Computer. My idea was simple. Buy Apple and immediately make Steve the CEO.

Apple wasn’t worth much back then, about $5 billion. We both had really good credit. I had already arranged to borrow all the money. All Steve had to do was say “Yes.” 

Steve proposed a somewhat more circuitous approach. First, persuade Apple to buy NeXT Computer. Then Steve would join the Apple board. Over time, the board would recognize that Steve was the right guy to lead the company. 

I said, “Okay, that might work. But Steve, if we don’t buy Apple, how are we going to make any money?” 

Suddenly, Steve stopped walking and turned toward me. We’re facing each other when he put his left hand on my right shoulder and his right hand on my left shoulder. He was staring unblinkingly into my eyes. 

Steve said, “Larry, this is why it’s so important that I’m your friend. You don’t need any more money.” I said, “Yeah, I know. I know. But we don’t have to keep it. We could give it all away.”

I was whining. Steve just shook his head and said, “I’m not doing this for the money. I don’t want to get paid. If I do this, I need to do this standing on the moral high ground.” 

The moral high ground, I said, “Well, that just might be the most expensive real estate on Earth.” 

I knew I had lost the argument. Steve had made up his mind right there and then at Castle Rock, in the summer of 1995 to save Apple his way. At the end of the hike and right before we got back into the car, I said, “Steve, you created Apple. It’s your company and it’s your call. I’ll do whatever you want me to do.” 

I went on the Apple board and then I watched Steve build the most valuable company on Earth.

Preston Pysh  11:15  

Pretty incredible story here. It really kind of comes across and shows you how powerful an idea can go, especially when it’s backed up with moral high ground, a sense of purpose, and not worrying about the money.

[Steve] was after something that was deep rooted into his soul and not necessarily the external things that so many people start a business for. 

Obviously, Steve was not starting a business but taking over a business that he had created. I think that that’s a really important thing to highlight when people are thinking about what is the fundamental thing that is driving you to create a business, if you’re trying to go that route or to get a job in a company. I would strongly encourage people to think about that sound clip.

Stig Brodersen  12:06  

That was just an amazing story. I never heard this story before. It is well-known that Larry Ellison and Steve Jobs were really good friends. I think they were friends for more than 25 years. They were close to being best friends. They have this very special bond. 

It also reminds me of this quick story, and then I’ll go back to Larry Ellison afterwards, but I reread the book, “Creativity, Inc.” by Edwin Catmull the other day. 

In this book, he talked about this special relationship he has to Steve Jobs when Jobs was acquiring Pixar. He asked this question to Steve, “What if we disagree?”

Steve answered, “I would just explain it better so you understand that I’m right and you’re wrong.”

This was really to talk more about Larry Ellison. I think give credit where credit is due. I don’t think he’s getting a lot of credit, if not any credit at all, for making Apple happen. Yes, he was not the iconic person that you saw there on the billboard, but he had an important role to play in rebuilding that company. 

I think this story also tells a lot about how underrated Larry Ellison is. I don’t even know if we talked about him before on the show, or not an episode specifically about him, but just even in passing.

I mean, he is the 7th richest person on the planet. If you look at the other people in the top 10, you have Jeff Bezos, Bill Gates, Warren Buffett, Mark Zuckerberg. Everyone would be people whom we know. 

Even someone like Steve Jobs and I’m talking about him again. I’m guilty as charged. Steve is not at all as financially successful as Larry Ellison. It might have something to do with how we know these other products, but we don’t know what Oracle is doing. Perhaps you’ve been sitting here, listening to this episode, and you still don’t know what Oracle is really doing and how they make so much money.

Preston Pysh  14:03  

Alright, the next question pertains to how Larry developed his personality and the personality that he thinks contributed a lot to his success and how it was formed at an early childhood. Here are his comments on that idea

Larry Ellison  14:19  

My personality has changed much since I was five years old. Probably the single most important aspect of my personality, as far as determining my success has been my questioning of conventional wisdom, my doubting of experts just because they’re experts, and questioning of authority. 

While that can be very painful in terms of relationship with your parents and your relationship with your teachers, it’s enormously useful in life. 

I was adopted within my own family when I was nine months old. I was born in New York City. My mother was 19. She wasn’t married and really wasn’t able to care for me. She tried until I was nine months old. Then I was adopted by my maternal aunt and uncle in Chicago. We moved to the southside of Chicago. 

I believed until I was 12 years old that I was not adopted, I had no idea that I was adopted within my own family. Again, I don’t attribute very much of my life and personality to my adoption. I do attribute it an awful lot to my relationship with my father who was a Russian immigrant. 

My father came here and he was very poor. He dearly loved this country as only an immigrant can. He loved our government as only an immigrant can. He was a pilot in World War Two, bomber pilot. He never questioned the government’s policies and never questioned authority. He didn’t really want me to question authority. 

I had some teachers when I was very young that I thought were telling me things that weren’t true. When I tried to ask questions, they wanted me to basically parrot back what they said. They really weren’t interested in a discourse with a child or a debate with a child. 

They said this was true and you are smart, if you can repeat it back to me exactly what I said to you. I had a real problem with that as well. I had very strong authoritarian figures, both in school and at home, which served as wonderful examples of how not to be.

Preston Pysh  16:29  

I personally really liked this discussion. The reason that I liked bringing this up is because it reminded me of another interview that I had heard fairly recently and I believe I heard the interview on Real Vision TV with Stan Druckenmiller. He was asked kind of a unique question where evidently Stan has kids and the person interviewing Stan…

For people who don’t know Stan Druckenmiller is, he is also a billionaire. He’s a real famous investor who learned under George Soros and whatnot.

In this interview, Stan was asked if his kids turned out so good and they’ve gone on to be successful. They’ve grown up to really kind of be great kids. The person asking the interview said for a lot of people that come with substantial wealth like Stan, sometimes that’s not how things play out for the children who grew up in that kind of household where there’s this massive abundance. 

He said something that to me that I’d never heard before. It kind of really made me think hard and it related to what Larry Ellison was just talking about. Stan Druckenmiller said, “I was told once that if you get the first five or six years right, everything else falls into place with your kids.”

What he’s really getting at is how powerful and how highly influenced a person is with the wiring of their brain at that early developmental stage of their life. What I find fascinating is when you study machine learning and you learn how deep neural networks work, so much of how those neural networks are developing their prediction or their understanding of the data that they’re being fed is highly influenced by the first flow of data that’s kind of coming through. It is just like how the human brain works. 

What I find fascinating about Larry Ellison’s comments here as he’s talking about how the thing that has had one of the most profound impacts on his personality and that he thinks is why he’s been so successful, it really goes back to that exposure that he had at a very young age of people trying to force him to fall into line and regurgitate facts. What it has done is it has forced him in the way that he takes in information to do the exact opposite and to do it fairly aggressively. 

Alright, so this is the point in the show where we play a question from the audience and this question comes from Robert.

Robert  19:19  

Hey, Preston and Stig. Robert from Northern California. My question has to do with the Buffett’s owner earnings and one of his shareholder letters, he sets out his definition which is as follows: owner earnings represent reported earnings, both depreciation, depletion, amortization and certain other non-cash charges, plus the average annual amount of capitalized expenditures for plant and equipment, etc, that the business requires to fully maintain its long term competitive position and its unit volume. 

I am wondering how this differs from EBITDA which is something that he has rallied against many of his shareholder letters.

Preston Pysh  19:54  

Thank you. All right, Robert. So you’re digging into some hardcore accounting and we absolutely love that. I just explained it like this free cash flow is what he’s getting at when he’s talking about owners earnings. If you go on Google or you go anywhere, and you kind of look up the equation for free cash flow, that’s pretty much what you’re going to find. 

For EBITDA, this is your earnings before interest, tax depreciation and amortization. So for Buffett’s opinion, the way he looks at EBITDA, is that depreciation and amortization are a real expense to the business. Not including that in your understanding of what free cash flow is just a complete misnomer and something that Wall Street does in order to beef up the multiples that they are able to sell equity for. 

That’s kind of where all that is coming from. If you go to one of the shareholders meetings, he talks about that. Usually this question gets brought up about EBITDA. I mean, his point is 100% valid. Your depreciation, even though it might not be something that you’re physically seeing day-to-day, or your amortization, it’s actually taking place over the long haul. That then absolutely has to be factored into the expense to the business when you’re trying to calculate what something’s worth. 

So I don’t know if that really kind of answers your question, but I’m kind of curious to see Stig’s take on it.

Stig Brodersen  21:16  

I think this is a really insightful question because if you look at the bottom line, it says net income. It would be logical to think that’s the money that I can take out of the business, that’s my money as the owner. But the net income, it’s more accounting, more than anything else. 

The frustrating thing about owner earnings is that you can’t really calculate it, or at least you can’t be 100% accurate in calculating what it is. Preston was getting at this before. He said this is the free cash flow and that’s correct. You can come up with a number that is free cash flow.

The way free cash flow is calculated is that it’s taking your operating cash flows, then just track your investment cash flows. What Buffett is getting at really, whenever he talks about owner earnings, it’s the more abstract concept of how much money we need to reinvest in the business to sustain that business. 

It’s something that you have to estimate one way or the other. So if you’re looking at a company like Apple, there’s definitely like capital expenditures for the iPhone business to maintain the current revenue. 

Then, they’re sending up their new cloud division. How does that work? Is that maintaining the current revenue? Is it to grow new revenue? It’s a different number. It’s something that I can estimate, Preston can estimate, and Buffett can estimate. However, we will probably come up with three slightly different numbers. 

The reason why you hear Wall Street and so many other people talking about EBITDA is because that is very easy to calculate. You can talk about the valuation of a company and say, “Oh, it’s six times EBITDA. The fair value is 15 times EBITDA.” 

It’s very easy to calculate so it seems that you are very certain that is the true value. I would prefer owner earnings at any time, even though it’s harder to estimate.

Preston Pysh  23:09  

All right, Robert, fantastic question. As a token of our appreciation for leaving your question, we’re going to give you access to one of our free courses on the TIP Academy page on our website. The course that we’re going to give you is our intrinsic value course. Our intrinsic value course teaches people how to determine the value of an individual stock. 

It also teaches you how to think about the market cycle and when you’re buying your stock. It also teaches you some stuff about options trading. So we’re really excited to give you this course.

If anybody else out there wants to check out the course, you can go to TIPintrinsicvalue.com or you can just go to our website and click on the Academy link at the top of the page and courses right there. If anyone else wants to leave a question on the show, go to asktheinvestors.com. If your question gets played on the show, you’ll get a free course.

Stig Brodersen  23:55  

Alright guys, that was all that Preston and I had for this week’s episode of The Investor’s Podcast. We will see each other again next week. 

Outro 24:01  

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