OtherTonight, a special edition of Charlie Rose.This is the Berkshire Hathaway annual meeting.20,000 people come from all over the world to Omaha, Nebraska, for a weekend of fun shoppingand to see their hero in person.They even get to see a movie about him.It all began with a key strategic alliance, a merger 100 years ago between Microsoft,Wal-Mart and Starbucks, Micro Wallbox.However, an elite rebel force of investment bankers created me, a biogenic being who cantravel back in time and stop the strategic alliance from ever taking place.I am the Warrenader.This is the annual meeting in April 2004, and Warren Buffett is front and center.
Charlie RoseWhat do you think they most want to hear this morning?
WarrenWell, that's the nice thing about taking unfiltered questions as you find out.I mean, you know, the press is naturally on governance issues, but in the end, youknow, we'll end up talking about what shareholders want to talk about.It is a kind of weathervane of where they are in terms of what their concerns are.
Charlie RoseYeah, we'll get 50 or 60 questions by the end of this, by 3.30 this afternoon.Interestingly enough, every question almost comes from somebody outside of Omaha.The Omaha people don't, they seem to defer to the out of town.We'll find out what's on their mind.Near the end of April in 2005, we went inside to see what happens.Warren Buffett and his partner, Charlie Munger, sit on stage and answer questions for morethan four hours.
WarrenWe work together.We really don't have any choice because he can hear and I can see.A few years ago, we have a dinner at Garotz the day after the meeting, and we were having,the whole family was there having dinner, the place was packed, and it started rainingcats and dogs.And a waitress came to me, we were eating, the waitress said, said, I got to tell you,she said, it's raining like crazy outside, and there's a long line, and Michael Eisneris standing out there getting soaked.So I turned to Suze, and Michael and Jane are friends of mine, good friends, and I saidto Suze, why don't you go out there and help them out before they get drenched.And she looked at me and said, I've waited in line at Disneyland.
QuestionerMy name is Molly Fanner, I'm 11 years old, and I'm from Long Island, New York.What is your view on PetroChina?
WarrenIf you come up at the break, Charlie and I will have taken all the pieces out of herethat we like best, and you will be, you will get the rest.
QuestionerCharlie, do you have anything to add to that?
QuestionerShe wants to know what you think about PetroChina.
WarrenWe have real owners on our board, and what they make for being board members is really inconsequential, as I get reminded occasionally, compared to their investment, and they're friends of mine, they're smart, they're very smart, I mean, they are handpicked in terms of business brainpower and quality of a human being, and I really think that we have the best board in the country, but the people that want to make their evaluations by checklist, whether either in terms of diversity or in terms of supposed independence, although I don't know how anybody that's getting half their income from board memberships can be independent, you know, we don't, we may not stack up so well, but it's the kind of board that I want to have, knowing that if I die tonight, that virtually everything I have goes to a foundation, I want that foundation to have as much money over the years to spend as possible, and there's no group of people I'd rather have in charge of the decisions subsequent to my death than the people that we've got on our board.
WarrenThe correct system is the Elihu Root system. Elihu Root, who had three different cabinet appointments if I remember right, said no man was fit to hold public office who wasn't perfectly willing to leave it at any time, and if Elihu Root didn't approve of something the government asked him to do, he could always go back and be the most sought-after lawyer in the world. He had an identity to go back to, and he didn't need the government's salary, and I think that ought to be more the test in corporate directorships. Is a man really fit to make tough calls who isn't perfectly willing to leave the office at any time? My answer is no.
WarrenYeah, we have one of our directors who was, who's been removed twice from compensation committees of other corporations because he had the temerity to actually question whether the compensation arrangement being suggested was the appropriate one. I mean, it's, it's being put on the comp committee of American corporations, as I've said, they're not, they're looking for chihuahuas and not Great Danes or Dobermans, and I hope I'm not insulting any of my friends that are on comp committees.
QuestionerYou're insulting the dogs.
WarrenThe degree to which the administration or other people are worrying about the deficit in Social Security 25 years out, when they have a $500 billion deficit excluding the
WarrenSocial Security surplus now, I mean, it just strikes me as nonsense. Here we are deploringsomething that's going to happen in 20 years, that's a fraction of what is happening rightnow while they're cheering, you know, basically. And Charlie, what do you say?
OtherWell, that's the view from Berkshire's Democratic chairman. And, and the odd part of Berkshireon this issue is that the right-wing Republican who is speaking feels more strongly than Warrenthat the Republicans are out of their cotton picking minds to be taking on this issue rightnow. Remember that the annual meeting of Berkshire, as it has evolved, is without anyclose precedent in the history of the world. No capitalist enterprise had ever had an annualshareholders meeting, anything like the one we have. We just morphed by accident intothis enormous event that everybody loves so.
WarrenCharlie is the best partner a guy could have. Now, Charlie is, he's in Los Angeles, I'min Omaha, and Charlie has got multiple other interests. But any time on anything importantthat I want to have the world's best brain working on, and he can usually get the answerin about 15 seconds, I can pick him up and talk to him about it. He understands everythingabout me, he understands everything about Berkshire. He doesn't spend all day thinkingabout it like I do. He's got plenty of other things he does. But when he's needed, he'sthere and he's right.
OtherBerkshire Hathaway is now a $140 billion company. It began when Warren Buffett came back fromNew York after working with his intellectual mentor, Ben Graham.
QuestionerWhen you came back from New York in the 56, I think it was, having studied and workedwith Ben Graham, what was the dream? What was the ambition?
WarrenWell, it was kind of disgustingly low. I didn't know what I was going to do. I had about $150,000at that time, and I felt, you know, if I earned 10% on it, that'd be $15,000 a year,and I could live big on that at the time. I was interested in reading and taking coursesat the university. I took my father-in-law's course in psychology, and I thought I mightgo to law school. I knew there were a whole bunch of subjects I wanted to read about.And then I sort of stumbled into this partnership a few months later, because seven membersof the family said, we want you to handle our investments, and I didn't want to do itone at a time or tell them what I was doing. So I put the seven together in a partnership
Warrenthat had $105,100 in it. You can guess who the $100 was.And I thought that was it. And a few months later, a fellow named Homer Dodge, who hadbeen a stockholder at Graham Newman, came out, saw me in Omaha, and he said Graham Newmanwas liquidating, and he said he'd asked Ben where to put his money, and Ben said maybeWarren would be a good choice. So he joined me for, I think, about $100,000 at the time.And then four months later, some fellow in Omaha that read the legal notice, actually,a friend of mine called me up and said, what are you doing? And I told him, and he didit. So I just kind of stumbled along.
QuestionerYou kind of stumbled along. All of a sudden, you have a partnership, and you're makingmoney.
WarrenAnd I couldn't sell Keogh now. But the partnership did well, and part of the partnership wasbuying what looked like cheap stocks. Berkshire Hathaway looked like a cheap stock. It wasa terrible business.
QuestionerWhat was your ambition then? Now you have a vehicle.
WarrenYeah. Well, I started out by thinking I was a textile expert. But I was just abused atthat notion fairly fast. I really did. I thought, you know, well, I'll, you know. What do theseguys know about making textiles? They've only been doing it a few hundred years. Imean, the Egyptians, I think, figured out how to weave.But I've been in Omaha for a while. I know a lot about textiles.
QuestionerThat's right. I just turned me loose at the plant and see what happens.
WarrenSo anyway, whathappened was, right at that period, the textile business was good for a very short periodof time. And so I was like a duck floating on a pond when it was raining. I was goingup in the world. And I thought it was because I was flapping my wings. But it was that damnrain that was coming.And then when it quit raining, I mean, what do I know? Right. And then then we went intoother businesses.
QuestionerYeah. And what so all of a sudden it was you went into other businesses, meaning you hadsome cash flow coming in.
WarrenWe had some cash, not very much, but we had some cash around. And when Jack Ringwald decidedto sell his insurance companies in early 67, we we paid eight point seven million, I thinkeight point four million, I guess it was eight point four million. And we had in Berkshire,we had, I don't know, maybe four or five million around. Maybe we borrowed a few million.But that was your first entry. That was the insurance business. Why was the insurancebusiness attractive?
OtherWell, it it does control money. And and and if you've got somebody that's doing a decentjob on the insurance and in underwriting, it gives you money to invest on my end.
QuestionerHow much of your revenue comes from the insurance?
WarrenA lot comes from insurance. And then we have a lot of money that's generated by insurance.
OtherThe insurance has propelled our growth. There's no question about that because it gave youmoney to give us money to both invest in marketable securities and also money to buy businessesoutright. And then in nineteen sixty five, you have a chance to take over. Right. Berkshire.
WarrenWhat happened after a while, I realized what a lousy business I was in and we didn't getout of the textile business, but I decided that to the extent we could, we try to addon other things. Interestingly enough, Charlie, the I'd have been better off if I'd doneall the subsequent things without putting them in Berkshire originally.
OtherI mean, you just talk financially Berkshire. The textile business was a drag for 20 years.
WarrenSo if I instead of buying these things for Berkshire, we just bought them in the separateentity, the excellent.
QuestionerThen why didn't you do that?
WarrenI don't know. But it worked out fine. But I don't know what everything worked out. But if you look back, looking back, it wasit was a big, fundamental wrong decision from a financial to get involved in the textilebusiness at all. Yeah, I should have just gotten out of that and going on and done theseother things. But do you tell me why you didn't kind of stick with things?
QuestionerIs that.
WarrenYeah, I really do. I mean, here was things here. It's just my personality. You know, I mean, I'm driving a car after eight years. I've lived in the same house after 47 years.
QuestionerYour net worth about that time was about sixor seven million dollars.
WarrenThat probably is about right.
QuestionerYeah, that's probably about right, because in 1962, when I formed, when I put all thepartnerships together, it was about a million. And when I wound up, it was about twenty five. And so it probably was.
OtherWhat are you thinking?
WarrenI mean, I'm just going to continue findinginvestments that I can make and everything will turn out. In the 60s, I was running this partnership, so I thought I was going to keep running thepartnership. And then I got to where I didn't think I could do that well.
QuestionerAnd why did you think that?
WarrenWell, the market in the stock market, the stock market justwent crazy. And it's a little like, you know, in 1999 and 2000, I mean, I was left behind
Warrenand I didn't want to do things I didn't understand and that didn't make sense to me.But I also didn't like sitting there while everybody else was running rings around meand my partners were probably not saying it, but they might think, you know, has this guylost it? So so I gave him all the money back and I gave him the shares of Berkshire andgot a lot of myself as part of that. And then I just kind of got more involved in Berkshire.You know, it it became my painting. I was only painting an hour or two a day at the start and I started painting like crazy.
QuestionerSo you had a stake in Berkshire. Right. And I actually bought more.
WarrenBut I just decided I'd put all my money in Berkshire and ride with it.And ride with Berkshire as a vehicle, just as this is kind of an extension, a corporate extension of me.
QuestionerAnd are you out of the textile business by then?
WarrenWe got out of it. No, we did not get out of the textile business for 20 years.I even bought another textile company. I mean, this is, you know, I've got to confess.This is like a revival meeting now. I'm going to just go up to you and we need to forgive me, will you?Because I I bought another textile company.I bought something called Wombeck Mills in Manchester, New Hampshire.
QuestionerWhy did you do that?
WarrenOnly my psychiatrist knows.I again, I thought I was going to solve something by doing it.I mean, I solved something.Well, I mean, I thought that these two put together would do better than some crazy thing.I mean, I did it myself, too.No management consultants told me to do it.So it was it was 19 about 85.I mean, 20 years later, before we got out of the textile business, they got the textile business.I said, it's a little bit like watching a parade with all these other textile companies.And you stand up on your tiptoes and then everybody else stands up on their tiptoes to it.And all that you don't see any better. And your legs hurt.And that's what happened with textiles.
QuestionerIn 1973, would maybe your first big first run at The Washington Post began to buy shares.Yeah. How did you come to the conclusion?
WarrenI'd looked at the prospectus in 1971, when Charlie and I first met Kay Graham one time,and they were going public right at the time of the Pentagon Papers.And then in 1973, the stock got very cheap because their television licenses were under challenge by B.B.Robozo, Nixon's friend.And the stock went from, I think, like 38 to 16 or so in a very short period of time.
WarrenAnd when it got down to around 20, just in a few blocks, we bought almost 10 percent of the company.And that now is about 18 percent because they've repurchased shares.When it got to about 20, that meant the whole Washington Post company had 4,800,000 shares.The whole Washington Post company was selling for $100 million.Now, they own The Washington Post. They own Newsweek.They own four big network television stations, including CBS in Washington, D.C. and all of that.Jacksonville. I mean, everything. And they didn't know any money.And if you had taken those separate parts, you literally could have been out in the middle of the Atlantic Ocean,you know, at midnight in a rowboat, and you could have sold them for $500 million.People have been swimming out in shark-infested waters, if necessary.And you could have had all of it for $100 million.For $100 million. I mean, you weren't going to get all of it.Here's what I don't understand. How come 95 people didn't see that?It was amazing. We were buying it from big institutional investors.And they were bailing out of it. And if you'd asked any one of them what the pieces were worth,they would have said something close to what I would say.But they thought the stock was going to go down. So, so what?You know, and the stock did go down. In fact, after we bought it, it went down a little more.So what? Warren Buffett believes that I'm not looking at the price of the stock.I'm looking at the value of the business. I'm looking at the properties and I'm looking at the Graham family.I mean, that stock we paid about $10 million for is probably worth a billion and a half or more today.And they haven't. Ten million and a billion and a half.And they have not struck oil. They have not invented a cure for cancer.You know, they've just taken those properties and kept doing reasonably intelligent things and sometimes very intelligent things.But the money generated by it and they've developed the properties they've had and they've been terrific stewards of the money.But there's there's no miracles involved.
CharlieWarren bought into the company without my knowing him.That's why I say luck really plays a role in people's lives.It just does. A lot of people said stiff arm and he's buying too much stock.He means, you know, good. And my native instinct was, let's take a look.Let's see what he's like. And everything I learned about him was very good.
WarrenSo I asked him to come and take a look at the company in which she just bought these shares.
WarrenHe had to write me a letter when he owned five percent of the company saying, dear, Mrs.Graham, I've just bought five percent of your company and I mean, you know, harm.
WarrenAnd I think it's a great company and I know it's Graham owned and Graham run and that's fine with me.
WarrenAnd so I got to know him and I thought, whoa, this guy's really terrific.
WarrenSo after he joined our board, he used to come to board meetings with about 20 annual reports and he would take me through these annual reports.
WarrenI mean, it was like going to business school with Warren Buffett. Couldn't have a better teacher.
OtherNo, it was wonderful.
OtherKay Graham told me that when she met you, she'd never even understood how to read an annual report,that that's what you brought to her, some sense of being a helping her come to grips with the idea of making business decisions.
WarrenKay was very, very smart.
WarrenBut she thought because she had been pushed into her by her mother and her husband to some extent in the past,she she thought only males who had been to business school could run businesses.
WarrenI mean, she she had been she had the intellect, but she didn't have the confidence.
WarrenAnd I told her my job was to get her away from looking into that funhouse mirror that she was looking into about herself and distorting it and looking into a real mirror.
WarrenAnd when she looked in a real mirror, she'd see a person that was perfectly capable of running the Washington Post or any other company.
OtherHow long did it take you to learn that?
WarrenWell, it was, you know, fits and starts over time.
WarrenBut but she I had the right raw material.
WarrenI mean, she was good. She was good. And and she'd had beaten into her over such a long period of time that that wasn't what she could do in life,that it took it took some convincing that she had to see evidence of success and all that sort of thing.
WarrenI said, Mrs. Graham, I said, you know.
WarrenYou control this company, Lock, Stock and Barrel, but you're still worried about me.
WarrenSo I said, what you're doing is you're looking at me and you're seeing fangs and I'm telling you these are baby teeth.
WarrenAnd I said, they really are baby teeth, but they always look like things to you.
WarrenAnd there's nothing I can do except even except take them out.
WarrenI said, even though they're baby teeth, I'm going to just take them all out.
WarrenSo I'm perfectly willing. You call George Gillespie up.
WarrenYou're your lawyer. And I said, I'll sign an agreement that I'll never buy another share of stock of Washington Post unless you give me the OK.And I said, I'm fine. You know, I want you happy with me.I want you nervous about me. And so George came up and I took out the baby teeth and she saw fangs falling to the floor.And we got a lot greater. OK, but then you already had.We had we had 10 million invested. Yeah, we had 10 million of us.We had not nine. We had nine percent, nine and a fraction percent of the stock.I told her the smart thing is to repurchase your shares.I mean, and the shares I would otherwise buy, you should buy for the company.And and we'll all get richer if you do that.And and she had a lot of other people advising her otherwise.But she finally she decided to do it.And that's the reason we now own almost 18 percent, I believe, of the company instead of nine and a fraction percent.The Buffalo News was bought in 1977 and I gave Kay first shot at that.You did what I gave Kay first shot at that.You said if you if you don't want to buy it, I don't want to.Yeah, I'm going to buy it. Why would you do that?I just felt that, you know, she'd been good to me and we were a big holder and they were in the newspaper business and and she wanted to buy things.So I just said, you know, I'm not going to not going to find that.I went up to see Vince Manno on a Sunday and bought this thing away from you so that you otherwise would have bought.So I gave her a shot at it.In 1983, you purchased Nebraska Furniture Mart.That's right. For 60 million dollars.This is me. Tell me about her.This is a woman that walked out of Russia, got on a peanut boat, landed in Seattle with a tag around her neck, couldn't speak a word of English.And the Red Cross got her out to Fort Dodge, Iowa, which is what the tag said.She couldn't learn the language.She moved to Omaha because there were more Russian Jews here that she could talk with.Her oldest daughter started school, came home and taught her the words that she learned.She took 16 years to save five hundred dollars so she could start this company.And you selling used clothing, bringing her siblings and her mother and father over 50 bucks at a crack.And in 1937, took five hundred dollars and went into business and competed against all these people who had all kinds of advantages over in every way.And she killed him and she killed him.
WarrenYeah. How was she able to kill him?She cared about it.She was smart. She knew the limitations of her knowledge and she and she was confident within her circle of competence, competence.She didn't get outside of it.And she took care of her customer.She sold sheep and it took her a long time.But she built the largest home furnishing store in the country in a town like Omaha with 700000 people.So how did you come to buy it?Well, I was in love with this operation.That's my kind of woman.And I bought it when she was eighty nine.She worked to one hundred and three.There was a period there where she left for a couple of years.If you went over to Mrs. B's house, as I did, and you very nice house and you go in and on her sofa or lamps or bed, there'd be little green tags hanging down because it made her feel like she was at the store.I mean, this is a remarkable, remarkable woman.And the punchline, Charlie, is she couldn't read or write.You know, and I think every business school in the United States ought to study her.I mean, what would they learn?They would learn the essence of business.They would learn that taking care of your customer is what it's all about, taking care of.And by that, I mean giving them good deals, you know, which nobody would touch.And she and working, working like crazy.I mean, she was there day after day after day.And she she she had a passion for it.And the truth is, if you took the Fortune 500 CEOs and I gave you first draft pick on ten of them and I put them in competition with Mrs.B, she'd she'd win.No doubt she'd win.Yeah. Michael Eisner was here.I told him the story. He loved it.And Michael wanted to get the movie rights.And Michael could be very persuasive.But but I saw him stand there with Mrs.B's daughter, the same daughter I referred to earlier, you know, who's now at that time was probably close to 80 or so.And and Francis is this tall and Michael's that tall.Francis is saying my mother wants a piece of everything.When you're an 80 year old, say your mother wants a piece of everything.That's right. So Mrs. B, Mrs.B wanted them, whatever they were going to do, she wanted a piece of the action.If they were going to make Mrs.B doll, she wanted on a piece of it.They didn't teach that in any business school to her.She picked that up. That's right.That's exactly right. Understanding that ownership was everything.She understood business and she understood people awfully well.
QuestionerIn 1988, you started buying Coca-Cola. How come?
WarrenI don't remember exactly. Probably read their annual report, probably read the 1987 annual report. And I've been I've watched it some. But there just comes a point. There's a tipping point, you know, in terms of knowledge you've accumulated over a period of time. Price changes in the stock, which had gone down some. They were heavy repurchases of their own stock. Roberto and Don were doing a terrific job. Nothing bad was going to happen to Coca-Cola. So I started buying most of it in that period from the middle of 88 to early 89. But I'm a little further on. But we put overall about a billion dollars into it. And it's probably worth about eight billion now.
QuestionerAnd you have no intent to sell?
WarrenNo.
QuestionerYou have said, though, that in during the bubble, it got overpriced. There were some areas that you might have sold.
WarrenSure. And would have been wise to have sold them at that time. If I was running the partnership like I did back in the 60s, I definitely should have sold those stocks. I mean, they that it stocks went crazy.
QuestionerAnd you do not today look back and say, I should have sold Coca-Cola when the bubble was there, because it just it wasn't me.
WarrenI mean, I wouldn't you know, I I I knew it was selling at a very fancy price. And I even wrote about it. And same way with Gillette. But but, you know, I don't do that very often. I'm not saying I wouldn't ever do it. I mean, if we went into the wild, a speculative orgy in history, orgy in history, and some of these things went crazy, maybe I would sell some. But I it's not mine. It goes against the grain. For one thing, wonderful businesses are not that common. And if you get a big position in a wonderful business, not a bad thing.
QuestionerWhat is the single best investment on a large scale that you have made?
WarrenGeico twice in my life, three times in my life has been a good investment. I mean, it was a good investment when I was when I was really 20 years of age. And when I when I bought, I put three quarters of my net worth in Geico when my net worth was like ten thousand dollars. And and that caused my net worth probably to double or something like that. And that was that was great at the time. In 1976, the company got in trouble and we bought what turned out to be half of the company for like forty million dollars. And then in 1995 or so, we bought the other half for two billion. And that was a good deal. So it's it's been a triple play.
QuestionerHelp me understand this. You you're sitting with more than 40 billion dollars essentially in cash, right?You could buy some big businesses, I would assume, for 40 billion dollars, right?But you don't see any at a price that you want to own.
WarrenThat's right. And when I look at the deals that have been made in the last year, there's not one I'm envious of.So, I mean, it isn't like we missed him. I mean, you know, it may turn out that that I should have bought one.But I mean, there's none that I feel, gee, I wish I'd bought that last year.But I hope I buy one tomorrow. But I mean, there's nothing I mean, you know, you don't look at General Motors and say, I look at General Motors.General Motors is selling for about 15 billion dollars.Now, there's 500 million shares, 28 or 29, something like that.You know, and the whole General Motors company, 15 billion.Of course, that was the most powerful company in the world, you know, back when I was a kid.And you could you could have it in a second.
QuestionerWell, I don't know about that, but I certainly can buy. I can buy plenty of it.Don't you know about that? Well, I mean, buying the whole company is a different story.How much is the whole company? The whole company would cost 15 billion dollars on the stock.Yeah. So why couldn't you get a 15 billion dollars and get General Motors?
WarrenWell, they might they might not like me doing it.Some other things. Oh, sure, sure. I never lost.I could buy a lot of stock at a valuation of 15 billion.
QuestionerAnd you think it's a good buy today?
WarrenI think it's too tough to figure.Too tough to think. Yeah. You know, it is a company that sells 25 percent of all the vehicles in the United States and one seventh of all the vehicles in the world, you know, and employs hundreds of thousands of people.But it's got some terrible obligations outside standing like Fiat.Well, the Fiat deal, they solve for two billion. Right. But still two billion out the door.But they know the big the big problem was that they really entered into contracts with the UAW and were based on their the economics of market dominance and they don't have market dominance anymore.But they still got the contracts. And I don't blame the UAW.I mean, you know, it was a freewill negotiation, but but they they signed up.I think they're paying like two and a half people that don't work for every people, for every person that works or something like that, you know, in terms of retirement and health care.
WarrenAnd and that gets to be crushing if you're competing with people that don't have the same obligations.You've looked at this closely. I look at all the things.When you read eight hours a day, you have a chance to cover a lot of. Yeah, a lot of.But General Motors and listen, I think they're doing a great job considering the hand they're dealt.But but General Motors is a huge. Annuity and health insurance company with a major auto company attached.And unfortunately, the huge annuity and health company has got a terrible bunch of contracts.I mean, it is worth some big minus number.And the question is, is whether the auto company is worth a big enough plus number to offset that big minus number.But you can't separate the two and you can't figure it out.
CharlieI can figure it out.
WarrenYou know what? Well, in the end, I can't come to a conclusion that that that that it's obvious that that's what I mean.You can't make you can't come to a conclusion.
CharlieRight. Because you don't have all the facts.
WarrenNo, I got the facts. What don't you know? Why can't you reach it?
CharlieI don't know whether you can exist with the kind of obligations they've got.And 25 percent of the market and very tough people like Toyota and all kinds of people coming out of who who don't have those costs.They call them legacy costs.
WarrenHere is the dilemma. You got 40 million dollars in cash.
CharlieForty billion.
WarrenForty billion. There's a difference.And you've gotten so big that you got to make a big play. Right. That's your problem.
CharlieThat's my problem. And I thought it was a problem when we were a lot smaller.And it was. But it's a bigger problem now. So what? And if I'm lucky, it'll be an even bigger problem five years now.And and why? And you.
QuestionerSo tell me how the dilemma plays itself out for you.
WarrenThe odds are good, Charlie, that one way or another, we will find reasonably intelligent things to do with most of the money.But they won't be as intelligent as the things that we could find 30 or 40 years ago with much smaller amounts of money.
CharlieNowhere close.
QuestionerIs there a few there? Right. It just can't. It won't happen.What's the test? What test does it have to meet?
WarrenIt has to be a business.I understand it has to be a company that I think has some kind of enduring competitive advantage.There has to be a management that I like and trust. And it has to be in a reasonably attractive price.Price is the least important, but it's still important. And you'd like to own all of it.
WarrenI'd like to, but not necessarily, but not necessarily. It's a very small.It's a small field, too. It's a small field when you get to have as much money as we have.It was a big field 30 or 40 years ago when I bought the Washington Post stock in 1973 and 74.There were hundreds of companies that met my test. It was just a question of, you know, choosing the best.Deciding, absolutely. And the one you like the most. Yeah. The combination.You don't have any single candidate right now. That's true.That's why you see these tears in my eyes. It is. Tell me the emotional feeling.Not only tears, but there is a certain sense of...It's happened before. I mean, I closed up my partnership in 69 because I didn't feel there were any opportunities then in what I was doing, managing money.And there weren't. I mean, at least for me.And, you know, in 1999 and 2000, in the general stock market, there was certainly nothing attractive.And we found some businesses then. But it happens from time to time.I mean, I am not in a business where you can do something smart every day.I'm not even in a business where you can do something smart every year.But I may be in a business where you can do something smart every three or four years.
QuestionerYeah, but I mean, I read every day about one more big deal by a group of private equity guys in the paper today.
WarrenRight. And they're using other people's money. And they get an override.And their calculus is not the same as my calculus. And right now that enables them to pay way more.
QuestionerTell me how their calculus is different.
WarrenIt's money they get from somebody else that they get paid quite a bit of money on if they don't do anything.And then they get a percentage of the upside and they don't take the downside.I mean, that is a different calculus than Berkshire's.
QuestionerYeah, you have the upside and the downside.
WarrenThe upside and the downside. And I'm going to keep them forever.And I'm not going to dress up the accounting or rearrange things a little and resell it.You're not going to take a big fee for doing it.No, so I don't have an exit strategy.And I'm not getting paid just to sit with a whole bunch of other people's money.It's my money.
OtherWe sat down again with Warren on June 29th, 2006, after he had made some acquisitions since we last spoke with him.
QuestionerLet's talk about the future of Berkshire Hathaway.
WarrenRight.
QuestionerThe last time we talked about the rise of Berkshire Hathaway, you were sitting on, give or take a billion dollars, about $44 billion.
QuestionerYou didn't find anything that you were very interested in making an investment.
WarrenSince then, you've made some investments.
QuestionerYeah, we've spent over $10 billion this year.
WarrenOne was ISCAR.
QuestionerOne was ISCAR, which was $4 billion, 80 percent we bought of a $5 billion business.
WarrenPacific Corp was $5 and a fraction billion.
QuestionerWe're finding a few things.
WarrenThe important thing is to find big things.
QuestionerOkay, for you, you have a unique size, scale problem.
WarrenI'm looking for elephants.
QuestionerBut my question is, did anything change between, say, 2004 and 2006?
WarrenBecause you don't look at the economy as much as you look at the business.
QuestionerI only look at the business.
WarrenThere's never been a business that I passed up that I liked because I had some view on the economy that maybe it would be better next year. There's never been one I bought because I thought the economy was going to do particularly well this year. I look at a business, we're going to hold it forever. If I hold, let's say I live 20 years, that's pretty optimistic, but let's just say I do. In those 20 years, there are going to be a lot of good years. There are going to be a few bad years in the economy. But what difference does it make? It's like playing 18 holes of golf. There's par threes and par fives. The only way to get to the clubhouse is to play them all. If you like golf, you play them all. I like business. And so we're going to play the tough years. We're going to play the easy years. And if we've got the right businesses and the right managers, it's going to work.
QuestionerWhy couldn't you have seen ISCAR in 2004?
WarrenBecause it was just that company. Nothing happened to them or nothing happened to you to make the investment in 2006 rather than 2004, except the CEO wrote you an e-mail.
QuestionerThat's right.
WarrenI'd never heard of the company in 2004. That's the reason. Very hard to do if you haven't heard of the company. And I'd never heard of Eitan Wertheimer. But he wrote me a letter in October. This is the guy who's the CEO. He's the CEO and the owner and his family. And he wrote me in October of 2005. And he told me a page and a fraction about the company. And he said, Berkshire is a logical home for us. And he said, I'd like to talk to you. So he came over from Israel and we talked. But if he had written me in 2004, we would have made the deal. It would have been cheaper, too. I wish he had written me in 2004. But my point is understanding why you didn't see companies was nothing having to do with the economy,
Warrennothing having to do with anything other than you just simply hadn't seen one.It's availability.Yeah.Sometimes it's something that happens in a family.There may be more people or they may owe taxes or who knows what.I mean we buy when they're ready to buy or it's ready to sell.And I don't go out prospecting.I let my interests be known.But I get a lot of people say, well, why don't you call on this person?Why don't you call on that one and soften them up?And I don't do it because my batting average would be terrible.You've got to wait until they're ready to do something.And that's when we hear about companies.So they come to you when they're ready.When they're ready.My phone rings.At this stage in your experience, you know pretty quickly if it's right.Yeah, like about two minutes.I mean I read the letter from Kathy.I knew it was right.I mean you can tell.Have you ever met girls, Charlie, that you knew it was right?I don't want to get personal.And you know that other people would like them, but it's just not for you.Sure, they're just not for you.They're just not for you.Exactly.But that has to do with, I mean you can see the numbers immediately.You've got to make an evaluation of the management.How can you do that so quick?You just have at this time in your life an instinctive knowledge.Yeah, it's not going to always be right, but it's usually going to be right.One more time for the criteria.It is in terms of an earnings record.We're looking for 75 million pre-tax earnings.Plus 75 million.You're looking at management.You're looking at a simple business, one I can understand, which really means simple.And we're looking for management in place,and we're looking for a seller that knows the price he wants for his business.The seller must know the price.Yeah.Is it a hard negotiation or is it pretty quick?Very quick because they know.I mean if I like the price and if it meets the test, I can say yes very fast.I mean it doesn't take any time really, Charlie.There's others if I spent two years on them I wouldn't know the answer at the end of two years,but I do know the difference between the ones that take two years and the ones that take two minutes.And you like the ones that take two minutes.Yeah.And you don't go to some investment bank to do the due diligence.No.No, if I need them, you know, I need a doctor maybe to tell me about my health,but if I need them to tell me about a business, you know, they ought to be running Berkshire.
WarrenI did not take money from 400,000 people to essentially start farming it out and say,well, I lost your money, but this guy, I thought it was good.It just happened it was wrong.It's my job to know what I'm doing.And if I don't know what I'm doing, I don't do it.
QuestionerWell, we've established that you know what you're doing.
WarrenNo, not always.Coca-Cola is one example.The value of your holding has gone down by about $8 billion, hasn't it?
QuestionerThat's, you hit it right on the button.Let's keep this quiet.I mean, do you ever say, man, what am I doing here?
WarrenMy commitment to the end is.No, looking back, I made a mistake by not selling Coca-Cola stock when it was $80 a share or something else.But no, I don't look back on things.
QuestionerOkay.But let me just say with that idea.Yeah.So you look back and you say when it was $80 a share, I should have sold it because that was at its top, say,or close to its top.50-plus times earnings.Right.50 times earnings.But it's not in your blood to want to sell.
WarrenNo, but I do sell marketable security sometimes.I don't sell businesses.Right.But I do sell marketable security.
QuestionerOkay, sure, and this is a marketable security.That was a marketable security.As is American Express, as is.
WarrenYeah, but I don't sell See's Candy or the Buffalo News.Oh, sure.Yeah, I don't sell businesses.So you're in merit to them for better or worse.Yeah, I've got one section in the annual report, and I put it in every year,that if a business like that promises to lose money indefinitely or if they have major labor problems or something,but just because I don't think it's going to do very well or I could use the money better elsewhereor because I get offered a crazy high price for something, I don't sell them.I got offered a crazy high price for something here recently that we own, and I told the fellow that called me,I said, I don't do it.You can look in the back of the annual report and you'll see I don't do it.He said, well, I read it, but I didn't believe it.He said, I believe it now.He thought he could buy it.He thought he could buy it.He named a number to me.And it was a good number.It was a good number.If I was trustee of a children's home and that was the only asset of the children's home,and it was my responsibility simply to get the best economic result for the children's home,I would have had to sell it to him.
QuestionerExactly.Since I last talked to you, you have, with the consent, in concert with other members of the board,
Questionerhave chosen the successor?
WarrenWell, what we have, Charlie, is we have three that could do it. And every meeting of the board, we don't have very many meetings, but every meeting of the board, that's the subject. And the question is, if something happens to me that night, who do they put in charge? So they always go away knowing what they would do the next day. Now, there may be a pool of three, but we have settled on one at any time. And so if something happened to me tonight, tomorrow morning, the board of directors of Berkshire would convene, and they would know exactly who they were going to put in charge.
QuestionerYou will run Berkshire as long as?
WarrenAs long as I keep my marbles.
QuestionerAnd you have somebody that will come to tell you that you don't have them, if necessary?
WarrenWell, yes, I have assigned that job to my children. I tell them they had better all three come in together, because if just one comes, I'm cutting them out of the will.
QuestionerYou have said that you want to keep, if you could find $30 billion in acquisitions, you're prepared to do that, and you want to just keep in reserve $10 billion?
WarrenAbout $10 billion, yeah.
QuestionerAnd why that breakup?
WarrenWell, I think that a company that writes the catastrophe insurance and all of that sort of thing that we do should have plenty of liquidity. I mean, I want Berkshire always to be the Rockets of Boulder. I mean, we've got 400,000 shareholders. We've got people who have workers' compensation claims against us that are quadriplegics or that are going to be getting a check from us 60 years from now. I've got no business fooling around with anything close to the solvency of Berkshire. So I will keep it way, way over on the safe side in every respect. And having a lot of money around, you know, when you're in the insurance business like we are, I don't want to depend on letters of credit from banks or anything of the sort. You know, I don't want a no-too-big-to-fail doctrine to bail us out. I really want us to be...
QuestionerAnd $10 billion is the right number?
WarrenWell, it is the right number. I understand.
QuestionerIs the insurance business still as attractive to you today as it was from the beginning?
WarrenIt's always been a business that sort of fits me. I mean, it gives you the money first, so the investment element is important. It also is a business where, you know, you're calculating odds on things. That's what you want. I was probably destined to be a bookmaker, but my dad wouldn't let me. You can calculate odds.
QuestionerBut, I mean, in the insurance business, the increasing number of hurricanes,the increasing number of terrorism is a fact of life today.
WarrenI think so.
QuestionerNo matter how you can write a policy against all those things, I mean, does it make it any less?
WarrenWell, you have to calculate the odds right.You've got to get the right premium.And you never know whether you've gotten the right premium.I mean, you know over a lifetime whether overall you've gotten the right premium for things,but you lose on some policies and on other policies nothing happens.And so you don't know at any given day or week or month whether you're doing the right thing.But over time, you'll see whether your judgment has generally been right.And it's an interesting game.
QuestionerHas the scandal affected at all?
WarrenNo, I wouldn't say so.All of the controversy about AGI and AIG?No, we're doing, you know, we do a lot of business.I mean, we've got a lot of different irons in the fire in the insurance business.I mean, we've got Geico, the auto insurance.So we've got a lot of different insurance businesses.And, you know, it'll be the most important business at Berkshire throughout my lifetimeand probably a long time thereafter.
QuestionerOne thing you're doing is looking out to international companies.Is it for the first time?
WarrenNo, I've always been interested, but we haven't been on the radar screen very much for entire businesses abroad.They did not think of us in Germany or the U.K. or, you know, up until now, Israel.They had a business to sell.Now, I've always looked at international stocks, and we've always owned some international stocks.
QuestionerTell me how you see the economy today.
WarrenWell, the economy still is pretty good as we sit and talk today.You know, people, they've taken lots of equity out of their, or they've taken,they've extracted the equity that's appreciated in their houses big time in the last few years and all that.But if you looked at the economy right today, you'd have to say it's pretty good.Now, we've got plenty of problems, but they are not manifesting themselves in business today.
QuestionerDo you worry about inflation?
WarrenI worry some about inflation, sure.Sure, inflation, inflation is never gone.It's always in remission.And, you know, it's very easy.It never did.It never did.And it's something that is man-made and governments can create,and it oftentimes seems preferable to some alternative that's in the here and now.So you have to worry about, anytime you have governments, you have to worry about inflation.
QuestionerAnd what about oil prices?
WarrenWell, I'm no good on oil prices. I mean, you know, we're using 84 million barrels a day or so in the world of oil, and if something disrupts three or four million barrels a day of supply, like something happening in Iran, perhaps, you know, the marginal barrel will go crazy. We're on the edge.
QuestionerYeah, yeah. We've got less reserve capacity by far than we had 15 or 20 years ago. When you think about the dollar?
WarrenI think the dollar over time will go down, because I think we're following policies in connection with trade that will cause the dollar, I don't know whether it will be in, you know, six months, six years, ten years, but the policies we're following as a country will cause the dollar, in my view, to decline. Primarily our trade deficit.
QuestionerOur trade deficit, right.
WarrenAnd the flip side of our trade deficit is when we consume more than we produce, we have to trade the rest of the world something for that, and we give them our assets. We give them IOUs of the government, we give them dollars initially, and then they can convert those into other assets in this country. So we are trading away assets in order to overconsume.
QuestionerAs you said to me earlier, we're giving away pieces of the farm.
WarrenYeah, we're giving away pieces of the farm. We want to consume more than we produce, and so we trade away a little bit of the farm, and we've got such a big farm, I mean, you know, this is one prosperous country, so we can trade away, we don't see it day by day, but it adds up, and it has consequences.
QuestionerMore severe to you than the fiscal deficit.
WarrenThat's true, yeah. Fiscal, our national debt in relation to GDP is not extraordinary. I mean, we've had plenty of times in the past when it's been higher, particularly after World War II, and I don't like it when it keeps going up as a percentage of GDP, but a very rich country can stand more debt than a poorer country, and we can handle a lot more debt than in the past. Now, as that debt gets to be more and more owned by the rest of the world because of the trade deficit, you know, it can cause problems down the line, but if you ask me whether I'd rather cure one or the other, I would rather largely cure the trade deficit.
QuestionerDo you accept the argument that countries like China are locked into this dance with us because they need our markets, so they're unlikely to dump American securities?
WarrenOh, yeah, and isn't it they want to sell American securities, if they sell them to somebody in the United States, they get dollars with them,
Warrenso they have to buy something else with the dollars.If you sell them to the French, the French now have them, you know,and the Chinese have got a claim on France, but they can't really get rid of them.They can change their asset preference about the American assets they own,but China can't get rid of American assets, basically, or the rest of the world can'tunless we start exporting as much to them as we're importing, and that day is coming.But there are people who will suggest that there may be some catastrophic day,and we had that little tremor from the South Koreans about a year ago.There could be a catastrophic day. I don't know the answer to that.But any time you have huge imbalances in the world and you have lots of people on hair triggerstrading currencies and stock and bonds, you have the potential for catastrophic days.
QuestionerBack to the fiscal deficit and your sense of where we are,a lot of people look at the budget that they see today, and they look 10 years out,and they say with a baby boom generation coming in and Social Security and Medicare,that we are looking at a huge problem downstream that either we've got to raise taxes,cut spending, or change the age of the beneficiary.
WarrenYeah, we have to change the promises.A lot of what you see coming down the road as really large looming problems revolve around promises,and we won't, in my view, ever change the promise on Social Security.We may change it when you get into Medicare or something of that sort.
QuestionerNo politician will suggest that.
WarrenNo, they wouldn't. But this country has incredible resources.It has more resources per capita than it had 5 or 10 or 20 years ago.I mean, we're not going backwards economically as a nation, but we have made a lot of promises,and we could have a very rich family, Charlie, and our income could keep going up.But if I promised the elder members of the family that they would all live like multimillionaires, we could get in trouble.
OtherTomorrow, a $60 billion friendship.How did it happen, and what does it mean for the world?
WarrenI don't know.I don't know.I don't know.I don't know.I don't know.I don't know.