[0:01]
OtherThe Oracle of Omaha. Well, if you have any left over, you can mark them down, call me. I'll buy one.
OtherWarren Buffett, gathering with his faithful. Let Charlie try and do this. Now he sits down with Squackbox for a three-hour-long conversation. The economy, the markets, the business of Berkshire Hathaway. A special presentation begins right now.
Becky QuickGood morning, everybody. Welcome to Squackbox here on CNBC. I'm Becky Quick, reporting live from Omaha this morning. Joe Curtin and Andrew Ross-ork in are back at headquarters on the East Coast. We have the man of the morning with us, Warren Buffett. Obviously, we have a lot to talk about with him, including stocks, records, runs, the Fed, Bonds, the Dollar, and his deal for Hines. But first, before we get to all of that, Joe and Andrew have a short roundup of the morning's top headlines, and guys, I'll send it over to you.
Joe KernenOkay, hello, good morning.
Andrew Ross SorkinHello, good morning. How are you?
Joe KernenHi, Warren. I keep hearing you talked about me more. No one knows what the heck you said, so I don't know. It's like one of the answers you get to a lot of questions.
Andrew Ross SorkinI was sitting right next to him and I heard him mention your name too and I'm not entirely nobody knows Joe and I were having this conversation this morning. He said what did he say and I said I'm not sure and I actually said DeBessie, what did you say? Was it always? It was nice. It was something about a question. It was nice. It was a question about something you're always being. a question about something you're always bringing up and it wasn't net Jets.
WarrenSee my lawyer. That was a long time ago.
Joe KernenAll right. We're going to get back to Omaha and let me just say Warren at because I and I just got back now. Warren and Warren and Charlie were on fire this weekend actually in a way that I don't think. We've been asking these questions for now, I think five years and I thought this was one of the most substantive meetings and just the most spirited of the discussions. obviously Doug Cass threw a couple ones at them too, but I thought it was fascinating. Warren, I've heard that people get to a certain age where they say whatever the hell they want to say. I mean, it's got anything to do with that or?
WarrenWell, we give him a little free fooders and things like that. It's amazing how far it goes.
Joe KernenYeah, it's true. I think, though, that you and Charlie have been saying, kind of speaking your mind, Charlie in particularly,
[2:36]
Questionerhe may be almost 90, but I think he was talking that way 30 years ago and even 60. 60 years ago. He was talking that way when I met him in 1959. Yeah. One of the things that attracted me to him. Yeah, so he had a lot of things that he had to talk about. But Warren, before we jump into what happened this weekend, why don't we start off with the headline that the guys were just talking about, J.P. Morgan. You've said before that you own shares of J.P. Morgan in your private account, not for Berkshire. So you get to vote on this too. I.S. came out with this recommendation in terms of what they're saying about the directors, three directors they're saying you shouldn't vote for. They actually had some pretty harsh language in some of the things that they were talking about. They said the board appears to have been largely reactive, making changes only when it was clear it could no longer maintain the status quo. What do you as a shareholder in J.P. Morgan think?
WarrenWell, I don't know the details, but if you're the director of a company like J.P. Morgan, you cannot know the details of what's going on with trading or anything of the sort. Your key decision is whether you believe that you have the right CEO. If you have the right CEO, the board has done its job. And if you prevent the CEO from overreaching in terms of comp or something. And I've written about that. And I think they've got the right CEO. So I think they've done their job.
QuestionerYou told this last week that you think he should maintain both the chairman and the CEO titles as well.
WarrenI think it's fine if he does.
QuestionerSure. Okay. So you're on board, not just as an outside observer, but also as a shareholder, type of Morgan.
WarrenRight.
QuestionerLet's talk a little bit about this weekend. It was a big weekend. If you had to pick your headline from what happened over the weekend, what would it be?
WarrenI think it was just that everybody had a good time, including me and the board members, the managers. and certainly the shareholders. I probably waived many thousands up as I went around. And, you know, they all call me war on which I like. And certainly in terms of the sales at our various enterprises, they all broke records. So people seem pretty happy.
QuestionerSome of the questions that jumped out as me, jumped out to me as being some of the ones that were maybe some of the most persistently asked questions, had to do with your investing style because the
[4:35]
Questionerhigh's deal is a different deal than we've seen in the past. It's one that links you up. up with private equity, which you haven't done before. It's one that takes on some leverage. And there have been some questions that people have asked just, does this signal that you're looking at things differently? Does it signal that you'll be getting into deals you might not have in the past? And does it mean that you're not all that confident where the market's headed overall?
WarrenNo. Well, we took on leverage when we bought BNSF, the railroad. And we in no way consider our partners in this as private equity. These are people that buy for keeps. They run businesses, I mean, they actively, and they will keep running them. So this is not a private equity from them. These fellows are not planning to make their money on some override on other people's money. They have big sums of their own money in this deal. And Georgi Apollo Lemon, my main partner in this, he'll keep the stock indefinitely, as will we. So it's a partnership. And our preferred stock introduced some leverage for our leverage for our partners, but it's non-threatening leverage. It's held by their partners. So we have between the two of us, we have 16 billion of equity in this deal. And they have the more leverage play because we have this preferred stock. There was a question asked over the weekend about a column that had been written about this deal that suggested that, you know, the money that you had that wasn't in preferred shares and the common was dead money. If that $4 billion is dead money, I'll be very surprised. And that's what I'm our partners own. I mean, we each own 50% of the equity. And if it works out, as we hope, the rate of return on that $4 billion, our $4 billion, their $4 billion of common, will be higher by a considerable margin than the rate of return on the preferred stock we got. But that's the way it should be. But it's not that money by a long shot.
QuestionerAre people wrong when they assume that you're looking at deals like this because you look at the stock market and you think that it's not as cheap and you can't get as much value as you might have been able to get there in the past.
WarrenWell, we always prefer to buy businesses, and that's what we consider Heinz to be. We'll be in minds forever. And if a few of our partners decide to sell out at some point, I hope they sell to us. So this, you know, we'd like to buy, we'd like to buy 100% of Heinz, but we love the idea
[6:58]
Questionerof Georgie Apollo Lemon being our partner. So if it takes 50% of the equity to bring them in, that's fine with us. I talked to you about the jobs report on Thursday of last week, and you said you wouldn't have put money on it, but if you had to bet, you thought it would be a weaker number. It came in up 165, which the market took as a huge roaring success. 165 still isn't great growth, and it's certainly down from where we'd been before we got into this new year. What do you think about that number? And, again, your read on where you see the jobs market.
WarrenWell, it's the good thing I didn't bet on it, isn't it? I don't pay that much attention to the numbers from month a month. But in terms of our businesses, and we have 70 plus direct businesses and a lot more indirect, we're seeing the same thing we've been seeing for four years, and that's gradual improvement in the economy. And we cut across the whole economy, so I think it's a pretty good view of what's going on. And what you are seeing now is certain areas which didn't participate initially, like home building, coming back fairly strong. We had record sales at the furniture mark last year during this week. a shareholder week, 36 million. It looks like, well, we know we'll have another record, it'll be about $40 million in one week. The retailers out there know what that is. The biggest, our biggest gains, 30% came in flooring. And so people are buying carpeting. And that area is coming back. But overall, the economy is moving forward, but at a slow pace. Why? There's been a lot of questions about why businesses aren't investing more, why they aren't hiring. Well, they always hire, they invest, they hire and respect to demand. Now, we had a record investment last year and we'll have another record this year. I mean, we have lots of projects going on that we think make sense. But businesses respond to demand, and demand has come back, but slowly. Now, you see demand coming back faster in the residential area now than a year ago or 15 months ago. And that makes a difference in the kind of fillers down through our brick business and carpet business and insulation business. But it's not roaring back. I know that you're not somebody who looks at the market averages on a daily basis or cares about any of these things. But when you start seeing the trend that we've been seeing, which is almost a straight march up, it seems like we're hitting new highs almost every day.
[9:21]
WarrenThey should pay more attention when they're crossing those milestones on the downside. That's what stocks are getting cheaper. That's what stocks are going on sale. But people do get more excited when they see new highs. Well, I can remember when it was a big time when the Dow crossed $100. And I certainly remember well when it hit $1,000. I mean, that was a magic number. So probably in my lifetime and certainly in your lifetime, you know, you will see. markets that are far higher than this. I mean, the retention of earnings by American industry, the growth of the country, but will cause stocks to go higher over time. You're not getting everything out of stocks in terms of the dividends they pay compared to the earnings that retention builds it up. It's exactly like if you had a savings account and you only took out part of your interest, your savings account would grow. So I don't get too concerned about a given level. You'll see, you will see numbers a lot higher than this in your lifetime, Becky.
Becky QuickYou know, I know you watch the show. And you probably have seen what Joe's been talking about. For quite a while now, he's been talking about how this is something that reminds him of what he's seen in the past. And Joe, maybe you want to talk a little bit more about this, just what you've seen with the market, your theory about how things continue to climb, and this feels really different than what we've seen in the past.
Joe KernenI don't know. There's two things that scare people. That's when you're, and people do the same thing with human nature. They ride things all the way down and they think it's too late to sell. And then when things are going up, they, a lot of a lot of times they're not on board. And if they start out not on board, they never do get on board. And watching this happen this time, every time we hit a new high, people say, well, I can't buy now. And that usually indicates that we're not near the end of something. That's only been my, and my other point, Warren, I just get so irritated with sell-side people that they're always saying
[11:29]
QuestionerI'm constructive long-term, but in the, you know, there could be a pullback any time. I'm looking for, you know, five to ten percent any time. And they say that is they miss thousands and thousands of points and they're not committing new money. But they never, you can never pin them down on being wrong. And that's what I think they're most motivated. So it's just sort of a, just having seen it for so many years, you just get, it's just a pet peeve of mine. And, you know, when it's just utilities moving and just bond equivalence moving, it seems like you're not really at the end of a run, of a bull run. I don't know.
WarrenYeah, yeah. When people talk about, you can see a pullback, of course, you can see a pullback any day for the next thousand, 10,000 days. Nobody knows what the market's going to do the next day. But you shouldn't pay any attention to that. I bought a farm in 1985. I haven't had a quote on it since. I bought a piece of real estate in New York in 1992. I have not had a quote on it since. I looked at the performance of the assets. Maybe my farm and my piece of real estate have had pullbacks, but I don't even know about it. People pay way too, way too much attention to the short term. your money's worth in a stock, buy it and forget it. I mean, is that an, oh, go ahead, Joe.
Joe KernenNo, I was just, I've just got this sort of exciting feeling with me, because I'm not sure whether Warren is, whether it's going to have enough, but, you know, he's given me a brick, and he's given me, you know, some ketchup. I got the Markey Jets card, but that came out. That didn't work, but there is a jet right behind him. Is this a surprise today for me, Warren? Is that, that one behind? behind you? Are you going to, is that going to be mine? You're going to wait all three hours of the show.
WarrenYeah. Is that, that's going to be at the end? Be sure to stick around, Joe. There's a big unveil going on at the end of this program. I mean, it is, Uncle Warren, it's beautiful. It is beautiful. There's a, there's a, there's a name on that plane, Joe, and we'll look at it later. I can see it from here. I'm not going to give it away, though. Can you see the ribbon on the side? Global 6,000. We're going to be talking more about this, too. this too. Yeah. It's a new, it's a brand new deliverer. We're going to talk more about this a little bit later too because...
Joe KernenBut we can put you behind the wheel, Joe.
[13:45]
Joe KernenDon't worry. I'm not writing if Joe's behind the wheel. Can I just say that?
Joe KernenWarren, let's talk about the Fed. The reason so many people think that equities have done so well, at least in part, is it's not just the economy improving, it's also what the Fed is doing to make every other asset class look not nearly as strong as equities. How much do you think the Fed has done? How much of this boom, I should say in stock, do you think is coming from what the Fed's done?
WarrenWell, when interest rates are low and people expect them to stay low for a while, it pushes up the value of all other assets. I mean, interest rates act like gravity to other asset prices. Everything is based off them. So when there are high interest rates, there's a lot of gravitational pull down on the value of assets as we found back in 1981. in 1881 and two when the rates got to extraordinary levels. If you guaranteed people that the long-term rate would be 1.7% or 10-year rate, you know, and short-term rates would be probably nothing, you know, stocks should be, you know, selling at least double where they are now. It's the question in people's mind is how long it lasts. You don't have the strong feeling it doesn't last forever. But interest rates have a powerful effect on all assets. Real estate, farms, farms, you oil, everything else. It's the cost of carrying other assets. They're the alternative. They're the yardstick.
Joe KernenBut if you had to look at it, would you say that it's 50% of the markets rise has come 50% from the improving economy and 50% from the Fed? Or is one side have a heavier weighting?
WarrenI don't know the answer to that. Both are very important. If the economy had gone no place and interest rates had come down like they have, stocks would be cheaper than they are now. And if the interest rates had been down, if interest rates had been somewhat higher during this period and the business had come back, stocks would be somewhat higher. I don't know how to break up the two.
Joe KernenIf you were Ben Bernanke, you know, we just heard from them last week, when we got the FMC minutes, we heard that they've said, look, if this isn't enough, we're prepared to do even more than $85 billion a month. He's a gutsy guy. I mean, he said back in September of 2008, he would do what it takes, and he's been doing what it takes ever since. He is a man that, and he has been doing what it takes ever since. He is a man that,
[16:04]
Warrenhe can do what it takes. He is a man that's felt a heavy responsibility, huge responsibility to get the economy going and to keep it going. And he has used monetary policy in a way I've never seen before, but we faced a situation I hadn't seen before. So I'm a huge admirer of his. I don't envy the job of playing the hand out from here. But I think he's done very, very well in terms of what he's done for the United States.
Becky QuickYou've been very outspoken about how much you admire him and what a job you think he's done. But you've also said over probably the last year or so that you thought maybe if it were you in that seat, you would have taken your foot off the gas a little sooner.
WarrenProbably. Well, I might not know how to take my foot off the gas. If he, if he called, when he decides to sell or but buying, which would signal selling at some point, if he calls me and asks me how to do it, you know, I will, I will tell him to call Charlie. Put that in the too hard pile. Way too hard.
Becky QuickAll right. If you'll bear with us, Warren, we're going to slip in a quick commercial break right now. But Cyprus demonstrates this is an old truth. You can't trust bankers to govern themselves. A banker who's allowed to borrow money at X and loan it out at X plus Y.
CharlieWe'll just go crazy and do too much of it if the civilization doesn't have rules that prevent it. What happened in Cyprus was very similar to what happened in Iceland. It was stark raving mad in both cases. And the bankers, they'd be doing even more if the thing hadn't blown up. I do not think you can trust bankers to control themselves. They're like heroin addicts.
OtherThat was Charlie Munger who sat down with us on Friday. We are live in Omaha this morning with Berkshire Hathaway Chairman and CEO, Warren Buffett. And Warren, you've heard Charlie's comments. What he was talking about there, ended up with bankers, but it started on what he thought about Cyprus and some of the things that are happening in Europe. Over the weekend when the two of you were on stage, it seemed like you disagreed a little bit about the state of Europe just in terms of how great of an investment it may or may not be right now, how safe of an investment it is. You talked about how you see things, you'd potentially be interested in a deal coming out of Europe right now.
WarrenWe've bought, in the last 12 months, we've bought a couple smaller businesses in Europe.
[18:38]
WarrenWe've bought some European stocks. The fact that there are troubles in Europe, and there are plenty of troubles, and they're not going to go away fast, does not mean you don't buy stocks. We bought stocks when the United States was in trouble in 2008, and it was in huge trouble, and we spent $15.5 billion in three weeks between September 15th and October 10th. It wasn't because the news was good. It was because the prices were good. And if you believe that Europe is going to be around, which it certainly is, and it's going to have huge amounts of purchasing power with citizens and all of that, But then you look at, you actually look at troubles as possibly being, offering you an opportunity to buy. I bought my first stock, you know, when the United States was losing the war right after Pearl Harbor. I didn't buy it because I thought losing the war was a great idea. I thought it because I thought stocks were cheap and that eventually we'd win the war. And same way in Europe. So you've been buying European stocks. Has that been disclosed already? Well, we bought some in our, in our, in a reinsurance company we have over there. We spent a couple billion euros a year or so ago. And we would look at more. I mean, if we find a good business, if Coca-Cola were based in Amsterdam instead of Atlanta, we'd love to buy it. And if they get cheap enough, that's what we like good companies at cheap prices. Would you buy in some of the southern European countries, too, and specifically in Greece and Italy and Spain? And I ask that because, Wilbur Ross joined us recently and said that he'd be interested in making some deals in Greece. Well, I don't see it as impossible. I think there's a higher hurdle to clear in looking at businesses in those areas. But many of those businesses are international businesses too. But the answer is if I understand the business well and I trust and admire the management and the price is right, we'll buy there. Charlie did crack on the stage on Saturday that if it was in Greece, he hoped you'd give him a call before you went ahead and buy it. I'll do that, but he says no to everything I come up with, so it really won't make a difference.
Andrew Ross SorkinAndrew, I know you have a question too. Hey, Warren. This really actually more of a follow-up from the meeting on Saturday, and it came after you had commented during the meeting. We got a number of emails asking for the follow-up.
[21:02]
QuestionerSo here's the follow-up. It was a philosophical question really related to the division of having a chairman and a CEO and whether they should be the same person. You had commented about the reasons for having Howard be the eventual successor, non-executive chairman to sort of oversee things and be a check on the CEO. After you said that during the meeting, invariably, I think I got maybe a half a dozen emails from people in the audience said, well then follow up and ask, should that be applicable across the board? And I guess given the news this morning related to J.P. Morgan, you could put it in that context. But more broadly, philosophically, Do you think there should be a separation between the chairman and CEO, now that you're thinking about the future of Berkshire, at least in that way a little bit?
WarrenYeah. I think either system is okay. But the one advantage of having the chairman separate from the CEO is that it becomes easier to change the CEO if you have the wrong person in the job. And the biggest problems with CEOs is not the occasional one that crooked or just absolutely terrible. The problem is, if you get somebody that's reasonably good, but you can come up with somebody better. I mean, we have all kinds of second string quarterbacks or third string, you know, and pro football or something. And they're very good, but you still want the top guy in there, and top person playing in the position. And it's very difficult when you have the chairman and CEO, and they're likable, they may have appointed you to the board, they're doing their best, they're doing a reasonable job, but you could get somebody better and perhaps you should. And that is not an easy thing when people come into board meetings, you know, six times a year, four times a year, and they have a lot of committee meetings and they want to get planes back out of town. It's not easy to change when you've got somebody that's good but not great. And so I, that is a reason to separate the two. On the other hand, I don't think that it's key to do that. key to do that. I do think it's important at Berkshire because my son Howard were the non-executive chairman, you would have no function, you know, in terms of capital allocation or anything else. It would just be if there was one chance in a hundred that we came up with a wrong CEO, it would be easier to make a change.
QuestionerIs it almost a lead director position?
[23:28]
QuestionerIt's almost similar to the lead director. And one of the, one of the beneficial things that have come out of securities regulation in the last 10 years or so is the I of having a meeting once a year of the board without the CEO there. I've been a participant as a director in those situations and directors say a lot of things and subjects come up when the CEO isn't there that don't happen with the CEO in person. And some important things. Why isn't that preferable all the time instead of just some other time?
WarrenWell, I think if you do it once a year, it's often enough.
QuestionerNo, I'm sorry. I mean, that's set up in that situation. situation, why is it a situation that you think is only good in some cases and not in others? For example, why is it not a good idea for Berkshire right now?
WarrenWell, Berkshire does it.
QuestionerNo. Oh, they do right now?
WarrenYeah. We will have a director's meeting later and then they'll ask me to leave. And you get a little nervous if you're going an hour or two and they're still meeting. But no, that's required, I believe, at public companies now. And it's been good at Berkshire. How long were you out of the room the last time this happened at Berkshire?
QuestionerHow long were you out of the room the last time this happened at Berkshire?
WarrenWell, I go back to the office in their meeting in another room, and I kind of hope that they're having a little post-meeting chatter or something. Ron Olson will be the guy that usually comes around, and he's coming around as late as an hour later. For example, I mean, I don't like a lot of security or anything, and the board, I don't know, two years ago or three years ago, said, you're going to have more, you know, and things like, and things like they don't want to talk to me directly like that. when I'm in the room. It's a little embarrassing to be the one that brings it up. But I, like you say, I've been on one board where a lot of change happened because the CEO left the room.
QuestionerIs the additional security the biggest thing the board has ever imposed on you?
WarrenThey made suggestions on a few other things, but that's the most recent. It's one I remember, yeah.
QuestionerOkay. Guys, I think we're going to send it back to you to slip in another quick break, but we do have a lot more to come from Warren Buffett right here in Omar.
OtherGood morning, everybody, and welcome back to Squawk Box. We are live in Omaha with Warren Buffett, the chairman and CEO of Berkshire Hathway this morning. And right now we are sitting on a global 6,000.
[25:47]
QuestionerWarren, this is part of the signature series for net jets. You just started taking delivery of these planes, I believe, in December of last year. Right. But this is a series of planes that you specifically designed with Bombardier because you wanted certain things that you wanted in these planes.
WarrenThe people of net jets did. But I actually made a suggestion or two months.
QuestionerWhat was your suggestion?
WarrenI like a wide bed.
QuestionerSo that's in back there? That's back there. All the way back. These planes can hold up to 13 people. They also have special crew quarters where you can actually sleep with them. And I guess that's so you can take longer flights.
WarrenThat's right. That's right. The crew change and route.
QuestionerOkay, so you've got these planes that are out here. And we're going to be sitting down with Jordan Hansel in just a moment to talk more about that. But one interesting thing is that this weekend happens to be a huge weekend for net because so many people are coming not only here to the Berkshire Hathaway annual meeting, but also to the Derby. When I saw Bill Gates earlier this weekend, he said he thought just based looking at the runway, he thought there were about 25% more jets than there were last year at this time, private jets. I talked to Lou Simpson over the weekend and he suggested that he thinks it's part of the wealth effect. People really starting to buy in to what they're seeing in the stock market. What do you think?
WarrenWell, we are seeing in flying that people that own the planes or fractions of the planes are flying more hours than they were. It was interesting to me when the, when 2008 came along in the fall, people already owned the planes, they were paying a monthly management fee, they had their homes, vacation homes, wherever they might be in Florida and Colorado. But the flying fell off dramatically. I mean, very, very, very rich people cut back in a significant way. It was like somebody blew a whistle, and it's been coming back from that.
QuestionerWas that in part, you think, just because of because of the appearance of austerity, or do you think that that was really, that they just feel like this is a luxury, that they can let go before everything else?
WarrenI think they just felt poor, even though they were still very rich. No, I don't think they were embarrassed getting out of a plane, but I think that they and their families in some way, even though they had the homes, they had the plane,
[27:56]
Becky Quickbut they just changed their behavior very, very significantly. We saw in a lot of places, but it surprised me the extent to which we saw it with the planes. Now, Now, like I said, they've come back dramatically since then. Okay. Again, what do you think about this particular plane? Have you spent time on the Global 6,000? I've flown at once, and once is a very powerful sales tool. Jordan will be working on me here in the next few months, I'm sure. And I think he probably has a Patsy. Okay, again, this is the Global 6,000. We're going to go back outside. We're going to sit down with Jordan Hansel. Joining us right now, joining the conversation is NetJet's chairman and CEO, Jordan Hansel. Jordan, thank you very much for hosting us here today. We appreciate it.
QuestionerThank you for it. Let me do it. It's been fun.
Becky QuickYou know, we were just talking inside, inside the global 6,000, I might add, about just the idea of how many people are coming back, what the numbers are like. When I talked to Bill Gates this weekend, he said just by looking around casually at the number of private jets on the runway when he came in, he expected that it was something like 25% more in terms of people who were coming to the annual meeting on private jets. meeting on private jets. Was he right?
QuestionerI think he's in the ballpark. We had a record number of flights for us coming in and out of Omaha this year for the meeting.
Becky QuickWhat do you attribute that to?
QuestionerI think it's the fact of the economy coming back and people are starting to feel better about things. They're more optimistic and they want to be here to hear what Warren and Charlie have to say and they want to do it efficiently.
Becky QuickIs this the biggest weekend for you just in terms of, I mean, I've heard that in the past and I kind of make that number up and throw it around? But in terms of both the Berkshire Hathaway meeting and the Kentucky Derby when you add them up?
QuestionerIt's a big week. Our biggest weekend and day is the Sunday after Thanksgiving. But this one ranks up there as well.
Becky QuickThis one ranks right up there too. So Kentucky Derby, did you have a similar gain there?
QuestionerWe did. We had a great trip down to the great set of trips down to the Kentucky Derby too.
Becky QuickOkay. So Warren, you see what's going on. You see what's happened. Is it a situation where people who hadn't been buying before or buying in? Is this people who are just now feeling like they can do something like this?
[29:58]
QuestionerOr is this a resurgence of all the old customers who were there who have come back and maybe who have come back and maybe are using it more frequently?
OtherIt's both from our perspective. We've got people who've been in the program flying more, and we're up year over year, 55% in terms of new owners. People just come to the program for the first time. 50% in terms of that?
QuestionerCan you give us numbers on that?
OtherWell, I like to keep that secret unless Warren tells me I'm supposed to be telling people. So I give generality.
QuestionerDon't work on me. So 50% in terms of new customers, that's interesting. And we keep looking for Joe's name too, but.
OtherYeah. Joe, have you jumped in with that? yet? We haven't shown the jet from the other side. And Andrew says that's where my name is. But I'm, you know, the more you talk about it...
QuestionerThere's a whole red ribbon. They're going to pan around at the end of the show. The more you talk about it without doing it, I think that I'm getting my hopes up and it's not really.
QuestionerHey, Warren, I was thinking about the business of net jets. And you remember the bumpy period you had, but can you explain? It was based on the dropping value of the jets themselves, I think. I think, and how does that work?
WarrenIt's all accounting. But there were a couple of really tough years. Why are you in a business that you can't necessarily insulate against the next big break? Or have you done something differently this time to make sure that that doesn't happen again? No, we're not insulated against major downturns in the economy. But that's part of the business. Incidentally, the, you know, the Burlington Northern peak was 219,000. was 219,000 carloads and it got down to 152,000 carloads. So all of our businesses, maybe with the exception of insurance, but all of our businesses showed declines of one sort or another, and some quite significantly during the recession. And you would expect aircraft to be in that group. But that doesn't mean it isn't a good business overtime. Seas Candy doesn't make any money in eight months of the year, but. Christmas always comes around and the metaphorical equivalent of Christmas comes around in the jet business.
QuestionerWarren, you know, Bill Miller had made the argument, or at least in the question, and Becky asked it during the meeting about airlines and given all the consolidation whether you'd be interested in those. Do you think about net jets in that context at all in terms of a competitor trying to come in?
[32:25]
QuestionerYou know, we talked to, one of the reasons I think you said during the meeting that you wouldn't want to buy an airline is that there's always a new competitor. Is there a moat in your mind around net jets?
OtherYeah, there are, I think there have been dozens of companies that have gone in the fractional ownership arena. And I believe, in Jordan, I think we have over 60% of the market in the United States. So people do come in one way or another, but they really can't match, you know, the breadth of our operation, the service. safety precautions that we follow. So it's not a feel, it's not like the airline business. There will be nobody come in, in my view, that goes in the fractional ownership business and has any kind of success. In fact, people have been going out of it for some time and like I say, our market shares held steady the run. It's in the low 60s, I believe.
QuestionerThat's right, yeah. We've had steady market share for some time. And, and And unlike the airline industry, we've been differentiating quite a bit, and you see the two aircraft behind us. Those are signature series aircraft. They're completely different than anything you can get anywhere else. It's not like flying for Delta, for United, and you're getting on a 737. It doesn't matter where you are.
OtherYou started taking deliveries.
QuestionerOh, sorry, back. Go ahead. Go ahead, John. No, you go and then I'll ask, I have a totally separate question.
OtherOkay, let me ask real quickly. Let's talk about the signature series behind us, Jordan. You started taking delivery of these in December of last. How many do you have now?
QuestionerRight now we've got eight on the fleet, two of which are leased to provide us with core, but six that we're flying fractionally. And how about how many more deliveries you'll be taking? We'll be taking about another eight this year, and of course we have it up to 120 that we can take over time. And this is part of that initial deal that you got to go in and help design some of these too. That's exactly right. Both of these aircraft, the phenom and the global 6,000, were completed with the heavy input from the folks at net jets.
OtherYeah, we should point out that they have the big one behind them. That's the global 6,000. Behind me is the phenom. And I think that one holds seven passengers. This one holds 13. That's correct. And the distances between the two for? 2,200 miles, 2,300 miles, depending on your flight pattern, nautical miles and the phenom and 6,000 nautical miles for the global.
[34:46]
QuestionerIs there a big demand for this? Do people get to request this as part of their package, or is it just luck of the draw?
OtherNo, they get to request it. If they're an owner, they obviously are going to get it faster. I've been trying to talk Warren into it here for a little while, and we'll see. And we'll see when if he ever decides to take that plunge, you'll get it even more. my credit.
QuestionerThat's right. That's right.
Joe KernenOkay, Joe, what was your question?
QuestionerMine was about kind of the air taxi business, and I wonder whether that's viable and whether I don't, maybe net jets wouldn't even play there in the low end. You know, there's a, I don't know how you do it. You buy a Honda jet that doesn't even have a bathroom, but there are people that want to operate between cities that are 80, 100, 200 miles away, and, you know, there's capacity, but there's a way of booking these flights. I guess net jets doesn't play there. Net Jets doesn't play there, does it, Jordan? Is it a viable business? Will that be a business someday?
OtherNet Jets has not played in that arena, and a lot of people have tried. It's a very difficult place to operate, and so we've not looked at it in some time.
QuestionerYeah, and I don't know if it's even possible to eventually do that, but is that your, what's your smallest jet? Was that the one that we just saw that, that holds seven?
OtherDo you have citations?
QuestionerThat's right.
OtherOh, that's the smallest one? Well, the phenom will be the new small cabin aircraft for us. for us, so it will replace everything we had in that category before. It will be the smallest jet we offer in the fleet.
QuestionerOkay. Jordan, when you look around, the biggest difficulty you face right now is what?
OtherOh, I think waiting for the economy, you've gained full stream. We're seeing it pick up in the United States, and Europe remains anemic. And as it continues to pick up, we'll do better. We've been working very hard. The team's done a terrific job, getting ourselves in a strong position to compete forcefully when the time comes, and I think we're starting to see that in the United States already.
QuestionerYou are hitting record numbers? I mean, we talked before about. how these are record numbers for some of these things. I mean, does that mean you're 100% back from any of the downturn?
OtherNo, we're still working our way back. And I think we will be for a while, but we're starting to see those early turns. And as you suggested, some of our performances at record levels, so we couldn't be happier.
[36:46]
QuestionerWell, one of the things we talked about is with housing, we talk about how maybe it's up 10% with Case Schiller, but it's still 30% below the peak. Where are you versus the peak?
OtherWe're still roughly 20% down versus the peak. And the industry is over that, beyond that, 30% down or something. 30% down or so. So we're in better shape on a comparative basis, but we have to remain vigilant. The contracts are generally for five years. And so we had a huge amount sold in 2007, and they matured in 2012. And there were quite a few in 2008 before the crash hit. So you had people that made a lot of money, financial types particularly, and they might not be in the same frame of mind now that they were in 2007.
QuestionerGot it. Jordan, thank you very much for joining us this morning. We really appreciate your time.
OtherThank you for having me.
QuestionerWe've been speaking all morning long with Warren Buffett. He is fresh off of this weekend's annual shareholder meeting here in Omaha. And Warren, we haven't spent much time talking about Berkshire in particular. You did report your earnings after the bell on Friday. One of the things that was very strong were the insurance operations, and that's because you were able to get strong premiums and you didn't have to pay out a whole lot in terms of catastrophe dollars. People might be surprised when they realized that Sandy, Hurricane Sandy happened this weekend, this in this past year. What's really happening in terms of catastrophe?
WarrenWell, the first quarter of the year usually is a very low period. The third quarter is the one most prone to catastrophes. Sometimes you get something in the first quarter, and we had a few hailstorms and things like that. But it was generally a benign quarter for the insurance world, and we shared in that. Our insurance business is really doing very well. All of the insurance businesses, just in general?
QuestionerYeah, they really are. I mean, it's led by good. GEICO, I mean, GEICO is having a phenomenal year in terms of new business and profit is fine too, but I just hope it keeps up.
QuestionerYou also nominated or elected, I should say, a new board member, Merrill Whitmer. She is a 51-year-old who's coming in. She is a general partner at Eagle Capital, which is an investment partnership. You've changed the board pretty significantly over the last several years.
WarrenYeah, we're moving. We have now, we have six directors over here. We have six directors over 80. We have 660. And those 660 are the ones for the future.
[39:05]
WarrenAnd we've been adding in that category. We had Steve Burke and now we have Merrill joining us. And we've really got a terrific group of younger directors that fit our tests perfectly. We want directors with business savvy that are shareholder oriented and that have a particular interest in Berkshire. That's not the criteria that most companies set out. But that's what we care about. about it, Berkshire. They're the ones that will care about addressing the issues of succession and that they're wonderful in terms of understanding the allocation of capital. And so we've got a great board.
QuestionerIs that why you wanted Merrill with her background as an investor, of really kind of overseeing potentially what Todd and Ted are doing?
WarrenWell, that's what we're seeing it, but just understanding how to pick the Todd's and Ted's of the world when the time comes maybe down the line. Merrill understands businesses. businesses. She's gone along with Todd on various trips to various companies. She understands management, she understands capital allocation, and a lot of people with very big names really don't understand that part of the business. They may understand medicine or a whole bunch of other subjects very well, but we're in the business of capital allocation and we're in the business of getting great managers and then keeping them happy. And it's a different place than most.
QuestionerYou didn't give away any secrets this weekend when it comes to succession, but you've told told us this weekend and in the past that the board knows that there are three people right now who could step in and take over your job as CEO. You've said in the past that these are three people who are currently at the company. You've said that they are men. And I couldn't help but notice when I was looking around the floor this weekend. Normally the way it's set up is that the directors sit on the floor directly in front of the stage. The managers sit up to the left in sort of the bleacher seating. I noticed that there were three managers who were sitting on the floor with the directors and that was Ajit Jane, Matt Rose, and Greg Abel. Is that a coincidence that those three were on the floor and you happen to have three names that are out there?
WarrenCertainly could be. But they were there particularly because I thought there might be some questions relating to the railroad or relating to our utility business that were technical in nature.
[41:17]
WarrenAnd I really wanted where I could spot them easily and get a spotlight on them and get a microphone to them fast. So I asked those managers to be there. And as you noticed, we did get a One question that, Greg, I answered one question that Matt answered, that I would have not have known the answer as well. Okay.
Andrew Ross SorkinIn terms of other things that came up this weekend, Andrew touched before on the question that Bill Miller asked of Lake Mason. His question was, again, related to the airlines. He's been on Squawk and talked about his investment thesis. He has bought into a lot of these airlines. And he points out that after the merger, the latest merger with U.S. Air to go through with American. the top four carriers are going to be carrying 90% of the traffic. And he sees that as a great reason to be buying into these stocks right now. You were not as convinced. Your reasoning behind that.
WarrenWell, to have the airline industry be a wonderful industry, you'd want one airline that was carrying 90%. As it consolidates, that helps to some degree. As they go through bankruptcy and they modify the labor contracts, it helps to some degree. But for a hundred years, airline transport. has not been a good business. If you got it down to few enough competitors, it could happen. And maybe four with 90% will get the job done. But the problem is that a seat on an airliner is a commodity to a great extent. And the incremental cost of the last seat to the airline is virtually zero. You've got these huge fixed costs. So there's this temptation always to try to sell that last seat. And unfortunately, when you sell the last seat cheap, you may sell the first seat pretty cheap too. Bill is a very smart guy. And the airline industry might have finally got to the point of concentration that enables it to become a decent return on capital. But I've seen enough times when that's been said before that I'm skeptical myself. And I hope Bill's right for his sake and I hope, right for the airlines' sake. I don't have the conviction.
Andrew Ross SorkinAnother question that came up on stage was just Bill Gross and his outlook for where things are headed. There's an article in today's Wall Street Journal that talks about Bill Gross and other people people who have been very bearish on bonds and says to this point it hasn't been an accurate reflection. But your take on what Bill Gross has been pointing out on this is what?
[43:38]
QuestionerWell, I don't know the exact specific comments. In terms of bonds, someday they will sell the yield a whole lot more than they're yielding now. I don't know when it will happen. So you agree with him on that point.
WarrenOh, it has, it's going to happen. And the question is, well, all the The question is always when, I'm no good on that. The question is to what degree it happens, but you could have interest rates very significantly different than what they are now in some reasonable period in the future. It's not a game that I can play. I mean, I don't have any special insight into that sort of thing other than that it will happen. In terms of stocks, you know, stocks are reasonably priced. They were very cheap a few years ago. They're reasonably priced now, but stocks grow in value over time because they retain earning. and they expand basically the companies underneath it. So, I like owning stocks. I do not like owning bonds now. There could be conditions under which we would like, we would own bonds. But there are conditions far different than what exists now.
QuestionerWell, it's always been standard investment advice that you have some sort of a blend of stocks and bonds so that you keep things, just for the man on the street, I should say, for the average investor who is kind of looking at this, getting a little bit of advice. Joe went in not long ago and talked to her. long ago and talked to a retirement specialist who told him he should be 40% in bonds. I just wonder if this is a very different time.
WarrenNo, you shouldn't be 40% in bonds. The, you know, my family, anybody that I've advised, and they, it's a lot of them are just typical people. I mean, they're not super wealthy or anything of the sort. You know, I, and bear in mind they have the proper attitude in that if stocks go down 20% in the next month, they're not going to be bothered. but I would have them having enough cash on hand so they feel comfortable and then the rest of inequities. Or if they, you know, if they're farmers or, I mean, they go to an apartment house or other things. But I would have productive assets. I would favor those enormously over fixed dollar investments now. And I think it's silly to have some ratio, like 30 or 40 or 50% in bonds. They're terrible investments now. So now, this is not just your lifelong look on it. This is particularly to what's happening right now.
QuestionerNo. I bought bonds back in the early 80s. We bought, we made a lot of money and we bought zero coupon bonds. I bought them personally.
[46:03]
WarrenAnd the price of everything determines its attractiveness. And the price of stocks was way down a few years ago. The news was terrible, but stocks were cheap. News is better now. Stocks are higher. They're not ridiculously high at all. And bonds are priced artificially. You've got some guy buying $85 a month. And that will change at some point. And when it changes, people could lose a lot of money if they're in long-term bonds.
QuestionerAt Lee Cooperman's point, when he talked to us about it, was that this is kind of like bending down to pick up a quarter in front of a steamroller.
WarrenYeah, well, I'm not sure it's even a quarter.
QuestionerYeah. So it is a concern for you. If you look at the pension funds, though, a lot of them are being forced out into other places to try and seek yield because they've promised or they're expected to return around 8% a year or something just to meet their obligation. It's a much more difficult game.
WarrenYeah, chasing yield is crazy. Just because you'd like to earn 8% or you'd like to earn 10% or you'd like to earn 6%. The world isn't going to adapt to that. You have to think about what is the most intelligent thing to do and if that produces 5% or 6% that's the best you're going to do. But to get enticed into some investment that is risky or that you don't understand because somebody promises you a higher yield. a higher yield. I mean, I can, you know, I can take it down to the waterfront or something like that, and they'll promise you 15% or something. It just doesn't make any sense at all. And, but pension funds, you know, they haven't been that well managed over time.
QuestionerWe spoke with the CEO of Lloyds of London last week and talked to him about some of the insurance businesses. And he said he's a little worried about hot money getting into the insurance arena because he thinks it could very likely create a bubble there. He's not saying that it's half happened yet, but he says as you see hedge fund managers and others who are looking for yield, they look at insurance stocks and it seems like potentially a good place to put that. But he's worried about that being fast money that is in the market and back out and that's not good, he thinks.
WarrenWell, money is capacity in terms of insurance. I mean, you need to have money to get people to trust you to write insurance policies that you'll pay off. So when you bring more money in, it's just like bringing in more capacity
[48:19]
Warrenand it's just like bringing in more steel capacity or auto capacity, you know, it's likely affect the supply side of the equation. And if the demand side doesn't change, prices come down. So he's correct in that. And of course, a number of money managers, they talk about something is uncorrelated, other things, they'll sell what they can sell. And they get special tax treatment if they put these things together in some offshore locations. They can keep their managers money for managing the money. They can keep that from hitting their U.S. tax returns. And so it's very attractive for the money manager to create it. And then the question is whether it's attractive for the investor when the game is all done. Right.
Becky QuickWarren, do you mind if we slip in a quick break here?
WarrenOh, I think you should have a commercial, yeah. You're in favor of capitalism and raising profits. Anyway, when we come back, we will have much more from Warren Buffett right after this break, including his thoughts on the railroads and JCPenney. And later, Microsoft chairman and CEO, or Microsoft chairman, I should make that. Bill Gates is going to be joining our conversation. conversation, everything from the third anniversary of the flash crash to the future of Microsoft. We'll cover it all when Squabbox returns.
Becky QuickWelcome back to a special edition of Squackbox, live from Omaha with Warren Buffett. Here now, Becky Quick. Good morning again, everyone. We're joined this morning by Warren Buffett, the chairman and CEO of Berkshire Hathaway. And Warren, we've been talking about some of the Berkshire businesses and some of the things that happened over the weekend. We have not talked much about the railroads to this point. When you look at what's happening with Burlington Northern, where are you just in terms of car loads coming back?
WarrenWe're running about 185,000 cars a week. The peak comes in the fall. My guess is will peak at maybe 205 or touch higher. That will not be quite as high. That's still below. Would you say it was 219? Was the peak? Yeah. Yeah. And we're gaining share this year so far, which I like. And So it looks to me like we will have record earnings at the railroad this year. It's been a terrific acquisition for Berkshire.
Becky QuickIs it still not back to the peak just because of the housing situation? Is that the biggest?
WarrenIt's part of it, but it's general business activity and coal is down significantly from 2006.
[50:47]
Greg AbelOil is up quite a bit a lot. So it's a mixture of things. But, and you can look at the other rails as well. And business has come back. It's come back year by year. It's not where it was in, in 2000, actually 2006. The oil situation, that's because Burlington is the largest player in the Bakken Shale formation area. Yeah. Luckily, they found oil where our railroad tracks happened to be. How big of a game changer? Is that? Well, it. Oil is now, petroleum products throughout the country, will be about 5% of our car loadings, and that was about 2.5%. And that's a lot. I mean, it's nothing like coal or anything, but we are now carrying about 650,000 barrels a day of oil. And the country not too long ago was producing about 5 million. So it's a very significant part of the oil production. of the country. And I've talked a number of producers and they're very happy with it. We spent a lot of money to have the facilities to carry this quantity and we expect the quantity to grow quite a bit. There are people who have suggested that pipelines will eventually siphon away some of that. How long a way of a change is that from happening? Well, pipelines are carrying a lot of oil now and there'll be more pipelines created. But surprisingly, oil moves through pipelines a lot slower than it does by rail. So if you want to get oil to a given refinery, and that happens to be the best, where the best prices, A, the pipeline may not fit that perfectly. But even if it does, you can get it there considerably faster with rail. On the other hand, it costs more per barrel to get it. So it's a tradeoff. But it gives the producer a lot more flexibility in terms of refineries than a pipeline system. There was a suggestion over the weekend from President Obama that he'd be in favor of exporting liquefied natural gas. I think he said something by 2020. He does expect that the United States will be an exporter, a significant player in that. Are you in favor of exporting liquidate natural gas? Well, it would be good for the short term, but in the end, I regard this huge finding we've had of both oil and gas in terms of fracking, that I mean, it's a huge natural resource. And my general feeling is that we ought to save that for our grandchildren. So I've often said that you can't rob your grandchildren. But in terms of a natural resource, which is, although we found much more of it, but it's a finite
[53:38]
Warrenasset, and if you're thinking about the country for hundreds of years to come, I don't think I'd be in favor of it. You know, Charlie said in the past, the idea of American independence is crazy. energy independence is crazy because he thinks you should use up everybody else's resources before you use your own. I think that's pretty smart, actually. But it's not good for the economy in the short term. But if we had been using Saudi oil all through the 1930s and during the Warriors, that's one of the arguments for having it developed in this country in terms of having an energy source in time of trouble. But in the 50s and 60s, we should have been using the other guy's oil more and we'd have more of it now. And we've got a whole lot more than we thought we have. now. It's finite.
Andrew Ross SorkinAndrew has a question too. I have a question actually, Warren, we have newspapers sitting all around the set, so it reminded me to follow up with you. We had a number of people also email in after we had talked during the meeting about newspapers. And the suggestion that I think you made and Charlie made was that your acquisitions and investments in newspapers, you consider it to be an exception or an exception to the rule in terms of businesses. A number of people emailed in and said, would you ever buy additional newspapers? newspapers personally? Meaning would you use your personal account to go and buy newspapers in the future?
WarrenYeah, it would be pretty awkward if I got offered a newspaper now, having bought them for Berkshire. It would be very awkward to pick one and buy it for myself. If it happened to do better than the ones we bought for Berkshire, I'm sure I'd be criticized. So any newspapers we buy in the future, I could have started out and just bought newspapers personally, perhaps, and said this is a sideline. But I can't do anything that looks like I'm going to do anything. anything that looks like I'm in competition with Berkshire. And the paper I bought would either do better or worse than the group we've already bought. And if it did better, I'd be in trouble. If it did worse, I wouldn't be that happy about it. The newspapers do not meet our size criteria on an individual basis, although they do meet the earnings criteria now on a group basis now that we've bought a group of them. Newspapers will decline in earnings over time. We got to give it up more. We've got to give it up, Warren.
[55:49]
Joe KernenGive it up. Sell that dog crap stock and buy some Comcasts. Sell your New York Times and buy something that's moving into the into the future. Just give it up. It's not going to happen for you.
QuestionerWarren, that's...
Joe KernenHe's doing it because he likes local newspapers. He has fun with them. He's not doing it to make money. Your options are never going back. They're never going to be worth anything. And the stock that you own is just going to zero. Give it up.
QuestionerHey, Warren. Thank you, Joe. I got to try Warren, right?
Joe KernenGeez. I can't believe you're asked about newspaper. Let me see. What else can we add? You know that one buggy whip company that's still left Warren? Do you have an opinion on? No, I'm not going to ask you about that.
WarrenI'm trying to buy it.
Joe KernenAre you? Just for a vanity buy.
WarrenI'll tell you what I was thinking of. National buggy whip. You'll see it in our portfolio.
Joe KernenI really want to know the answer to this in what you think. Larry Summers, zero interest rates. Let's do all of our infrastructure. infrastructure improvements that we need right now. I mean, it has such a, just on the surface sounds like a slam dunk. But we would be borrowing money, probably, more money from China. We'd still be, you know, it wouldn't be deficit neutral. Is there a payoff? You got a brand new bridge. Does suddenly the, does GDP grow faster? Does something happen because you do all those improvements? Is that something that we should? something that we should do right now while we can't?
WarrenWell, certainly the country should have a first-class infrastructure. Incidentally, we have that in the railroads. I mean, the railroads have never been in better shape physically than they are now. They're dramatically better shape than they were.
Joe KernenBut the private sector did that, didn't it, Warren? Didn't the private sector?
WarrenMostly. Overwhelmingly.
Joe KernenThat's great. But what about, is it a good investment for taxpayers? I know you would like to bring, percentage of GDP that we spend on government. We're still, I figure you think we're still too high. Should we take it from somewhere else to do this? Should we not do it right now? I'm talking about, you know, airports. All the big, heavy things that only the government can really do, maybe in a public-private partnership, but really government spending. Should we do that?
WarrenWell, it depends what you do. You have a Congress that might appropriate the money and have bridges
[58:15]
Warrenof nowhere, but you also might have them do something like that them do something like the interstate highway system, which was a stroke of genius back in the Eisenhower years. So it depends on the projects, but certainly you want a great highway system in this country. And you want a very sensible, well-controlled airport system. And then the question is, do you raise gasoline taxes, for example, and devoted to highways? There are a lot of ways to go. It doesn't have to be done by bonds. It can be done by, in effect, what are usually. and affect what are user fees. I mean, that's done when you build toll roads, for example.
QuestionerYeah. Yeah, so I'm trying to figure out whether you're giving me an unequivocal yes, or I don't, you know, because that's something we hear about a lot. It would create jobs. At least we wouldn't be, you know, digging a hole and then filling it back up, like so many, you know, like so many government, I mean, at least we'd have something to show for it when it was all said and done. And actually even, you know, in the 30s, I mean, you know, that's, Boulder Dam, TBA, I mean, there can be a lot of useful projects. And the question is whether you finance them by bonds or user fees is not the question. But I think you have to really look at the specifics of the program. There was no better investment in the interstate highway system. We've got to take a break now, I guess, to pay for our infrastructure. Anyway, thanks, Warren.
OtherStill to come. We'll get Warren's take on health care and YPEC's backs Jamie Diamond, which we already know that. We are speaking to Warren Buffett, Chairman and CEO, Berkshire Hethway. Fresh off this weekend's big shareholder meeting.
QuestionerCan I ask them a question, Becky? Or you want to?
Becky QuickYeah, yeah, yeah. That's what we thought. No, no, jump in, Joe.
Joe KernenI got a shopping list here of some companies. Because I don't understand you sometimes. I'm bored with ketchup, okay? I'm bored with some of the, they're great businesses, the things you buy. I understand that. But I'm just trying to get you to expand your universe here a little. And I still don't understand, and I'm not talking in newspapers, even though it's. media, but big media, big media, and I got a list of companies here that I want to tell you why you've never really gotten that interested about, okay. Do you like Disney? Do you like that model? You got theme parks, you got movies, you got cable.
[1:00:30]
QuestionerYou got Comcast, the parent here. You got News Corp, Viacom, CBS, Time Warner, even Google or Facebook or something. This is the future, Warren. I know you sometimes you don't think you understand technology, but what makes you hesitant to do something something that's so ubiquitous and that as we get more advanced as a culture, you know media gets more and more, gets bigger and bigger as a percentage of what we spend our leisure time doing. Why can't you make an investment?
WarrenNo question. And it's going to get bigger. I just don't know if I look out 10 years. I don't know which of those companies your name will be doing the best. It's an industry that's subject to a lot of change, and it's much easier for me to produce much easier for me to predict that ketchup will be doing well or Coca-Cola will be doing well in 10 years. And some of the companies you name will undoubtedly outperform the ones we own. It's just I don't know which ones.
QuestionerWell, if you don't know, how am I supposed to, how is anybody else supposed to know then if you don't know? Do you think that you are like an old dog with new tricks or something? Does someone know how this is going to work itself out? Is there anyone on the planet that knows how it's going to, really?
WarrenSure, there are people, all kinds of people are a lot smarter about some of those companies than I am. And that doesn't bother me. As long as I can make money with ketchup and Coca-Cola and I don't really think I know which one of that list that you ran off. There'll be a couple big winners in that list and there'll be a couple little really surprise you on the downside. And you know, you know enough about the history of the stock market to look at the tech companies that have fallen by the wayside, for example. But you will have a bigger winner in that group. But who does know? I mean, if somebody knows it, do you know if there's anybody that you would listen to when it comes to those stops?
QuestionerNo, there's anybody I'd listen to, but there are people in our office, for example, that would buy some of those companies.
WarrenDirect TV is one that both Todd and Ted have put some money in. They put money in DirecTV. I think they put, one of them at least, is put money in Viacomom. Liberty Media, maybe both have, I'm not sure. Do you feel any better?
QuestionerI'm not so. I'm not. I'm not.
QuestionerDo you feel any different about IBM? Since you bought IBM, they've had a couple of tough, tough quarters.
[1:02:49]
WarrenNow, they, I think we'll be right about IBM, but I've said at the meeting in terms of the certainty of conviction, I feel more certainty of conviction in terms of where Coca-Cola will be in 10 years, or Heinz for that matter, than I do about IBM, but I feel enough conviction about IBM to put a lot of money in it, and I like very much their financial policies. And I like their position in the way. in the world, but I don't think it's as bulletproof as something like Coca-Cola.
QuestionerAnd content. You said the other day that you have bought more IBM shares, though, right?
WarrenPardon me?
QuestionerYou said the other day when we asked you, you have bought some more IBM shares this year before the earnings were before.
WarrenWe bought a few, yeah.
Joe KernenJoe, I'm sorry, go ahead.
Joe KernenJust getting back to just meeting, because I'm trying to understand. I don't know what the landscape looks like, and Warren probably doesn't necessarily. Does it look like the pipes, Warren, eventually, eventually, become more commodity? and we've, you know, people have been saying content is king forever. And then it's hard to, content is so, it's a creative area, and it's so hard, it's so specific to the people running it or the people that you bring in that, that are creative. I guess that makes it difficult, too. If you're going to invest just in content, that's hard. And then you don't even know whether to keep the distribution because of technology is, Andrew always brings up the disintermediation of all these different technologies. is difficult to do, but there's just such a potential, it seems like, to me.
WarrenYeah, well, distribution was incredibly valuable, for example, when there were three electronic highways, you know, the three big networks. And you could run a test pattern on one of them and get a reasonable audience practically. So when it was limited, when distribution was limited, that distribution was really valuable. And that were a couple of big VHS stations in the big markets and the profit margins were fantastic. But as distribution became more ubiquitous in all kinds of forms, then as you say, content, you know, content is where the money is. And content will always be where the money is. That's why sports players, you know, they'll make millions of dollars a year when you can remember when, you know, DiMaggio was playing for $25,000 a year or something of sort. But content, distribution magnifies the value of content. And you want to be, unfortunately,
[1:05:07]
WarrenSo I can't cash in on that. And talent usually gets its share of the revenues. If you own distribution and there's very little in the way of competition for your distribution, you can make a lot of money. And that's was shown by what the networks and the TV stations did in the past.
Joe KernenYou know, this was a big weekend at Berkshire, and there were a number of events that took place. And Joe, you know Andrew was out here. He was here for all of this. The new issue this year was the 5K race that Brooks running shoes put on on Sunday. Warren, you showed up for it.
WarrenOh, I participated in a big way. I shot off the gun.
Joe KernenYeah, you shot off the gun, but you showed up. Andrew told us that he was going to show up. So we were there waiting to shoot him. There's Warren shooting off the gun. They were looking and looking and looking. And I was not there, I will admit, but I never claimed I would be. In fact, I said there was no way I was getting up that early on Sunday, which is the only day in the last three weeks I've slept in.
Andrew Ross SorkinIn fact, I said there was no way I was getting up that early on Sunday, which is the only day in the last three weeks I've slept in.
QuestionerThat's Steve Burke. He did show up for the race and Andrew didn't. So that looks like a Steve did very, very well. Steve is a board member. He beat every board member. I think he might have even beat most Berkshire employees. I think he did it in under 20 minutes. That was a fast pace. Frankly, you know, he's the boss. So I didn't want to have to have you were hung over probably. You would have lost so badly.
Andrew Ross SorkinI would have lost so badly. I didn't even, I couldn't, couldn't bring myself.
QuestionerDid you say you were going to be there and then you didn't?
Andrew Ross SorkinI didn't say I said I was contemplating.
Joe KernenHe did say he was going to be there. He did say he was going to be there. He did say he was going to be there. He did say he was going to be. there because they were looking for him with the cameras to shoot him. I waited to shoot the gun. I kept, where is Andrew? Where is Andrew?
QuestionerBut Steve Burke ran a 239 marathon one time. I mean, we had some real talent on the board.
Joe KernenWow. Yeah, 239. Yeah. That's scary. Yeah. Yeah. Thank you. Yeah. Thank you. Yeah. Thank you. It gives you a good excuse to talk about what?
Andrew Ross SorkinNo, I said it was a good excuse to talk about the wonders of of Steve Burke's running performance, which was outstanding, we should say. I mean, do we know that, was it really under 20 minutes? I mean, I don't even know if I've ever run a six 10 minutes.
Joe KernenThat's what I heard. That's what I heard. Yeah, no, he's fast. I want to say 18 something,
[1:07:17]
Joe Kernenbut I don't know if I'm making that. 18 minutes. Something, around 18 minutes. Oh, under 21. Under 21, I'm told. I'm told under 21. Anyway, it's a lot faster than Andrew or I did. So, way to go. Hey, very quickly, before we go to a break, Warren, I wanted to ask you about J.C. Penny. We've been watching this story very closely. There was a story recently about how I think Goldman Sachs had been potentially lining up a line of credit for them. It's got to be a company that you've been following too because Fruit of the Loom is a supplier to Jay C. Penny.
WarrenWell, there's a supplier, but I worked for J.C. Penny for a considerable period of time. I've got a rooting interest for them. I don't have a financial interest, but I would like to see J.C. Penny succeed.
Joe KernenYou would like to see them succeed? Do you think they're going to?
WarrenI think it's very tough. I mean, they obviously alienated a significant part of their customer base in the last 18 months. or whatever it's been. And retailing is, it's a tough game. And you've got very, very smart competitors are out there doing smart things every day. So when you lose momentum and when you turn off a significant part of your percentage of your customers, it is a big job to get back. I really hope that O'Man pulls it off. I mean, I'm for him and I think, you know, they've got a good man in there to do it, but I'll just have to wait and see the figures on it. They've been burning through cash pretty quickly.
Joe KernenSure. Is it ever gotten to the point where as a supplier, you've gotten nervous about it?
WarrenNo, but you worry about that if your retail are getting to that point. When your suppliers get worried, you've got troubles. But that is not the case with Penny.
Joe KernenSo you've never actually worried about that?
WarrenNo, no.
Joe KernenAll right. Warren, thank you again. If you'll let us, we're going to jump in for another quick break. When we come back, we're going to be looking at the week ahead for the markets. Obviously, it was a huge week last week. is a huge week last week. Also, coming up at the top of the hour, these two ping pong addicts, yeah, these two right here, willing to put it all on the line when it comes to risk-taking and building successful businesses. We will add Bill Gates to the mix coming up at the top of the hour in an interview you can't afford to miss. Squawk box will be right back.
OtherWelcome back, everybody. We are speaking with Warren Buffett this morning.
[1:09:24]
Becky QuickI've been talking about a lot of things. Warren, the annual meeting is a place where you see a lot of people that, it's just an amazing place to people watch. You see some huge successful people from the worlds of business and beyond. This weekend, some of the people who I ran into here were Bill Ackman, Bill Miller, who we've talked about, Lee Cooperman was here, Mario Gablee was here, and people like Kathy Ireland were here too. She beat me. She beat you in the golf, which is a mini-putting, right, it was a mini-golf putting scene. One of the people who was here, though, that really caught my attention, who I haven't seen here in the past, was Erskine Bowls. He came in this weekend as well. We spoke with them very recently about his new plan. This is kind of Simpson Bowles 2.0, where he's coming back at the Congress again and saying that we still have a lot that needs to be done, that the sequester is stupid. When he was on with us the other day, he said it was three times stupid because it's dumb cuts the way you use it, and it's not attacking what we should be attacking, which is really the entitlements. Where do you come down on this argument?
WarrenWell, Congress originally set it up and they say, we're going to propose something so dumb that we can't possibly do it. And then they did it. And so it. So it is a stupid way to enact a cut in the budget. And like I say, it was designed to be stupid. And Congress at some point will face up to the fact that their job is designed a responsible, long-term budget plan, and some things immediately that make sense in terms of where the economy is now and where expenditures should be made, where taxes should be raised, and whatever the case. This business of getting it, you know, at the final, the middle of the night, it's some crazy compromise, and then letting things like the sequester kick in, you know, we deserve a Congress better than that.
Becky QuickThe biggest issue that you've talked about for a long time is health care costs. That's something that Erskine has spoken an awful lot about as well. And we've done just about nothing to try and get those costs on that
Warrenthat's right. That's right. We are a very rich country so we can get away. with the sort of deferring things like that. I mean, we can get, we can mismanage in significant ways, but because we're so rich, you know, it does, we don't go under. We're not a grease or something like that because of it.
[1:11:44]
WarrenBut health care costs are the biggest factor that make us non-competitive, certain industries non-competitive in the world. We have a, anywhere from a six cents in the dollar to maybe eight cents in the dollar disadvantage and costs from that one item. against the rest of the world. Imagine if we faced a six percent, six percentage point disadvantage in terms of our cost of our steel or something like that. I mean, it would be a national emergency, but health care marches on. The Affordable Health Care Act is now being brought in more into play all the time. Does that help or hurt the situation? Well, I don't know the answer to that, but I know that we are not addressing the costs overall. And it isn't, it isn't government. the problem, it's the whole system. And we need some very, very good minds to tell us how we can get to something like 15% perhaps of GDP going to health care. If the rest of the world is anywhere from, you know, 8 to 11 or something of the sort, we ought to be able to figure out how to have a very, very good system for all Americans for 15% of GDP. And I would love to get, you know, the Cleveland Clinic and the Mayo's and Kaiser and just give them that task and design a system. Toby Cosgrove was here this weekend, too. Yeah, he's a terrific guy. He's a terrific guy. But he was talking about how they are rolling that program out. He's going to be looking for a lot of other ways to try and get that there. But the idea of getting down to 15%, how do you do that without crushing innovation and without hurting the quality of care that people receive? We operated at 5 in a fraction percent, what, 45 years ago, and we thought we had thought we had a reasonably good health care then. The GDP is growing like crazy, so it isn't like the base from which we're working. I don't know enough about health care to design a system, but there are very smart people that I really think if you gave them the responsibility, we're actually just looking at the whole system. And why do we have this runaway situation? We have terrific health care, but we do not have more doctors per capita, we do not have more hospital bits per capita. We do not have more nurses per capita than country after country. And we've got this huge cost. And now the problem, of course, is that we're spending 2.6 or 2.7 trillion a year on health care. It's as big as the governmental receipts total.
[1:14:12]
WarrenAnd those dollars all have a constituency. And so it is a tough problem. We'll attack it and solve it. But there is no real incentive to bring down the costs. In terms of the research we're doing, nobody's doing research. that will focus, or at least I don't know of it, that's focused on bringing down costs of health care. They're looking for ways, and maybe very expensive ways, to deliver even better care. And I applaud that. But when you've got these kind of expenditures going on, you have to have somebody focused on bringing down cost. The way Washington has gone about this, so there are a lot of people who have pointed out we have brought down the rate of increase for spending, I should say. They're cutting spending. They're bringing down the rate of increase for spending over the future years. That's part of what the sequester is doing, too, is trying to take out and strip out some of those costs. People say, hey, we've done a much better job. And maybe we'll be okay even if there's not a grand bargain that gets reached on either end. Maybe we've already cut enough. What do you think of that? Well, we are so rich, we can afford a lot of slop. But that's no reason to have it. And we we aren't so rich that we're going to afford all kinds of slop. And, you know, there are choices that are going to have to be made. And, and, and, and, and, and, and, you know, there are so rich that we're going to afford And so far, you know, I had Bayer Ersk and Alan Simpson enormously. I mean, they were given the task of working in a bipartisan manner to come up with somebody who made sense over the longer term. Nobody likes it 100%. But they got Tom Coburn and Dick Durbin to vote for it. They got 11 votes out of 18. That's a monumental achievement. And, you know, they've basically been ignored. When it comes to Social Security, everybody we talked to says, oh, this is a pretty easy fix. If it's such an easy fix, how come we haven't done it? Because it's the third railroad politics. In the end, nobody wants to vote recorded that affects any voter in their district negatively, and particularly a large group of voters. And they worry about losing in primaries. They don't worry so much about the general election. And the fact that primaries have become the important election in this country for most people in Congress, I think drives them into more and more and more intractable and more fringe-type positions.
[1:16:25]
Andrew Ross SorkinAndrew, you have a question too? Where do you stand on repatriating money from abroad and what type of either a tax holiday we should have or maybe a longer-term corporate tax plan that works globally?
WarrenYeah, well, if we have a tax holiday, I guarantee you will have a ton of money will come back. They may have already borrowed money to repurchase shares or paid dividends, so now they would use it to replenish, take care of the money they'd borrowed. If you give people a tax holiday, there will just be more money invested abroad. because obviously if you're going to invest it abroad and get taxed at 5% or something like that, and you think you can get it back into the country, it will push investment abroad. And companies now that have tons of cash are borrowing money in the United States and they are going to use it to repurchase shares. So the idea that if that money came back, it would come back to pay back the debt instead. It's somewhat disingenuous, the argument that's made that this is a terrible thing because it forces companies to keep their money abroad. This doesn't force us to keep money abroad. We just have to pay a normal tax of 35%. The tax that was paid originally to the foreign country plus the supplemental tax to bring it up to the U.S. rate and people can bring it back. They just don't want to bring it back and they're hoping like that they can get a tax holiday and then they'll bring it all back that time and then they'll start accumulating it again. So that's what happened after the last one.
Andrew Ross SorkinIf they were to overhaul the corporate tax code though, I mean, would it be something that you would think would be okay if they lowered tax rates to 28% like Simpson Bulls suggested the first time around.
WarrenThe problem is a lot of companies don't pay 35%. Of course. What will happen is if you have something to bring the rate down to 28%. Every single company will figure out when they look at all the, if it's revenue neutral, there will be some companies who will pay more and some that will pay less. And everybody that will pay more will go straight to K Street and get every lobbyist that they can lined up. And the lobbyists will kind of like the proposal because it drums up business for them. And it will be very hard to get done. That doesn't mean I'm against it. It just, I'm just laying out the difficulties that if you talk about a revenue neutral bill,
[1:18:32]
Otheryou're going to have a lot of people that are opposed to it being enacted. Okay, we can continue this conversation in just a moment, but we are up against the end of the hour. So right now, we're going to take a quick break. When we come back, Microsoft Chairman Bill Gates will be joining Warren in a very special interview. We'll get his thoughts on everything from philanthropy to the global economy. to the global economy, to the future of Microsoft. This is the site of the Berkshire Hathaway annual shareholder meeting, and that's when the Berkshire chairman and CEO Warren Buffett spent all weekend on the stage in different venues talking to all types of people. There were about 40,000 shareholders who were here this weekend. But Warren, we get the chance now to sit down with you and talk about the perspective of where things are headed in the stock market right now. People look at you. You're called the Oracle of Omaha because they think that you are one of, if not the greatest investor of all time. We've been watching where the markets head. We've been watching the new numbers that they run through, the Dow above 15,000, and the S&P above 1,600. That's the type of thing that makes people set up and take notice, even when they are not people who pay attention to the stock market every day. It's got people worried, it's got people eager, it's got people anticipating about what comes next. What do you say to those people who are just looking for any sort of advice on what they should be doing right now when it comes to the stock market?
WarrenWell, I never know what comes next. No one knows what comes next. But what you do know is that over a long period of time, American business is going to do fine. And you not only get dividends, but they retain earnings and values will build over time. Berkshire's value will build over time. But you can go down up and down the list and they will. And you never know what they're going to do next week. You never know what they're going to do next month. Anybody that tries to buy and sell stocks actively, in my view, is making a terrible mistake, anybody that owns a cross-section of American business at these prices. I think we'll do very well over a 10 or 20 year period. And I have no idea of, you know, how they'll do in the next 10 days, and I don't think they should think about it.
OtherYou said earlier this morning that you remember when the Dow went above 100?
[1:20:33]
WarrenRight. When was that? Well, it was in 1942. It hit a low of 92 on the Dow. And I bought some stock and I watched it go down. And then I watched it go up finally, and the Dow crossed 100. And it was before I got out of college that... I got out of college that it crossed 200. And I've watched it across three, four. It'll go far higher over time just because businesses will become more valuable over time. I mean, it's going to happen. But if you think you can buy and sell stocks based on current news or something of the sort, I think you're giving away an enormous advantage which you have. I bought a farm in 1985. I haven't had a quote on it since, but I know what it's produced every year, and I know it's and I know it's worth more money now. You know, if I'd gotten a quote on it every day and somebody said, you know, maybe you ought to sell because there's, you know, there's clouds in the West or something. It's crazy.
QuestionerYou know, over the weekend, or on Friday, I should say, we spoke with Charlie Munger, who's the vice chairman of Berkshire, and he talked about how he thinks bankers are like heroin addicts because they get addicted to things like leverage in different things. And yet the biggest investment that Berkshire has in a situation. in a stock is in Wells Fargo. So not all bankers are created equal, I guess we read into that.
WarrenThat's true. And a lot of leverage has been taken out of the system. You hit right on it when you said because of leverage. Leverage is like heroin to people in investments. I mean, everybody starts thinking I could make a little more money if I leveraged up. And of course, that's the way they felt about housing. And that's why we got in all this trouble. People wanted to borrow every dime they could against their house. So when they went down a little bit, they had negative equity. equity. So leverage is catnip to people in finance. And it's particularly troublesome in banking because you can issue a government guaranteed piece of paper. So there is no market system that puts a limit on the leverage that you can obtain. In fact, people give you all the money that they have. You can have leverage of 100 for one if the depositor is guaranteed by the FDIC. So they have the ability, they had the ability to leverage up and they had some up and they had special purpose vehicles and through derivatives they could leverage more. And it's just tempting because it's the way to increase earnings.
[1:22:56]
CharlieThat's how Freddie and Fannie got in trouble. Freddie and Fannie had a perfectly decent mission. But then they just built a huge portfolios and they had to build the leverage because the government was behind him. So anything the government is behind particularly, you need someone that can put their foot on the amount of leverage that they have.
QuestionerLast time we spoke with you, I think you said that you were still buying Wells Fargo in the market, that you were still adding to your.
WarrenThat's right.
QuestionerAre you continuing to do that?
WarrenWe bought Wells Fargo probably every month this year. Moody's, you're not buying. You've been selling that. At least that's what we...
QuestionerWe sold some last week, yeah.
QuestionerYou sold some last week on Monday through Wednesday. There was a filing on that. The obvious question becomes, you're going to keep selling that. You're going to drop down?
WarrenI guess the obvious answer is I don't tell. If we sell, we have to announce it as long as we have more than 10%. And then if we get to 10%, we don't have to announce it. We don't have to announce it after that. We don't have to announce it very quickly after we do it.
QuestionerYeah. We have to announce it. So there would be an advantage to owning less than 10% because then you're...
WarrenYeah. But, you know, we've done, I mean, we're selling Moody's at six times what we paid for it.
QuestionerOkay. Joe, I know you have a question too?
Joe KernenIt was more of a comment. I was listening to Charlie and thinking about, you know, Andrew has written a book on this. And Warren, Charlie was saying, you know, they're going to do it, and then they're going to do it. leverage to the point where they blow up, and that would be fine. And in any business, if you mess it up and you blow up, then you quickly learn you don't do it next time. But it's that, it's either the government backing or being systemic so that you take down a country like Cyprus, that's what makes the difference. So we're back to too big, if you're too big and you're systemic and you take everyone down, then you can't fail. So you can do these things. But in a perfect world, is it better to regulate these guys or just make it so that they're it so that they can fail. I mean, it seems like it would be self-correcting. Bankers would not be able to act like that. Bankers, if they were going to go out of business.
QuestionerSomebody else who was more prudent would obviously take the place of those guys. But as long as
[1:25:03]
Warrenthey can't fail, then we need regulation. And one of the problems is, Joe, that when they failed, the people at the top often went away rich. So it isn't like their calculus when they leverage dollars. was that they would lose everything if it went bad and they needed society to bail them out. So it was the shareholders that lost 90% or more in certain of the banking institutions. But the management's, I don't know a CEO of one of the really big institutions, whether it's Freddie or Fannie or Fannie or AIG or a number of the banks where the CEO went away in the any kind of financial distress at all. They went away rich. So they have a different calculus and they and in the case of the banks they were off able to offer government guaranteed deposits and in case of Freddie and Fannie they had the implicit guarantee of the federal government and that enabled them to leverage to the sky and I think it's perfectly appropriate that they be regulated in terms of the amount of leverage they could have.
Joe KernenWarren, would you put Berkshire and specifically I guess the insurance businesses given the size in the systemically important category that that that that sometimes we put some of the big banks in?
WarrenNo, we can't issue government guaranteed paper. And if you look at our resources, our earning Bauer and everything, it's an incredible percentage, you know, of anything bad that can happen to us.
Joe KernenWell, for you specifically, but AIG got us in a lot of trouble. Should the regulators be looking at the insurance companies as potentially the ones that could really get us in a mess next time around too?
WarrenWell, regulators are looking at insurance companies all the time. We are regulated. But the insurance industry is saying, no, you should. shouldn't look at us or who's right? Well, no, the insurance companies are all regulated, but they're regulated by the states. But they're regulated by the states instead of by the federal regulators who look after the banks. Yeah. AIG got in trouble basically because in terms of the derivative positions they had. And I think they're changing the rules on derivatives. If the rules in terms of collateral and so on it, then what they're going to be, it would have been a somewhat different story. But it was a very. recklessly managed institution.
Joe KernenI guess my question gets back to the idea, though, that how safe should Americans feel if an insurance company can get us into that position?
[1:27:25]
QuestionerDerivatives, if that's taken away, you think that can't repeat itself, another insurance agency?
WarrenI think there's... Agency? I don't think an AIG will be the type of problem. Berkshire itself, I mean, we have 200 billion a net worth. We always have at least 20 billion of... We have 200 derivative contracts. Lehman had hundreds of thousands. Bear Stearns had hundreds of thousands. Right. So the big weapon is going to be something we haven't thought of, probably. We will have another bubble and it will burst. It won't be the same as the last one. That's been the history. You don't have one internet after another. You have housing after the internet. But capitalism will continue to have excess, as you can count on that.
Andrew Ross SorkinAndrew, I'm sorry. I'm sorry. You had a quick question?
Andrew Ross SorkinI just wanted to ask, you know, a lot's been made of the fact that you had a bear, a short-seller, there asking questions and I wanted to just get a post-mortem. How do you think it went? What was the hardest question you think you got?
WarrenWell, I don't think we really got any pretty hard questions, but I think it's... We tried to throw some zingers.
Andrew Ross SorkinWell, you know, we'll give the best answer we can. I mean, that doesn't mean we got...
WarrenI don't have an answer. If you ask me what the Stockberg is going to do next week, I have no answer at all. So there's plenty of questions I can't answer. But I thought the questions were good that we got generally, and I think that... I think that...
Andrew Ross SorkinYou invited a guy who short your stock to come out after you knew you were going to report a 51% jump in net income.
WarrenWell, that's the danger of being short. I mean, bring them on. You knew you were going to get 50% increase in net income and you got a guy who's short your stock. I mean, he should have known. He should have stayed home.
Andrew Ross SorkinHe wants to come back next year.
WarrenOh, I'm sure he does. I'm sure he does. God, it was the greatest thing in the world. thing in the world. But you're not going to give him a hundred million, I guess.
CharlieCharlie said no.
WarrenNo, I don't think we give him one million. Maybe even a dollar. You could double what he manages if you gave him a million. You could double what he manages if you gave him a million. No, I'm kidding.
Andrew Ross SorkinAll right, guys. We're going to take a quick break. We've been spending the morning with Berkshire Hathaway Chairman and CEO, Warren Buffett. Now we are joined by another very special guest.
[1:29:48]
OtherMicrosoft Chairman Bill Gates of the Bill and Melinda Gates Foundation, and Bill, thank you very much for being here this morning. Great to get out. Well, we are thrilled to have the two of you sitting here with us together. People are going to be watching this, realizing that you are two of the richest men in the world, and that's because you are two of the brightest businessmen. We've been watching the markets. We've been watching what's happening, and I know that this is not something that either of you spend a lot of time wondering about, but our viewers are going to have a question, just what you think about where we've seen, about where we've seen the markets headed. And we've talked with Warren about this this this morning. Bill, your thoughts. And again, I realize you don't look at these numbers every day. But people want to know what you think about this. Well, I know Luss the Morin does. You're in trouble. You know, there's always a question of what's going to happen with interest rates. It has this fundamental effect on things. You know, certainly you could say equities are a good deal relative to bonds at this point. But, you know, if interest rates are going to go shooting up, you'd like to sort of stay short, stay liquid. And so it is definitely an overreaching figure that people have to think about as they're investing right now. In terms of what it could mean, what we haven't talked about this morning with either one of you is the currency markets. There are a lot of people trying to figure that out because it seems what central banks are doing doing right now is chaotic, particularly when you look at what the Bank of Japan is doing with the yen and what that means around the globe. Have either of you spent much time thinking about that or going through any of those maneuvers? Any big thoughts from either of you on it?
QuestionerWe talk about currencies. Yeah, there's been times in the past in between, like World War I and World War II, where there was an effort for people to depreciate currencies. I think this in terms of simultaneously people trying to stimulate their economies by having very low interest. rates and weak weakening their currencies. It's pretty unique. You know, it's unfortunate for somebody who's trying to reboot their economy that they can't relatively get their currency much below. In the EU, they've given up that tool altogether.
[1:32:02]
QuestionerEverybody else, you're fighting everybody with, almost everybody, with weakening currencies. It's easier to predict that interest rates will go up at some point and probably substantially than it is to predict which currency will will gain versus another currency when that happens. I guess the big question is when on all of these issues. It's like when these things will run. Today happens to be the three-year anniversary of the flash crash. Since that time, there have been a lot of things that have shaken investors' confidence. If you look at LIBOR and the rigging scandals that were there, if you just look through some of the issues at the CBOE, some of the things that they've been talking about at the CME, too. On Friday, I sat down with Charlie Munger, and he talked a little bit about the high-frequency trade. the high-frequency traders. Listen to what he said in terms of who he was comparing these traders to. We don't have the sound bite. But at the time, Charlie said this is basically legalized front running. What do you guys think about that?
WarrenI agree. I agree. I mean, that's why these fellows exist and why they spend enormous sums on trying to get speed of transmission, you know, that's a millionth of a second or a thousandth of a second faster than the other guy. I mean, you know, it is not contributing anything to capitalism. And whoever gets the information, you know, can front run just the slightest bit faster than somebody else and they have algorithms that obviously they're working with. They make money, but that is not money. Berkshire Hathaway, General Motors, IBM does not make more money because somebody is front running by a nanosecond other orders. You know, it raises the question though whether average investors can get a fair shake on Wall Street. And that's probably always been a question that's been out there. I don't know that this time is a whole lot of. different than others. I mean, my dad has always looked at the market as kind of a Vegas in terms of being able to get in. Bill, you're looking at me skeptically. Well, if you buy a stock and hold it for many years, the percentage effect of all these things we're talking about, you know, assume you didn't sell during the flash crash, or I guess some of those got reversed, you still have a bet that's fundamentally based on that business. I don't think you're, you still have a bet that's fundamentally based on that business.
[1:34:15]
WarrenI don't think trading in and out of the market with high frequency makes sense for most people. And these frictional costs just add to the fact of how crazy it is. I mean, you might as well go to Las Vegas. Okay, so that's the buy and hold is the solution to a lot of these problems in other ways. Yeah, and that's really the primary function of the market is to have people provide capital to businesses, drive the evaluation of those businesses. And that works just fine without this high frequency or even day-type trading. The flash crash didn't hurt any investor. I mean, you're sitting there with the stock and the next day it's gone past. The frictional costs in investing for somebody that does it in a real investing manner are really peanuts. I mean, they're far less than the costs in real estate or farms or all kinds of things. So unless you turn it to your disadvantage by trying to do a lot of trading or something to sort, it's a very, very inexpensive market to operate in. And all that noise should not bother you at all. Just forget it.
QuestionerHey, Bill, we talked with Warren earlier this morning about how once a year he leaves the room for the Berkshire board meetings and the directors sit around and talk about things that maybe they wouldn't feel as comfortable talking about in front of. him. He doesn't know what they're talking about. You do. Can you give us any insights as to what type of things get brought up?
Bill GatesWell, I agree with Warren. This is one of the great improvements in boards is you get that person who's so wise, knows the company better, you know, has a relation with everybody. Get him out of the worm and say, gosh, part of the function of the board is to say, is our CEO doing the best job possible, is our CEO, the right person. Are there things we're seeing where we could support the CEO in a different way? You know, Warren's case, we've talked about security or, you know, health, or, you know, make sure that we're performing our fiduciary duty. I think that's a great thing. It gets the board to think, boy, we are supposed to be, in certain cases, an independent voice. And we sit and talked about it, and then we welcome Warren back into the room.
QuestionerI wonder what they said. I know Joe Kernan has a question from back at studio, too. I know. I want to ask Bill some questions about his philanthropy and based on something Warren said earlier. But first, Bill, I think we've got to just ask you about all these tablets and, you know, PCs, everybody's writing off.
[1:37:10]
QuestionerEverybody's writing off the PC. You still do, Microsoft still does $80 billion a year doing so. I don't know what the hell it does, but obviously there's something going on in the PC world to still do that revenues like that. But what's the world going to look like? And how does the cloud factor into what Microsoft will do in the future?
OtherWell, the cloud is a gigantic opportunity because now there's so many things that you can do in computing that just wouldn't have been possible before. So you've got a lot of the top companies going to see. companies going to seize that opportunity. In terms of the devices themselves, Windows 8 really is revolutionary in that it takes the benefits of a tablet and benefits of a PC and it's able to support both of those. So, you know, if you have Surface, Surface Pro, you've got that portability of the tablet, but the richness in terms of the keyboard, Microsoft Office of a PC. So as you say, PCs are a big market. It's going to be harder and harder. going to be harder and harder to distinguish products, whether their tablets or PCs. With Windows 8, Microsoft is trying to gain share in what has been dominated by the iPad-type device. But a lot of those users are frustrated. They can't type, they can't create documents, they don't have office there. So we're providing them something with the benefits they've seen that have made that a big category, but without giving up what they expect in a PC.
QuestionerBill, what do you make of what's happened to... to both Apple's stock price and a view, frankly, that people have compared Apple to Microsoft over what may be the next decade suggesting that they may grow more slowly.
OtherWell, with tech companies, whoever's the leader is always questioned, you know, they say, is this the end of them? And there's more times people think that's the case than it really is the case. Eventually they're right, and then they remember, okay, we said these people would, you know, have challenges. We've got some amazingly strong companies. Apple, Google, Microsoft, companies coming up like Amazon, Facebook, Samsung, to some degree, belongs in that mix. If you do deep software, both on the client and deep services, if you have things that are unique for businesses, which is a particular strength of Microsoft, the software business is an amazing business to be in, both in terms of growth in, and the profitability dynamics.
[1:39:43]
OtherHow big of a problem is China when it comes to that? Well, China has been a disaster, if you say, per unit of your product that gets used, how much do you get paid? It's been over 10 to 1 versus the United States, and even like 4 to 1 versus India. And so it is a uniquely high piracy market. Now, the trend line, that number's been coming down somewhat. down somewhat. The place we have piracy in China that we don't in most of the world is in government institutions, state-owned enterprises, and large businesses. All over the world, you have a challenge as you get down to the consumer, even to some degree small business, but here we have a challenge with these large entities. It is improving, but fairly slowly, so there's a constant dialogue with the companies, the government about how to get compliance rates up to be higher. up to be higher.
Becky QuickOkay. We're going to continue this conversation with Warren Buffett and Bill Gates. Squawk will be right back. Again, Warren Buffett and Bill Gates are here with us. And Bill, I want to ask you a little bit about something you wrote in your annual letter this year, just in terms of measuring innovations. We're talking about this specifically for delivery systems, things like for the next seed that's out there or for an immunization, getting those to the people who need them. And you talk very specifically. specifically about how you need to measure how that is working, and I had never thought about it from that perspective before. Can you explain what you mean by that because there were some big turns? I'd read through it about three times before I kind of got the concept.
OtherWell, capitalism works best when things can be measured, and helping the poorest are the same, even though you may have government donors or philanthropic donors. And so picking, say, which seed to improve, and then you improve it, does the farmer really use it? really use it? Does it give them productivity? Do they, have you educated them in the best practices? Or have you created something that requires fertilizer, which they can't get, or tools that they don't have available? So there's all this well-meaning thinking going on, but the actual benefit always ends up being so much less than, you know, people with new tools might think. And the only way to get around that and to see that that and to see where it's hard and to see what you need to do more of
[1:42:10]
Otheris to be able to measure, measure the health improvements and measure the agricultural productivity. And you'd be amazed at how weak these numbers are. Most of them are just huge interpolations where they measure less than 1% and they sort of assume that the rest is the same. And even population numbers, GDP numbers, as you get to these poor countries, it makes the normal statistics that you look at, which sometimes have flaws, they are so much worse. And so our foundation has had to invest in, okay, how could we use satellite maps to look at these crops and see what's going on with them? How can we use more surveys, more regular surveys, to ask people about health type things? And that's been a big way of seeing that some interventions just aren't working and some are miraculous.
QuestionerYou pointed out that this is something that's really necessary, particularly in times of tight budgets. tight budgets, and we have seen tight budgets all the way around the globe. We've gone through a very difficult point where I know charitable giving suffered in a big way, too. Have you seen you, you too, with your globetrotting efforts to try and raise awareness of philanthropy and get people to give more money, has it improved, like we've seen the wealth effect with jets and other issues?
OtherWell, you have this trend of there being more rich people, billionaires, or whatever level you take. And so that will lead to flying. going up over time. Then you have the idea is it something people consider that lots of people are doing, and I'm optimistic that's going up over time. So you had the blip of the financial crisis that heard a lot of things. The government budgets are very tough because when you talk about aid to the poorest, overwhelmingly that comes from government budgets. I mean philanthropy is fantastic, but in terms of buying AIDS drugs, the vast majority of that is the generosity of the U.S. government. When you look at buying bad nets, when you look at all the different aid activities, and most countries, as they've squeezed their budgets, have cut back on those things. A few like the United Kingdom have gone up even despite big budget cuts. So it's harder to raise money now than it's ever been.
Joe KernenJoe, I know you have a question too. Based on something Warren said earlier, I want to address it. to Mr. Gates. And Warren pointed out that a lot of basic science and a lot of money that goes into science
[1:44:42]
Otheris directed towards extending longevity rather than figuring out a way to pay for it. And it's very expensive. A lot of these things that we come up with, whether it's drugs that cost $300,000 or $300,000 a year or techniques or organ transplants or whatever it is, not everyone, we can't afford for everyone to live forever. Are we not funding some of this properly in terms of what we're doing and just as a throwaway, Ray Kurzweil thinks that by 2045 we may be able to do something in terms of living much longer than we live right now. How are we going to do this? Well, there's two key factors in this. The first is the ratio of your working life to your retirement life. And so if that ratio is staying the same, then, you know, it's all okay because your contribution to retirement health care is scaling up. with the extra length of that retirement period. So you've got to look at that variable. The other variable that's interesting, and the foundation funded a thing called the Global Burden of Disease, is the chronic diseases where you're sick but staying alive, like a Parkinson's or diabetes versus acute disease, like a lung cancer, where you don't live very long. The rise in chronic disease is a big. big challenge and we need to get our innovation our risk takers we need big incentives for them to go after these chronic diseases because only by having lots of solutions there do you avoid the the reduction in acute which gives you longevity throwing things completely out of whack so overall I'm optimistic not like I'm not optimistic like Bray Kurzweil he thinks 2045 immortality by 2045 I'd transplanted I don't know what we do with the brain that makes it a little bit more difficult but we might make it I'm optimistic I don't know we might make it but it's going to be expensive if no one dies well Bill and I've talked a lot over the last couple of years about the incentives in medical research are not to bring down costs they are they are actually whether not perhaps by accident but they are actually going to produce more and more increased costs because they when somebody goes to work on a given solution to a given problem the cost of that solution is not really part of the calculation or any significant part it's just getting the answer and no matter what the cost is but I get we want that but we can't pay for it's the problem that's the problem with it Andrew you had a question too yeah I was
[1:47:32]
Questionergoing to just follow up with billion on the last hour bill we talked to Warren a little about a tax policy and I you know there's now a conversation about capping charitable deductions and I just wanted to get your thoughts on you know what you think the impact of that will be and and if something like that existed how it might have changed or would it have changed the way you approached your philanthropy and the same for Warren
Warrenwell the answers is no wouldn't have changed what I do in terms of charity you know if you give away 90% of your money the deduction doesn't is not not beneficial to you in any any meaningful way I do think that the having an estate tax where giving to a foundation is exempt from that and having charitable deduction is a very good thing in eliminating it to a 28% rate I don't think will have a dramatic impact it it probably would have a slight negative impact but I don't think that would be super dramatic if they were going to get rid of that deduction altogether I think that that could change behavior and would be unfortunate
Bill GatesWhat? Well, yeah, in the case, certainly in the case of Bill and myself, I got to use less than 1% of what I gave away in terms of the charitable deduction, less than 1% of that showed up on the income tax return. The last 99% I got no deduction for it all. And I'm sure, you know, Bill and I have Kerry Ford's, I don't know, mine's 10 or 11 billion and his is probably a lot of time. I gave 20 billion in 2000 and that expired, 98%. of it expired unused. Yeah, 99% of it expires unused. But anyway, it's not a factor. I would say this, of the people at the high end in our giving pledge, I don't think it would make a lot of difference. I think sort of in the intermediate area of wealth and income, it could make a fair amount of difference.
QuestionerOkay, we're going to take a quick break. When we come back, we will have much more from Warren Buffett and Bill Gates.
Becky QuickWelcome back to Squawk Box, everyone. I'm Becky Quick. and we are live in Omaha, Nebraska this morning. We are joined by Berkshire Hathaway Chairman and CEO Warren Buffett and Microsoft Chairman Bill Gates, who is on the Board of Directors for Berkshire Hathaway. And guys, one of the things that we haven't touched on today is what's happening with immigration. Bill, I know this is something you've talked about in the past where you do believe that immigration laws need to be altered.
[1:50:00]
QuestionerIt looks like we are closer than ever to getting something done. How important is it in terms of what it will mean for technology workers, Bill?
OtherWell, I think there's two issues. year. One is the high-skilled worker part, where this group of aid has come up with something that looks pretty good on that, and it's bipartisan. And then there's the overall issue where you have this great injustice of a kid who is undocumented, not being able to get scholarships, not being able to participate in a lot of things. So I think it would be fantastic to get this issue resolved. And as you say, it looks more hopeful now than in the past. The one question people had is whether the situation in Boston would make it much more difficult to get through the House in particular. It shouldn't. It shouldn't. No. I mean, to take one case and then extrapolate it and say that that should affect all of immigration policy does not make sense. And well, we ought to be attracting the kind of people we want to attract and we certainly did not want to kick out of this country, you know, millions of people that are here. And I think it's in both parties' interests now, which is more important to pass an immigration bill. And so I think you'll see it. I mean, it's in their self-interest. You mean because of the voting patterns? Yeah, the Republicans are scared and silly. They're losing more and more of the minority vote in the future. And the Democrats are for it based on principles.
QuestionerAnother issue in Washington is the online sales tax being collected by online retailers. That again is something I think the Senate's expected to vote on today. Is it fair? Is it right? And should online retailers be protected in a way that they hadn't been before, either one of you?
OtherWell, the bill that asks them to collect these taxes makes a lot of sense. It's very unfair to the person who's got a physical store, that not only do they have those expenses, but that the other person isn't collecting the sales tax. So this is a, it's a good thing for state budgets, it's a good thing for fairness in terms of the competitive framework.
OtherYeah, I think the fairness argument is compelling. You've got thousands of merchants here in Omaha and have people walk into those stores, look at the item, and then order. from somebody out of state and then not pay a sales tax and that would be a differential on their cost I think is just it's just unfair.
[1:52:47]
Joe KernenJoe, you have a question as well? Yeah, I mean, as long as Gates is here, there are big issues that I'm thinking about. And this is something that was in the news last week, and I'm just, I'm going to ask it a certain way, Bill. Bioethics is it keeping up with technology? And I'm talking about the Chinese scientists that put a bird flu together with a swine flu. Do you think about technology? technology and things like this. And I mean, you talk about a brave new world that we're in. Are we safe? Can we trust all these different countries to abide by, you know, prudent science when we've got this stuff at our disposal? I mean, a very contagious bird flu virus would not help anyone.
OtherWell, certainly, yeah, the whole area of genetics will give us a lot of ethical challenges. And if you want to think about a nightmare scenario that's even worse than a new nuclear bomb going off, bioterrorism is the area that you've got to be concerned because the right sort of construct either intentionally created or unintentionally created could do so much damage. In the scientific community, there's been this debate about should scientists figure out which mutations would cause, say, a flu to get worse, and then they can see if that's starting to happen and be more alert, or should they not try out those things because that information might be getting to the hands of somebody who would misuse the information. And that is a very tough discussion. Lots of reasonable scientists have disagreed about the right approach there. But it is an area, you know, we're lucky that we haven't had a bad flu pandemic. And the fact we had a scare and it wasn't that that bad made us get a little more prepared. But we would still, it would still be a huge problem.
OtherWarren, you've spent a lot of money trying to prevent nuclear bombs from getting into the wrong hands.
WarrenYeah, nuclear chemical and biological. I mean, there are people in the world that wish ill on their neighbors and and would like to kill as many people as possible. And the choke point is not so much knowledge anymore with knowledge spreading so much, but materials. very fortunate and probably quite vigilant, you know, since 1945 when we unleashed the atom and avoiding it. But the biological, you know, as Bill says, is probably more of a danger than the nuclear.
Joe KernenWe're going to go to a quick break right now. And Joe, I think when we come back, we'll have some final thoughts from Warren Buffett and Bill Gates.
[1:55:36]
QuestionerIf we have a pandemic, you're not going to want to be long.
QuestionerYeah. I was just saying, if we have a global pandemic, you're not going to want to be long. That the buy and hold probably isn't going to, you know, isn't going to serve us very well. That could probably change Warren's long-term outlook. I mean, it's frightening. Anyway, coming up more from Warren Buffett and Bill Gates. Welcome back, everybody. Right now we have more from Berkshire Hathaway, Chairman and CEO Warren Buffett, and Microsoft Chairman Bill Gates, who is a board member at Berkshire Hathaway. Gentlemen, I was thinking about how much Berkshire has changed. And Warren, you've written about this in the annual letter. But when you look back to just about eight years ago, You can look at the biggest businesses for Berkshire outside the insurance companies. It's Mid-American, Lou Brazal, Iscar, Marman, and BNSF. And four of those companies were not part of Berkshire, just from when Bill joined the board back in 2004. Yeah, we had one of those then, yeah. How has your investing strategy changed and why?
WarrenWell, we've always liked buying businesses, but we've had a fair amount more success in the last eight years. So you name five companies, we had one of those earning a little less than 400 million pre-taught. then now we've got the five making a little more than 10 billion. So it's, we're transforming Berkshire as we go along. It's a work in progress.
QuestionerYou know, Bill, from the perspective of being in the board, has your job changed over that period of time? Is it different? As you begin adding more businesses and the business just looks so different?
OtherWell, the key role of the board is supporting more on talking about the succession plan, and so that's pretty much the same. It is more about wholly owned businesses and less about trading stuff. And in that sense, the value is very enduring because those business franchises are just an amazing asset. So I think it's a really great maturation process that bodes well for the future of the company.
QuestionerThe future of the company, how will the board's role change with the next CEO who comes in?
OtherMy guess is things are going to be run a little differently. Well, you'll certainly have a period of supporting the new CEO. CEO where, you know, we'll have some institutional memory and want to make sure he gets into the job very well. So I think things will be more intense than they have been.
[1:57:58]
OtherYou know, there'll be a lot of questions about the company that all of us who are on the board will, you know, lend our time and our reputation to talk about what an enduring incredible company, Berkshire is. sure that's really what's happening. You've talked about how succession is the number one topic that the board talks about. You have a board meeting that starts in about half, or I guess, an hour and a half from now. Is that going to be the top topic of discussion today as well?
OtherIt's always the main topic. Warren's good about letting us bring up anything we want, but we all know that that's the main thing we're there for and we go through it even when there isn't that much of a change. We make sure that nobody in the room has new information or new thinking because it's such a critical decision.
OtherAll right, Andrew, Joe, I'll give you the last 30 seconds each if you have a quick question that you want to ask.
OtherHey, Bill, you have a very special friendship with Warren, and I never even like to think about this, but in a post-Warren world, 10 years out, do you imagine you'd still be a board member of Berkshire Hathaway?
OtherAbsolutely. Absolutely. That's one of the things that I can do is a favor to Warren.
OtherWe got no time, Warren. You can give me the jet? I mean, is there some kind of ceremony or something that you've got planned? You've got like 40 seconds now. You're not going to, are you?
WarrenNo, I was planning to do it until he said 10 years out. If you said 25 years out, I know, I heard that. That was cold, man. That was cold. That was cold. That was not insane. I don't live past 92? No, no, no, no, no. I meant 10 years in it. No, look, Warren's going to live until at least over 100, 100, 120. I was thinking 10 years, no, 10 years after. You know what? Warren, I heard that question was. That was cold, Warren. No, no, Warren. I missed. I heard that too. I heard that too. I heard that too. That wasn't the intention at all. You know what? Sorkin, he's going to live forever because he's in his 30s. No, Warren's going to live forever. Yeah, he is. We're all going to be very happy about that. So it's been great to.
OtherGuys, I will let you on a secret real quickly. Just, just, even if you think I never do anything for you. I just want to tell you about the hazards of working here. We're in a big hangar. There are a lot of birds. One pooped on my head 10 seconds before we came back to air. Look.
OtherOh, my God. It's there. Only in Omaha.
OtherOnly in Omaha. Indoor's, holy smoke. All right. That was great. Thank you. Thank you. Thank you both very much. It was awesome. It was good to see you both in person over the weekend. We thank you for a great show.