OtherBerkshire Hathaway Chairman and CEO Warren Buffett. We are live this morning from the Nebraska Furniture Mart, which is one of many Berkshire businesses. Warren, this business in particular really sees a huge surge of business on the shareholders weekend. What kind of numbers have come through here? And how many shareholders do you think we're actually here this weekend?
WarrenWe'll do over $40 million in one week here at the Furniture Mart. And that's a lot of business. Most furniture stores don't do that in a year. And it's our biggest week of the year. In fact, it's a normal month. We do about $450 million a year at the store. So it's a normal month, and we do it all in a week, and the stockholders get more excited every year. I run into people in the elevator that a month or two ahead of time, they say, thank you for holding the meeting. I think, you know, they're patting me on the back for all they're going to learn from the going to learn for the meeting and then they explain they want to come out at the furniture bar. So you had told this before, you expected maybe 38,000 people this year. What do you think the numbers were?
OtherIt wasn't, not any less than that.
WarrenThis was the biggest meeting by quite a margin because we filled not only the main auditorium, but we filled all three overflow rooms. Then we had to spill over to the Hilton and then there were people in the exhibition halls. So we never can get a perfect count. But I'm sure we'd be able to be. anything in the past by at least 3,000 and I wouldn't be surprised if we beat it by 5,000. So somewhere between 38 and 40,000?
OtherThat's about it. That's what you're guessing. Let's talk a little bit about what Joe was just mentioning. I had not seen the tenure yet this morning. He talked about how it's at 2.57 percent. Why do you think that is? Is this a sign of concern about what's happening? What would be your guess?
WarrenI don't know. I'm no good on interest rates, but the one thing I know is 10 years from now, they won't be at 2.57 or probably at 3.57. Does it catch your attention though when you see the tenure continuing to decline? Because most people thought it would definitely have to go up this year. Yeah. It's surprising, but I'm used to getting surprised in markets. And, you know, we issue bonds from time to time, so the lower rates are a more we like to issue them and the longer we like to issue them. So would a tenure at this level change any of your behavior in the business?
[2:21]
QuestionerWould you do anything differently?
WarrenNo, we don't do anything differently. We, we, if it moved up 50 basis points, or down 50 basis points, we would not do anything differently. We don't react to macro factors at Berkshire. Our macro factor is that the country is going to do a lot better over time, and that that guides us in everything we do.
QuestionerAgain, I know it's not something you sit around spending a lot of time thinking about, but if you had to make a guess right now, would you guess that the tenure would end the year above or below 3%?
WarrenI mean, you don't think about that, but if you told me I had to pick a figure, I'd pick a figure.
QuestionerI'd I want to talk about one of the issues that came up repeatedly at the shareholders' meeting. Actually, I only came up a couple of times, but I did get a lot of questions related to it in my email box where shareholders were sending things in. And that's Coca-Cola. Joe already alluded to that this morning, and we'll talk a little bit about what has happened. I know we've had a lot to say, but there was some criticism, some people who didn't understand why if you thought Coca-Cola's equity plan was excessive, you didn't say something before the vote and you didn't take your 9. 1% of the outstanding shares and vote no.
WarrenYeah. We had no desire, never will have a desire to go to war with Coca-Cola. I mean, it's a wonderful company, it's treated us wonderfully. The management's always been totally candid with us. I think we've got the right leader. I'm sure we've got the right leader in Mutar, Kent, so we had no desire to go to war, but we did think the program was excessive. And with those two beliefs, we felt the best thing to do was to do was to express our opinions, privately to the management who listened carefully and to abstain from voting at this meeting. And we think, I know we'll have some very constructive discussions with Coca-Cola between now and when they implement any plan.
QuestionerBarron's out over the weekend, and there was an article in the back of it from Carl Icon. I know you're friends with Carl, and I know that you're both on the giving pledge together, But this article says why Buffett is wrong on Coke. He's got a different style than you do.
WarrenI hope so.
QuestionerDo you think that, first of all, what do you think about what Carl said? And second of all, do you think that your style will be effective in this situation?
WarrenYeah, I do think our styles will be effective.
[4:46]
WarrenAnd I think our style actually would be more effective than the style that might be proposed by Carl. But Carl goes into other types of businesses. And he goes in. in where often at least it goes in where there's a problem. There isn't a problem with Coca-Cola. There's a, there was a plan that was proposed that was excessive. It's very easy to make it not excessive. All you have to do is spread the authorization over more years than the four years that they talked about having it in the proxy. And that's easy to do. So whether it actually turns out to be excessive will depend on the actions they take subsequent to this, because they have not locked it in stone that they're going to use the stock over four years. But I would say that generally, or frequently at least, Carl is working with managements with different attitudes. And they probably have a different attitude toward him that Coke has toward me.
QuestionerHave you spoken with Muttark Kent to this point?
WarrenWhen we talked with you on Thursday, you had not.
QuestionerI've not talked to him since the meeting.
WarrenSince the Coca-Cola meeting.
QuestionerSince Coca-Cola's meeting, which was on. the 23rd.
WarrenOkay. So that's about a week and a half ago.
QuestionerOne other pointed question that came from a shareholder this weekend, and I got several iterations of this too in my inbox, was your son, Howard Buffett, is on the board. He voted in favor of this plan. And there were some people who questioned Howard is expected to be the chairman when you step away from the company to be the protector of the culture there. Does this raise any questions or should shareholders have questions about his ability to protect the culture when he voted for? a plan that you yourself didn't like?
WarrenYeah. I've voted for plans over the years. I've been on boards for 55 years. I've voted for plans that I didn't like. I've actually voted for acquisitions I didn't like. I've opposed a few, too. But there's only so many bullets you can use in the gun. And if you start objecting to this and this and this, pretty soon people don't pay any attention to you. And you want to save your bullets for when they really count. And I have never seen. I have never seen a comp committee come into a boardroom in all my time. And that's happened hundreds of times. I've never seen them come in with a recommendation and heard a no vote. The board delegates to a committee. They say, you go out and work on this.
[7:10]
WarrenThey may say that to the governance committee. You go out and work on getting directors or all kinds of things. And once a board's delegated to a committee and they've spent hours working on something and then they report it and there's 20 other items on the agenda and the chairman calls on the the comp committee. He gives it in about 30 seconds. It never gets voted against. And it would be regarded as sort of usurping the power of the committee. They'll all of a sudden say, I've got a better idea. I haven't talked to the compensation consultants. I haven't looked at the figures, but I still have a better idea. It doesn't happen.
QuestionerA lot of people have been a little stunned by your comments on corporate governance. I don't think stunned by what you've said, but just that you've said it. There has been a better idea. this idea that boards are clubby. You've basically come out and said that's the case.
WarrenWell, and I've written that for 30 years. And I've seen boards operate and it's not, it should be no surprise. It's always interesting to me to read academic discussions of boards and have this theory of, you know, that I could be in the movies or something, but boards are in part business organizations and in part social organizations. And people walk into those with their behavior formed by dozens of years. Usually these are people. have achieved some standing, perhaps, too, in the community. So they've learned how to get along with other people, and they don't suddenly change their stripes when they come into a board meeting. So there's a great tendency to behave in a socially acceptable way, and not necessarily in a business maximization way. The motives are good. The behavior is formed by decades earlier, and people like to get along with other people. Most people. A few people. Carl doesn't have that gene quite as strongly as others. And I love Carl. But he may enjoy, you know, he may enjoy battle. Some people do that. But generally you don't get invited on boards if you think you got a person that actually loves a fight. And your point, I guess, again, people will look at this and be stunned about it. But your point is that this is not too much different than the rest of the world.
QuestionerYeah, I think that that's very true. And it doesn't mean because you don't get into fights that you can. can't get things done. And it doesn't mean that there aren't certain issues.
[9:29]
WarrenThat I've been involved with a couple situations where a proposal to buy a company has come to the board and it's been shot down. And what happens in that case is that one person finally pipes up and it's a little bit like the kids saying, you know, the emperor's wearing no clothes and then everybody will come on board. But that first person to speak, you know, is belching at the dinner table. And then sometimes other people start belching. And sometimes they move further away from it. It depends on the situation. But there are some people that have enough bravery to be followers in a situation like that, but not to initiate it. But it's, you've seen that in other aspects of human behavior.
OtherAndrew has a question from back at CNBC headquarters too. Andrew?
Andrew Ross SorkinNo, I was just saying. It's remarkably honest what Warren's saying. The question is whether it should be this way. Whether, you know, from the outside, there's a sense that people are more strident in the boardroom, more brave, or more willing to come forward, or that the social issues aren't supposed to impact the way people behave and the way they think, even though, of course, they do. And so I hear you saying this is what happens. My question is, should it happen this way?
WarrenWell, no, I mean, obviously, you know, everybody would speak freely and all of that sort of thing. And dialogue would be encouraged, and the chairman would love to hear reasons why his ideas were no good. It just isn't quite that way. And I think it's probably, you'll get some of that. But I'll give you a great example. I mean, we bought $700 million worth of Solomon Preferred in 1987. It was a big investment for Berkshire. Charlie and I were put on the board. Our preferred was convertible at 38 because the stock had been selling in the mid-30s. We went to the very first board meeting and at the very first board meeting. meeting and at the very first board meeting was right after October 19, 1987. So here we are two brand new directors. One of the first items on the agenda was to change the option price of all the options outstanding at Solomon from prices in their 30s down to $17 a share. Now nobody proposed to change our conversion price from $38 down to $37.50. But the $35 options of the employees were all getting, including the people sitting at the table, going to get changed down to $17 a share. Charlie and I voted for it. We probably mumbled our vote.
[11:59]
WarrenBut those things happen. And we later objected to a few things at Solomon too. But you can't object a lot. And bear in mind this too, Andrew, this is important. There are a number of directors at any company that are making $200,000 or $300,000 a year. And that money is important to them. And what they really hope is that they get invited to go on other boards. Now, if you're going to, if a CEO comes to another CEO and says, you know, I hear you've got so-and-so on the board, we need another woman or whatever it may be, you know, how will she behave? Uh, if they say, well, she just raises the hell at every meeting, you know, she's not going going to be on that next board. On the other hand, if they say, well, she's constructive, you know, and she's come, her, her, her compensation committee recommendations have been spot on, et cetera. She's got another $300,000 year job. That is not a bad, you know, that's the real world. Right.
Andrew Ross SorkinHey, Warren, one quick follow-up. In the Walsher Journal this morning, they were pointing out a comment that you made in 2009 about when you talked about speaking out on the most egregious cases of CEO compensation. And you said, quote, the way to get big shots to change their behavior is to embarrass them. And so I was hoping you could try to explain the distinction between what you were talking about then in 2009 and perhaps this Coca-Cola situation today.
WarrenYeah. Well, I don't really want to embarrass the Coca-Cola company. I mean, I like the people and everything, but I think perhaps if you ask some of the people, they would, I don't know whether they use the word embarrassed, but they would have preferred I didn't do it, I'm sure of that. And like I say, it, I used that word in 2009, so I'm stuck with it. I wasn't looking to embarrass them, but I was certainly looking to have them reexamine what they were doing. And they're in a great position to reexamine it because they haven't used a share of this authorization yet. And even though they said in the proxy statement that they expected to use it over four years, that that could easily be changed. They generally issue, I believe, their options in either January or February. So they have a lot of time to think about what's best. And they are, the one thing I can guarantee you, they are decent, high-grade people. do what's right, but I don't believe that the best way to do that is to go to war with them.
[14:28]
WarrenWell, it got very public and basically the management sort of let the world know that Coca-Cola was buying Quaker Oats. And there was a meeting rather hastily called in New York. And And the directors went into that room, and I was not the first one to say that giving away 11% or so of the Coca-Cola company to obtain Gator Aid primarily, although a bunch of other foods came with it, but Coca-Cola Bede didn't want the foods they wanted Gator Aide. You know, that we just didn't think, or the fellow that first proposed it, or proposed opposition to it, I should say, said he just didn't think that was a, mathematically made sense, to give away 11% of Coca-Cola to get a single product Gatorade. And I had come into the meeting feeling the same way. I just didn't speak first in that case. And then I spoke, and by the time I got through, the deal did not go through. And the whole table was belching? Most of them were belching. I mean, it was sort of a belching contest there for a while. And the company had the whole thing grease to go through. I mean, the press people were there. It was in the evening, as I remember, and there, you know, everybody was on deadline and, you know, let's get this done. There's usually that sort of momentum attached to any deal. And you can't oppose five in a row. I mean, it just, you've become totally ineffective at that point. But that was a big deal. And a number of the directors had reservations about it. And that became apparent as this first director spoke up, but the other ones probably wouldn't have spoken up.
QuestionerIncluding yourself?
WarrenI'm not sure. But we won't know that because I didn't, I think I probably would have. I mean, that was not a deal with that made sense to me.
QuestionerOkay. Warren, if you'll bear with us, we have to take a commercial break. But we do have much more to come with Warren Buffett. We will be back after that very quick break. Also, starting at 8 a.m. Eastern Time, Berkshire Vice Chairman Charlie Munger and Bill Gates will be our. special guests. We're all going to be sharing the stage here. All three of those gentlemen will be with us live. We are back again with Warren Buffett. And Warren, Warren, after the shareholders meeting this week, and we talked about how there were 38 to 40,000 shareholders were here. There are always a number of really
[17:07]
Questionerinteresting people to see in this audience. Kathy Ireland was there with you, tossing newspapers on Saturday morning. She checked me out. She was a newspaper carrier herself. Right. She did a good job. She did a good job. Bill Ackman was here. David Winters. It was the, you know, the glitterati of the financial world, Mario Gabelli. Also, Georgie Paolo was here from 3G. I ran into him a couple of times. And the question came up over the weekend. The partnership that you have with 3G when it comes to Heinz, first of all, how is Heinz doing? And second of all, would you do more deals like this with 3G with Georgie Paulo?
WarrenYeah. The Heinz deal is coming very well. That doesn't surprise me at all. We would not, we would not have done Heinz by ourselves. ourselves, certainly at that price. But there's no one I'm more impressed with than George E. Paul Lemon and as associates in terms of their operating abilities. So the chance to join them was terrific. And I would love to join them again. And one thing I like about them is they think big. So they're likely to come up with a big one someday. Maybe next year, maybe the year after, who knows when. And I think that if they need so a financial partner. I think they'll do it with us. And so it's a big plus for Berkshire to have an association with Georgi Paolo Lemon and his associates.
QuestionerIs there anything that two of you are cooking up together right now?
WarrenWell, he does the cooking and I do the tasting. His mind is incapable of not thinking about possible deals. And we will not do anything ever hostile at all. That's ruled out. But when the phone rings and they say it's Georgie calling, I feel good. So he was here this weekend and we talked about that.
QuestionerHow much cash do you have on hand at Berkshire right now? Is it about 48 billion?
WarrenCounting everything except the regulated subsidiaries, we probably have around 47 billion, something like that.
QuestionerYou like to keep 20 billion on hand. So that still gives you $27 billion to play with you.
WarrenYeah, and we could raise more pretty fast.
QuestionerHow?
WarrenWell, we could raise some by debt, but we could also raise something by selling some securities. We've got well over $100 billion of securities and well over $100. We've got over $150, but as far as that's concerned. But so we could we could come up with, I'd like to be challenged on that.
QuestionerWell, if that were the case, if you did have to come up with some money quickly because you saw a deal you really liked, what would be the
[19:50]
WarrenWell, we had to do it very quickly. We might borrow some money first and then sell the securities over a little longer period of time. But we would look at, we would look at the prices of the securities which change daily and we would look at what I think about the companies, which doesn't change daily, but does change over time. And if we needed a lot of money, we'd have to be looking at some of the bigger things. But since I don't have to have a deal today. I don't have to think about what I would sell today.
QuestionerYou know, just to get to some of those securities that you do own, you mentioned over the weekend that you met recently with Mary Barra, of GM for lunch. What did you think about that? Had you met with her before?
WarrenI just met her briefly at a conference of eight or ten months ago.
QuestionerWas that the Fortune Most Powerful Women's Conference?
WarrenYeah, exactly. And that was my first time I'd seen her. And I don't own that stock personally at Berkshire, one of, one of, uh, one of, uh, our country. two managers does. But Mary was here and I think she's terrific. She can run any company at Berkshire, that's for sure. She loves cars. I mean, it did she told her she was a car guy. I mean, it's just, it's just all the way through it. She knows cars. I mean, she knows every aspect of it it that you get into. She knows the impact there, the tradeoffs involved, you know, between weight and style and price and all. I mean, she just has cars down forward and backwards. And she loves General Motors. I mean, her father was there for a very long period of time. And she's made for the job.
QuestionerHave you had any concerns about the GM recall news? Obviously, that happened before her time. But is there anything that's risen to the point that you think, wait a second, maybe we should reconsider whether we own the stock right now?
WarrenWell, again, it wouldn't be my decision. Actually, it's Ted Wechler's decision. But she, you know, she inherited a mess. And it's not. It's not. She inherited a mess. And it's not. a small one. And it's a particular concern to the American public because the government did save General Motors in 2009 and these events which happened prior to that. But it's General Motors is in the forefront of most Americans' minds. Cars are important to them. So Mary, you know, she's basically on a hot seat, but it's not a hot seat of her own making. And I don't think there's
[22:19]
Otheranybody better that's going to be better at handling. It won't be handled, you know, in a week or a month. I mean, it's just the nature of problems like that to go on for quite a while. Again, Warren Buffett is our guest host this morning and Andrew will have a lot more coming up. But right now, we'll send it back to you guys. Welcome back, everybody. We are with our guest host today. Warren Buffett live in Omaha at the Nebraska Furniture Mark. This weekend for Berkshire Hathaway is a lot of business, Warren. A lot of serious talk that comes out. But there's also some fun times. Yesterday, you spent the day going to Borshawrishore. And selling jewelry yourself?
WarrenRight, a couple hours. And the first thing you did was... Crazy Warren. My prices can't be touched.
OtherYeah, so you were selling yourself. You also spent some time playing a little bridge and playing a little table tennis, some ping pong. In fact, guys, I want to show you the shot because Warren, you were going up against Ariel.
WarrenYeah, she's the national champ, a women's national champ and played in the Olympics and won a couple of matches.
OtherUh-huh. And where's the... Oh, yeah, you got the great shot off. You dropped it. And you said, forget it, I'm sitting down, right? You're going to get a shot on Ariel and you're out. One shot of year.
WarrenYeah.
OtherSo there has been a lot of stuff that we talked about that was very serious business, though. One of the issues that came up was another one of your holdings, Bank of America. Bank of America very recently had to pull back their plan to increase the dividend and buy back even more shares because there was a mess up in the regulatory capital. They were off by a big number. Was it four billion? billion? I believe it was. Yeah, it was about $4 billion. And I just wonder, as a shareholder, as someone who has a big stake in the company, did that concern you?
WarrenNo. The answer is no. It did not affect the gap net worth the gap earnings or anything of sort. And actually, the change they're making with our preferred adds $5 billion to regulatory capital.
OtherReally?
WarrenYeah. Yeah. They're changing our preferred from a cumulative preferred to a non-cimitive preferred and that, and that changes that category of capital by $5 billion. I'm not saying that's a good reason we're making the $4 billion. But it, you know, we've made mistakes. It doesn't involve any loss of money or anything.
[24:40]
OtherIt's some structured debt that they acquired when they took over Merrill Lynch. Yeah. Again, after I took over some. After I took over Solomon, Solomon was a merger of Solomon and Fibro. I took over in 1991. And when I took over, there was a plug item in the balance sheet. Some item that floated around every day. And that was because they had not been able to find, they had not been able to reconcile the books since 1981, 10 years earlier. And Arthur Anderson were our auditors and they came in and explained to me as the new CEO. They said, oh, you'll see this $180 million or whatever it is, move around in different amounts. But don't worry. Some day we'll figure it out.
QuestionerDid that concern you at that time?
OtherYeah, it concerned me. They had gone from, I don't know, one of the companies had been on a cash basis and went on on a trade date basis and somehow they never got it worked out. We had a situation in our savings in loan many, many years ago where there was a situation. We couldn't get it worked out. So we just ran out the bank account and started all over again.
QuestionerSo you're not concerned? You think Brian Moynihan is doing a good job?
WarrenI think Brian Moynihan is doing a terrific job. He's at a lot. a lot of problems to deal with that were not of his making. And he's just methodically worked his way through. And one of the problems is that when he thinks he's worked his way through, there's a few more. But he has done the right things. He's simplified the bank dramatically. He's brought down the balance sheet. He's got it back to the fundamentals. And the Bank of America has a wonderful deposit franchise. And it will do well over time. But when I first bought the stock, when I was talking to Brian, I said, you know, you've got a long period ahead of you. You work through all of this.
Joe KernenAll right. Our guest host again this morning is Warren Buffett. We have a lot more to talk about with him. Pfizer is reporting right now. I'm hitting up the first call estimates because the company looks like 36 cents a share, but adjusted is what you need to use to compare to estimates. And that is 57 cents. 57 cents a share for Pfizer on revenue of $11.4 billion. I think the revenue number might be below, expectations. The 55 cents was the estimate, so 57 is two cents ahead of expectations. But I think that number on revenue might be a little bit light. For the entire year, the company sees 220 to 230.
[27:06]
Joe KernenAnd believe it or not, the estimate's 225. So exactly brackets where Wall Street is. But for revenue, 49.2 to 51.2 is what the company is forecasting. That's also pretty good, because 49.8 is where Wall Street is on this. And I haven't, I'm going to look at a quick bid and ask. I'm not looked at what we're showing. They want to set up two cents. Yeah, that's about right. No real trading yet so far in Pfizer. And I haven't looked to see any of the details. The net number was $2.33 billion. Pfizer's probably trading more on its proposed acquisition. And that's what I was going to say, but they have to have strength in these numbers. They had to go into this quarter knowing that the number was going to be. be okay given the offer. Even though revenue is down. Even though revenue is below expectations, I should say. Right. So as long as the stock holds up, we'll see what happens to this deal. Okay, let's get back to Becky in Omaha with special guest, Warren Buffett. And I know Andrew mentioned that the I-word inversion was discussed a little bit out there as well. And I'm sure in the broader context of what we should do here with corporate taxes and the whole tax code. Anyway, Becky, back to you.
Becky QuickWell, Joe, let's jump right into that. The Pfizer is a good jumping off point for all of this. Warren, I know we've talked a lot about some of the merger and acquisition activity. This is a little different this time around. Some of the acquiring stocks have actually risen on some of the news. But what's really caught our attention are situations like Pfizer, where Pfizer buying AstraZeneca, it has said that it would move its tax domicile if this deal goes through to the UK because they'd be paying a lower tax rate there. What does that tell you about? about business? What does it tell you about the U.S. tax code, the corporate tax code?
WarrenNo, you are getting more mergers that are tax driven. And that's one of the reasons maybe the acquirer stock goes up because you're actually talking not only about buying a business, but you're talking about bringing down the tax rate for the acquire. And that's been coming along to some degree. You saw insurance companies go to Bermuda and you've seen valiant pull off a number of these. And my guess is that, you know, you've seen, you know, as Valia is going along, the people at Pfizer and other places think, you know, this is getting out of hand. We've got to bring our tax rate down too.
[29:29]
WarrenSo it will gather momentum. And my guess is that when you get to companies of this size, this prominence, and with this speed up of momentum, my guess is that Congress one way or another addresses this, but that could go either direction in terms of how they address it. And whether they just try to work on this little aspect of the code that allows this, which is not insignificant, or whether they, that forces them to rethink sort of all corporate taxes will find out. But I do think it's going to get attention. The President has already put it in his budget for this year. It's not been closely focused on, except for potentially by some of these companies that are considering doing these things. The President has proposed to make it tougher to move your tax domicile. Right now, if you have 20 percent of your shareholders outside the United States, you have. you're allowed to do that, but the president has proposed moving that up to 50 percent. Some people look at that and say, wait a second, why don't you just deal with the tax code overall and make it a little more attractive for people to be here rather than moving somewhere else? Well, that's the fight that's going to go on. And what's the right, what's the right move? Well, everybody talks about tax reform. People love to use the word tax reform. And very few people are for tax reform that increases their own taxes. I mean, they have all kinds of other things that they don't like in the code that are helping other people. people and they want to get that corrected. But I have yet to hear from anybody pretty much that wants to equates tax reform with some set of proposals that increases their own taxes. And this whole thing on the foreign situation, I think, will cause one hell of a fight in corporate America. But you're talking about a policy that right now pushes companies like Pfizer that pay a relatively high tax rate, 27 percent, and pushes them away. It keeps the people. people who maybe aren't paying rates nearly as high. Isn't that an argument for simplifying the tax code, not handing away as many incentives or advantages to other people, and getting everybody to pay, like Simpson Bowles suggested, closer to 28 percent? Yeah, you'd like to get everybody at the same. And we'd like to see that, but that's because we're paying more than 28 percent and bring us down. And somebody is paying 20 percent, and I could name a lot of companies, you know,
[31:48]
Warrenthey're not going to like it if that activity brings them up to 20 percent. So if you go for something that's revenue neutral, a lot of companies are going to get hurt and they will probably squeal more than the people who are getting some benefit out of the change. You know, I think there may be enough action going on now that despite what I've said, you will get some new resolution of the situation on corporate taxes, generally beyond the question of just foreign tax rates. But it will take a lot because. As soon as company X's taxes go up a couple of points pro forma under some new proposal, they will have lobbyists lined up in Washington that will stretch to Baltimore.
Andrew Ross SorkinAndrew, you have a question too? Well, it was a question that I wanted to follow up with Warren on, which is that we asked the question of you on the panel over the weekend at the meeting, whether Berkshire would ever pursue a deal like a deal like what Pfizer is doing, an inversion of some sort. And you said no, and I ran into a couple investors who wanted to know. So why wouldn't you do it? If, for example, I think you pay about $8.9 billion in taxes last year, if you could take that number down to $7 billion or $6 billion, you couldn't come up with a rationale for why that would make sense from a shareholder perspective?
WarrenWell, for one thing, we do not come close to having 20% of our shareholders outside the United States. I'm not sure that Charlie moving would get the job done. So I, I'm being half facetious with that. We are, we do not feel that we are unduly burdened by federal income taxes. But we, it does get a little annoying to us when we see other people paying far lower tax rates while engaging in the same sort of business that we engage in. But Berkshire, you know, Berkshire operated under 52% tax rates and 48% tax rates. And we make a lot of money under U.S. tax rates.
Joe KernenWarren, you know. Joe, was that you? Yeah. When you talk about the 20%, we've talked about this a lot, too. A lot of companies have been induced to move operations overseas by the tax rate. And the 20% represents a blended rate that they're now paying because they've already, you know, they've already reacted to what they see. Okay, so that's one thing. Number two, I've been told that the president in corporate tax reform won't go for anything that is even revenue neutral. He wants to actually raise revenue in any type of reform that comes from corporate taxation.
[34:37]
Joe KernenAnd you just mentioned that to keep it revenue neutral, taxes are going to go up on some companies and maybe they'll come down on other ones, so some people will like and some people won't. That sort of implies that that, that, this level of revenues right now is appropriate, which sort of goes against the think that goes against, in other words, the total number that we take from our corporations, if we need to keep it revenue neutral, then that means that our corporations are not overtaxed as far as the big picture goes. Who's to say that right now, I mean, there's another side that would say that corporations right now are competitively disadvantaged globally because they're just too high. So in fact, if it's not revenue neutral, if it actually lowers taxes for the entire group, that that's not necessarily a bad thing. That would bring us more in line globally. And then you could get people signed on because most corporations would have lower taxes. Am I wrong?
WarrenWell, if you want to take corporate taxes, if you want to take corporate taxes down, just tell me again whose taxes you want to take up in terms of keeping the overall budget budget.
Joe KernenI don't want to keep it. I'm saying that we don't need to keep it neutral. It should be a lower amount because we're disadvantage now globally because it's too high.
WarrenJoe, we do almost $200 billion worth of business and we pay normal rights on most. We have certain deals that are tax advantage in terms of wind power and solar power. We are not in a competitive disadvantage with the rest of the world of Berkshire halfway. Some companies are. Some are and that's why they're doing some of these things, right? Or then they're just, then they're just disaffling that. They're doing it. They're doing it to pay even lower taxes. Pfizer is a very profitable company. You look at the return on net tangible assets at Pfizer. It's terrific. They'd like to make even more money by not paying taxes. But they have a wonderful business paying U.S. corporate tax rates. And all you have to do is look at the numbers on that. I don't know what profits fair and what is. I don't know whether they make too much or they make too little. But if we're leaving trillions of dollars overseas and they're induced to do this and they're moving headquarters and other companies that have lower tax rates can come in here and buy our because they can offer more money than domestic companies can. None of these things seem
[36:54]
Otherlike it's the optimal way for us to be competing globally at this point. On balance, American companies have bought more of foreign companies in the last 20 years than vice versa. So we have actually been net investing over there. But beyond that, if you look at corporate taxes as a percentage of GDP since World War II, they've come down from four percent. to about 2%. In fact, under 2%. That's why corporate profits have been hitting record levels. So if you look at the budget of the United States, individuals have paid more taxes. Corporations have come down from 4% of GDP to 2% of GDP. No other group has come down as much percentage-wise as corporations. Corporations are doing fine in the United States. Then we should just... Valiant is looking at deals. We should acknowledge that then and not worry about it. But it does leave trillions of dollars. That would be, you know, we could bring it back and use it for infrastructure. They can bring it back now. They just don't want to pay the tax. And if you let them bring it back cheap, they're going to try and make even more over there with the idea they can bring it back cheap someday. I know. That's why you need to change the overall way. That's why you need to change the... And if you look at most of it... Go ahead. The number one industry with cash over there is the tech industry. There isn't a tech company I know of the major company making lots of money that has got the least bit of a problem in in financing their businesses. What they'd rather do is borrow the money here, and as Apple's doing, but that's because they got loads of cash. They'll borrow it here, they'll borrow it very cheap, but they do not have a need for cash for their business. They have a need for cash to repurchase shares because the shareholders are pushing them for it. But they're not using that money to build plants and equipment in the United States. They're using it to repurchase shares. But Warren, you've yourself said that it's okay. to follow the tax rules and not get out of taxes entirely, but if you can avoid taxes by doing something differently. In fact, you've done some deals recently, including the sale of the Washington Post shares that were tax advantaged. We have never lobbied for a tax advantage, but in terms of the of the tax code, we do not figure up our tax return for the year and then at a tip of 15% at the end of the year, like a restaurant
[39:15]
Warrencheck. We pay what we owe. And by paying what we owe, we've earned substantial returns on capital. We've never foregone a capital investment because we were here in the United States instead of some foreign country, and we bought foreign businesses.
Joe KernenJoe?
Joe KernenWell, I mean, the journal today says the only reason that you're building wind farms at all, you know they're not economically feasible, is for the tax breaks. You made a... He said that over the weekend.
WarrenWe've said that. We've said that publicly for years. That sounds different than taking advantage of a little line here, line there in the tax code to actually invest and to have a whole wind farm unit just based on the tax advantages? That doesn't seem, you know, like in keeping with the spirit of the law.
WarrenNo, it is in keeping with the spirit of the law. The U.S. Congress decided that they wanted to encourage wind farms, they want to encourage solar. They wanted to encourage low-income housing. And all of those were put in the law. Actually, it was President George Bush 41 that had me in the Oval Office to congratulate me because we were investing in low-income housing tax credits. But those are pieces of both. Why do you make a distinction between that? Those are pieces of the law. Why do you make a distinction between that and what some of the U.S. companies are doing when it comes to an inversion?
WarrenWell, I think they can do it with an inversion if they want to leave. I think that is one that's likely to get plugged. I am not saying they're doing anything illegal at all in following the rules on inversion. I would personally change that part of the law. And other people might change the part of the law about wind tax credits, but I am not attacking. I'm not attacking Pfizer for following the U.S. tax law. And that provision wasn't even put, I'm sure it wasn't put in there because of Pfizer. I'm just saying that there's probably a mistake to have that part of it. And people can argue whether it's a mistake to have the wind tax credits. But American business, I will tell you, whether it's Berkshire Hathaway or Pfizer or Apple, are doing wonderfully under this tax code and are not short of capital in any way shape or form or having any trouble competing. competing. Now, you can make other arguments for changing the tax code, but you can't really make those arguments in my view.
Joe KernenOkay, great. We continue this conversation. We do have a lot more with Warren Buffett.
[41:29]
OtherGuys, I will send it back to you. Also coming up at 8 a.m. Eastern time, we should point out, Berkshire Hathaway Vice Chairman Charlie Munger and Microsoft founder Bill Gates will both be joining us live right here on the set with Warren Buffett. Guys, again, we are spending the morning with Berkshire Hathaway Chairman and CEO, Warren Buffett.
QuestionerWarren, one of the things I saw last night kind of digging around online was an article in The Economist where they suggested that maybe you should break up Berkshire Hathaway, that for your successor it would be easier to run the company if it were smaller or broken into pieces. What do you think about that idea?
WarrenWell, there are real advantages to having the company together. I mean, one big advantage is the ability to allocate capital from businesses where it can't be used effectively effectively, maybe the present capital can be used effectively, but incremental capital has very little value, and we can move that over to other areas which have capital needs beyond the amount they're generating themselves. So capitalism is about capital allocation. The whole idea is putting resources in the right places. And we've got the ability to take, to look at 70 plus companies, various industries and everything else, and allocate capital wherever it makes the most sense. sense. And most companies are, you know, if they're in the XYZ business, they feel that they look at the opportunities in XYZ and if they can't find any good ones, they may do some ones that aren't quite so good. And if they need capital, they may have to go to capital markets and incur the expense of that. So we have a seamless, very efficient way of rearranging capital among businesses, which in aggregate will spend like $12 billion on capital this year.
QuestionerWhat you and Charlie Munger, your partner, are incredible capital allocators. You've proven that over decades and decades of time. It does raise the question, though, what are you doing to prepare your potential successors to make sure that they are equally good at allocating capital?
WarrenWe will, the board will not put a person into the job of CEO of Berkshire that they don't think is terrific at allocating capital and the candidates we have. I've got no worries about. There are plenty of people that are very good at something else and my might meet a lot of the tests but would not meet the capital allocation test and they should not be in the job.
[43:47]
QuestionerIs there an argument, though, that any potential success or spend time at more than just one unit? Simply from the perspective that you don't want to look at that unit as the best place always just to make sure you get a broader view of the businesses.
WarrenYeah, you want somebody in the top position that doesn't have favorites, you know, doesn't have anybody in the blacklist, that doesn't feel way more comfortable putting capital in area A than area B. really is looking at it from the standpoint of the brochure shareholders and saying where can this money be used best? And that money may be used in repurchasing shares too.
QuestionerI was just going to bring that up. The other idea is that you want somebody who is allocated capital to the businesses you own, but when there's not money best put there, you would go out and buy other stocks. So now you're going to have more than one person who's making that decision. Todd and Ted have been in the position of looking at stocks. How does that work? Would there be a triumvirate?
WarrenIt's a big plus. They're not the bosses. But we will have a lot of money in not only stocks but bonds, various forms of securities. and we've got two terrific people to carry out that function. They will not be the chief executive officer, but they will be there to help the chief executive officer in that arena, just like people that run a given business are there to help in their arenas. But the chief executive should think exactly like an owner. I mean, that's the whole, and an owner is trying to figure out where to put the capital to best advantage. And we will generate a lot of capital. So it's a very important function.
QuestionerTodd Combs and Ted Wechler are the two individuals you've been talking about. There were several questions raised by shareholders this weekend. Wondering when they were going to get to hear a little bit more from Todd and Ted. What do you think? Would they be in a position of maybe taking questions at the annual meeting down the road too?
WarrenWell, that's not impossible, but they're not publicity hounds or anything of the sort. And they like managing money and and the record of how they do on that will be available for the shareholders to see but they're not interested at all for example in talking about their investment ideas why should they be they work hard to develop them and they're not about to pass them out okay we're going to continue this conversation in just a moment but
[45:54]
Joe KernenJoe Charlie Munger is here he showed up early so we're going to put him on the set when we come right back excellent that's going to be fun we have much yeah and Warren has said, Charlie's on very well in middle age, flourishing. Can I tell you he's amazing more than it was this weekend. I mean, it's inspirational, yeah. He is inspirational. Because it is. He's middle age. He's much more. He's sharper than anybody at this table. Well, it's a low bar, as we've said many times. Much more from Warren Buffett's a little head. And we have a special guest coming up in the next hour. Microsoft founder Bill Gates is going to join us. He's a member of CNBC's top 25 leaders over the past 25 years. years in business. We're going to talk tech, the legacy of Microsoft, and of course, his plans to change the world. Spock Box is coming right back. We are spending the morning with Berkshire Hathaway, Chairman and CEO Warren Buffett. And now we're adding another special guest, Berkshire Hathaway, Vice Chairman Charlie Munger. Charlie, it is a pleasure to see you this morning. Thank you so much for joining us.
CharlieI'm delighted to be here.
Joe KernenYou know, people come every year because they want to hear the two of you on stage together. I talked to so many shareholders. this weekend about it. You guys have been doing this together for how long, being on stage, taking questions from the shareholders?
CharlieMostly 50 years, more or less, isn't it one?
WarrenYeah, pretty about that.
Joe KernenSo I guess my question is, other than being a year older for all of us, what's different or what did you learn this year? Because I know the two of you say that you learned something just about every day. Did you learn anything this weekend?
WarrenWell, I think you always learn something, but it's hard to put a finger on it. I very seldom have an ecstatic moment where I like Archimedes. I always learned something when I listen to Charlie. I mean, one of the things that I have fun with, I mean, a lot of fun with at the annual meeting, is just getting up there and hearing what Charlie's got to say.
Joe KernenI was going to ask you that. Do you ever talk about it in advance? Do you rehearse?
CharlieNever.
WarrenNever.
Joe KernenYou two have perfect. Preparation would be cheating.
CharlieWell, you two have perfect comedic timing. Has it gotten better over the years? Did you hit that off the first day you?
WarrenWe are natural wiseasses. It's not put on. That's what attracted us to these.
[48:10]
Otherother. I'm serious about that too. I've heard the story before, but I know a lot of our viewers haven't. You two met Warren when you were 29 and Charlie, you were 35? Correct. Yes. Can you tell us a little bit about that meeting?
WarrenWell, it was at a local dinner. Our wives were there. And after about five minutes, Charlie was rolling on the floor laughing at his own jokes. And I know. I've been known to do that myself. So I decided there's not many guys like this in the world. I better I broke up with him.
OtherWhat is it that you two share in common? What similarities do you think you have, Charlie?
CharlieWell, the Omaha background. And I think we're both very intellectually curious. We both kind of like competing in games. And I think we both love ideas. And I like going to ask Warren what I want to remember it as, and he says, a teacher. Who else in America, who's the CEO, says he wants to remember it as a teacher?
Otheras a teacher. I like it. Charlie, what do you want to be remembered as?
CharlieWell, I wouldn't mind being remembered as a teacher, but I won't be. I think you will be. I may be remembered as a wise ass.
OtherOne of the things I've always wondered is how Berkshire Hathaway really works. With the chairman and the vice chairman, how often do you two talk? Because, Charlie, you're in California.
WarrenWay less than we used to because we know what the other thinks. We're not wasting a lot of time checking what we already know. what we already know. Yeah, we're like an old married couple. We just sort of grunted each other, but we know what the grunts mean. But originally, and this was when phone conversation was fairly expensive and we were not rich, but we would talk, you know, for hours, a lot of days. But now, you know, we may talk once every two weeks or something like that.
OtherYou did say, though, Warren, that you spoke with Charlie about the Coca-Cola decision before you came to any conclusions. any conclusions. What did you two think about that as you were talking about 10 seconds?
WarrenReally? I do not find that a difficult decision.
OtherThe abstention or the...
CharlieI thought he did it just right. Every move on. He complained a little, but not to voice-efferously. I think that was just the right tone. And with compliments which were deserved to the management of Coca-Cola. I thought he handled it perfectly.
OtherWell, let me ask you too about the acquisition that you just did. There was a $3 billion acquisition that you announced for Berkshire Energy last week.
[50:43]
Questionerenergy last week. Do you guys talk about everything that comes through? That wasn't even talked about by me. What do you mean?
OtherWarren and Greg Abel did that one.
QuestionerMy guess is Warren didn't talk about it for more a minute or two.
OtherThat's true.
WarrenI mean, I got the facts on it. I like the deal. And I knew Charlie would like it, so why waste a phone call?
QuestionerSo that's a $3 billion acquisition. What kind of rates as the level that you think, oh, I really need to talk this through with Charlie?
WarrenWell, you should. if I talk it through it, it's because down deep, I know I might be doing something dumb. And he'll tell me.
QuestionerWarren, you said over the weekend that you're probably more inclined towards action than Charlie is. Charlie, you had a response to that.
CharlieWell, it depends on the action. We're both very action-prone when it's obvious.
QuestionerWhat he's saying is I know the ones that are kind of marginal. But you said over the weekend that he's called you something before. Oh, the abominable. Well, no man. Right. But he is, he likes that.
WarrenBut when we, we talked on a Thursday night about doing Burlington, Northern Santa Fe, and, you know, Charlie was on board and, you know, immediately. I mean, he thinks, he sees the facts so fast and thinks so fast, and he doesn't waste any time making arguments just for the hell of it, you know, the speech or anything like that. I would say that. equality that we share is that to a great extent we're rational. I mean, that we, and we don't waste a lot of time exploring things that are just nonsense.
QuestionerWhat's something that you thought was going to be a great idea until you talk to Charlie?
WarrenWell, if you go back far enough, I called him one time on the Pittsburgh and West Virginia Rail Road. This is 40 years ago, and I said, Charlie, I really think we ought to put a lot of money in the Pittsburgh and West Virginia Railroad. And Charlie said to me, well, Warren, if you've studied it carefully, you think you know all the facts, you're going to pay attention to it, if you're going to put a lot of your own money in it. He said, I'll just shut my eyes and say no.
QuestionerAnd was he right?
WarrenHe was right. Yeah, that's the irritating part. If you take the batting average, the times we've disagreed, he's been right a very high percentage of the time.
QuestionerI know that you are in California now, but you make it out every year for this meeting. And what's in my hometown? I like coming.
[53:27]
QuestionerYeah, what's important to you about being here and about seeing the people at Berkshire?
WarrenWell, it's a very remarkable experience to go back to your hometown every year. And as part of something as big as Berkshire, which keeps getting bigger and more admired as the decades go by, it's very pleasant. You too have been excellent. You have been excellent about knowing your circles of competency.
QuestionerThere was a question from a shareholder this weekend asking how they could identify their own circles of competency. Charlie, you have any advice to anybody who's trying to figure that out themselves?
CharlieWell, I'm really better to determine that level of incompetency and then just avoiding that. And I prefer to think that question through in reverse.
WarrenHe likes to think, he likes to invert. And, you know, he says, all I want to know is, where I'm going to die, so I'll never go there. so I'll never go there. I mean, that's his approach, generally, is casting out a whole bunch of things. He's good at pointing out where my level of competency ends. And Charlie, honestly, for somebody who was trying to figure that out, how do you know when you're getting out over your skis?
CharlieAll I can say is we have a good batting average. And that is probably because we're probably a little more competent than we think we are. and what we're doing. It probably is very useful.
WarrenThere's a lot of reasons why the partnership works, but to have someone that you respect enormously, say, you're really out in an area where you don't belong, Warren. I mean, I will pay attention to him when he says that. And he'll say it. So there's real utility in our functions together for one to simply just say, you know, are you sure you know what you're talking about? what you're talking about.
QuestionerThat raised another question at the shareholders meeting. I mean, you two work so well together. When you look at a potential successor for the CEO position at Berkshire, how do you help them along the way to try and make sure that they find someone who they can work equally well with and who can also point out when maybe they're making an incorrect decision?
CharlieI hardly know anybody who's done very well in life in terms of cognition that doesn't have somebody he trusted to talk to. Einstein would not have been able to do what he did without people to talk to. He didn't need many, but he needed some. You organize your own thoughts as you would try and convince other people.
[56:06]
WarrenIt's very necessary part of operations. If you had some hermit sitting on a mountain, he wouldn't be very good. And Charlie... And by the way, we have some of those and they aren't very good. Charlie will always emphasize the fact that we ought to state the other guy's case. case as well as he can and better than he can if possible. I mean, and that's when you get to where that you can think through your own case better. So, so, and that may be his legal training to some extent, but he starts out stating the opposite case.
Andrew Ross SorkinAll right, gentlemen, we are going to continue this conversation in just a moment. Andrew, I'll send it back to you.
Andrew Ross SorkinOkay, thank you for that great conversation. We got a lot more to come with Berkshire Hathaway Vice Chairman Charlie Munger. Plus another special guest is going to join Becky. Microsoft founder and philanthropist Bill Gates. That's coming up right after the break.
Andrew Ross SorkinWelcome back to a special edition of Squabbox. Folks. We do have some breaking news that is just hitting from the retail company Target. Target is saying that its CEO, Greg Steinhoffel, is stepping down. His resignation takes effect immediately. In his resignation letter, he says that Target has faced some unprecedented challenges in recent months. Most notably, that massive data breach, where millions of Americans' information was breached, and this all happened over the holiday. season started right around Thanksgiving. It went through early December, and that is something that the stock took a huge hit on. Steine Heffle says that he's been focused on ensuring target emerges from the data breach as a better company, and that now is the right time for new leadership. Target's CFO, John Mulligan, is going to be serving as interim CEO until a permanent successor is found. It also says that Roxanne Austin, who's a current member of Target Board of Directors, she has been appointed as the interim non-executive chair of the board. They say both will be serving in those roles until their permanent replacements are named. The company also says that they've asked Steinhoff will to serve in an advisory capacity during that transition and that he has agreed. The board says it's deeply grateful to Greg for his significant contributions and outstanding service through his notable 35-year career with the company. But our guest host today, again, Charlie Munger and Warren Buffett.
[58:14]
QuestionerGentlemen, the news on target comes not only after the data breach, but also after targets expansion into Canada. to Canada. That is something that has been a target for analysts who have said that that was the wrong move. You two have an awful lot of experience when it comes to retail. We've got a lot of awful experience, actually. You guys have a long history with the department store and other stores, but Charlie, you're still on the board of directors at Costco.
CharlieYes, but I'm not running it.
QuestionerBut I wonder what you two think about news like this. Target has had a rough run over the last six months or so.
WarrenWell, I think these data breaches are so likely that we'll see more of them, and I don't think the CEO is necessarily at some terrible fault.
QuestionerYeah, I wonder if this has more to do with the Canadian expansion than with the data breach itself, because Steinheffel has come out and tried to be very forthright with us.
CharlieI think Warren and I can match anybody else's failures in retail.
WarrenYeah, we have a really bad record. We bought a what we thought was a second-rate department store in Baltimore at a third-rate price, but we found out very quickly that we bought a fourth-rate department store at a third-rate price. And we failed at them. And we failed.
CharlieQuickly.
WarrenYeah, quickly, that's true. And we failed other times in retail. Retailing is a tough, tough business, partly because your competitors are always attempting and very frequently successfully attempting to copy anything you do. copy anything you do that's working. And so the world keeps moving, but it's hard to establish a permanent mode that your competitor can't cross. And you've seen the giants of retail, the Sears, the Montgomery Awards, the Woolworths, the grants, the Creskes. I mean, over the years, a lot of giants have been toppled in that.
CharlieYeah, most of the giants of yesterday are gone. And Target went into Canada and it cost them a lot of money to go in there. And it could be tough. I mean, you know, everybody's already doing business with somebody there. And your competitor is never standing still. So that even though you think they may have a vulnerability at this moment when you start in on something, when your store is completed a year later, you know, they're moving to it. It's always a moving target. It is a tough business.
WarrenAnd yet here we are at the Nebraska Furniture Mart that Berkshire has done very well with.
[1:00:42]
WarrenNobody's going to be able to compete with the Nebraska Furniture Mart. I mean, this, this store does more homes. does more home furnishings business than any store in the country. And what are we in? I don't know, the 50th market in the country. This store does $450 million annually. It's doing $40 million during the Berkshire shareholders week. But there's no store that remotely can offer the variety. There's no store that can undersell us. But to achieve that kind of dominance, you can't do it with a chain of stores in Canada when you're competing with Walmart up there and a whole bunch of other people.
QuestionerWarren, I know you use the internet a lot, but I wonder, Charlie Warren, if either of you ever buys anything on Amazon.
CharlieMy children buy it for me occasionally. My assistant buys it for me. I have never done it personally.
QuestionerYeah. What do you think about the Amazon business model, though?
WarrenWell, I think it's very disruptive to practically everybody else. I think it's a formidable model that's going to change America.
CharlieI agree. It's one of the most powerful models that I've seen in a lifetime, and it's being run by by a fellow that has had a very clear view of what he wants to do and does it every day when he goes to work and is not hampered by external factors like people telling him what he should earn quarterly or something of the sort. And ungodly smart, you know, focused. And he's really got a powerful business and he's got satisfied customers. That's hugely important.
QuestionerCharlie, earlier, we got the chance to talk with Warren about some of the U.S. corporate tax code and some of the new acquisitions that we've seen, Pfizer reported earlier this morning. So we talked a little bit about Pfizer's plan to buy AstraZeneca and then use an inversion where they would move their tax domicile to the UK because I guess they play about 27 percent here in the United States. If it was a UK tax domicile, they'd pay closer to 21 or 22 percent. There was a little bit of conversation around.
CharlieWell, I think the pharmacy companies try and get the tax rate. They're on their way to zero. That's the only one that will make them happy.
QuestionerWhat do you think about that whole practice, though? Because Berkshire has taken advantage of tax code in the past to make sure that it's doing things in the most tax-effective way.
WarrenYeah, but we would never take our U.S. tax rate to zero on purpose or even close to it.
[1:03:05]
OtherAnd for other people, that's sort of an ideal. Getting to 22 percent is still more than a lot of U.S. companies would be paying if Pfizer does do that inversion and goes ahead and moves the tax domicile. It's the rage in Armistula. pharmaceuticals now to get the tax rate down. I think Joe Kernan, my colleague has a question back at home too. Joe?
Joe KernenI'm just reading in the past. You have talked to Warren about this before, Charlie, right? I mean, you're on the record. Here's the headline. Buffett clashes with Munger over U.S. corporate taxes at a meeting. And I'll quote what you said. The corporate tax rate should be much lower when the rest of the world keeps bringing the rates down. There's some disadvantage to us if we're much higher. Did you change your opinion on that recently? opinion on that recently, Charlie, or you still feel that way?
CharlieI would not, I think there's something to be said for making the tax rate a little lower. But going from 35 to 33 or something, it's not like taking it to zero by moving your pharmaceutical manufacturing to some tiny little place. No, I'm not asking about it. I think a lot of places that don't know what. Go ahead. I think the economy might work a little better if the corporate tax rate was lower. But I think it would be on a stake for America. on a stake for American corporations to get really low taxes.
Joe KernenYeah, and when you talk about the tax rate being lower, you're not talking about aggregate corporate taxes being lower. You're just talking about evening out the rate, aren't it?
CharlieYes, yes. Yeah. What did you... I'd like a consistent rate that everybody paid. There's something more like Simpson Bowles was talking about, getting rid of a lot of the... Something more like Latvia. It's like Latvia. Yeah. Lithuania is... That's the same statement to make since nobody knows what the hell Latvia is. What's the rate of Latvia? Charlie, what's the right in Latvia? Do you know? Latvia is one of those single tax rate places. So is Lithuania. Like Hong Kong or something. So is Lithuania and it's much lower. It's like 15%. I think it's 10%, but it's a 15% flat tax on everyone else. But I think the corporate rate is 10% in Lithuania. Generally speaking, I would tax consumption higher and earning power of business a little lower. It just works so well in Hong Kong in various places. Right. I don't think we deserve it, but I think the economy would work better if we had it.
[1:05:26]
QuestionerCharlie, can I follow up with you on something else you said over the weekend and warranted too. Another sort of unconventional thought. We had a conversation and a question about compensation and the disclosure of compensation. And you made a point that I think many of our viewers may find surprising about how the disclosure may not be a good thing. Do you want to elaborate?
CharlieWell, I think envy is one of the major problems of the human condition. condition and that's why it figured so prominently in the laws of Moses. Remember he said you couldn't even covet your neighbor's donkey. I never have. Yeah, but other people did. And so I think this race to have high compensation because other people do has been fomented by all this publicity about high earnings. So I think it's quite counterproductive. it's quite counterproductive for the nation. Because the natural reaction to all this disclosure is everybody wants to match the highest earning power. And I think that's a crazy race for us to get into. I've never been on a board of directors where the CEO came in and waving the proxy statement of some competitor and said, here, this guy is making less, I probably should be making less too. No, it doesn't happen. There's a ratcheting effect that is produced by the publication of large salaries. of large salaries. And every comp committee is not hearing the comparison by the consultant to the fourth quartile or the third quartile. It's always to the second quartile. And that will produce a ratcheting. And it's very natural to think if you're a director of the ABC Corp and the CEO of the XYZ Corp is getting more, well, our guy's at least as good as his. And that just goes on and on and on. So publication of top salaries has cost the American has cost the American shareholder money. And maybe you can say disclosure is the great disinfectant and all of that, sunshine is the great disinfectant. Sunshine has cost American shareholders money when it comes to paying their managers. And you're right, that's a peculiar attitude of ours. But we're right just as Moses was. And perhaps people in between.
QuestionerWe're going to continue this conversation with Charlie and Warren. In fact, when we come back, we have to come back. We are adding yet another amazing business leader to this conversation. Microsoft founder Bill Gates will join us live right after this break. We are speaking to Warren Buffett, the chairman and CEO of Berkshire Hathway.
[1:08:02]
OtherCharlie Munger, the vice chairman, and now we are adding another powerful business leader to the roundtable. Bill Gates. He is the founder of Microsoft and the co-chair of the Bill and Melinda Gates Foundation. He's also a member of the CNBC First 25 list that was revealed last week. And he is on the board of directors right here at Berkshire. And that's why we have you three gentlemen here to do. gentlemen here today. Bill, thank you for joining us this morning.
OtherGreat to be here.
QuestionerOne of the things I'd love to hear from you three is just what it is you talk about. When you just sat down, you were talking about Mongolia. You guys will talk about anything and everything. What do you know about Mongolia?
OtherWell, business stories are fascinating to us. And all the demand for minerals is meant that countries like Mongolia have opened up big new mines and the countries deciding what to do with the minerals. deciding what to do with the revenues they're getting from that. And a friend we have owns 10% of the retail operations in Ulaan Bator. So he was telling us how that's all working.
QuestionerWhen you are at the board of directors meeting today, obviously you can't talk about specifics on things, but how did those board of directors meetings go? How are things led?
OtherIt's a love fest. It's not a... I hope so. It's not a highly critical place. Go place. Are we supposed to say that? I don't care. Let's keep it that way.
QuestionerWell, Warren, you did make the comment over the weekend that when it comes to boards, too often they don't look for Dobermans, they look for cocker spaniels, and then they try to make sure that their tails are wagging. Is that how the Berkshire board runs to?
WarrenNo. Berkshire, we look for directors that were shareholder-oriented, business savvy, and interested in Berkshire. We think those criteria make sense, and other people have a whole bunch of different checklists, but we have a group of directors. They get paid virtually nothing, and they have to, their interest has to come about because they find the place interesting and in many cases because they have huge investments. And they made those investments themselves. Nobody gave them shares. So it's a very unusual board, but it's a terrific board.
QuestionerWe heard the story about how you and Charlie first. first met up. How about the story about how you and Bill first met?
WarrenWell, he was forced to meet me. It's actually true. My mom was having K Graham and Warren over, and I was still sort of
[1:10:32]
Othermaniacal about not doing anything but working at Microsoft. And so I agreed to come by. I actually, you know, I made this mistake thinking that Warren's view of the world was just about charts and stock volumes. volumes and not about the fundamentals of business. And so when we met and he was asking me, you know, how do you compete with IBM? How do you price your stop? Where is it going? I, it was fantastic. It was the most fun conversation I'd ever had. And so that started an amazing friendship. We got in the bedroom talking and the governor of Washington had come. Bill's dad was a little wonderful man. We got a little irritated with the fact that we were sitting there. that we were sitting in the bedroom talking. Finally, he came in very politely. He said, he said, won't you boys please come out and talk to the governor. So you stayed a little longer than maybe you planned at the power? Yeah, both sides wondered what these two groups were going to talk about. And had an amazing day. And then it was only a few weeks later that I went up and Warren had a group of friends who were talking about business and stocks. And so it's been a conversation. conversation ever since then.
OtherYou know, Charlie, you made the comment over the weekend that when it comes to frugal people, you collect these type of people at Berkshire. You're looking for frugal people, but one thing I have noticed is you tend to collect friends and colleagues who have all of those characteristics that Bill was just talking about, people who look at business and who think through it. How did that happen?
CharlieWell, we like people who are intellectually curious. And I don't see how you know how you think. you can wise up all the time if you aren't working at it. How do you do that? Do you read every day?
OtherSure. I knew Charlie and Bill would hit it off.
OtherYeah. Charlie's amazing.
OtherWell, let me ask each of you. What's something you're reading now or that you've read recently that you would recommend other people read, Bill?
OtherZeke Emanuel wrote a book about medical costs in America and how we got to the complex situation we have. And he makes some predictions about the people. predictions about the future. And people can disagree with him. Actually, I disagree with some of it, but it's very well written. And we should have a more informed dialogue about that critical topic.
OtherCharlie, how about you?
CharlieWell, I have just read Faraday Maxwell on the electro-magnetic field.
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OtherWhat is that? It's a combination of scientific biography and explanation of the development of physics. physics, particularly relating to electricity. It's just the best book of its kind I have ever read. And I just hugely enjoyed it. I couldn't put it down. It was just a fabulous human achievement. And neither of the writers is a physicist. And neither of them, okay.
CharlieWarren?
CharlieWhy the light goes on when you hit the switch, but I couldn't understand the book. I had to move on. I had to move on. I read Tim Geithner's book, which will be out in another week or so. And anybody, politician or financial manager, financial supervisor that should read that book. Tim correctly says that you're going to run into more panics in the future. And here's how to think about them and here's what to do. And it's a very, very good book. He thinks we'll run into more financial panics. How far down the road do you think that? He has no idea. And I have no idea. as humans will keep behaving the same way. And he describes how they behave in various ways and how they behave this time and what has to be done. In other words, next time will not be different. There will be a next time. There will be a next time. It may be led by the same people.
WarrenYeah. By the same people, meaning the finance here is the banks. Other no woman.
Becky QuickAll right. Gentlemen, if you will stay with us for just a moment, we're going to take a quick commercial break. When we come back, we do have much more from Omaha. and our special panel, Warren Buffett, Charlie Munger, Bill Gates. Squawk box will be right back.
Becky QuickOur special guest this morning will all be at the Berkshire Board meeting later today. Warren Buffett, Charlie Munger and Bill Gates. And gentlemen, people would die for the opportunity to get here to sit and talk to you about business. So what I'd like to do is just throw some topics out to you and maybe you guys can respond on your thoughts on things. First up, how about activist investors? We have seen a rise of activist investing, Carl Icahn, Bill Ackman, who was actually here this week. And I just wonder what the three of you think about activist investing. Is it a good thing for America or not? Charlie?
CharlieWell, sometimes it's good and sometimes it's awful. And I'm afraid that's just the way it is.
Becky QuickBill, what about you? What do you think about it?
OtherWell, there's a level of discipline that shareholders, you know, in the hierarchy, they should
[1:15:44]
Questionerbe viewing the actions of the board and management. Sometimes it seems to get focused on very short-term things like the digital. dividend policy as opposed to the strength of the management team and the long-term strategy. But shareholders having power is a very important part of the system. Can shares get hijacked though by a shareholder who's very loud but who happens to have a small position in a stock?
WarrenOnly if the press allows it to happen.
QuestionerWell, you could say we've been guilty of such things.
WarrenWe will certainly take any at all. activist shareholders. If you have thousands of corporations, some of them are going to be poorly run and some of them are going to be run in a very self-interested manner by the managers. What's the correction for that and activism can be a correction for some of that? I think very often the activism, and they're attracting money on this basis, the money is pouring into activists-related type investment vehicles. The measure really is whether you get the stock up in a very short period of time. And I can remember when the best managed company I knew in the United States, capital cities was selling a third of what it was worth and an activist might come around and say, why don't you sell off the properties or something. So an immediate bump in the stock price should not be the measure of whether somebody has accomplished something successfully in a corporation. But there are times when changes needed to corporations and they're not going to do it themselves. themselves.
QuestionerAndrew has a question too. Andrew?
Andrew Ross SorkinHey, Warren. I wanted to follow up on something we talked about over the weekend, which is actually Bill Ackman's approach in this recent transaction between Valiant and Allergan, where he effectively teamed up with Valiant, bought shares of Allergan before they actually made the bid, knowing that the bid was coming. Some people have argued that is the equivalent of front running or inside trading. And I wanted to get your thoughts on that tactic from a policy perspective and what you think it means to the markets.
WarrenYeah. I'm sure you had it well-lawyered. And, but, you know, if I bought that stock because I learned that somebody might be doing something and I learned it in certain ways, I'd be in trouble. But if they joined forces, you know, certainly, certainly a company that has in mind making a bid is entitled to buy some stock.
[1:18:17]
QuestionerAnd how big a group you could form. Maybe you could form a group with the whole hedge fund community and have a group. all go out and buy stock like crazy, you know, for a couple of weeks. And if they were part of a group, maybe it doesn't count. But I would say that if that, if that should be the case, it probably should be changed.
Joe KernenJoe?
Joe KernenYeah, thanks, Beck. All three of these great gentlemen, I'd like to just hear Mo Pine quickly on this. I'm going to say his name again, Tomas Pickety, the left and the sort of, he's a French elitist academic that has the hottest book on economics right now. Basically, I'm sure you gentlemen have read about it, it talks about capitalism in the downside in terms of income inequality, that capitalism, he says, by definition, in genders, that we've just been lucky in recent years that it's not even worse. So we're revisiting what system is the most appropriate. I think about you, Bill Gates, and what you're able to do with everything that you amassed in your lifetime through capitalism in some respect. Certainly, you're doing a lot of good with it now, but in and of itself, is capitalism a good or a bad thing?
OtherWell, of course, it's a fantastic thing versus any other system we've tried. And Bacchetti's mostly talking about retained wealth. That is, if you have high returns on capital over generations, then you'll get a group of people who have a disproportionate part of the money. If you think about the three fortunes represented here, These are first generation fortunes that show there is dynamism in this system. He makes some assumptions about returns that I'm not sure it's over the long term, but the direct remedy for what he's talking about is some type of estate tax or wealth tax. He actually comes out for a wealth tax, which I think is hard to do. But in estate tax, which I happen to believe in, is something that would reduce the phenomena that he talks about. But, but, and I've talked to Warren about this before, too, and then what you guys can answer too, but to give all your money away beforehand, and I think Warren has actually admitted to me that he thinks in the private sector that it'll be better used by charitable organizations because it does avoid, when you give it all away, it does avoid, it's going to the uncle Sam in the end anyway, doesn't? That solves the pickety problem, too, because it's still, it's still a generational issue.
[1:20:50]
WarrenI don't need to answer for Bill. No, actually. Joe, you set up a little wrong case there in the sense that if I didn't give it all to philanthropy, I could arrange it so that, actually, I could arrange it so that it's greater than this, but I could certainly create 60% that would be dynastic wealth. And actually, if I was really concerned about dynastic wealth, as many people are, I could, I could set it up so that far more than 60% went to a dynasty. But you could bequeath it all. You could bequeath it all to the federal government if you thought it was going to be a good use of the funds. You're not going to do that. That's a choice, but I'm just saying that, I'm just saying the choice is not between philanthropy, you know, that it's false to say that you can't create a dynastic wealth in this country. That's not what I'm saying, I'm just saying. You have never, you know, necessarily looked like he thought the government was the best place to allow capital to be utilized. I agree with you on that.
Joe KernenOkay. All right. That's pretty good. Gentlemen, I think we're going to take a very quick break here. Of course, Joe, we do have more coming up.
Otherup after this. Welcome back to a special edition with Squawk Box. Our guest this morning, Warren Buffett, Charlie Munger, and Bill Gates. Gentlemen, another topic I'd like to hear from you on high-frequency trading. Charlie, I'd love to get your opinion on what you think about high-frequency traders. Is the book right that lays out from Michael Lewis that they are skimming off the top and it's a fixed market?
CharlieWell, of course, they have an advantage cleverly obtained. And of course, it does the rest of the civilization, no good at all. It's the functional equivalent of letting a lot of rats into a granary. No, I don't like it.
OtherOh, that's the conclusion. I wonder where this point was. Charlie, Bill, do you agree or disagree with, Warren, Bill, do you agree or disagree with Charlie?
Bill GatesIt doesn't seem like it's much value added because it's not, when you get, you really need the liquidity, it's not guaranteed. to be there. So I'm not an expert on it, but it seems like a strange source of profit.
WarrenBill's right. I mean, it's not a liquidity provider. It may create more volume, but that's not the same as being a liquidity provider. And to the extent that it's front-running, I mean, I think society generally has been against front-running for good reasons. And where it's in the old-fashioned front-running,
[1:23:25]
Warrenthey had rules against it. gained a natural advantage by speed just by figuring out how the system worked and then getting there first. And that adds nothing to GDP or anything, a real output of goods and services. On the other hand, the market isn't rigged. And for the small investor, they've never had it so good. And high-frequency trading, I don't think, costs them a penny probably. I see Bill nodding with that, Charlie. You agree with that, too?
CharlieWell, somebody's paying it. They're not. Not is not creating extra money. No, it's the big orders. Yeah, if you don't trade very often, then all these frictional costs can be quite modest. If you're a frequent day trader running in and out, that's where you make it a little harder. The big institutions are acting in behalf of little people. Yeah. No, I think it's a curse, and I think the author of the book was basically right.
Andrew Ross SorkinOkay. Andrew has a question, too. Andrew. He writes well, too. Warren, related to this, one of the books your companies is Business Wire. They reached a settlement along with PR Newswire and a couple of the others with the Attorney General Eric Schnauterman about this idea of front-running.
WarrenNo, I'd have to correct that, Andrew. They reached no settlement. They had decided, I had decided, along with Kathy Barron Tamara, as when an article appeared in the journal about that. We always provided simultaneous distribution, and we continued to provide simultaneous distribution, but we did get rid of the five high-frequency traders who had no edge in the time at which they received things, but we got rid of them in any event. But that was not pursuant to any settlement. That was that was a decision that was made at Business Wire. I'm glad you cleared that up. Gentlemen, I'd also liked it. I was just guess, what was the settlement part then? Well, there was no settlement. There was no settlement. We, we got rid of, we made, I think there was an article late in the week in the journal, and Kathy talked to me early the following week. And after assuring myself, that they were getting totally simultaneous distribution. I said, we don't eat them, so we got rid of them.
Andrew Ross SorkinGentlemen, let me ask you very quickly. I love it. Go ahead, Charlie. I said, I love it. I wish there were more of it. Let me ask you very quickly about the situation in Ukraine. How much time do any of you spend thinking about that? How concerned should we be from a geopolitical risk standpoint?
[1:25:56]
WarrenWhat in hell do I know about the Ukraine? I'm glad I'm not making the those decisions?
QuestionerDo you worry that it will spill over and affect business and markets and goals?
WarrenWell, of course you worry a little when you see a pattern that reminds you of Hitler.
QuestionerRight.
WarrenBut basically, I regard myself, it was totally incompetent to judge what should be done.
QuestionerBill Warren, either of you want to follow up after that and say that you are more competent to make a decision on it?
OtherTotally, it's not hard to approve.
QuestionerWell, you have a global economy, so when you have disputes between countries like your European, Europe's dependency on Russian gas. You sometimes will make, to make political points, you'll sometimes take economic pain. And, you know, it's a great debate, you know, what penalties should there be to discourage more takeover behavior. And you actually have the business community having one view and talking to the politicians. I don't think it's going to get terrible, but it'd certainly be on a high on the on the list of concerns right now. When you get a shift in boundaries, it can set other forces in motion and nobody knows what those forces are not, maybe, there may be political popularity considerations, there are all kinds of things can start happening. So once you shake things up, you never can be sure on the international matters, what will be item two, item three, and item four. They have their own dynamics.
OtherSo it's not a plus. It's not a plus, and nobody knows how it's going to turn out. But something has been put in motion and it would be nice to see it come to rest.
OtherWe'll continue this conversation in just a moment. Welcome back, everybody. Some final thoughts right now from Warren Buffett, Charlie Munger and Bill Gates. And gentlemen, in the commercial break, I love your conversations that continue to go on. You were talking about Apple and Samsung, Apple just winning a minor court victory of $120 million to get paid to it. What I wonder is what you think about the patent wars, Charlie. When I was young, there wasn't much money that changed hands based on patents, and now they're hugely important.
CharlieI think patents are too easily granted now. I don't think we need as much patent protection as we have. Bill will probably disagree. The Patent Office has had a hard time keeping up with technology, but Bill, should people get paid for their creations and inventions?
[1:28:29]
OtherWell, there's entire industries like the drug industry that only exists. only exist because if you invent something, you're allowed some protection. The particulars of the system have gotten very complex, and you could talk about various improvements. But the idea that innovation in and of itself should be protected, you should get paid. That's been a very successful idea going all the way back to the steam engine.
QuestionerBill, I do want to ask you, we've talked a little bit this morning, about how you are no longer the largest shareholder of Microsoft. You've been selling down that stake. Why is that?
OtherI've sold for over a decade, the same number of shares every quarter. That plan lasts through the end of this year. You know, I'm going to retain a lot of Microsoft stock, but the U.S. Treasury's done well. Many billions of dollars. And, you know, I'm going to retain a lot of Microsoft stock. And, you know, I'm excited about the stuff I'm doing at Microsoft right now. It's, you know, reexamining all its strategies and a lot of great work going on.
QuestionerAre you excited about the new CEO, Satch and Adele?
OtherYeah, Satch is off to an amazing start. And he's drawing on a broad set of people in the company to get them to rethink how can Microsoft move a bit faster and really distinguishes ourselves with things like Office 365.
QuestionerLet me ask you all about energy policy. And I come back to this, Charlie, because you've said some things. because you've said some things in previous meetings, maybe it was two or three years ago, that kind of changed my thinking about it. Just the idea of whether or not we should be exporting natural gas and some of our other natural resources. Your idea was that we should save it all.
CharlieYeah, I'm totally against exporting natural gas. I don't like oil to be exported either. I'm all for using up our oil more slowly and discovering it more slowly. I mean, I'm all by myself in this. I feel very lonely. very lonely.
QuestionerWhy is it that you feel that? Why is it that you think we shouldn't export it?
CharlieI think this stuff is utterly precious, and I feel it's like the topsoil of Iowa. We don't want it to go way too fast. And I also have old-fashioned capitalist ideas that intelligent, responsible people are always suffering now to make later better. I don't like making today great by making later worse.
QuestionerWarren, you agree with Charlie?
WarrenWell, if I were in charge of running the United States for the next 500 years,
[1:31:09]
Otherand I want the ability to produce energy in a way that would take care of national defense under all circumstances because I would not want to be dependent on the rest of the world in that respect. But if otherwise I could use up as an important item to the planet as energy and use the other guys. And like I said, I had a responsibility for hundreds and hundreds of years. I'd use the other guys and trade them little pieces of paper for it. But I would always want to have enough to take care of national offense, any immediate national fessies.
QuestionerWell, let me ask all three of you. All three of you are investors who spend a lot of time thinking about things. And I just wonder with the stock market hitting new highs, if that concerns any of the three of you if things are starting to look expensive at these levels. Bill, Bill, what do you think?
OtherWell, relative to interest rates, equities are still a bargain. And, you know, see, you've really got to have an opinion about interest rates to be an investor of any kind in this market. It's such a key factor. You know, by historical measures, yes, but interest rates were very different. different in most of those time periods. Have you been surprised that interest rates have stayed so low this year?
OtherWell, so the central banks are making sure that's the case. They're trying to stimulate these economies as best they can. The fact that it requires the gas pedal being pushed to the floor as much as it does is an amazing and even a little bit scary thing.
QuestionerCharlie, what do you think?
CharlieWell, I think under what Bill Gross calls the new normal. Common stocks may not do quite as well in the future as they did in the last hundred years. But that doesn't mean that the mongers are going to sell their common stocks in an effort to buy them back later cheaper. So...
QuestionerWarren, how about you?
WarrenWell, the option is to own equities or don't fixed dollars. I think it's clear you own you own equities. I do not think they're in crazy territory. But most of the time, stocks have been in a zone of reasonableness over my lifetime. I think they're in a zone of reasonableness now. And certainly, if you said to me, they've got to have to be long the 30-year bond and short an index fund for 30 years or vice versa be long the index fund, I'd be long to stocks.
QuestionerGentlemen, I want to thank you all for your time today. We really appreciate it. That does it for us.