OtherThis is a special presentation of Squawk Box, live from Omaha with Warren Buffett, the Berkshire Hathaway boss ready to dish on the economy, the global markets, and his investments, including IBM and Deer. Three hours with the Oracle of Omaha, and it all begins right now.
Becky QuickWarren, thank you so much for joining us this morning.
WarrenWell, thanks for coming.
Becky QuickI know this is 50 years since Berkshire Hathaway has been under your control. And we have a lot that we're going to be talking about with that this morning.
WarrenOh, we'll do it day by day.
Becky QuickWe will. Day by day, 50 years. It's coming. We've got him coming up with a lot to talk about in just a moment. By the way, folks, you've reached out across many social media platforms. Warren is ready to answer your questions. Let's get back to Becky and Warren Buffan.
Andrew Ross SorkinAnd I need to thank Warren Buffett for giving me a lot of reading over the weekend. Very good reading.
Becky QuickYes, a lot of us with a lot of reading over the weekend. In fact, this is a big year, Andrew for Berkshire Hathaway. Part of the reason that the letter was longer is because of that 50-year anniversary. There was more in the letter. What was it? Something about 50 or 60% more words than average?
WarrenYeah, normally the letter is 12 or 13,000 words. The letter itself was about that. But then there was 8,500 by me and another 2,500 by Charlie that looked back 50 years and looked ahead 50 years.
Andrew Ross SorkinWhich is kind of an amazing feat looking at 100 years in business of what you guys have been through. We should tell everybody again, we are live at the national. indemnity company lunchroom. And the reason that we chose this location is because when you first started holding annual shareholders meetings in Omaha, this was the location that you chose. How did you pick this room in particular?
WarrenWell, we wanted something grand that would impress the shareholders. It was larger, quite a bit larger than the office I was working out of at that time. And we expected eight or 10 people so we could get 10 shares in here and preside. And then we had vending machines to supplement the income of the company. And we still have the vending machines.
Becky QuickSo honestly, eight to 12 people would sit around in this lunchroom, and that was your annual shareholders meeting?
WarrenThat was the annual shareholders meeting. My uncle Fred and my aunt Katie were regulars. And there would be a couple of others. And, you know, the meetings did not last long.
[2:23]
WarrenBut we, just like today, we held it open for questions as long as long as long as we. people want to ask questions, and Mike and Katie would ask if I was coming over for dinner on Sunday, and that was about it.
QuestionerWe were just looking at some video of what the annual shareholders meeting has become. And I think last year there were about 40,000 people that showed up here in Omaha for it. I think we'll top it this year. So no longer being able to use the National Indemnity lunchroom. One of the things that really jumped out at me from the letter, though, was where you talk about national indemnity. You said this was one of the best deals you've ever made. You paid $8.6 million for this company back in 1967. It now has a gap net worth of about $11 billion. How'd you get from there to hear?
WarrenOne day at a time. It was a business I like, so I was always looking for ways to add on to it. And at various times, we got pretty good size jumps. And Ajit Jane came with us in the mid-80s and developed a reinsurance operation, which I'd have to look it up, but probably added $30 or $40 billion to the net worth of national indemnity over time. But it's a combination of having some really good people in the insurance business and compound interest and the investments worked out well. So one way or another, the number got up to $111 billion. And actually, we own the BNSF railroad within national indemnity. So it's carried at a price that's considerably less than its worth. So you could say that the real net worth is substantially higher. That's kind of an odd construct.
QuestionerWhy is BNS, the Burlington Northern owned by National Indemnity.
WarrenWell, we bought some stock in Burlington Northern.
QuestionerThrough national indemnity?
WarrenThrough national indemnity. And so we had a very significant investment here. And we just decided when we made the offer for the whole thing to do it through through National Indemnity, it put even more financial firepower into the insurance company. And so it seems happy there.
QuestionerYou know, you brought up a Jeet Jane. And your letter and Charlie's, letter in addition to that really kicked off a firestorm of people trying to figure out what the succession of Berkshire Hathaway is. There's a story in the money and investing section of today's Wall Street Journal with a very clever headline, Buffett's successor, a Jane and Abel story. You say very clearly in your letter that the board now has one person in mind. Charlie went out of
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Questionerhis way to say that both Ajit Jane and Greg Abel would be excellent managers. In fact, even better managers than I think you would be in some respects. What's the story? The Journal says that this is creating some sort of a jockeying position between these two.
WarrenNo, there's no jockeying position at all. But Charlie and I each wrote our individual letter about the last 50 years in the next 50 years. And I said ahead of time, and we kept to it, that neither would change a word of their own letter based on what the other had written. So when Charlie's letter came in, And it referenced Greg and Ajit. That was, it was news to me that he was writing that. And he's right, they're very, very, very good. Each one of them. Incidentally, I wanted to see what Charlie had written. He had no interest in seeing what I'd written. So you didn't change anything the other rope.
QuestionerBut by putting those two in, even though you say there is no jockeying between the do-it-it-it-it-the-try. it does create that public perception. Do the two of them know who the next successor is?
WarrenNo, no. The board has talked about it at every meeting for, I don't know how many years, and we have a precise plan in mind, very detailed, as to what happens later today if I pass out on this show or something of the sort. So it's all in place, and it wouldn't take 24 hours to to implement. And, you know, it's known how each will function and everything about it's in place. But that's been true for some time.
QuestionerBut you're saying that each would have a role in the new company, that you envision both of them being very key active players in the?
WarrenThey would be very key. As, as, well, they'd be as key as key as anybody. Let's talk a little bit about the letter that both you and Charlie laid out. You've been working with Charlie for how many years now?
QuestionerWell, we've been metal partners ever since we. met in 1959.
WarrenCharlie didn't really join Berkshire until we merged in Blue Chip Stamps, which was around 1982. But he and I talked all the time. He knew what I was doing in Berkshire. He didn't own a share of Berkshire until 1982 when we merged in Blue Chip. But it didn't make any difference. I mean, like having a twin brother or something that you talk to all the time and he's doing one thing and you're doing it a little bit different things. But he had a huge, impact way before that in how I managed Berkshire. But like I said, I had no position,
[7:34]
Warrenit received no salary. And then when we merged Blue Chip stamps, which Berkshire had an interest in, I had an interest in, Charlie had an interest in. At that point, he now had a lot of Berkshire stock instead of Blue Chip stock, and he became vice chairman. And we really just formalized a little bit what had been going on for a long, long time.
QuestionerYou know, we got the chance to talk with Charlie. And a lot of people have sent in questions for you, Charlie included. So if you don't mind, here's one question that he sent in for you, and I hope you'll listen to it for just a moment. Guys, again, this is Charlie Munger, Vice Chairman of Berkshire Hathaway. And here's his question for Warren Buffett. Do you have any regret about using Berkshire Hathaway in an effort to teach a wide audience? I spoke with Charlie about it. What he's talking about is using your annual letter. out that you've always wanted to be known as a teacher, and he just, that was his question for you in terms of the annual shareholder letter.
WarrenYeah, I like teaching, and I started teaching formally when I was 21 at what was then the University of Omaha, and I've done it off and on. In fact, on Friday I had eight schools, one from Canada, Harvard was out here, and we had 160 students. So I've always enjoyed teaching. And I regard the annual report. I regard the annual meeting as a teaching venue. And I think Charlie does too, incidentally, but the two of us look at it that way. I think he thinks he's teaching me. Probably is, too.
QuestionerIn the past when you've disagreed.
WarrenIt's very simple. I mean, he just says, Warren, he said, we've never argued. When we disagree, he says, Warren, he says, Warren, you'll end up agreeing with me because you're smart and I'm right.
QuestionerThat's good, come back to give someone. Yeah, a little hard to think. How do you want to argue with that? You know, on the subject to teaching, we also have a question that came in from Twitter. This question is from Khan Michael Accus. He says, are you a better investor in your mid-70s to 80s than you were in, say, your 40s to 60s?
WarrenAt age 70s, 80s, 80s? No, well, I would say this, I've got a way different investment problem at this time than I had 30 years. ago and more so even 50 years ago because the universe of things that I can invest in that where it can have a significant effect on Berkshire's net worth is very, very limited. Let's just assume we're going to buy a 5% position in the company.
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WarrenIf we're going to get 1% of Berkshire's net worth in that company, that would be roughly $2 billion. That means a $40 billion cap company. And that's just to get 1% of the net worth in. If that stock goes up 50%, we've made a half a percent pre-tax at about 30-some basis points after tax. So I don't have the opportunities remotely that I had, particularly if you go back when I was in my 20s or 30s, when anything would change my net worth.
QuestionerIs that part of the reason that you were pretty explicit in your letter in terms of who should be buying Berkshire shares and who shouldn't? You say basically, if you're not looking for at least a five-year time, you're not looking for at least a five-year time horizon stay out don't buy the stock
Warrenyeah well I've always felt that way I don't know and I don't think anybody knows but I certainly know I don't know Charlie doesn't know we don't have the faintest idea what stocks are going to do next year or what Berkshire is going to do next year we do know over time we're doing enough things that make sense and compound interest takes effect that so that if you pay if you don't pay some terribly excessive price over a five-year period that you know at that point value value takes hold but but we don't have any idea what but what what what your stock is going to do in the in the near term or intermediate term and and we never have but it doesn't make any difference to us either
Questionerwell you have a lot of stocks that you've been purchasing some in particular like IBM that people have some huge questions about if you don't mind we're going to slip in a quick break right now but when we come back we'd like to talk about all of those investments some of the biggest investments that Berkshire owns very recently we saw the filings the SEC filings that showed that you've been buying even more shares of IBM there were huge questions about this because while the stock was underperforming people assumed maybe you thought you'd made a mistake and were backing out in fact your holdings in IBM grew to 7.8% from 6.3% the last time we'd heard about this why why are you buying more IBM?
WarrenI well I'm buying it because I like it the the it's a it's a it's a it's a It's a company has been doing exactly what I like over the laws ever since we first started buying it. There were a billion 160 or 70 million shares outstanding when we started buying and there were a fair number of options out there
[12:42]
Warrenmaybe 40 million shares or something like that. That overhang has been reduced significantly and the number of shares is now 990 million. So I actually wrote a couple of years ago when we bought it that the best thing that could happen would be if the stock did nothing for five years because they were going to buy in a lot of stock and the cheaper they bought it, the more shares they bought. Well, in that case you've done even better because it's the stock has gotten down over that period.
QuestionerYeah, yeah. People have this misconception that when we buy a stock we like it to go up. That's the last thing we wanted to do. We're going to buy billions of dollars worth of stock in companies we like. And if we buy a hundred million dollars worth of stock or 200 million and it goes up, I'm very unhappy. In fact, sometimes I just kick it out because we don't have a significant enough holding. But what we like and particularly if the company itself is buying in its stock, as most of our companies are. You know, our interest in the company is just increasing day after day. And if the company's buying it, we're not laying out a dollar. If we're buying it, we're laying out some money, but we're buying it cheaper. And I like buying anything. You can look around this room. You can see that I like buying things cheap. However, there's a reason that the stock has been going down. There's a reason the market doesn't like it. The revenue has been declining substantially over time. I know that. Jenny Rometti has said that is because they don't like the empty calories, the stuff that they're not making any money off of the revenue. But if you look at the company, it's got declining revenue. They continue to borrow money to buy back shares. And there are some who say that that is a huge problem. How do you combat that? Why do you think it's not the case?
WarrenWell, we expected revenue to be going down. We particularly expected in a year like this where foreign exchange will take a big whack off revenues. But they also disposed to $7 billion of revenue last year. There have been no surprises at... at IBM since we started buying it a few years ago. And the pleasant surprise is that the stock has gone down. And therefore, they've been able to reduce the shares to $990 million. If it stayed at $200, you know, there'd be a billion, 10 or a billion, 20 million shares outstanding. And you bring the shares down far enough.
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WarrenWe own 77 million shares or something like that. They've ever gotten out there's 77 million shares outstanding? I'll be very happy. You've often said, though, that you don't understand technology. So what makes you think you understand IBM's competitive mode? Well, I don't understand it. There's no question. I don't understand technology as well as I understand the railroad or I understand insurance. But I don't understand every aspect of insurance. I understand some of the key economic characteristics of insurance. And the same way with the railroad. I mean, I know a lot of things about parts of the railroad that lead to an economic conclusion. But there are a lot of things I don't understand. I mean, that's true of industry after industry. We competed. I personally was chairman of the board of a company that competed with IBM for 10 years in the 1960s. And I didn't understand all of IBM's business then, but we actually did quite well competing with IBM in the tab card business, the company data documents I was chairman of. So I think I know enough about IBM to make an investment decision. But whatever, whatever. Remember, you just said we were competing. them in the tab card business. Yeah. So these are the punch cards. This is not the cloud. This is not the stuff that they're trying to get into that. It changes. And IBM's changed with it. And there was one time when they didn't change so well with it. And then they made enormous progress under Lou and at Thresner. Yeah. Yeah. So businesses, the insurance business has changed. I mean, we used to sell at GEICO. We used to sell by direct mail primarily. And then it went to phone. Then it goes to the internet. And now it goes to the mobile. And companies have to change. But I think Jenny's done a great job of fostering change at IBM. But it doesn't happen overnight.
Andrew Ross SorkinAndrew has a question as well. Andrew? Hey, Warren. Talking about the stickiness issue and the moat, one of the the the the the thesis, I think, that you presented when we talked about this a couple years ago on this show, was that you felt it was one of those businesses that was so sticky that if you were a big enterprise, a company that used and had a contract with IBM, it would be so difficult to get out of that contract just because of the pain and cost involved. Have you said you weren't surprised, but have you been surprised over the past couple of years
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Warrenjust how easy or how less sticky that business is, in that it's actually now relatively cheap or cheaper to actually just jump into the cloud with a competitor? Well, and IBM is helping people jump to the cloud or with a hybrid cloud, but we have, you know, 70 some businesses at Berkshire and we have investments in others so if you look at just take a Wells Fargo or an American Express which we own stock and you'll find they're doing a lot of business with IBM as our direct subsidiaries are and it changes and we've actually put in something what's called a hybrid cloud at certain of the companies but there's a lot of reasons why we stick with IBM but it's not a winner-take-all business with the cloud there's some businesses that are winner take all but I that's not true in IT in my view at all and like I say I see company after company after company with which we're associated doing significant business but it's being done it's it's migrating to different forms at these companies but I think if you if you check with the ten largest banks I think you'll you'll find that they're doing a lot of business with IBM and if you ask them whether they'll be doing a lot of business with with IBM 10 years from now they would say yes
Questionerone more question on the subject and this comes from Facebook
Joe KernenI'm sorry real quickly I'll do this and then Joe I'll let you back in on this
QuestionerFacebook a question that came in from Mark Hall and this is again just in the same vein he says I own IBM and it stinks why in the world are you buying more and should why should I hang on to my shares which I've had for decades give me some hope please
Otherguess the follow-up question for that is are you buying more shares
Warrenwell I'm not the business of giving hope my man and and you you should only own IBM or any other stock if you have reasons for thinking you should own it I mean it's that simple and whether you own Berkshire Hathaway or or not or it that's an individual decision and and the last thing in the world you should do is own it because somebody else owns it I said that one time when I was in college I was at an annual meeting in Jersey City I was 20 years old and coming back there were only about four of us there at the meeting a fellow named Lou Green who was a very famous figure and Wall Street said why do you own the stock it was Marshall Well and I said I own it because Ben Graham owns it and he said strike one that was not a good
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Warrenanswer even though Ben Graham was the dean of it it's not a reason you don't own a stock because somebody else owns it you own it because you do your own analysis and you decide where you think the future will be and if you don't know the answer to that you don't own it so it's a terrible mistake to own it because somebody else owns it they may not own it six months for now they may want it for different reasons I I've never bought a stock except for Marshall Wells in 1950 I've never bought a stock because somebody else owned it
QuestionerI'm sorry was that Joe or Andrew who was
Joe Kernenno yeah that was me
Questioneryeah that was me thanks Becky
Becky QuickWarren what you must know your your exact cost or your average cost on IBM what do you know offhand what it is exactly it would it why I can come with a dollar or two probably
Warrenit's probably around 170 dollars a share or something like that right but I'll tell you what I'm happy I'm happier to have it at 150 or 160 now or whatever it is I'm happier to have it at 160 than at 200
Joe KernenI'll tell you what what people have said Warren to me and that is that you've you know for for the stock coming down that much you haven't bought it with both hands even though you got it cheaper than than your your your acquisition it almost looks like you're tiptoeing in there almost to make you know to be able to say yeah I bought some more so that you know so that it wouldn't indicate that you weren't and enthralled with it at this point
WarrenHow would we know that you're just going to sell the entire steak and throw in the towel? I mean, if it's the worst performer in the Dow, that's not something you're going to marry forever, obviously, if that happens year after year after year after year.
Joe KernenThat's hard to tell, Joe. I mean, the lower it goes, the better I would like buying it in all probability. But I'll run an ad on CNBC when we're selling it. I mean, what else? I mean, Eastman Kodak got bought back a lot of stock, too. They continue to to lower the float. And it kept getting cheaper and cheaper and cheaper and cheaper too.
QuestionerThat's true. And Penn Central went out of business. And, you know, I can name all kinds of companies that, and incidentally, a stock like Tesco, which when it went down, I sold it. I mean, I'm quite capable of selling a stock when it goes down. I'm quite capable of buying a stock when it goes out. It all depends on the underlying facts. Right. I haven't, I just don't, I haven't heard, I haven't heard you make the
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Questionercase for the actual fundamentals. of the turnaround, which will, you know, and it's had to been, you know, it's been turned around a couple of times already, and it gets harder and harder, I think. We were talking last week. I think old tech now is Google. I mean, new tech, I don't even know what it is. I have to talk to Andrew about it, but IBM, I don't even know what that is anymore. It's almost like a, like a service stock or something.
WarrenYeah. Well, that's up to you. That's a nice thing about stocks. You know, you look at the company, and hopefully the way you do it is you look at the company, and you try to evaluate it. and he tried to look at where it'll be in five or 10 years. And if you think it's cheap, you buy it. And everybody should do that. That's exactly what we do. And we don't, you know, if we decide we like it, then we like it better as it goes down. If we decide we don't like it, like it was the case with Tesco after it went down, we sell it. So it has nothing to do with the movement of the stock determining what we think of the business. I would say this, Berkshire Hathaway, three times while I've run it, has gone down 50%. In 1973 and 4, it went from 80, in fact, over 80, down to 40. That was where I bought stock at 70 and 60 and 50 and 40, and I loved it, you know. On the other hand, I've been in businesses that have, you know, been headed for the junkyard, and I've sold stock at losses when they were going down. I've bought stocks when they're going up, I bought stocks when they're going down. It really doesn't have anything to do with the price action, except that what that price offers you in terms of future value. And that's what every investor has to make a decision on.
QuestionerWarren, can I ask you about another stock in this last go-round that was missing from some of the SEC files, ExxonMobil? People assume that you sold the entire stake, although I've also seen some commentary of people kind of wondering, are you buying more and kind of holding off on telling people? Can you tell us? Did you sell it all?
WarrenWe sold it all. You sold it all in the fourth quarter. And why? we thought we might have other uses for the money. ExxonMobil is a wonderful company. Its current earning power, obviously, has been diminished significantly from where it was a year ago, as is true with all oil companies. But ExxonMobil has been one of the great investments of all time.
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QuestionerBut the reason you sold it is you thought you could better deploy that in other?
WarrenI think I may have some use for the money.
QuestionerAre you talking about other stocks or a deal?
WarrenBoth.
QuestionerAll right. That's a good tease. Why don't we leave it there for right now? We'll come back and ask you a little bit more about it. And still may remain it to you. Welcome back to Squawk Box, everyone. We are live from Omaha, Nebraska this morning with a special guest, Warren Buffett. He is the chairman and CEO of Berkshire Hathaway. We've been talking with Mr. Buffett about his investments because we've just seen the SEC filings, Warren, that show you the latest purchases and sales that you've made in stocks and securities. People are very interested about that. And one new, well, not a new stock, but one that you definitely added to. to your position. I think you went from $360 million in Deer to $1.51 billion at the end of 2014. What attracted you to Deer?
WarrenWell, it's a good company, and they're going to have some tough years coming up. And in the end, we think 10 years from now that it'll be worth more money than it is now. And that stock actually was bought by one of the other managers and me. I mean, that happens to be something that we both bought.
QuestionerThat actually leads to a question from Twitter. Someone wrote in Eric Tusher, I think is how you pronounce his name. Eric Tusher wrote in, how do we know if it's you, Todd, or Ted, who's buying or selling a position? For example, Chicago Bridge and Iron, of which you own about 10%. How does anyone know?
WarrenThey don't.
QuestionerYeah.
WarrenYeah, Ted and Todd run separate portfolios. They occasionally buy the same stock themselves. They might occasionally be buying a stock that I would be buying. I don't look there are tickets every day. I do not see their orders placed or anything of the sort. At the end of the month, I get a sheet that shows their holdings and they don't change them much, nor do I change mine much. But I give them a few things that they shouldn't buy because there's some rule we might trigger or something of the sort.
QuestionerWhat do you mean?
WarrenWell, like if we were at nine, let's just take Wells Fargo or something where we're nine and a high fraction percent. I don't, we need the bank holding, we'd need the Fed's permission to go over 10. So I don't want to wake up some morning and find out I've broken some rule of the Fed. So there are occasional things like that, very few. And it's conceivable
[26:45]
Warrenwe could be working on a deal on something, and then I would not want them, obviously, to be buying stock, and they wouldn't even know about the deal. So we have a few little checks to make sure. that we don't break any rules. But by the large, I mean, they are free agents in terms of what they're doing. And in the case of John Deere, one of the managers was buying it, and I happened to be buying it. Who was the other manager buying it? Well, I don't want to tell us. No, that's up to them.
QuestionerThere was another question that came in on this. A question from Twitter again, this is Cochise, I think is the name of it. What's the major upside of Deer compared to Caterpillar at the current levels for a long-term position?
WarrenI'm not the investment advisory business. You really shouldn't ask other people their opinion about stocks. Because let's say I give an opinion on the XYZ company. I could change my mind a week from now and I won't be on the program. If somebody, you ought to have your own reasons for buying a stock. If you don't, you're going to get shaken out by some event. The stock market is going to go down a lot or you're going to read some negative comment. You should make your own judgments in stocks. We've always made our own judgments in stocks. Whacked me. Is deer, though, a long-term bet on the strength of agriculture and the need for more and more food to feed more people?
QuestionerWell, I mean, obviously people are going to eat, but you can say that about 10 other farm implement companies, too. So it's not one variable. And, again, you should make your own decisions. If you don't feel capable of making your own decisions, which is fine, you should buy an index fund. It's that simple. But you should not try and... pick up stocks from listening to me or listening to anybody else talk about this company or that company or why they bought it. They may be doing something different the next day. And if you haven't made the decision for your own reasons, you're going to be subject to somebody else saying something negative, you know, a week later. It's just, it's bad to try and pick stocks based on commentary by this person or that person, when you can do very well just buying an index fund and just forget about it. Although you do realize that people want. watch very closely what you're buying. And it's not uncommon for people to buy things simply because they've seen you move it.
[29:04]
WarrenYes, I can't help that, but I certainly don't encourage it. Yeah. Do you think that you owning shares of IBM has boosted that company right now, that it's... Well, it might be selling a little higher than otherwise, which is too bad from our standpoint, because we'd rather have to sell it lower. So you can buy more of it. We'd buy more of it. Or if the company is spending... The company spent many, many billions of dollars buying their stock. I mean, if they buy their stock at X instead of 2X, our ownership goes up dramatically more. And we don't like companies buying in their stock just because they buy in their stock. We like it when they buy in their stock below what we think it's worth. And at that point, we're making money without laying out a dollar of our own money. How much do you think IBM is worth right now? Don't ask you that either, right? Close but no cigar.
OtherWelcome back, everybody, to our annual Ask Warren Show. The questions have been pouring in for the Berkshire boss. Warren, we have a number of questions that have come in, and here's actually one from a surprise guest that came in via video. Why don't you listen in to this?
OtherWarren, in preparation for this year's meeting, I was reviewing prior year's annual reports, which reminded me of the question that's been troubling me for some time. One of the problems with GAAP accounting is that reported financial results can conflate the perception of actual performance, namely from the disparities that emanate from accrual versus cash-e. accounting. This can be particularly exacerbated in insurance results, which can be viewed either through GAAP or statutory accounting. I'm curious, Warren, how you reconcile this in looking at acquisitions or even your own insurance business.
WarrenGlenn Close, the actress, obviously no pushover has been doing her homework on some of this stuff. I just saw her a few weeks ago, but I'm glad she didn't grill me that. I I just finished in the last couple of days watching seven hours of damages. I'm entranced with it. That's fantastic. It's great. It's great. She's great. Accounting is the language of business. And you have to be as comfortable with that as you are with your own native language to really evaluate businesses. And accounting tells you a lot and it can be used in many ways to deceive. I mean, you saw it at Enron, for example. In fact, in the seven hours of damages, I'm watching one of the characters is playing around with accounting very dramatically.
[31:37]
CharlieSo maybe that's where Glenn got her experience. But you really have to understand what can be done with accounting when it gives you correct answers and when it gives you wrong answers. And particularly with insurance companies, over the years, there have been a number of insurance companies that have played games with their lost reserves. And any time you play a game with the liability account like the loss reserves, you're also playing a game with the earnings. And there have been some notorious examples of that. So my job, going back to when I was 20 years old and used to go to Lincoln, Nebraska, to look at these big convention reports and analyze Schedule P's and that sort of thing to determine whether people were giving me honest numbers, I have to know enough about the business to be able to evaluate that. And most people don't. Okay.
Becky QuickWe're going to continue this conversation in just a moment. Good morning, everybody. Welcome back to a special edition of Squawk Box. We are live in Omaha, Nebraska with Warren Buffett this morning. And Warren, we've talked about a lot of things this morning, but one of the things people look to for your annual letter is really to lay out a breakdown of the company and where things stand. You've been building bigger and bigger companies that you've been putting in. And in fact, this year's letter, you point out that you now have 490 and a half, or you now have nine and a half. You now have nine and a half of companies that if they were standalone, would be large enough to be in the S&P 500. So you said that that has... In the Fortune... In the Fortune... I'm sorry, I say this every time with S&P 500. In the Fortune 500, you point out that that leaves 490 and a half to go and that your lines are out. What does that mean?
WarrenIt means that I'm not going to be happy with nine and a half. And I hope that this year, next year, somewhere along the line, that we have more that join us. And we probably will over time. We probably will over time.
Becky QuickDo you have a specific target in mind right now?
WarrenWell, we always have something that we see swimming out there. And the question is whether it comes to our lines or not. But there's, we always see a few fish in the sea. We don't see 490 and a half of fish in the sea at any given time. But there's usually something swimming around and we'll find out if they go for our bait.
Becky QuickYou do go out of your way to point out the good news and the best.
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Questionerbad news in every report. This year you point out that Burlington, Northern, Santa Fay, disappointed many of its customers. What happened?
WarrenWell, what happened was that in terms of on-time performance, you know, our coal customers, they never ran out of coal, but they got lower in terms of what they had than they would have liked. Do they, you know, if you're running a utility and your coal bin gets down to 10 or 12 days of supply, you get very worried if there's a blackout you're going to get blamed now not the not the not the railroad so we didn't know why we made sure they got their call but but but we worried those customers in terms of in terms of fertilizer we you know you need to get that in time and and there were enormous demands and and we got it there but but there again it was a last-minute situation with many and and then in terms of the we had this huge grain harvest and and in terms of getting cars in that case there was a big shortage of of grain cars you know the farmers worried if he can't get his crop to market so so we had much more congestion more we had a slowdown of the trains other people experienced this too but but but ours was ours was particularly severe all the Canadian Pacific had plenty of problems too and we a fortune we spent more money in 2014 than any railroad is spent to my knowledge trying to solve problems and we're spending even a lot more money this year and that means double tracking and doing various things but you can't double track 60 miles you know overnight and the very act of improving service sometimes slows it down because you're working on the track but it's our job to foresee that sort of thing we've got the money to do things and it's it's our job to have satisfied customers and the metrics of the last three months have been significantly better in in terms of on-time performance and and reduction of backlogs and all of that sort of thing
Questioneryeah but I wanted to get even better Warren
OtherI know Joe has a question as well
Joe KernenJoe a Joe a warren I can't believe it's been a year since since last time we talked about something and and I don't know whether you found out a way to slow time down as we get older for me it's I don't know know is it because it's 159th of my life or something? Huh? Can you figure out a way? Anyway, you're very wise and I'm not sucking up to you. You're very sage. Do you remember a year ago ago you said that the insurance business hadn't seen any adverse effect of climate change in the
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Questionerpast five years and that you didn't expect any adverse effect over the next five years. Do you remember saying that?
WarrenWell, I certainly remember saying something like that, sure. I've said it, you know,
Joe KernenAll right. Just summarizing the year, and I'm just, I love the way you go with your hands like this after that hurricane season from about 10 years ago. 2014, there were only eight named storms in the Atlantic. That's the fewest since 1997. Only one major hurricane made landfall, and that was the first one, Hurricane Arthur, and it was a two. So in terms of your property casualty results with hurricanes last year, you absolutely cleaned up, didn't you?
WarrenWell, we didn't write that much last year because the rates had come down a lot. It's been remarkably benign, particularly in Florida. I mean, in the United States, you think of Florida first, then you think of Texas, but Florida is the big cahuna. And Florida has gone a number of years now without any severe hurricane. So the rates have come down a lot. So we did not write a lot of cat business in the United States. Now, we wrote a fair amount of cat business around the world. New Zealand had some big quakes a couple of years ago, and so there was a lot of demand there, and Thailand had the floods a few years back. And so we wrote more around the world than we did in the United States. And we're not writing much this year. The rates are way down this year.
Joe KernenAre you at least amused or be mused or thankful to climate alarmists that keep your PNC rates high? This is the biggest problem facing humanity. Are you seeing anything to validate that in terms of insurance claims over in the past five years of the next five?
WarrenNo. But I would say this. There was a category five over in Queensland just in the last couple of weeks. And we had some insurance over there, but it's nothing huge. But you know what I'm saying. You know what I'm saying. You must, at times you must listen to what you hear in the mainstream media and think. I think this is just really amazing. But, you know, what is...
Joe KernenNo, I listen to you. I listen to you. I listened to you, Joe. Thank you. You have been telling me I'm not going to have a problem and I haven't had a problem, so thanks. Thanks. Well, that's bad because I was listening to you to get where I got my info. So that sounds a little bit circular. But anyway, thank you. And let's take a quick look at Crude. Crude is at 4878. I don't know, Quickey. You know, Warren wouldn't say,
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Questioneryou know, he had 490 companies or how many he could have sold to raise money for an acquisition. Didn't have to be Exxon. Does he think it's staying at 48? I mean, he's got, he could have raised money anywhere. Why Exxon? Does he think that oil is staying down here?
WarrenWe're not, we're not running a stock advisory service at Berkshire. Exxon's an wonderful company. But you got to have an opinion on whether oil is going to be down here. here for a while. I would think if you sold your entire stake of Exxon that you wouldn't be that positive about crude. I've been a very, very long time since I think back in the 90s when crude crude got down to $12 or something, we actually bought some. But commodities are something that I think in 50 years I can't remember more than two or three trades in those. I have no opinion as to what oil is going to be months from now. I mean, the forward curve is, I think the $48 spot can contrast with $61 or $2 12 months out. And do I have a better insight into where it should be than the market? The answer is no.
QuestionerSo why did you buy Exxomobil to begin with?
WarrenI thought it was attractive. And I still think it's attractive for a 10-year deal, but I think there's other things I would rather be buying.
QuestionerWarren, let's talk a little bit more about Berkshire Hathaway and Succession, because again, this is one of the huge kind of questions and conundrums that people have been following Berkshire for a long time still look. And you gave more hints in your annual letter this time than you ever have before. You pointed out that there is one person in mind that the board is looking at to be the next CEO of Berkshire Hathaway. Charlie himself, and what he wrote that was included in this letter, talked about a job. Jeet Jane and Greg Abel. Obviously, Ajit Jane from the insurance companies, Greg Abel from Berkshire Hathaway Energy. The headlines that are getting picked up today include this story from the Wall Street Journal again, Buffett's successor, a Jane and Abel story. How, in the past, the reason that you had not named a successor is because you didn't want a horse race. How does this not create a horse race?
WarrenThey're not a horse race. And that story comes from Charlie saying that those two are world class, which they absolutely are. In fact, he said describing it was world class was probably an understatement and world leader. I would totally agree with that. Either one of those
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Warrenmen could run just about any company you could name. Wouldn't just be Berkshire. I mean, they are incredible managers, and we are lucky to have them. And as Charlie said in his letter, and he wrote his letter without me seeing it. I mean, that that was our deal ahead of time that we would not edit the other guy's letter. But he said in that letter that, you know, that not only were they world class, but they weren't going to ever go anyplace. And I believe that too. They love Berkshire and Berkshire loves them. And we are very lucky to have those two. You know, you criticize some of Burlington Northern, just how they've had a tough time with weather, with trying to keep up with demand and other things. Matt Rose has been listed as a potential candidate to run as the next CEO of Berkshire, too. Does this mean he's out of the race? Out of the run? No, no. And we've had tough years in insurance. If you go back and read 50 years of the annual report, we've had, we've had tough years in insurance. We've had tough years in other businesses. I mean, that happens in business, and it particularly happens in a business that's really an outdoor sport. I mean, the biggest thing that I really worry about with the railroad is floods. We can have floods that there's nothing we can do about it. And unfortunately, they tended to build railroads along riverbeds. It was a very logical place to build up. We have we have something like 13,000 bridges. I mean, can you imagine that? So there are things that can happen with a railroad. You can't expect that everything is going to work right all the time. But over the years both in terms of safety and in terms of derailments, in terms of all kinds of factors, the railroads have run better and better. And that's the case. But last year, you know, we had too many trains that didn't come in on time. Andrew has a question as well. Andrew.
Andrew Ross SorkinHey, Warren, on BNSF, just because in the letter you did seem to be so disappointed, what do you think the screw-up was, was it avoidable? And secondarily, given all the cash and capital you're going to expend, is there a way to measure what kind of return you're going to get on that capital?
WarrenWell, we have to spend the capital whether we get a return or not, because we've got an obligation on service. The history would be that we will get decent returns. The railroad business is a good business. It wasn't for a long time. It's kind of like the Chicago Cubs. It had a bad century. But then it's really
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Greg Abelimproved dramatically since the Stagger's Act 30 years ago, by every measurement. And it's a very decent business. It's very capital intensive. But, you know, obviously, if you had your entire system double-tracked, you'd have a whole lot fewer problems that were single-tracked. And there are all kinds of other variables. So the big thing, I think, over the next 10 years, that's going to be a real problem for the whole industry is Chicago, because the rail system, you know, was designed 100 or 150 years ago. It gets modified all the time. But Chicago was where everything went. And things got switched there. I think 40% or so of the interchange takes place in Chicago between the east and the west. So as the city grows, I mean, you just run into real problems and they're expensive to fix. And in the case of something like that, it takes a lot of coordination among all the railroads that go in there and city and county and you name it. But to have the kind of railroad system we want to have 20, 30, 40 years from now, we will have to do some big expensive things. Chicago. Wow.
QuestionerYou know, Warren, another thing we should bring up are the two of the managers who you also talked about, Todd and Ted, Todd Combs and Ted Leshler, obviously the investment gurus, who have been doing a lot of the investing. There's a question that came up from Twitter, and this is from Jim Ladd. He asks, are Ted and Todd value investors in the same sense that you consider yourself to be? And if not, how do they differ?
WarrenYeah, well, they're value investors. Anybody who I always say, if you aren't investing for value, what are you investing for? Yeah, and the idea that value and growth are two different things makes no sense. I mean, growth is part of the value equation at a company that grows and uses little capital in doing, gets high returns on incremental capital, is obviously worth more money than one that doesn't grow. That doesn't make the one that doesn't grow valueless, though. So they have a very similar approach to investing that than Charlie and I do, but it's not identical. But essentially, they are trying to figure out what a bit of business. business is going to look at, look like five, 10, or 20 years now. If you were buying a farm, you try and figure out what the farm is going to produce five or 10 or 20 years from now. If you buy an apartment house, you're trying to think, was this apartment house going to produce
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Warrenfive or 10 or 20 years from now? That's what we do with stocks. They're just pieces of businesses. If we're right about the business, we're right about the stock. And so they are doing the same thing. They're looking at whatever company they're looking at and they're trying to figure out where that company is going to be five or 10 years from now. And many companies, they will say, I can't figure it out, which is exactly what Charlie and I say. But you don't have to figure every company out. You just have to figure out a few companies. And they're doing the same thing.
QuestionerTodd and Ted came here because they wanted to learn from you. But are there things that you've learned from them too?
WarrenOh, sure. And as I mentioned in the annual report, we bought two smaller companies in the last few months. And I made each one chairman of one of them. And because you learned something from actually running a business interacting with people. I mean, people are part of a business. And the better you understand human nature and are able to distinguish between different types of individuals, the better the investor you're going to be. So, no, it's all worked out very well. We have lunch once a week and they tell me some things. And, you know, I talk about some of what's going on with me. And we're running all the time.
OtherOkay. We'll continue this conversation in just a moment. Welcome back, everybody. We are live in Omaha. where we are speaking with Warren Buffett, the chairman and CEO of Berkshire Hathaway. We've been talking about some of Berkshire's ownership stakes in different securities. And, Warren, one of the things we haven't gotten a chance to talk to you about is American Express. It's been in the headlines recently because of the fact that it lost the exclusive deal with Costco. Right. What did you think of that?
WarrenWell, obviously Costco and American Express, who have been linked up for well over 10 years, you know, each, in terms of negotiating an extension of a contract that runs out March 31st of 2016, that American Express made their best offer, and Costco thought they could do better elsewhere. I mean, it's simply a question of where the bid and the ass didn't cross. The question on the street, though, has been that a lot of people didn't understand just how important that relationship was to American Express. There have been some people who have even said that the company wasn't completely.
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Questionerstraightforward in that relationship. Would you agree with that?
WarrenNo, I've always, no, and I just read the public material, but it, the Costco relationship, obviously you knew it was an exclusive. Anybody shopped at Costco could not use another credit card. They could use a debit card, I guess. But clearly, if you have a retailer with the size and scope of Costco, and you've got the exclusive credit card, you know, you know that's a very important relationship. And of course, that co-branded card. gets used outside of Costco as well. In fact, a majority of the volume comes from outside of Costco. But Costco did not renew in Canada on December 31st of 2014. So it was already the knowledge that it was out there that at least in Canada, that they had not come to terms. And now it's become apparent that they have not come to terms in the U.S. And your stake in American Express actually increased, but it was because the company was buying back It increases. We have an arrangement. We, American Express has become a bank holding company since we originally bought our stock. We're over 10%. We can't buy another share without the Federal Reserve approving. But because American Express buys in its own stock, our percentage interest has gone up, and we love it. I'm just, they're getting very close to a billion shares outstanding, and that'll make my math very easily then. When they get to a billion shares, we'll own 15.2%. I think it is. So you have about $12.5 billion. And American Expressers? Well, we have 150 million shares. We have about $12.5 billion, yeah, market.
QuestionerGuys, I know there was a question from back in the studio. Yeah, Warren, I just wanted to ask on Amec, specifically, there has been this antitrust lawsuit, which American Express just lost. Some people believe over time it's going to erode the margins of the company, given that they're going going to have to compete more on price with potentially Visa and MasterCard. Did you agree with this, with the decision? Do you think they'll win it on a price? and what do you think the implications are to the business?
WarrenWell, if you ask me, I do think they'll win on appeal, but they also have a period of time when they can suggest a remedy to the court, and if the court accepted that, and I guess the Justice Department probably would have to, too. So there's a possibility still of a negotiated settlement at the trial court level, and I think if they don't get that, there'll be an appeal, and that
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Warrenthat will probably take a couple of years. But I've read some of the material in connection with the case, and I think that, I think American Express has a very, a very strong position. Actually, I think in a sense, losing the Costco account might even further strengthen that position.
Becky QuickYou know, Warren, let's run through some of the biggest holdings. You point out in your annual letter, again, that the four bigst holdings are Wells Fargo, Coca-Cola, American Express, and IBM. Those are the four horsemen. That's not what you call them. What do you call them?
WarrenThe four giants. Yeah, but the fabulous four, I think. And our, we own it through warrants, but the Bank of America, we actually have a similar investment in.
Becky QuickWell, that's what I wanted to talk to you about. You laid out that Bank of America would be your, was it your second or third largest?
WarrenWell, it depends on the day, but it, right now, we have a warrant to buy 700 million shares at a little over or $7 a share. And we can exercise that using our preferred stock if we want to. So, I don't know whether, what's it, 16 or 17, so you're talking $11 or $12 billion worth of stock. That you pay about $5 billion for.
Becky QuickExactly. But we're not obligated to exercise the warrant for some years. And in the meantime, we get 6% on the preferred, which we might use as the medium of exchange in order to exercise the warrant. So, but you're by all guesses, you're going to exercise.
WarrenYeah, exactly. I think the odds are very, very high well exercise. I think that's something that people forget, that that that is equally up there. It's up there. It's up there. Yeah, our share of the earnings of, of, of, I mean, we get, we get the 6% on our, on our 5 billion of preferred, so we're getting 300 million a year there of dividends, but we have an interest in the undistributed earnings of Bank America common, and that's building value for us.
Becky QuickOkay. We're going to continue this conversation with Warren Buffett in just a moment. Welcome back to a special edition of Squackbox. We are live in Omaha, Nebraska, with Warren Buffett, the chairman and CEO of Berkshire Hathaway. Warren, we've talked about a lot of things this morning, but what we generally hit you up for first and what we haven't gotten to yet, even though we've been here for an hour and a half this morning, is what you think about what's happening in the economy right now. You have incredible access to all kinds of statistics
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Becky Quickand numbers and figures that other people don't. How do you see things?
WarrenIt's really interesting, Becky, because I've said this every time I've come on virtually that since the fall of 2009, the economies just kept coming back at a moderate pace. And people occasionally get very excited and they think it's going to spurt much faster. Sometimes they get worried and say it's going to be a double-dip. I've been listening to all of that now. It's five and a half years. And it just keeps... improving at a modest pace. And we see it in virtually all of our businesses. If you take our 20 largest earners last year, those top five and then the next 15, I think 17 of the 20 had improved earnings. And it looks to me like most of them will have improved earnings. I don't know if something could come out of the blue and change that. But it's it's consistently gotten better. And compared to the rest of the world, I mean, we're doing very well. And incidentally, 2%, even 2% real growth is not at all bad. I mean, if you think about it, if population grows 1%, and you have real growth of 2%, that's 20% in a generation. 20%. The average household income now is, you know, $125,000. 20% is another 25,000 in real terms of household income now. We won't get divided equally. But that's fantastic. And And we have a terrific economy. Right here in Nebraska, I think unemployment's 2.9%. Our businesses are doing well. Some are doing better than other. Housing has come back at a slower rate than I would have anticipated. Autos that came back at a faster rate than I would have anticipated.
Becky Quick2% growth, though, isn't great when you consider what we've been able to do in this country for some time. Productivity gains are down. And I just wonder, have you been surprised that we haven't grown at a faster clip?
WarrenAnd not really. And when you say 2%? percent growth isn't so great. I know what you're saying, but in my lifetime, it's been six for one. Now, can you imagine six for one for some baby born now that lives 84 years? I mean, the numbers are incredible, but at 2%, it'll be, for a baby born today, it'll double in their lifetime. And that is not bad. But even when you start from where we're starting.
Becky QuickBut do you think 2% is just the way it's going to be in the United States?
WarrenOh, I don't know that, but I would be surprised if it's less over time. No, I think it'll probably be better. But our economic machine really works.
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WarrenI mean, it's worked, you know, since 1776, and it's worked throughout my lifetime. We've had depressions and world wars and we had civil wars in this country. We've had panic after panic. We had recessions after World War II. But just look at where we are now compared to where we were at any milestone you want to pick in the past. As you mentioned, though, those gains will not be distributed equally.
QuestionerThere's a question that came in from Twitter from Zarelli that says, Yellen remarked that the greatest risk to the U.S. is income inequality. How would you combat this ever-increasing problem?
WarrenI would change the earned income tax credit big time. I think that the nature of a market system and a highly developed market system is such that that results become less equal over time. If you go back 200 years and you had an agrarian society, You had the best person in town, in terms of ability, and the worst person, and they both could work on the farm, and the best one would do somewhat better in terms of productivity than the worst, but both had jobs, and there was not a great disparity. And then you went on to Henry Ford's assembly line, and ability differentiation became greater. But in this world, we've got 20% of the population, the bottom quintile, 25 million households, and their top income is the low. over 21,000. And that's happening in a world where the average household is 125,000 or so. So that isn't because anybody's evil or anything of the sort. It just means that as the economy becomes more specialized, the rewards go more and more at the top, and more and more people get left behind. And education will not solve it. It will help. But the earned income tax credit, I think it's much better than the minimum wage. The minimum wage distorts the market too much. But the earned income tax credit is how a very rich. family takes care of those who didn't have the wiring to really participate in this economy.
QuestionerYou know, I've talked to economists, progressive economists, who would say that, sure, we're happy with the earned income tax credit. We'd like to see that, but we think it should be done in combination with a higher minimum wage. What's wrong with that argument? And you say it distorts the market. You think it does damage to actually push higher minimum wages?
WarrenWell, it obviously does at some point. Otherwise, we just increase the minimum wage to $20. We could afford that on a national wide basis, but we'd have a whole lot of people that wouldn't have a job.
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WarrenMarkets are very effective deployers of resources, but a more specialized market deploys those resources a whole lot more than a totally agrarian, you know, where you didn't have any tractors, you didn't have any combines. I just had human labor. That's a whole different game than we have now. And we get more and more specialized. But I don't quarrel with a change in in the minimum wage, but I don't really think that's the answer. And I think it does result in less employment if you kick it a whole lot. We've seen some companies, though, kind of taking it on themselves. Etna, Walmart, other companies that have said we're raising our employees' wages on our own. That's the market doing it itself. That's the market. That's the market.
QuestionerYeah. And I think Walmart obviously made a good decision for Walmart. They wouldn't have made it otherwise.
Warrenup, I just think that if you set them at a given level, I mean, if you set them at 20 bucks, you're going to have a whole lot of people unemployed. But you can achieve something similar to that through the earned income tax credit to give people whose talents don't really, they're not valued that high in a market economy, but they're doing useful things. It's just not high value stuff. They're good citizens. You want them feeling part of the system. You want them contributing. And as long as they work, earned income tax credit can can give them a better life than they have now without messing up the market system.
OtherLet's get back to Becky and Warren Buffett in Omaha. I want to bet you 50 years when I worry about this. This is one of my things, Becky, how quickly time is passing. I'll bet Warren remembers 1965 like it was yesterday. Warren?
WarrenYeah, it moves fast. The good news is that you can have just as much fun at 84 as you were having at 24 or 34. And Charlie's 91. I mean, he's my canary in the coal mine, and he's doing fine.
Becky QuickI was thinking about that. Yeah, exactly. Yeah, because I think you're 25 years older, Warren, and I was thinking, hey, if I can be, you know, I'm not going to be rich, but I think we're rich in just, you know, being healthy and living long lives, Warren. So that's what we're sure.
WarrenYou get to watch your kids grow up, and then you get to watch your grandkids and everything else. So it's all good. I'm trying to take a positive view. And if you live long enough, you get to watch the Cubs win the pennant.
[1:01:44]
Becky QuickYeah, Warren, let's talk a little bit about dividends at Berkshire Hathaway. Back in 2011 at the annual meeting, I asked a question that a shareholder had written in about dividends. And your response at that time was, I think the day Berkshire declares a dividend is the day when the stock goes down as it should. This time around in the annual shareholder letter, you wrote a slightly different take. You said that you think sometime in the next 10 to 20 years, there will come a deal. when Berkshire has more cash than it can adequately figure out how to properly invest to make a better return on it. So as a result, you think that the board of directors could very well be trying to determine in 10 to 20 years whether they should pay a dividend or buy back more shares. How did you change so drastically on the idea of a dividend? Or is this just giving permission to a future board and future CEO to someday say it's okay to pay a dividend?
WarrenWell, the numbers just keep building, Becky. And I mean, I think I always would have said, is it going to do it? Someday the answer is yes, I mean, just because of compounding numbers. And there's nothing magical about the 10 to 20, but when I was writing that section, it just seemed to me that that, you know, I can kind of project in my mind how much cash will have coming in that 10 to 20 year period. And it would seem to me it would get very difficult to deploy it all intelligently in the business. And then you have a decision to make between dividends and repurchases or both. And to me, that decision is very simple. I mean, if you can repurchase your shares for below what they're worth, you're doing the shareholders are going out a favor and you're doing the shareholders who are saying in a favor and nobody's getting cash that they don't want. So I would hope at that time that huge repurchases might make sense. But that would all depend on the price of the stock versus its intrinsic value. I guess it's a tax-free transaction. for the shareholders who don't want the cash going back out. And they enhance their interest in the company, and they do it at a modestly bargain price. I mean, it's a wonderful equation.
Becky QuickLet me ask you this, because I can't figure out exactly what I think about this, but it's been something I've been kicking around. If you think that in the next 10 to 20 years, Berkshire will have so much cash that it won't be able
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Questionerto deploy it properly to use it all. To use it all, does it still make sense for the insurance companies to be part of Berkshire? because obviously the insurance companies have done very well. You've been very smart about where you've written policies. But I think one of the biggest advantages to having the insurance companies is it creates this massive float. You can take the money now, invest it wisely, and even if you have to pay out those returns, two years, five years, 10 years, 20 years down the road, you have made up more money because you've invested it smartly. Sure. If you have more cash than you can figure out how to invest it, does it still make sense to have the insurance companies?
WarrenOh, yeah, the floats still worth something. So, I mean, if you can get an extra dollar afloat, even when you're paying out dividends or repurchasing shares, it still has value. It doesn't have as much value as obviously if you can't use it all in things that are intelligent other than paying dividends or repurchasing shares. It's not quite as attractive as it has been for us over the years. But cost-free float is always valuable.
QuestionerDoes it change the nature of the insurance business and some of the contracts that you write? because Ajit Jane has come up with some really clever ways, new business lines that nobody else thinks of. Some of those, though, are taking some big bets over a long period of time. Does it change that inherently, or does that business stand on its own and never want to?
WarrenThat business stands on its own. Anytime we can do something we think is mathematically intelligent, we've got the resources to do anything, which leaves most companies behind in that respect. So we can take on anything. And then the question is, does the math make sense? And we'll always, that's the way we'll evaluate things forever. But we won't always have an achieve who can think of through as well as he can.
QuestionerRight. You say that when you look out 10 to 20 years, you can see in your mind how much money Berkshire will have coming. Right. What's the ballpark figure?
WarrenBig. And, but I've always, you know, I've always had numbers in my mind. When I was in grade school, before I learned, learned about launderisms and that sort of thing, I would still do little compound tables of my own.
QuestionerAll right, Warren, we're going to continue this conversation in just a moment. We have a lot more to get to.
[1:06:19]
OtherWelcome back, everybody. We've had a lot of questions for Warren Buffett today. In fact, we asked viewers to submit video questions as well. Here's one right now from a familiar face. Cleveland Cavalier, LeBron James.
QuestionerWell, actually, I have two questions that I would like to ask Warren Buffett. My first question would be, um, Yeah, what should I invest in next? Can I have some tips? And my second question will be, I'm not doing too well with the profession I'm in right now. Can you teach me how to play a little basketball, please? Those would be my two questions to Warren Buffett.
OtherWarren?
WarrenFirst one was what should invest in now? Right. I think somebody like LeBron, and we've talked about it, but I think, I think,
OtherYou and LeBron have talked about it?
WarrenOccasionally. I think actually, through the rest of his career, and beyond, in terms of earning power then, just making monthly investments in the low-cost index fund makes a lot of sense. I think that somebody's position ought to have a significant cash reserve, whatever makes them comfortable. And then beyond that, owning a piece of America, a diversified piece, bought over time, held for 30 or 40 years, it's bound to do well. And the income will go up over the years, and there's really nothing to worry about.
OtherYou think he's listened to you on that?
WarrenWell, I'll have to ask him.
OtherHis second question.
WarrenI would say this, athletes generally tend to get promoted by people with restaurants or real estate. I mean, everybody's got an idea for him. And usually the simplest is the best.
OtherWhat does that mean?
WarrenI mean something like just owning the United States. States, you know, at a decent average price bought over time, you really can't go wrong with that. Now, somebody else will end up doing better with this or that, but somebody will end up doing a lot worse with this or that, too. And their expertise is making a lot of money, doing something they do extremely well, but they aren't going to generally be able to take the time to become a professional investor, too. And so it's the same advice I give 99% of people. Buy an index fund. and doing it over time and starting early, starting young in life. And nobody's ever followed that and gotten other than a decent result. Nobody.
OtherAll right. Warren will continue this conversation. Joe, we'll send it back to you right now.
Joe KernenI missed the second question, though.
OtherOh, I'm sorry, the second question.
[1:08:57]
QuestionerWait, wait, wait, wait, wait. Time out. Let me take it back. Second question was what? If he's not doing so well in his current career, what would you tell him to do?
WarrenNo, no, no. No, no. No, no. He's doing fine. present career and he wants what oh he wants advice on how to play basketball yeah well we we went one-on-one for considerable period and his game picked up a lot after that actually I'm kidding kids that we went up for a jump ball one time and and he got it went the length of the of the of the court dunked it and just then I was starting to jump so he does not have much to learn from me
Becky Quickwelcome back to Squackbox everyone it is ask Warren day with Warren Buffett we're coming to you live for Omaha, Nebraska. It's time to start talking politics this morning, Warren. There was a story out today suggesting that Hillary Clinton could announce her run for the presidency as early as next month. We did have a question that came in on Twitter from Zarelli saying, oh, nope, wrong page, sorry, this one came in from the panic. Would you still bet money that Hillary Clinton will run and win in 2016? And obviously that's referencing something you said at Fortune's most powerful women's conference back in October.
WarrenYeah, I bet money on both those. And I don't know whether in trade has started there. calculations yet, but maybe as time goes along, you'll be able to actually bet money. The odds may be up on that. But I sure, she's a, things could always happen in politics, including illnesses or something of the sort, but she's extremely likely to be the Democratic nominee, and I think she's very likely to be the president of the United States.
Becky QuickGuys, back in the studio, I'm not sure if you guys wanted to play in on this one.
OtherI've heard before, I, you know, I've heard.
OtherYeah, hot potato. Yeah, no, no, no. I thought of a couple of ways of approaching it, I guess. I know how Warren feels about this. You know, we've had him on, I think, eight years ago. You were saying the same thing that you wouldn't, no, I wasn't eight now. I'm already, I'm jumping the gun to 2016, but it was six Warren, and you didn't care. You thought either President Obama or Hillary Clinton would be great nominees for the Democratic Party, and, you know, you were positive on the prospects for both as president. If you had to pick, let's just say that, you know, that I can promise you IBM would be at 1,000 by the end of next year.
[1:11:20]
QuestionerIf you were to pick a Republican to run, are there any of them that are less, I don't know, less distasteful to you than others? Who do you think they should run?
WarrenOh, I think well of a number of Republicans. And I vote for Republicans. I've contributed to Republicans in the last few years. Yeah, I can think of certain Republican candidates that I would vote for in preference to certain Democratic candidates, but I'm not going to give you names. But I, but that is the case. I mean, if you, there are a couple of Democrats that if they were the nominees, I would, I would end up voting for the Republican, probably, depending who the Republican was.
QuestionerIf Elizabeth Warren were the nominee, would you vote for a kid, three?
WarrenWe're not getting specific, Joe. Ted Cruz? We're not going to get out the, don't get out the phone book. But I'm just telling you, I am not a card-carrying Democrat. I vote Democrat most of the time, and I agree with, I agree with their position on social matters to a very significant degree. And, but I'm not a straight-down-the-road Democrat.
QuestionerWarren, what do you make of Elizabeth Warren, and especially her views of Wall Street?
WarrenWell, I think that she would do better if she was less angry and demonized less. I mean, I believe in hate the sin and love the sinner. And I also believe in praising by name and criticizing by category. And I'm not sure that I've totally convinced Elizabeth Warren that that's the way to go. Speaking of criticizing by category. Oh, go ahead. I know, I know, I know. Don't pick her out of it. There's plenty of other candidates that their styles are not 100% my style. But I do think it's a mistake to get angry with people to disagree with you. I mean, in the end, we do have to work together. I mean, I think the whole nature of governing is, particularly when you've got divided government like we have now, is that you'll end up with bills that each side doesn't like, but they like it better than, than doing nothing. I mean, that's, that's the way government has to function. And, and it does not help when you demonized or get too violent with the people you're talking to. Orrin Hatch talks about how he had this great relationship with Ted Kennedy. Well, they certainly didn't agree on many things, but they got some things done. And I tip my hat to both of them. And incidentally, I think there's a reasonable chance of a corporate tax.
[1:14:17]
Questionerchange because I think that Orrin Hatch and Ron Wyden are two people who, if they do it in private, can forge something that, again, neither one of them likes, but they like it better than the present system. And that's what's going to have to happen in government.
Andrew Ross SorkinWarren, you say that you like to criticize by category, not by name.
WarrenRight. You certainly did a lot of that in the annual shareholder letter this year. You took on investment bankers, conglomerates, you took on private equity and a lot more. And we're going to talk about some of those names in just a moment when we come back because we're not shy on a lot of these categories. I'm not shy in my views on them.
Andrew Ross SorkinNo, there's plenty to criticize, but I don't name names. Okay. Andrew, we'll send it back to you and we'll have more on this in just a moment.
QuestionerJust before he goes, about having fun. We're getting a lot of comments on that at 84. Can you Give us an idea of that, too. Are you talking about playing bridge or what other things? What, what, uh, can you just, golf? What, what is it?
WarrenI, I probably play bridge 10 hours a week, but, but that just depends what games you like. But I also, I watched. Grimco. Across the board, I mean, you're doing everything you were doing at 24. I mean, well, I'm doing every, all my daytime activities are similar. The, uh, I would say, I was having a lot of fun at 24 or 34, or 44, but, but at 84, I will tell you, if you're working with people you love, at a job you love, it doesn't get any better than that.
QuestionerOkay, Warren Buffett, don't let him take you there. You know where he's trying to go. We're coming back in just a moment with a lot more of Warren Buffett still to come. We are spending the morning with Warren Buffett. We've been talking about his letter to shareholders, which was released this weekend. And Andrew, as you pointed out, it was a lot of reading, a lot of people going through of all this.
Andrew Ross SorkinWarren, one of the things that kind of jumped out at us, as we were going through it, is that you really didn't hold back. This was no holds barred in terms of your opinions and everybody on Wall Street got scathed in one way or another. Let's talk about a couple of things of what you said. First of all, you said, conglomerates, it should be acknowledged, have a terrible reputation with investors, and they richly deserve it.
WarrenAbsolutely. What's wrong with conglomerates? Because, by the way, Berkshire Hathaway is a conglom.
[1:16:39]
WarrenYeah, and there's nothing wrong with the structure. It's just that they were, they were this, been the source of enormous abuse, including all kinds of accounting manipulations over the years. And they lent themselves to that. And actually, the worst period was in the late 60s. It actually contributed into me winding up my partnership, by the Buffett partnership, because there were, it was just a feast of accounting manipulation and promotion. And I didn't want to engage in it. But I also didn't. And I didn't like having lousy figures against people who were just basically playing games with the numbers. So, but the conglomerate form for us is perfect. I mean, we can move capital, which capitalism is all about is, is intelligently deploying capital and withdrawing capital and withdrawing it from places where the return is not prospectively good and moving it to where it's better. And we can do that without taxes and very seamlessly and in a way that doesn't upset. people. So we have a good form, but that form has been abused in the past. That form has been abused in the past.
QuestionerDo you see excesses like that taking place in the marketplace right now? There are accounting fraud, I should say, accounting games.
WarrenThere almost always are accounting games going on in business. Now, there's huge peaks and valleys of that. And generally speaking, as the market advances, the accounting gets looser. I mean, that's a big generalization. But But that has been true over the years. And people push accounting rules. And in the past, too often, their auditors helped them. I mean, I have sat in board meetings when a company has been acquired and heard the auditors, outside auditors, explain ways that purchase price accounting can be used to goose the earnings in subsequent years. And that was regarded as, it's regarded as they thought that was their job. A lot of that has been improved and in fact, I've been on audit committees where I've tried to improve it. But accounting, it's just very tempting. I mean, you're putting out little numbers that people capitalize and create billions and billions of dollars of value off of them. And any company that consistently projects out earnings quarter by quarter and always beats them by a penny, I will guarantee you that almost guarantee you that there's of games going on.
Andrew Ross SorkinAndrew, I believe you have some breaking news right now.
Andrew Ross SorkinYes, Becky, a little bit of breaking news actually relates to Warren Buffett to some degree.
[1:19:27]
Becky QuickCostco, which as you know last week or two weeks ago, announced that it was going to be ending its relationship with American Express, has just announced that it has now signed a deal with Citigroup and Visa to do a co-branded credit card. That's what will effectively replace the American Express card. Of course, American Express, a company that Warren Buffett owns a stake in which we just talked about last hour. But that is the news. This deal goes into effect April 1, 2016. So we're still about a years away from that. And I would toss it back to both of you, but also ask Warren, if you have views about this deal. I imagine we knew some kind of deal like this would be coming.
WarrenWell, yeah, somebody was going to get the bid. And American Express learned a week or two ago that they were not the one that was going to get it. I don't know the terms. of the New Deal. But I don't think City will get rich off of it.
Becky QuickWhy, you think there wasn't much margin to begin with on the bill?
WarrenThat would be my guess. But I thought with Costco it wasn't necessarily the margin that was helping as much as the business. You'd get these customers who come in and they use those cards in other places. I'm counting all of that. The business you get outside of Costco and everything. I mean, the co-branded cards, cards, and this isn't just true of Costco, the airlines are renewed, and the co-branded cards become quite a competitive business. It's much better to have your own, your own proprietary card is worth a whole lot more than a co-branded card.
Becky QuickOkay. Let's get back to some of the insults that you handed out in the annual letter. I don't go. Commentary. Commentary that I know you look at as teaching people, but let's talk about some of these things. Sure. You say when it comes to private equity. Here's a quote from it. In truth, equity is a dirty word for many private equity buyers. What they love is debt. You go on to say that equity is dramatically reduced and debt is piled on in virtually all private equity purchases. Right.
WarrenAs a matter of fact, private equity is grumbling to some extent about the fact that the Fed has sort of said six times is what the banks, it's okay to lend. Six times leverage. And private equity would like to. private equity would like to see it higher. They want to borrow every dime they can. In most cases, there's some exceptions to that. But, and that's why they called themselves leveraged buyout operations originally.
[1:21:57]
WarrenAnd that's what they did. They do. They do leveraged buyouts. And that got a dirty name, particularly after RJR. And so they changed the name, but they didn't change the activity. And I don't blame them. I mean, if you can get all the money from somebody else and you get, you get the upside and if they get the downside, they get the downside, to a great degree. There's nothing un-American about that. But that is what it is. And if you're selling your firm to a private equity firm, you can expect it to be loaded with debt. The equity will go down. It will become less of an equity-rich company after the deal. And like I said, there's nothing un-American about that. It's just not the way we operate. And it's not the way some sellers want their companies to operate after they sell. And when they don't, then we're the logical guys. However, you've done deals with 3G in Georgia Hollow. Right. And they like to leverage up. And they're very good of running businesses and we're delighted to be their partners. It's not what we would do in buying businesses. So those, but we are partner with them and they are exceptionally good operators. I feel fine about the debt. I've actually bought a little debt personally of some of the ones that they've done. But they like leverage. And they can pay more because they like leverage than we could pay on an all equity basis. So what's your point in the letter that it's a bad practice unless you're really good at it? I'm saying that it's a different practice than some companies want to have for their businesses. And so we get people come who do not want their companies loaded up with that. But there's nothing improper about loading something up with that. It's just it's one of several forms of selling out. And to anybody that doesn't want their the company hock to the gills that they sell to us. So it's a big ad for why to sell to Berkshire, right? It's an ad why people who don't like a lot of debt should sell the Berkshire. If you want to get the best price, particularly when money is this cheap, you'll probably get it by auctioning it off to somebody who's going to borrow as much as they can. There's nothing wrong with that. But if they don't want that, we're a good place to call. Let's talk about what you had to say about investment bankers. One of the companies. One of the you made is that investment bankers, being paid as they are for action, constantly urge
[1:24:22]
WarrenNo, you rarely listen to their opinions. I mean, they are in the business of selling companies, and therefore they see the virtues in people buying them and selling them. And that is, I mean, they're very smart. people, and sometimes they can contribute in a helpful way on, but, but they like having, they like having transactions. And, you know, again, there's nothing evil about it, but you just better be aware of it. I mean, if you're, if you're, if you're, if you're, if you go to a dentist and he only gets paid by the number of teeth that he removes, well, then you better start thinking a little bit, make a few judgments of your own about which teeth you want to keep.
Becky QuickOkay, we'll continue this conversation in just a moment. Everybody, we are live with Warren Buffett this morning. We've been talking about a lot of things, but also talking about some of the major investments for Berkshire Hathaway. One of those stocks, Warren, that you do own a big chunk in. I think $5 billion we were just talking about this is Walmart. We and the Walton family control the company.
WarrenYeah. I'm not sure they look at it the same way. Charlie Munger, in what he wrote in the letter this year, pointed out that all Almost all huge errors that he's talking about, errors of Berkshire Hathaway, were in not making a purchase, including not purchasing Walmart stock that was sure to work out enormously well. Berkshire's net worth would now be at least $50 billion higher if it had seized several opportunities. It was not quite smart enough to recognize as virtually sure things.
Becky QuickWhen did you and Charlie first start looking at Walmart?
WarrenOh, a long, long time ago. I don't remember when, but our biggest errors have been errors of omission, not comission. Now, to some extent, that's because we're basically so conservative. I mean, we have never wanted to push. So there have been times, even in the 2008 panic, we bought $15 billion worth of things in three weeks. But we kept a lot of dry powder just because we always believe in operating from strength. So we could have played that harder, but we just never want to get close to the edge.
Becky QuickWhat do you think about some of the recent moves? We talked very briefly about Walmart raising its own minimum wage internally, just deciding to pay its employees more. You think that was the right move?
[1:27:12]
WarrenWell, I think the management is very good there. I think Doug McLean is doing a great job. I met him here in Omaha a couple months ago at a breakfast, and I'll see him again in a month. But I think he really has a feel for the business. But I think that, you know, e-commerce has to be enormously important to them. And I think there are 12 months. billion now or something like that. But, you know, that's a game that they've, they've got to become very, very competitive in.
QuestionerI know another CEO who you've met with here in Omaha is Mary Barra, that you bought a new Cadillac. She was instrumental, I think, in convincing you to buy that Cadillac. We had some questions that came in from Kyle Bass. Kyle Bass is an investor in general members. He's been pushing for the company to buy back more shares. and increase the dividend. And put a fellow on the board. And put a fellow on the board. That is Harry Wilson is one of the people that he's been pushing for that. Harry Wilson was involved in GM with the resetting of GM and was involved in that process. But he points out that he thinks that it's trading at a significant discount to intrinsic value. Would you be in favor of them buying some stock?
WarrenThat's not a big deal with me. I mean, Mary's only been in there a very short period of time. There's a lot of things to do. Having had to go to the government to stay alive a few years. ago. The auto business, you can go through a lot of cash very fast. And they're also building their finance unit back up. I don't know. If I were running, would I be buying a stock? I don't know whether I would or not. But it doesn't bother me at all that she's not doing it. I think that I think she is exactly the right person for the job. I've met her a couple of times. And she is very, very good. And I think it, I just think the idea of trying to do something now that gets a little pop in the stock is just should not be on her agenda or the shareholders agenda. I think that the main thing to do is build the strengths of General Motors, which they had in the past, and I think Mary's the right one to do it. And I totally disagree with the idea of putting somebody on the board who has an option on some other people's stock, which is only good for two years. To have somebody sitting there in the boardroom who has a two-year horizon when they make money that goes to zero after that. It's just not the way to run a business.
[1:29:32]
WarrenI did. Berkshire would not be where it is today if we'd had a bunch of directors over the years that had two-year time horizons on when they could make money out of the stock.
QuestionerWhat do you think about corporate activism in general, activist investors?
WarrenWell, I think sometimes it's justified and sometimes it's just way, way off the mark. I mean, I think that Coca-Cola, when David Winters, who runs a fund that is underperformed by every measure from inception, five years, one year, and who draws 150, basis point fee when you could go to Vanguard and do it for 17 basis points. And he complains about compensation, not being commensurate with performance at Coke. And then he has that kind of a record himself. I think that, I think he's a fellow living in an all-glass house.
QuestionerYou agreed with some of his points when he first came out against Coca-Cola.
WarrenI thought the comp plan last year was excessive in terms of stock. And I think the Coca-Cola Comp Committee has done a sensational job. of absolutely re-engineering that plan. I've seen the proxy material for this year. I think it's a model in terms of what proxy should be written and in terms of what they're doing. But they've gone from the top quartile to the bottom quartile in terms of stock issuance, and now they're issuing cash to people to whom they should issue cash, and they're treating their stock as valuable as it really is. And I give great credit to a woman named Marie Elena, and like a Messino, they call her Mel. I mean, she has really worked at devising and explaining a plan that is totally in the interest of shareholders.
QuestionerYou've been in close contact with him about this?
WarrenI saw it last week, yeah.
QuestionerAnd what did they lay out?
WarrenThey just showed me the proxy material that's going out and that will go out pretty soon and how the plan is put together. They already described this a few months ago in a letter, but these are the specifics. And they've thought it through like an owner. And that's all you can ask. And they spent a lot of time doing it. I did notice they changed the compensation consultant, which I can't, which I think was warranted. But it's, they really, they really went out of just exactly like an owner should go at it. And I tip my hat to it. And I think it's crazy of winners who, you know, getting incredible fees for negative production to complain about Coca-Cola.
QuestionerBut again, you agreed with his points when he first came out.
[1:32:08]
WarrenI agreed totally with the fact that the plan that was put out last year was way too big on stock issuance and there should have been cash substituted and I felt that it had flaws in it. And so did the Coca-Cola Compensation Committee when they looked at it again and looked at it hard. So there was, you can say there was a service performed by David when he pointed out the fact that there was too much stock involved in it. But then unfortunately that when the facts changed, he didn't.
OtherWelcome back to Squawk Messy Day in New York City this morning. Forbes just out with its annual ranking of the world's billionaires. Bill Gates beat out Carlos Slim for the second straight year. He's now at the top of that list with a net worth of 79. $9.2 billion. Warren Buffett, our big guest all day today here on the program, climbing one spot coming in at the world's third richest person. He was the biggest gainer of the year, growing his fortune by $14.5 billion to a total now of $72.7 billion.
Becky QuickWelcome back, everybody. We are live with Warren Buffett this morning. And Warren, I can't believe that it's already two and a half hours into the show. And we haven't even gotten a chance to ask you about some of the headlines that have been coming out from Greece in the Eurozone. We heard headlines at the very top of the show. You said you had some comments on it. And I'd actually like to run another question for you that was sent in by Charlie Munger. He had some questions for you as well on that. Listen into this.
CharlieIn the Eurozone, should the rich nations simply give the poor nations all that they want in order to avoid an unusual share of economic decline?
Becky QuickThat was his question. his question, should the rich nations just give in to the poor nations to make sure that there's not an undue amount of economic decline?
WarrenWell, Becky, if you have behavior you want to get rid of, it's probably not the smartest idea to reward it, right? I mean, if you have a dog that's peeing on your carpet, you do not want to start giving it a bunch of dog biscuits. Or you're going to have some, you know, your carpet after a while else'll sell you a new carpet. If people find they can break the rules and you're kind of threatened the rest of them by the fact that will cause you more trouble, you have to deal with it. And, you know, you're going to have a more stained carpet here from now or two years from now if you essentially give into them, just keep modifying the rules as you go along.
[1:35:12]
WarrenOkay, I would in general agree with that comment, but the situation in Greece, I think, is a little more complicated. First of all, the Eurozone stepped in in the beginning and bought a bunch of bonds that they were kind of trying to experiment. It wasn't something the Greeks necessarily wanted. It was something they tried out. Now, that is a lot of the debt that is loaded up on them. And quite frankly, Germany and some of the other rich nations have benefited greatly from being linked to weaker economies and therefore having their currency in effect devalue. Germany in particular has been a huge beneficiary of this. Is there anything that says that they should be sharing the wealth with some of these poorer nations? Well, if they want to engage in foreign aid, you know, and just say that these people are permanently can play the game anyway they want and they have a foreign aid program. I suppose that's up to them. But the idea, what Greece has done is exposed the weakness of the original concept. And the idea that you're going to link currency in lockstep among a large group of countries that have different fiscal policies, different cultures, different labor laws and everything. I mean, you know, it has a structural weakness to it. Just imagine that we had a Western Hemisphere zone and we'd linked ourselves to Venezuela and, you know, and you name it. It wouldn't work. And you have to, you have to either get further in or recognize the fact that this structure will not work over time. But it may work in some modified form. So if you were calling the shots, you would tell Greece to take a walk. Yeah. I would tell them, you know, that here's what you can do. And if you want to do it, fine. But it isn't going to work if you're going to go in a different direction in terms of fiscal policies and all of that. And if you decide then that you'd like to give foreign aid to them, that's fine. We've done that with countries. But you shouldn't, I mean, just imagine if we tried to limit our currency to 18 or so other countries in the Western Hemisphere. And we picked some that had way different fiscal policies and a whole different approach to government. It wouldn't work over time. I mean, you either have to have a greater conformity. So, you know, Lincoln talked about the nation not being able to exist half-slave, half-free. And in effect, you're saying, you're taking things that are really disparate types of economies
[1:37:44]
Questionerand saying, well, you're going to be... You can operate in all these way different ways, but we're going to keep our currencies in line. And currencies don't work that way. It sounds like a really dumb idea when you put it that way. Do you think the EU still exists in 10 years, in 20 years, and 50 years?
WarrenI think it will, but I think it'll be modified. I mean, listen, the first time around, you know, we've had amendments to our Constitution, right? You know, we thought we wrote a pretty good document, but, and we did. But we still have to amend it occasionally, and they, you know, there was probably be a burst of enthusiasm that they really got, they did half the job and they'll have to do the other half the job.
QuestionerThe biggest security that Berkshire Hathaway owns, the biggest stock that it owns, stock investment is in Wells Fargo. Correct. There have been a lot of questions about the big banks and whether the big banks need to be broken up. There's also the huge question with the change in the regulatory structure, if it is going to make as much sense to be an investor in big banks. down the road. What do you think?
WarrenWell, you can make, if you have different capital requirements based on size, which you do to some degree now, and based on other things than sheer size, but you can make banking unprofitable. I mean, you make a decent return on equity by through leverage, and that's why you take in deposits, and you earn on your liabilities plus your capital. And if you have to have more and more capital relative other liabilities. You can bring down the return on equity to where it's unattractive. I think our banking system is doing a terrific job. And it is not, our banks are not as large relative to the economy, remotely as in many other countries. And our banks are in better shape than much of the rest of the world's. But big banks are now being J.P. Morgan's number one, I believe, but in terms of penalized on capital. And you can make it an unattractable. business. And I suppose if you push that hard enough, people would say, well, you know, they don't like big banks. They didn't like big oil when the standard oil trust existed. They broke it into pieces. All the pieces have done pretty well. I think the present banking system is a pretty damn good system for the United States.
QuestionerLet me ask you also, you're not only in the business of banking through your investments, but now
[1:40:12]
Andrew Ross Sorkinwith the purchase of Van Tile, you're a car salesman too.
WarrenYeah, pretty good one.
Andrew Ross SorkinWhich leads us to an interesting combination on a story that's out from Deal book. They talked about how Wells Fargo is now putting a ceiling on subprime auto loans. I know that the subprime auto loans have gotten back to about the place that they were before 2008 in terms of how frequently and how easily you can get these things. Wells Fargo's not participating anymore, and that is putting a little bit of a freeze on the rest of the industry and certainly raising concerns. What do you think?
WarrenI think they put a lid on the percentage they want to have. I just saw the figures. on a subprime lender the other day where 50% of the loans they made defaulted within the first year. There's something wrong with an operation like that. I mean, you don't need the degree of misery that occurs with hundreds of thousands of borrowers, if 50% of them default within the year. Your lending standards are wrong in that respect. I don't say anybody that's kind of marginal doesn't have a right to get a shot at, you know, and you know, maybe with a low-down payment or a car. But have it become the norm big time, I think it's a mistake.
Andrew Ross SorkinYou said earlier though, that car sales have rebounded more quickly than you had expected. That's true. Do you think it's in part because of these loans being handed out? And do you think that the auto sales will be hampered by those loans?
WarrenI don't think it's been a big part, but I think that just from what I've seen on one or two operations, I think that there's been a weakening of credit standards that that It's probably unwise.
OtherWelcome back, everybody. This is our annual Ask Warren show. The questions have been pouring in for the Berkshire boss. Warren, we've got another question that came into you on video. Take a listen and see what you think.
QuestionerWarren, you have been very outspoken about the unfunded liabilities, the pensions that you're talking about here. And in California, we have a huge problem. We have over $500 billion in unfunded liabilities when he comes to pensions and health benefits for the retirees. But on the book, we only show. show maybe $90 to $100 billion of debt. So we're putting really wool over people's eyes. We're not telling them the truth. What is your solution to this big problem that we have not only in California, but all over the United States?
[1:42:38]
QuestionerArnold Schwarzenegger, the former governor of California, asking about those pension liabilities that could be a lot bigger than we even admit in terms of what we tell the public. What do you think?
WarrenWell, they can be. There's assumptions about future earnings on investments. And they're too optimistic. You know, it doesn't change how long the pensioner lives or the pension. So it's been particularly easy for politicians to make promises on pensions because they're not around to pay them. And it makes the union you're negotiating with a state or local union very happy to get a pension increase. And they vote for it the next election and by the time the bill comes due year to long gone. So it is true that many, I mean, Illinois is terrible shape. New Jersey's in bad shape. They thought they'd talked about curing it, but they didn't. California's in bad shape. Those pension obligations can be met, but they can't be met if you pretend they don't exist and you and you never start making large payments into into trust funds essentially to deal with them as they come due. The nature of pensions is, you know, you promise somebody that you're going to pay them for 30 years after they quit working, you better start accumulating something now to make those payments. And state and local governments have been particularly remiss in that compared to corporations, although there have been plenty of corporations that have come up short as well.
OtherOkay. We'll continue this conversation with Warren in just a minute. Joe?
Joe KernenBecky, hey, Warren, what's your favorite ice cream flavoring?
WarrenWell, this morning I had a little strawberry, a houganosh strawberry before I came down. That was at about 4 o'clock this morning.
Joe KernenYou've had graders. I know. Did you ever look at graders and think about buying greater? I know you know that you probably know that old Cincinnati company, right?
WarrenI don't know that one, but if you tell me it's good, I'll believe you.
Joe KernenI'm going to send you some. So you like strawberry, right?
WarrenI like strawberry. I like strawberry. I like chocolate chip. I like a lot of, hard to find an ice cream I don't like.
Joe KernenYou finish off the Montgomery in Rids. You finish it off with the grater's. All right, All right. Chocolate chip, strawberry.
WarrenI eat it right out of the carton.
Joe KernenI do, too. For some reason, then I feel like if I don't leave a dish in the sink, no one knows. You know what I mean? And I don't go down very far on the, you know, I kind of make it flat. You know, you can't really tell the way I do it.
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OtherWelcome back, everybody. Let's get down to the New York Stock Exchange. Jim Kramer joins us right now. And Jim, you had sent in a question. I was waiting for this because I wanted to give you the chance to ask the question yourself. Sir, thank you so much.
OtherThe energy business that you have, Warren, is just phenomenal, a tremendous pipeline business, but also great railroad business. And I was wondering whether Keystone shelving that isn't a terrific opportunity for Burlington Northern, which you were somewhat critical of in the report. And I kind of felt bad for those guys because that is one of the best railroads in the world. I think they could be a winner from the president blocking a pipeline.
WarrenYeah. Well, I agree with it about Burlington being a great railroad. I don't know how Keystone, you know, there's so many, there's pluses in minds. I, in terms of how it cuts for our particular railroad. But I think I would have passed Keystone. I think that that we have an enormous interest in working with Canada as they have in working with us. That oil is going to get sold. If we make it more difficult for them, you know, who knows how they'll feel about making things more difficult for us someday. But that is a valuable resource. North America and Canada has been a terrific partner over the over the decades and for us to kind of thumb our nose of them, you know, not what I would do.
OtherWow. Look, I think that's great. I wanted to also ask you, if you're managing Burlington Northern, you read the letter, obviously you say that Union Pacific did a better job, put more money of it. Is this the type of thing when you're the manager in a very decentralized business that you have, you wake up and you say, oh my, I'm the guy that didn't do as well as I should have for Mr. Buffett.
WarrenMatt Rose has done a terrific job for us. And the UP, if you remember, and I know you do, Jim, about a dozen years ago, the UP had some major service problems and we gained a lot of share against them, and they're a terrific competitor. But we are spending a lot more money than they are now to improve service. And my guess is that over the next 20 or 30 or 50 years, there will be a few years when we surge in a few years when they surge and that we both come out a whole lot better off than we are now.
OtherAll right. Well, look, I wanted to congratulate you. I thought the letter was just unbelievable.
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QuestionerI read it twice. Everyone has to read it. They should be in an index plan. I agree with you. But it was brilliant. I learned so much. I just want to thank you. Thank you for what you've done for investing and for making it so that it's accessible, but also for recognizing people. people's own limitations and being in index funds if they can't spend the time like you do.
WarrenYeah. Thanks, Jim. I appreciate it.
QuestionerJim, thank you. And we will see you in just a few minutes coming up at the top of the hour.
Becky QuickWelcome back, everybody. We are coming to the end of three hours live with Warren Buffett. Time seems to fly when you got a lot to talk about, and we have had a lot to talk about today. There are still some questions that are coming in, Warren. In fact, David Tepper wrote in a little bit ago. And he has a couple of questions for you. Obviously, David Tepper, the hedge fund manager, he says, first of all, what does Buffett think about transparency of compensation plans, particularly in regard to how companies make capital allocation decisions? And then he wrote me another email and says, and how does capital allocation relate to how much cash is on the balance sheet?
WarrenWell, that's a pretty broad question. Transparency of compensation relative to capital allocation. Yeah. The compensation figures that we publish are the ones that are required by the SEC. and I think it's a terrible mistake, just like in your business. I mean, if everybody knew how much each anchor got paid, believe me, it would tend to escalate payments, I mean, and is that good for the shareholders or not? So I think publishing everybody's earnings would be a, it would be anti-sharholder in the end. It would satisfy a lot of curiosity, and a lot of people would get very envious of those around them. And I saw at Solomon when I ran it, how envious people could get of others' compensation. But I don't see how it relates to capital allocation exactly. I don't get that part of the question.
Becky QuickAll right. Maybe David Lowe write in if he's got any additional thoughts on that. In the meantime, I also want to tell you, Harry Wilson wrote in. And we were talking about GM earlier. Harry Wilson has been proposed by a group of activist investors as a potential addition to the board of General Motors. We had some comments about it. He wrote in just to clarify some things. And I do want to give him a say. letter I won't read it all, but he does say that the underlying rationale of his candidacy
[1:50:03]
Otheris to do exactly what you said to help General Motors build for the long-term strengths that needs to become a world-class company and thrive for many years to come. He points out he's been a shareholder since 2011. And as he said, he expects to be a shareholder for many years to come, as he said to the company, he's perfectly willing to take all of my compensation in stock and have it locked up for an extended period of time. This is not by any means a two-year deal.
QuestionerYeah. Well, maybe I'm wrong, but my understanding. was he was getting the profit on 4% of roughly 30 million shares owned by three hedge funds. So that's a 1.2 million share position that where the money that was made in the next two years counted and nothing afterwards. So I don't know the size of these other positions compared to that million two or whatever it may be that he has an option on. I just I don't think it's wise to compensate any director based on based on what happens in the next two years and have them overwhelmingly focused on that, which may or may not be the case. If Harry has a ton of stock himself that he's going to put away for a long period of time, that's one thing. I don't know the answer on that either. But he does also write him right now and say that he does agree with you on Mary Barra, that he supports her as well. He's a big supporter of her and thinks she's doing a good job.
WarrenI think he's dead right. I think he's dead right. It's not easy running General Motors. And walking in now in the last year, a whole lot of things on her plate. I mean, It's a worldwide organization. And I believe in giving somebody like that a lot of slack. We do it with our own managers.
OtherI'll also point out, emails are coming in Fast and Furious, David Faber, just writing in saying, you are exactly right, at 4% of 31 million shares at 2 and 3 years, is what he's talking about with that.
QuestionerWarren, if you had one message that you wanted to get out to people, obviously, this is 50 years for Berkshire Hathaway. Looking back, reflecting, you had a very long letter. Anybody who hasn't read it yet, I would suggest they'd. go and do that. There's a lot of good information. And one quick message you had for anybody?
WarrenIf you're a 20 or 30-year-old and you can invest for your next 50 years and you just consistently buy American business. American business is going to do wonderful over that time and I think you'll do wonderful as a shareholder, but you have to do it consistently and you shouldn't try and dance in and out or pick this stock or that stock. Just own the country. It's a one. The best days of America lie ahead And the best days of American investors lie ahead as long as they don't beat themselves.
QuestionerWarren, thank you so much for joining us today. We really appreciate your time.