Becky QuickWarren Buffett is joining us this morning after the 50th anniversary of Berkshire Hathaway. And Warren, what did you think of the weekend?
WarrenIt couldn't have gone better. I mean, we had record crowds, we had record sales. We all have everybody had a lot of fun. I mean, I didn't see anything with smiles. And I didn't have anything to do with it. Everybody else did the work, so I could brag a little bit about it. But it was terrific. We ran out of seats, but there are worse things than that.
Becky QuickDid you get a final number of how many people were actually here?
WarrenThere's really no way to get a number. I know it was a record. I know it was well over 40,000, but it was just all over the place, so I don't have a number.
Becky QuickFor almost seven hours on Saturday morning, you sat and took questions along with Charlie Munger from your shareholders who were here. Andrew and I were both going through a lot of those questions that came in. And I'll tell you, I got thousands of notes that came in from shareholders, thousands of questions. But if you're looking for the most newsworthy topics, there were a few. that came in much more frequently than other questions. The issue I think I got the most questions about was Clayton Holmes and an article that had been written in the Seattle Times. This is an article that was written about a month ago that accused Clayton Holmes of predatory lending practices and exorbitant fees when it comes to mortgages. You took on some of these issues, but can we talk through this right now?
WarrenSure. Okay, so what do you say, first of all, just to the premise of the article, that Clayton issues predatory loans? Well, Clayton does something very unusual in lending money. It keeps the loan. And when a loan goes bad, there's two people that lose money. The person who own the home and the person who made the loan and kept the loan. And if you go back to the 2007-8, the housing bubble, a good bit of that was caused because the person that originated the loan immediately sold it or securitized, packaged it, and sold it maybe even in Europe or something of the sort. They had no skin in the game. They sat there and collected an origination fee and perhaps a servicing fee. But if the loan went bad, it didn't cost them a dime. Clayton followed a much more responsible policy of keeping loans. And if a loan went bad, it cost us money and it costs the borrow money. And so we had strong motivation to make good loans.
[2:24]
WarrenNow, we were lending to people, 70% of the houses that were sold with less than 150,000. dollars last year were manufactured homes and we sold half of them. And there's no question that you're dealing with people with lower FICO scores, people whose jobs aren't as secure. And so you expect some foreclosures in a situation like that. Our foreclosure rate has been around 3%. We've never had a loss to an investor on a securitization. We make very clear to the buyer of a home from us. We make very clear that they, have a wide choice of whom they borrow the money from. Here is the loan form. Excuse me a second. Here is the loan form that every buyer sees and size. And it's hard to read this. It's a one-page document. But it's not much more than a half a page. There's no small print. It may look small on a TV, but there's no small print. And at the very top, Wait, one second. They're shooting in on this right now. Sure thing. Okay, but at the top. At the very top, it says, we recommend selecting more than one lender to compare offers. And then we list the various lenders. And maybe there are local bank. There's a credit union in San Antonio that lends. We lend. And we list the terms. And we also have a lender board in every retail operation. And that lists all the terms. And at the very bottom, when they finally decided, who they want to send their applications to. It says by signing below you are confirming if the retailer or the employee did not recommend, refer, steer, or otherwise influence your decision of lender or lenders to whom your credit application was sent. If for some reason you would like to send your application to an additional lender in the future, you may be asked to complete an additional copy of the form for our records. I think some of the specific cases, though, that this story laid out. They looked at four or five individual cases, maybe even more than that. And in some of these specific instances, the allegations are that the Clayton Holmes offered one family a 7% loan, turned around. It was a 12% loan that they laid it. They're painting it as a bait and switch, essentially. And obviously, there are a lot of cases, but in some of these specific cases, it sounded like there was pressure that was put on some of these individuals. Well, all I can say is that 300,000 loans were made. In the last three years, people frequently write me and complain about an insurance settlement someplace or they bought a TV set, some place, of one of our stores.
[5:09]
WarrenI have not received one letter, and all the letters get to me. I have not received one letter from Clayton Homes, and we've sold in that period maybe 75,000 homes. We have 300,000 mortgages, and we have been examined in the last three years by 98,000. different state, well, we've been involved 98 times by state regulators. 98 times. We're licensed in just about every state. And in 98 cases, we were fined, once we were fined $1,500, or once we were fined $5,500, we got the fines right here, once we were fined $1,400,000, once we were fined $1,400, before I'm $1, $1,400 by Tennessee in 2000. 2012. We were fined $3,000 by Michigan in 2013, and we were fined $5,500 by one other, one other year. And that's from 98 state examination. So 98 times the state regulators have come in and checked us out, and that's what they have found while examining our loan files. Again, you make the point that there were over 300,000 home loans. This is focusing on a very small number of them.
QuestionerBut what about in these particular instances? Do you know, if the article is correct, if the authors of this article will correct, in the situations of a few heartbreaking stories where, again, if the article is to be believed, it sounds like a Clayton home representative put undue pressure on these people, baited and switched, did a bait and switch when it came to some of the prices that came through. That's what I think shareholders had trouble with. There are a lot of shareholders who read this who thought, is this really what our business is doing.
WarrenYeah, well, they get, they get the form, they can send their application in to any group and any, bank that's on that list, including their local bank. And the local bank makes more loans than anybody else.
QuestionerBut you're speaking broadly. I'm speaking very specifically about these individual cases. Do you know in these individual cases?
WarrenI don't know the individual cases, but we've got 300,000 loans, and I don't doubt that some people wouldn't understand making a loan. I mean, I'm sure that the 300,000 people make a margin loan in buying stocks and some of them don't understand what they're doing. But I don't see how you can have anything written more clearly than that loan application. or the lender board that describes the terms from every lender that wants to be out there for our loans. And there are many cases where if they get in trouble on their loan, we give them modifications or something of the sort.
[7:45]
OtherWe cannot, for privacy reasons, name loan by loan what we have done with anybody. We're prohibited by doing that. So I remember that one time that was a national televised program about, not about manufactured home loans, but other loans. And they had a woman there who was very unhappy about losing her home and all of that. It turned out when they examined it, she'd refied it four times up to wait more than she'd paid. But the privacy rules keep you from responding to that. Okay. You mentioned that of these loans that you put out, again, these are loans that are made to individuals who probably don't have great FICO scores. Right. They are individuals who maybe have a little more tenuous income that's coming in. They're a greater risk. They're a greater risk. You said that about 3% of the loans go bad. Yesterday, the Seattle Times took that number because you used it at the shareholders meeting on Saturday and said that 3% annually go bad, but if you look a pool of mortgages over a period of time, that number would be much higher. They took an example from one of your competitors where they said their loans annually went bad at a rate of 4%. But if you looked at that same pool over eight years, it was closer to 20%. Their implication was that the numbers would be similar at Clayton. If you looked at the same pool over a number of years. Are they correct in that assumption?
WarrenWell, they're correct that in any case, whether you're about car loans, or you're talking about Freddie and Fannie's loans. I mean, they give you the foreclosure rate by year, and it's true that if somebody is in the fifth year, that would be added to it. But that's true of all every foreclosure rate that you read. And our foreclosure rates, for these people who generally have four FICO scores, have jobs that are less secure. Our foreclosure rates, our foreclosure rates. were considerably lower than a great many of the mortgages that people borrowed on in 2007, 2006 from all kinds of other organizations. But everybody has foreclosures. I mean, if you just out with people that absolutely were certain to pay like me, you wouldn't so many homes. And a lot of people wouldn't be denied the chance to get homes. I mean, some people take some risk in putting down a 5% down payment. The average payment on our loan is. under $600 per month for principal and interest. You saw the house we had there for $69,500,
[10:08]
Warrenit's $1,200 square feet, a couple of bedrooms includes the appliances and air conditioning. You have to supply the land. But, you know, it's it's bargain living, but it's being offered, you know, you're not buying one and I'm not buying one. And people who are buying them are people who, if they lose their jobs, are probably going to lose their home. But if they lose their home, and we have the mortgage, we lose money too. and putting anybody in a house that they're not going to be able to pay for it because we're going to lose money. Well, that's a claim. You definitely lose money in every case because one of the things the article pointed out is that these homes, unlike other homes, get repossessed by cars. They'll come up and pick up the home right off of the property and take it away and resell it. But you're definitely losing money every time the loan goes bad in this situation. Well, maybe there's one time when we haven't. We lose money. We lose significant money. Well, I can tell you what we lose. because the average loan when we take it over is only 40,000. That's another reason interest rates have to be higher. These are much smaller loans that you're servicing. And our loss runs about 40% of the mortgage balance. So if we repose a loan of $40,000, we probably lose maybe $16,000. A lot of times when people leave, if there's a divorce or they lose their job, they don't leave the house in the best tradition. We find the rugs torn up and stuff. I'm sorry, not everybody does that, obviously. But if they have no equity in the home and they're mad, for one thing, they stay in it for a while and no pay us anything. I mean, they got a red free house for a while, and some of them behave kind of badly when they leave, but I can understand that.
QuestionerOkay. Warren, thank you very much. We've got a lot more to talk about this morning. In fact, when we come back, we're going to talk about Berkshire's Big Four Investments. We will be catching up with the CEOs of IBM, Coca-Cola, Wells Fargo, and American Express. We'll hear what they have to say about business. the economy, and having Warren Buffett as their largest shareholder. Welcome back to Squackbox, everybody. We are live from Omaha, Nebraska. The chief executive of Berkshire Hathaway's Big Four investments were here over the weekend. These are the companies that Berkshire Hathaway is the largest investor in for big blue chip stocks. IBM's Ginny Remedy, American Express
[12:19]
OtherKen Chinald, Coca-Cola's Muttarkent, and Wells Fargo's John Stubb. Together, they represent over 60% of Berkshire's $117.5 billion dollar portfolio. I sat down with the group and asked them what it's like to have Warren Buffett as their biggest shareholder.
QuestionerWarren has been with us the longest and he owns 14.88% but who's counting? And it's really fantastic. One of the things I always talk about is that great leaders are people who capture the hearts and minds. And Warren captures your heart and mind because he's so passionate, so engaged, so authentic and he wants to win. And so this disarming manner masks this fierce competitor, but he's a real gentleman. Anybody have things to add to that?
QuestionerWe've been very fortunate to have Warren, not only as our largest share owner, since the 80s, but also on our board for 17 years. It's been a wonderful journey, and it continues unabated. and he was at our annual meeting this week on Wednesday. Everyone loves him, and everyone he's able to simplify complex matters in just a few words. And I think that's an incredible asset all the time.
QuestionerYou even got him to play the ukulele.
QuestionerWell, he's a great ukulele player, so it didn't take much.
QuestionerWell, we're the newest in his portfolio, and almost 8% almost 8%. And I have to say, you know, having Warren, it's a wonderful thing to have someone who's got such appreciation for setting a gold standard for that style of investing. And I know, I mean, all of us are brands that have endured decades and decades and decades. And it is great to have an owner who has that view about investing, that you make the right decisions to create value for the long term, and that you keep moving your own company to higher value and balance that with shareholder return.
QuestionerI would add just what Jenny said. I talked to him not often, but maybe once a month or so, and it's generally about very long-term things. I said, Warren, you're 84 years old. And he's talking about things 10 and 20 years out. He really has long-term views, and he understands the core elements of what builds shareholder value over a long-term. It's so refreshing because we all have analysts we meet with every quarter, which we also love. Equally. Equally, but we really like our long-term investors.
QuestionerYou know what's really interesting, I think, is Warren's long-term commitment, but the fact that all of our companies have really strong brands, and yet we're working with someone who probably
[15:15]
Otherhas one of the strongest personal brands in the world. And so I think the congruence of having someone who really believes. believes in a very strong reputation and sustainable long-term performance is absolutely critical.
Becky QuickWell, Ken, let's touch on that point. You said that he has a very strong world brand himself. Is he different from other shareholders? Is it different dealing with him than it is other people, or is it just the perception because we know who he is?
OtherI think for me, Warren has a very unique style. We have a number of different share holders. I get along with them very well. But there's something that is incredibly engaging from the first time I met him. I agree with Ken. I find him both inspiring. We learn, but if, and I bet I don't share a unique sort of experience that he asked more questions. And it is, it is questions and great questions, and whether they're about the long term, about competitiveness. And it's just, you know, he listens more than he actually talks about. But when he does, you always take away. There is not a meeting I have. I don't walk away with a great learning. I agree with Ginny and Ken in that I think there is no one else that I know of that is as keen an observer of of trends, of people, of countries, of what's going on in the world, not just in business, but just general trends. And being able to just bring those out in the most simplistic way. way and articulate those in the most simplistic way. And then the second piece is the fusion of humor and humility. I don't know that in anyone else that is of any stature. So I think that those things, you know, when you come here for him to drive you in his own car to a place to eat, but those are really important things. So, you know, if you say, Becky, what advice? It's not just something that comes out of his mouth. It's about his whole attitude about the way he lives and the way he adds value to everybody that he's in touch with. They're being picked up by him in his car. He's a real thrill. I mean, he comes to the airport, he picks you up, and he drives down and you go to the, you know, either garashes or Piccolo Pete's, into the room he is in, the room he is in, and he says, They'll say, what do you want, Warren? And Warren said, I'll have the usual. And I thought, well, you know, I'm a usual guy, all the usual also. I don't realize the usual was a T-bone steak with a side of fried chicken, mashed potatoes.
[18:06]
OtherI mean, it is a big plate of food. He loves it. Don't forget the cherry. Don't forget the cherry-counter exactly, right? And he also might take Deary Queen. But I think one of the things that, to me, personifies Warren, and I think we've all had this experience, right? You call Warren, how are you doing? you're doing? Never been better. That tells you that he's always looking to the future and it's informed optimism because this is not someone who is afraid to face reality and to tell you what the deal is because he has a mine like a steel trap. But that phrase, I think, really personifies what Warren Buffett is all about. Again, those are the CEOs of the big four companies that Berkshire Hathaway has in its portfolio. And Warren, the thing that struck me the most from hearing from them is that every one of them said it was your long-term vision that they appreciated the most. Now, obviously, you're looking at things for the long term. One of the companies that you've told me you've been buying more stock in is IBM. You told me that on Saturday that in the first quarter you bought more shares. We will see that coming out in SEC filing soon. And I just wonder what you see in the long haul for IBM, because there have been a bunch of people who have questioned why you got into that stock right now. got into that stock right now. What do you see happening over the long?
WarrenWell, I think 10 years from now that they'll be earning a fair amount more money than they are now, and I think they'll have a fair amount fewer shares. So our percentage ownership will be up, and I think we'll make considerable money. I can always be wrong on any stock, but that's my best estimate. I felt that way when we started buying it a few years ago. I think they had a $1,165 million or something like that, shares out then. They have $985 million shares out now, so our interest is going up by $1,000. up by 15 or so percent without us laying out a dime in that respect. And it's true that they're going through a transition in terms of the product, many of the products their customers like. But if you look at those people on that program, Wells Fargo is a huge customer, American Express is a huge customer, and my guess is that 10 years from now, Wells Fargo and American Express will be huge customers of IBM. They'll be selling them different things than they're selling them now, but they'll be solving the problems that those companies have at that time.
[20:28]
WarrenWell, I would say that if you have $1.9 billion, 8,000. servings of your product being consumed around the world in 200 countries by people who consumed it yesterday or consumed it tomorrow, I would say that that's a pretty strong competitive position to be in. If people like something today, they usually like it tomorrow. And usually as their kids come along and more people inhabit the world, they like it. So here you have a product, we'll take Coca-Cola. It started in 1886, and maybe during the war when they had little trouble getting sugar or something of the sort. Maybe there were. some declines in total consumption. But per capita consumption of of Coca-Cola products has gone up almost every year since 1886. So you have to be doing something right. Our ketchup at Heinz, you know, started in the 1870s and people are still putting it on hot dogs. So I don't think, I don't think something's going to change dramatically tomorrow on that. Andrew, you have a question too?
Andrew Ross SorkinHey, Warren. How are you? One of the things you said, this goes back to IBM, One of the things you said on Saturday was there's been more stupid stuff and stupid stuff, stupid stuff written and stupid stuff done when it comes to buying back stock. And one of the big questions about IBM, of course, is how much stock they've bought back over the past decade. I know you've supported their efforts to continue buying back stock. Do you wish that they had bought back all that stock when the stock was higher?
WarrenWell, I mean, I mean, obviously you'd like to buy every stock at the low check, but that doesn't happen for them or for me. But overall, all their stock repurchase program. I think it goes back even more than a decade. It's been dramatic and it's been enormously beneficial to the shareholders. And incidentally, while they reduced their shares, they also had, I think, something like 250 million shares of options outstanding 10 years ago. The options are now down to a few millions. So they're not only got, they're not only reduced the number of shares dramatically. They practically eliminated this fantastic,
[22:56]
WarrenSo we look at, you know, buying, buying in stock can be extremely dumb. It can be extremely smart. It was extremely smart for Henry Singleton and Teledyne. And I won't give you the names of people more. It was extremely dumb. It all depends on whether you're buying the stock for less than it's worth.
Andrew Ross SorkinI don't know. Did you get a chance? And we think that I was going to say, did you see Larry Fink about a couple weeks ago put out this letter saying that he thought that companies these days were buying back too much stock and trying to actually put too much money back. into the pockets of shareholders rather than investing in their own businesses. And I wanted to get your thought on whether he was right or wrong about that.
WarrenYeah, Andrew, it's all case specific. We say that at Berkshire will buy our stock in it, and we'll buy it aggressively at 120% of book value. I know that at that price, the shareholders who stay are gaining on a per share basis because we're doing that. If we were to buy it in a 200% of book value, our shareholders that were staying, would be penalized by that action. It's solely a function of what you're paying compared to the price. If you and I had a, if we owned a McDonald's stand together, and I bought you out at 80 cents on the dollar, you know, I bought in your stock, I would be ahead of the game for doing so. If I paid you 120% of what it was worth, I'd be behind the game. And that is that simple an equation for managements, but many managements just decide we're going to buy an X billion dollars worth of stock and we're going to do it over the next 12 months or 24 months. That's no way to buy anything. I mean, the way to buy things is to buy them when you think they're selling for less than they're worth. And when you do that, you are favoring the continuing shareholder. Now, in doing it, you have a moral obligation to make sure that the exiting shareholder has received all the facts and, you know, just like you would if you're buying the person out of the McDonald's stand. But it's not a complicated equation. at all to figure out whether it's beneficial or not beneficial to repurchase shares. We know how to do it at Berkshire, and we'll be doing it this way 10 years or 20 years from now.
Joe KernenHey, Joe?
Andrew Ross SorkinYeah, hey, Warren. Good to see you. I hear you. Hi, Joe.
Joe KernenYou must have been talking a lot. Again, you know, once you get started, it's hard to get you to get you to start.
[25:15]
Joe KernenYou sound a little bit hoarse, but I, and you got two and a half hours to go. You got two and a half hours to go. Here's, here's. Well, I get paid by the words, so I.
QuestionerWe kind of do.
Joe KernenSo does Joe. Yeah, we kind of do. I'll tell you what I was saying. I don't know how to ask it, actually. This morning I was, I listened on the way in now. I got headphones and I got my iPhone and everything, and I downloaded something from the cloud. So that's about as much as I know about the cloud. And I'm wondering about your technological expertise, because as I recall, I don't think you bought, I don't think you bought Microsoft. I don't think you ever bought really Apple. I don't know if you ever bought. I don't know if you ever bought Cisco. I mean, you have sort of an aversion, not an aversion, but maybe you don't feel like you have the expertise, and yet that changed somehow with IBM. And I've never really understood that. Maybe it's because there are such a services company now, and they've got so many established relationships that it's almost an annuity. Or do you actually understand what type of cloud strategy that a company like IBM should have right now? should have right now because I can remember Carl Icon buying Motorola and I said he has no idea what kind of phones to put out there or biogen. I doubt if he knew it had any idea how any of the biotechnology products worked and yet he knew how to do that. Is it the same with you or how did it change with IBM?
WarrenWell, I get great news for you Joe. You're only the second dumbest guy in the country about the cloud. I've got you beat out in that respect. What we do, and there's no question that I have far less technical knowledge about how IBM works than I do about how Wells Fargo or Coca-Cola works. But we do have 70 plus companies, and when we talk to them, we learn something of their plans, and we learn about competitive products, and we make some estimate. We'll take Wells Fargo. So my guess is that Wells Fargo, IBM is their biggest supplier now. My guess is that IBM will be their biggest supplier five or ten years from now. I think that there's a significant difference. Sometimes the location of the information actually has to be geographically specific. But there's certainly differences in the degree of security that people feel they need in terms of storing information on the cloud. And as I talk to CEOs and I talk to our own managers, I feel pretty good about IBM's future, probably more so in what they call the hybrid cloud than the cloud that you generally read about.
[28:07]
WarrenIBM is a very, it's a trusted organization, it's an innovative organization, and they're competing against a lot of other people that are innovative too. but it's not a winner-take-all game. I mean, search, you might say, comes very close to a winner-take-all game. Cloud computing is not a winner-take-all game.
QuestionerI understand, yeah. So there's a hybrid cloud. So right there, you're not the second. He just won up to you with the hybrid cloud.
WarrenYeah, you just won up me on that one. And you tried not to, but there's, you know, you're crazy. Like, I bet you know a lot more about IBM's strategy. for the future.
QuestionerDon't bet too much.
WarrenYeah, no. But, you know, when you put it that way, with Wells Fargo, knowing that, and they probably have relationships like that with, I don't know how many of the S&P 500, and you're probably right, that's probably going to stay. But, see, you're not really looking at it like an Apple or like some type of disruptive, innovative technology now. You're looking at it as an established sort of a brand name that's not as dependent. and I don't think on innovation as some of the newer tech players.
QuestionerYeah, well, Amazon, for example, I mean, they just gave their figures out on cloud computing a few weeks ago. And, you know, they have, they, I would guess they have far more customers by number, perhaps, than an IBM, because they've made themselves open to all kinds of developers. And that's probably a very good business model. model.
WarrenI mean, Jeff Bais was a very, very, very smart guy, and he got in early. But what he's doing does not, it is not a winner-take-all game. And different kinds of organizations have different needs. American Express is a huge customer of IBM. Our Burlington Northern Santa Fe Railroad, we pay a lot of money to IBM every year, and we're very, very, very, very likely to continue paying a lot of money. And they will modify their offerings to things that are more useful to us as we go along. But I, listen, Microsoft's going to prosper, Amazon's going to prosper, you know, oracle's going to prosper, but I think IBM's going to prosper too. And I think what they have done, from a capital structure standpoint, on top of that, I like very much. I mean, it is a company with, they had 250 million of options when they had a billion six or seven 100 million shares outstanding, and now they're down to 985 million with virtually no options.
[30:56]
WarrenOne of the interesting things about an IBM, and it's true of other tech companies, IBM earns infinite returns on tangible common equity. I mean, those are very good businesses. Not just IBM, you can take the others, but those are basically very good businesses. We earn a lot of money to Burlington Northern, but we have a huge tangible investment. tangible investment. There is no net tangible investment. They are earning infinite returns on net tangible equity at IBM.
OtherAll right, gentlemen, we're going to slip in a break very quickly. Welcome back to Swackbox, everyone. Berkshire Hathaway shareholders saw a new name on the exhibit floor this year, IBM. The company brought Watson to the annual meeting, allowing shareholders to play jeopardy against it. I have to tell you, I didn't see a whole lot of winners there. CEO Ginny Remedy, though, says that Watson is much more than a quiz show expert. Sometimes people think, well, then Watson is just a search engine, no. Or it's just artificial intelligence, no. And really what it is is take natural language and it learns any industry, then combine it with a system that constantly learns, never forgets. But then one more thing, as you and I were talking about, when you saw the demo on cancer, it really deals with the gray zone and how we make decisions. So, what does that mean? You and I do this naturally. Everybody does it naturally. When you go to make a decision on something, you form lots of hypotheses, and your brain does this very quickly, and then you test it against everything you know, and you come up with an answer, and you're confident or not. So Watson forms millions of hypotheses, tested against everything it knows, forms a percentage of confidence, but the difference is it can tell you how confident, what data it needs to be more, or the evidence for an answer. Is it already profitable, or is it something that you ramp it up and it becomes profitable quickly? How does that? It's a service, so it ramps up over time. It's a service. by its nature. It's a cloud service. And it is a really important part of, as you know, one of our big strategic imperatives we call them, is data and analytics, which is already for us a $17 billion business last year. And in fact, grew 7% first quarter grew 12. I mean, so it's an important part of that, and this will be a play for the long run. So Warren, question for you. Did you get a chance to play Watson in Jeopardy?
[33:12]
WarrenI didn't get a chance to play Watson in Jeopardy, but I can't offer a couple of interesting comments. At GEICO, we are spending millions and millions of dollars with Watson, and we've been working with it for probably a year or so. And there are a lot of possibilities with it. And we're learning a lot as we go along. I mean, we're not to the finish point by a long shot. But we do consider it something of potentially great value in terms of our insurance business. The one thing I was thinking of doing this year was to work into my report, the fact that there would be a third party at the sitting up there with Charlie and Munger and myself at the meeting and have people speculating about this being my successor and maybe having some, having it hidden in some way and then unveiling it and waiting for the first question which you could have asked and you could have said, well, let's get right to the meet of it. Who's going to be Warren's successor and then have Watson rumble a little bit and finally say, I am. Sort of going back to hell in terms of 2001. Right.
QuestionerWith GEICO, what are you using Watson to do?
WarrenWell, we're training Watson. Watson learns. And basically, but it's not going to know anything that we haven't taught it. I mean, in terms of putting in the information, but it learns. And it would be enormously valuable, for example, just in terms of training thousands of new people who act as agents for us on the phone. on the phone. I mean, they have to be licensed and that sort of thing. And it can be, it may, and this is a long way off, but it possibly could be responding to tens of thousands of phone calls that we get every day. It can be helpful in terms of claims and it, you know, it can learn a lot and it can, it can, it has to learn what humans mean when they talk to. But I think the most exciting thing. right now, of course, is in the health field because you have millions of doctors around the world that can't possibly keep up with all the scientific specialist information coming along and they have, you know, somebody, if I have prostate cancer, my doctor seemed to be 500 people with prostate cancer in his life for a thousand and treated them. And he draws certain deductions from what this test meant and that test meant. Imagine getting that in the millions and having that all process. So I think a lot of things are going to happen in medicine. Joe has a question too.
[35:48]
QuestionerQuestion about the GEICO headband on Freddie Roach, Warren. Was that your idea? Did you know about that?
WarrenWell, no, I didn't know about that specifically. But at our annual meeting, actually, there was a movie where I challenged Floyd Mayweather here a few months ago. And we got in the ring together. I was the Berkshire bomber. So he didn't have that second in there with Freddie at that time. He was drinking water. I was drinking Coca-Cola. Yeah. We had a lot of fun together, actually.
QuestionerI bet you did. I was amazing. It was just amazing that Geico, you know what advertising, you've talked about it before, what advertising has done for Geico, and there it was. There it was. I was just like, what is like, what does that hit? And I saw Geico and I just shook my head and said, Buffett. Buffett.
WarrenYeah. Yeah. We spend about a one point, I think we're the fifth largest advertiser in the United States. And we spent 20 million or so when we took control in 1995, and we'll spend a 1.3 billion now. And, uh, but advertising doesn't do you any good unless your product delivers what you promise. And, and, uh, obviously, Geico's product does. So here's one more ad. 15 minutes can save you 15%.
QuestionerAgain, I'm in Omaha with Warren Buffett, who's the chairman and CEO of Berkshire Hathaway, just coming off of this year's annual meeting weekend. Warren, a lot of the questions that I've heard that were asked by other media, that were asked by other shareholders that tried to approach you. The one thing that people want to know most is what you think about the market right now. And obviously, it's not something you look at a day-by-day basis, but you have, from time to time, made calls that the market is overvalued or the market is undervalued. Where do we stand right now? based on what you've looked at historically.
WarrenVery occasionally over a really a six-year period, it's been very clear that the markets really is overvalued or dramatically undervalued. Most of the time I don't have the faintest idea of whether it's on the high side or the low side. When you get the extremes, 1973 and four with the cheapest market I've ever seen, including our recent panic, but our recent panic was such that you could clearly say stocks were undervalued. Back around 1999, 2000, I said they really were overvalued. What you can say now is that not very helpful, but the market against normal interest rates
[38:26]
Warrenis on the high side of valuation, not dangerously high, but on the high side of valuation. On the other hand, if these interest rates were to continue for 10 years, stocks would be extremely cheap now. And the one thing you can say is stocks are cheaper than bonds. uh... very definitely and what we've seen low interest rates now for six years or so i mean rates that we really wouldn't have thought possible particularly in europe where they go on negative and that's continued a long time and of course we saw them continue for decades in Japan so we own stocks we're happy owning stocks we look at stocks as parts of businesses we don't try to guess which way the markets we have no idea what the market's gonna do next year charlie and i never talk about it uh... low interest rates prevailed for five or ten years, stocks, you will look back and say stocks were very cheap. If interest rates normalized, you will look back and say they weren't so cheap. So if you were a betting man, not that you are, but if you were a betting man, would you assume that interest rates will remain low in the United States for the next five to ten years? Well, they fooled me so far. So I've been wrong. I would have thought by now you'd have seen much more, much higher rates than we have now, which are essentially nothing. It looks to me like they'll certainly going to stay low as long as Europe keeps following the present policies and Europe will probably keep following those policies till they see their European economy come back fairly strong. I don't know the answer to that and I don't bet on what I do is if I could, if I had an easy way and a non-risk way of shorting a whole lot of 20 or 30 year bombs, I would do it. But that's not my game and it's very, it can't be done in the country. kind of quantity that would make sense for us. But I think that, I think bonds are very overvalued, I'll put it that way. Now, the central bank has the capacity to keep them in that situation almost indefinitely. So we'll see what happens on that. Although every expectation is that the Fed will at least start raising interest rates, probably this year, maybe September, maybe December, if not certainly next year.
QuestionerCorrect or no?
WarrenWell, I think you're right that the expectation is that. But I think it's difficult. And it's not impossible. I mean, the Fed can do what the Fed wants to do. But I think if you have negative rates in Europe,
[40:53]
WarrenI think there are a lot of consequences to raising race significantly here. The important thing to remember in economics, people forget it, is you can never just do one thing. I mean, it's like physics. You cannot just change one variable and not have anything else change in the world. And when Poland borrows at negative interest rates, it has an effect on what we can do without changing, export prices, all kinds of things. Meaning that our rates look so much more attractive. People come flooding into our issues. The money will keep coming here. The dollar gets stronger, and you don't want to even continue that curve. Becky, I'm sitting with a lot of money in euros that has to be in euros at our insurance company in Germany. I'm getting a minus rate on that. Well, that gets your attention. If you were sitting with some money, you know, in your billfold, and every day a little bit of it got clipped away, you'd start wondering, why is this in my billfold? And so it pushes behavior, interest rates push behavior like, you know, incredibly. And we are not immune from what goes on in the market as big as the euro market. And I think it's difficult for us to raise rates significantly, certainly. certainly. I mean, I cannot envision us, for example, having a 4% or something right here with negative rates in Europe. Now, the gradations, you can argue, as to how much effect they might have. But this is a very unusual situation, and I don't know how it plays out.
Becky QuickIs that a box, potentially, that the Fed has put itself into? I mean, we've seen what happened with QE. I know you were a huge supporter of what Bernanke and company was doing that point. I know that you have said that you would probably do a lot of the same things that they had done.
Warrensame things that they had done. But we haven't seen all the consequences play out. What possibilities? I mean, every action in economics creates some other fallout from it. But I think the Fed has done the right thing, 100% the right thing. And I think probably the ECB is doing the right thing in terms of their situation. But they still have consequences. And it's hard to, it's hard to envision all the consequences. We have not seen this movie before.
Becky Quickbut you've got an active imagination. What are some of the playlines that you've fought through in worst-case scenarios? What could be consulate? We issued three billion dollars worth of euros the other day. And our average interest
[43:26]
QuestionerYou're happy getting 1% on your money for over 12 years?
WarrenOh, for the, for the, for the I'm happy paying one percent. And incidently, if rates go back to what seemed like normal not so long ago, you know, we might buy those bonds back at 60 cents on the dollar, you know.
QuestionerRight. Well, we'll see what happens. But I don't think anything terrible is going to happen to me because I'm paying 1%. Maybe not to you, but what are the unintended consequences to the rest of the system?
WarrenYeah. That's hard to tell. Historically, I would have thought the consequences would be significant inflation at some point. And that has not happened. I mean, we've kept rates low here now for six years, and now you're seeing something even more extreme. And you even have a central bank saying we want 2% inflation. And so it's, it's very interesting. And undoubtedly, we'll look back five or 10 years from now and something will have happened. We'll say, well, that was the obvious consequence. But I'm not, I can't tell you what the obvious.
QuestionerWhat about deflation in the Japanese situation? You pointed to that earlier, 20 years.
WarrenA long time. Well, that's, in theory, you have to have to. have deflation to make negative race to make any sense. I mean, it's a strange situation. When somebody owes us money at our insurance company in Europe, I don't want them to pay us. I'd rather have a good receivable. I'm collected in a year. Normally, you want to collect your receivables as fast as you can. And if we collect it, we're going to actually have that money depreciate right away. And whereas if we have the receivable is still 100, 100 cents on the dollar. Right. We have much more coming up for more.
OtherBuffett a lot more this morning. We will also be joined a little later by Charlie Munger and Bill Gates. Warren Buffett owned shares of all of Berkshire's big four investments before the current CEOs took office. Again, these are the four big CEOs, the four big companies, Blue Chick companies that Berkshire Hathaway is the primary investors, the leading investor in. Of those four, though, only one of these was not there before Buffett started buying. This is a CEO who was CEO-elect when it was first announced. that Buffett had accumulated at a significant stake. I asked Ginny Remedy what she thought
[45:48]
Questionerwhen she heard that Buffett was buying into the company. I had just been named. It maybe had been only two weeks or something at the time. And when we had found out in the, obviously, I called him that minute to talk to him. And couldn't have been. And you did smile a little bit. Oh, I'm still smiling. So I remember immediately called, because obviously I had just been named. And actually had not even been effective yet, but I would be the one he would have a long-term relationship with. And he couldn't have been more complimentary. And again, it's all about a business model. And the things that are important and to steward the company for the long-term. And, you know, he's true to that. I mean, to this day, I mean, he'll talk to me about, as you know, we've made many divestitures, you know, as our models about moving to higher value. And he certainly would agree, you don't want revenue that doesn't bring value to a company. So when we divest $7 billion that loses a half a billion, that's a good thing to do as you continue to move forward. And so he's very true to those principles about value that's sustainable for the long term. So I'll always remember that first phone call and couldn't have been more pleasant and more reinforcing about the business model and the quality of the company is the feedback that he gives you.
QuestionerYou know, Warren Buffett has a very unique style of investing. He will never do a hostile takeover. He's not interested in battling manager. And I just wonder if you all think that he's the best possible poison pill out there. Having Warren Buffett as an owner, it almost seems like it's unassailable to anybody else who's going to come in.
QuestionerI don't think of him as a poison pill. I think of him as a tremendous asset and a tremendous advantage and a privilege. And so those are the, that's the start that I have. And I was, I joined the Coca-Cola Company in 19. He became a shareholder a few years after that. So almost all my life working for the company, he's been a shareholder and the company has been a shareholder and the company has benefited in very, so many different ways of having him as a shareowner, as a director. But I do always recall the story when that was recited by the late Don Keo, who would say, who would say, who one day, you know, the price of the stock started going up a little bit, and he picked up the phone, and he always says, called Warren and said, you wouldn't be buying a few of our stock.
[48:25]
OtherAnd apparently he said yes. And so that's how he started. I think I feel the same way. I mean, this is not from a defensive poison pill, but from a, it's such a privilege to have him be our largest owner at Wells Fargo. I mean, who wouldn't want the best investor, the world's ever known, and maybe the finest human being. And we've all talked about that to be a major investor. Not that we don't care about our other investors, we care about all of them. But it is, it's a privilege. And we want to earn that respect and make him proud of his investment. Like we want to make all of our shareholders proud of their investment. That's kind of how we think about that, as opposed to a defensive perspective. The key thing you know with Warren is he's not patronizing. He tells you exactly as it is. And that's fantastic. But the other thing to think about, because none of us are saying this lightly, it really is a privilege and honor. Because think of how many people Warren is saying no to, right? For the very reason that they would love to have that association for a variety of reasons for a variety of reasons, what's most important, is you have to earn it. And Warren has to believe in your business model. And he has to believe in you as a leader. And unless those two connect, he doesn't go. And that's a good point because other companies he's associated with, sometimes it's taken a preferred share's offer to get them in the door. You guys, he bought on the open market. Right. Right. Right. Again, Warren Buffett is here and has been listening to all of this. Warren, one of the things that I look at these companies and think they're probably, it'd be very difficult for an activist investor to come into any of these four with you as the major shareholder. Is that a fair way of looking at things?
WarrenYeah, I think it probably is. I think that when we have close to 15% of American Express or when we have 9% of Coke or almost 10% of Wells Fargo, I think it'd be very silly for an activist to come in and say, you know, double your dividend in today or buy it a whole lot more stock or whatever it might be that they were proposing. Because I think the companies are well-run, and I think their financial policies are sound. And if you have some financial policies and a well-run company, the best thing to do is just sit back and enjoy it.
OtherWell, the one company that has been approached very recently was Coca-Cola with David Winters and the efforts that he's undertaken.
[51:06]
WarrenAnd originally when David Winters came in, you said that you had given it some thought. You hadn't thought about it before, but you were looking at what he was. was proposing and he had a good point his math was way off but but he had a good point about the about the level of the number of shares involved in the in the in the option program or restricted stock program and the period over which it would be issued and so i like i say it's math was way off but but but i i agreed with them that that that policy should be modified in some way way. And I commend the Coca-Cola company terrifically. The woman that headed the committee, Mel. Yeah, the comp committee, Mel. She worked very, very hard. She contacted other company. She contacted other companies. She contacted investors. She thought it through. And they designed a program that made terrific sense for the shareholders and the and the management and directors embraced it.
QuestionerWhy do you take this different approach to investing? that you would never do a hostile offer, the idea that you would never really publicly get into things like this. How did you get to that point of view and why you do it?
WarrenI did it. I did some semi-hostile things very early on and it wasn't much fun. It just isn't the way to go through life. Why not find a wonderful company and join them rather than find a so-so company and get in a fight. So that was 50 years ago or more and and Berkshire itself was semi-hostile, although the chairman of the board and the brother of the president both were on my side, but the president himself wasn't, and it just doesn't make much sense when you can find very good companies that will welcome you, assuming you aren't going to try to take them over. So that's been my game now for 50 years. But I must admit that there were a couple of instances in my youth where I took on what I thought were. bad management. And they deserved to be taken on, but it was not a life I wanted to live.
QuestionerGreat. Again, we have much more to come from Warren Buffett when we return. Joe, I'll send it back to you in the studio, and we're going to open this up for a lot more all-played when we come back, too. What about that house across the street from Warren? Did you guys see that? The person's asked...
Joe KernenYeah, I did. The person wants 10 shares of Berkshire, which doesn't seem like a lot.
OtherYeah. John Keough lived in that house 50, 55 years ago.
[53:50]
WarrenThat's the exact house in which Donna Mickey Keough and their many children lived and where I got to be friends with them long before Coca-Cola. Is that a good price? Yeah, but 10 shares of Berkshire is what? It's over $2 million. If they sell their house for 10 shares of Berkshire A, I'll be, I think I may be inclined to sell my house.
Becky QuickAgain, we have Warren Buffett here, and he's just come off of the 50th anniversary of his annual shareholders' meeting. This was a packed town. There were more than 40,000 Berkshire faithful who descended on Omaha right here in this hotel, across the street at the convention center, a lot of people that came to pay homage. But there are always tough questions that come up, Warren, and this time was no different. You and Charlie sat for six and a half or seven hours and took constant questions. These were questions that came directly from the floor, from Shakespeare. shareholders. There were three analysts of Berkshire who were on stage posing business questions, and there were three journalists who had been fielding additional questions from shareholders, a lot of them, who couldn't make it to the meeting. In going through all of those questions, again, Andrew and I were both here and saw thousands of questions that had come in. We talked about Clayton Holmes earlier this morning and about some of the criticisms that had come up on that front. But I want to bring up another three issues that we saw several questions on as well. ThreeG is the... company, the private equity company, essentially, that you have done several deals with. First, with Heinz and now with Kraft. And we had several questions that came up from shareholders who were concerned that 3G's way of business is not necessarily the Berkshire way of doing business. ThreeG finds companies and goes in and tends to lay off lots of people when they come into a company, maybe an underperforming company, but it seems like it's a little tougher management than Berkshire generally does. Would you agree with that?
WarrenWell, yeah, they go into companies where they feel that they're inefficient in one way or another. And they proceed very quickly to make them more efficient, whether it's having losing plants in Heinz, we found, they found, but I'm on the board, so I'm aware of it. They found that there were certain plants that were losing money, been losing money for years. And frequently, when you have a very profitable company, they just tolerate such things.
[56:12]
WarrenAnd that 3G does not. They think we're making very good money, but you have plants that are losing money or products that are losing money, or you have the opportunity to bring on new products that will make money. They believe in taking the actions they would take, whether the company's profitable or not. And they believe in doing it promptly. And from everything I've seen, they do it not only sensibly, they do it humanely. So I, Berkshire just, when we buy a company, the people that were managing it before keep managing it. And usually they manage quite efficient operations. And we like to buy companies like that. But 3G is perfectly willing to take on something where a lot of improvement can be made and then they do it.
QuestionerIs it fair to say that you would have never bought shares in Heinz or in kraft recently? You used to own kraft, but sold out of it. Is it fair to say that you would not have gotten involved with those companies? if it weren't for 3G management coming in?
WarrenSure. Those companies needed management that would make changes. And they were spending money they didn't need to spend, quite a bit of money they didn't need to spend. And I knew that 3G would do something about it, whereas if I bought it, I wouldn't have done anything about it. I would have left the old management employees.
OtherAndrew was here this weekend, too, and I know he has a question. Andrew.
Andrew Ross SorkinHey, Warren, on 3G in their approach, you know, one of the questions is, you know, one of the questions is, long-term shareholder. And they position themselves to be a somewhat long-term shareholder, though more like a private equity investor. Do you have any concern or worry that when they cut, they don't just cut, you know, the fat, but they end up cutting the muscle and they maybe get down to the bone and what that means from a long-term perspective, meaning they can maybe eke out some great profits in the next couple of years ahead, but what that does to the business, you know, 10, 20 years down the road?
WarrenYeah, well, I think there'll be. in the business 10, 20 years down the road. They have, they, when they went into brewing business, they started with a little brewery in Brazil, and now they have Anheiser Bush, and they're not going to sell Anheiser Bush, and they're started with Burger King, and they're making a lot of progress of Burger King, and they're not going to sell Burger King, they're going to make it larger.
[58:23]
WarrenAnd the same way with Heinz. We did not buy into Heinz to sell Heinz. We bought into Heinz to grow Heinz, as did they. So it is true that the private equity firms generally have some timetable, the one they want to get out of an investment. Sometimes they got out just in a couple of years. 3G and we, but we're their partner. 3G has no plans to do anything but build the businesses that we've joined them with, and they've shown no indication to do anything else throughout their history. They are in a retailing operation in Brazil that they went into 20 years ago. So they are builders. They are builders of efficiency as well as builders the product. At Heinz, we have four new products coming out very soon. Be sure and try our new Heinz mustard in. These fellows, every conversation I have with them, they want to figure out how to make the companies bigger and more efficient over time. And I've watched them do it. So they are not, there are in no way private equity operators who are buying a business, getting an override for running it for a while, and then selling it. Another one of the big issues here this weekend, again, this was not on the floor of the convention center where things were taking place, but outside there were protests that came from NetJet's pilots who have been negotiating a contract and who have had issues with the contract that they've been negotiating. I think they're concerned about health care costs that they're being asked to pick up a larger portion of. But these NetJet's pilots have been very very persuasive or very in evidence. You're looking at photos right now. They were outside picketing, standing outside. And I've noticed even this morning here, there have been NetJets pilots standing behind us from time to time who try and get into the shot and bring this back to your attention. So what do you say about the situation at NetJets? Well, I would say that on average, the pilots are making $145,000 a year. They're making as much or quite a bit more than they make with our competitors. They make far more than they make with flight options and competitor. They they have they have arrangements for seven days on seven days off being able to enter the system at many places that are the envy of pilots elsewhere and we do not see pilots leaving net jets to go to work for competitors and we certainly see people from competitors lining up to be pilots at net jets but we have a good business they have a good job it's very natural
[1:00:56]
Warrenthat from time to time in labor negotiations that that people people have difference of opinion about what kind of a contract that would either want to get or be offered and we're in the midst of that now but we have no anti-union type of philosophy at Berkshire over 50 years we've had hundreds and hundreds of unions and in my memory we've had three strikes two of which lasted less than a week so it's it's we would like to change the health provision so they participated in some of the cost but we're willing to pay a large lump sum to buy that and and there will be negotiations and in my view there will be a settlement because the pilots like to fly out net jets that's evidenced by the fact that they line up to get the jobs and we like to have them and they are terrific pilots I've flown net jets for my family for 20 years and I've never met a pilot that wasn't professional and and I feel very good about the pilots we have and I think they feel good about the jobs they have and now we got we got we got to come to a And there's no hurry on it, but we have to come to a an agreement that both sides are happy with. And finally, the other issue that seemed to come up a lot was concerns about changing taste, consumer tastes in the food industries that Berkshire owns major stakes in, companies like Kraft, companies like Coca-Cola, people concerned about whether this food is good for them, and that's something that millennials in particular have been thinking about. Well, people have been drinking Coca-Cola. since 1886. So I imagine that there's been some, I don't know of any study that's been made on the lifetime of heavy user of Coca-Cola versus people who drink nothing but water. But speaking for myself, I'm 84, literally one-quarter of all the calories I've consumed in the last 30 years have been Coca-Cola. And I don't see how anybody can feel any better than I feel. I am one-quarter Coca-Cola, and I can tell you, I've missed a day of work, you know, since I had the prostate cancer, radiation three years ago, and I don't think the prostate cancer was caused by Coca-Cola. And all my friends drink it like crazy. So there's 1.9 billion, eight-ounce servings of Coca-Cola products sold around the world today. And there will be more than $1.9 billion a year from now, and more than that, five years from now, and more than that 10 years from now. And that's been true. And some people will like other things, and that they like broccoli and Brussels, God bless them,
[1:03:28]
Andrew Ross SorkinAndrew? Warren, on that issue, I actually received a number of emails after you gave a similar answer at the meeting. And some people say, I think the question became not what your preferences are, but whether you recognize and think that companies like Coca-Cola, or whether it's Hines or Kraft, are going to have to transform themselves over the next 10 years, meaning will people be drinking Coca-Cola or will they be drinking some, it may be a Coca-Cola product, but a different type of product. And whether your tastes, by the way, are in line or out of line with the sort of transformation in tastes, at least in this country and abroad?
WarrenWell, there's no question that additional tastes evolved. That doesn't mean that people's enthusiasm for the old tastes disappear. But the diet product came about in the 1960s. In fact, I think it was R.C. Kolo that came up with diet right first. they beat Pepsi and Coke to the field, but Coke and Pepsi followed with a diet product. And then there's been Coke Zero, and there's the new product with Sivia. And sure, there's going to be all kinds of products. And some products sell well in certain countries and don't sell in other countries. Georgia coffee is a huge Coca-Cola item in Japan, huge. It doesn't sell that well in some other places. So there will always be local tastes. There'll be changes in taste. Coca-Cola has hundreds of different products. And there will be a different array of products in five years from now, 10 years from now. But the one thing I'll promise you is the kind of Coca-Cola I drink will still be a huge, huge item at that time. But at Heinz, we've got four new products coming out very soon. And there's always some evolving. But there's also a huge base for most products. If you take Heinz ketchup, take A1 sauce, you know, with a craft desk, take Heinz 57 beefsteak sauce. I was using Heinz 57 beefsteak sauce on hamburger when I was eight or ten years old. And I had a steak last night, and I put some on at 84. So there's a lot of continuity in brands, but there's also change. And any intelligent company is going to try and anticipate those changes. And when they find them, try to come up with the best product to satisfy them.
OtherOkay. Gentlemen, we have more coming from Mr. Buffett's still ahead. Welcome back, everybody, special guests joining us right now. Endomik and Sue leaving Detroit from Miami this past
[1:06:08]
Otheroff season. His new contract made him the NFL's highest paid defensive player. He met Warren Buffett when he played at Nebraska, and the two men have been friends ever since. And Dumbican Sue is in town for the Berkshire Hathaway meeting, and he joins us right now. And in Dumbican, welcome.
QuestionerThank you. It's an honor to be here. I'm looking forward to.
OtherIt's a pleasure to meet you. a lot about you.
QuestionerYeah. This is not your first, Forkshire Hathaway meeting. It is not. I was fortunate enough. I believe it was two years ago. We had an opportunity to have the paper toss earlier in the morning and see all the ex-ex-ex- excuse me, all the festivities. And it was a lot of fun. I enjoyed it. And it probably won't be my last one. I hope not at least. You know, I have been hearing it a lot about you, too. And I loved the Wall Street Journal story last year that called you a secret finance nerd. Let's talk a little bit about that because. This guy is smart. Yeah, you're not somebody who is just a football player. You are known on field for your very aggressive tackles and where you go after people. But let's talk about the finance side of things. How'd you get interested in that?
QuestionerIt's always been something that's fascinated me. I'm an engineer at heart. Get it from my father. And it's something that's always been, I've always loved numbers. So I'd like to be involved in to understand what's going on and not just a person that just always wants to take great advice, which I've been lucky enough to know somebody who can get it. enough to know somebody who can give me some great advice. And for me, I like to understand things. So understanding my investments, understanding how to be sustainable and understand how I can progress my family to the future is going to be huge. And I'm lucky enough to be on Mr. Ross, Mr. Buffett, and a great friend and mentor and Gary Schiffman, who won't some communities, so.
OtherHow did you get to know Warren Buffett?
QuestionerThe first time we actually met was he came to my Oklahoma game in my senior year in college. And I had a brief meeting right before the game. So I was like, wow, all right, now I've got to get focused. But then it was, I had the true pleasure and honor from Mr. Coach Osborne for us to set up a meeting and have an office face to face. And we sat down and it was like speaking to my father and just had a great long conversation and it was good.
[1:08:12]
QuestionerWarren, I know you're a Nebraska fan. Why did you sit down with Indomakan the first time around?
WarrenWell, I admire him a lot and he's a smart guy. And, you know, he listens, he asked the right questions, and it's true, we did that. an Oklahoma game and I was an honorary coach for one quarter and I filled up a commanding seven to nothing lead and Domen held it for me.
OtherAnd Domen, what you're talking about is something that's actually very important for other football players, other athletes who go through it. It was recently a study release that showed one in six NFL players filed for bankruptcy within 12 years of retirement from the NFL. I mean, that's kind of stunning when you think about people who are making an average of over $3 million through that career.
OtherNo question. It's something that we definitely as athletes need to make sure we understand. And it's really financial literacy that we all have to become sharper in. And at the end of the day, it's about educating ourselves and finding people. I mean, I'm a guy that I feel like I'm fairly smart. I get compliments, but at the end of the day, I don't know everything. So it's asking questions, have an opportunity to go and meet different people that can show you the ropes of it and understand. And that's where I think that's where we lack as athletes. We feel like we're kind of untouchable and nothing's going to go wrong to us, especially when we're in the limelight and everything's going to. going well but you got to understand it's football is only for so long and that's something I learned at a very early age.
QuestionerWarren it seems to me that athletes, movie stars, people who are newly into money like this probably have a lot of people who are going after them trying to prey on that money and find ways of telling it. What advice have you given?
WarrenWell I mean some are that that always happens and then there's some smart guys like Endomicon that recognize that but they're going to get it. I mean they get they get they get they probably get female groupies and then they get natural grobies.
QuestionerWhich do you prefer?
WarrenI know which one I'd prefer.
QuestionerAnd Domic and I know that Joe Kernan back in our studio has a question too. Joe go ahead.
Joe KernenWell I'm just thinking you know six years for only 114 million. I think you could yeah I think you could kick Floyd Mayweather's butt right now and make it in one night couldn't you and don I look at you. It just seems like a long time to a long time to spend making a
[1:10:25]
Othercan you believe that he's going to make 200 million on that fight no it's a it's a great great opportunity for him and I would I would love to be able and have a lot of respect for that sport but I don't know if I could cut down the 145 or something like that that take a lot for me to get down there so I think I'm going to where I'm at and stick to my daily workouts where I can be around the 300s let me answer your legs let me answer a serious question I both thought about it but and Dominica if you see Do you did you get to watch Leonard Williams played it is he got they said he might have been the best player you know for the draft that the Jets ended up picking as far as a defensive player did you get to watch him do you do you get the feeling he's going to be as good as you are I didn't get an opportunity to watch him but I feel like at any level when you're a young guy coming into the NFL and a guy that has great talent athleticism you have an opportunity to grow and when I came into the first time into the league I didn't understand everything I was doing and as I've gone into my five years I continue to grow and grow and even I've been fortunate enough to be successful and and see a lot of great things and myself on the football field there's I still have a ton of more room to grow and so that's why my contract is so long so I can hit my peak in the next six years and go from there and Domican let me ask you you are somebody who's pretty serious about mentoring others too you've given back a lot of money to try and help let me make sure I get this right kids from your high school who are also playing football and in engineering interest too that's pretty specific but you're really trying to reach out yeah no it's it's exciting for me and I know that I was very very lucky to get where I am right now and the one of the ways I was able to get there is because of people helping me get there it's a kind of a cliche thing but it takes a village to raise a tile but I very much so believe in that and I feel it's my duty and it's my want to it's the way I was brought up to want to want to help other people and especially a great experience that I had here at Nebraska I want to just continue to share it more and more and that's what my scholarships about coming to Nebraska been going from there we have a table in front of you because Warren specifically asked for that I guess you guys have done an arm
[1:12:39]
Otherwrestling challenge before you're trying to recreate that this time around I'd be I'd be delighted to I wouldn't have brought the subject up unless I had what did you do you must have completely distracted him before I I felt it was the only fair to give him a return match yeah we're ready I'm getting ready I'm ready I am okay now okay now Okay. You ready? Okay. I'm toying with him. I'm toying with him. I'm trying with him. Watch it. Just let me know when you want me to give it to him. Becky, tell me when. Go. Oh! Oh! Oh! Okay. Smart man, Indomicon. I am. I am. At least this time he didn't make me sign the affidavit. So I had to sign a release last time that if I heard him wouldn't sue me.
Becky QuickWell, Ed Domican, thank you so much for joining us today. It's really a pleasure meeting.
OtherThank you very much. Thanks again for having you. I appreciate it.
Becky QuickIBM announced last week that it would raise its dividend by 18 percent. That marks the 20th straight year that the company has increased its payout. Shares outstanding, by the way, down 17 percent since January Medi took the helm in 2012. I asked the IBM CEO who was here at the Berkshire Hathaway meeting this weekend, what investors should be reading into that news.
QuestionerNo, I mean, the right message to take out of this, and we've been so clear about this, that we think, you know, in returning value to shareholders, you do it a couple of different ways. And it isn't in either or. So we can and do invest in our business and what we need, as you know, whether it's R&D, our acquisitions, our capital, and we line it up, and it's been very consistent. 10, 11, 12 billion dollars, and then as well you can return to shareholders. And so what you saw, the 18% dividend, which is the 12th year that it was double digit and 100th year that we have paid one, right, is our ability to balance these two things. And I think that's, again, got a lot to do with always this view. of a business model, which is keep moving to higher value, at the same time, do the right decisions to sustain the company and reinvent it for the long term, and balance return to shareholders.
Becky QuickBerkshire Hathaway is the largest shareholder of IBM. It's also revealed we found out over the weekend. Warren told us that you've been buying more shares, or at least you were in the first quarter. And those purchases will be revealed in SEC statements that are coming soon, SEC filings,
[1:15:00]
Becky QuickI should say. When I spoke with Ginny about this, I just brought up the idea that on Wall Street, a lot of people were looking at this 18% hike in the dividend is very good news because they see it as a way of getting money back to shareholders that maybe means IBM won't be making quite as many share repurchases. That's how a few houses on Wall Street had read it. That's a little different than how you view the company. You'd be just as happy if they were buying back shares because it increases your stake in the company, right?
WarrenWell, I like both. And dividends and repurchases are really two different animals. I don't look at repurchases as repurchases as. I don't look at repurchases as as shareholder value or something like that. I look at those as a decision to buy a business at less than it's worth. And hopefully it's done for that reason. I mean, sometimes they buy it back. Other companies may buy it back for more than it's worth. But there's no, in my mind, there's no connection between share repurchases and dividends. You know, dividends go to everybody and their distribution. Share repurchases should be made when you're buying your stock for less than worth and it's pretty simple formula. And the one thing it does emphasize it, but this is true throughout the tech field. This is true with Microsoft. It's true with Apple. It's true with Apple. It's true with Oracle. It's true with Qualcomm. Those companies earn extraordinary returns on net tangible equity. They don't really need much money. Apple doesn't need much money. Microsoft doesn't need much money. They spend money on R&D, but they don't really need much tangible capital. And I IBM operates with a negative net tangible assets. And you could do the same thing with most of the other tech companies. It's a terrific business when it works.
Becky QuickLet's shift gears and talk about a few other issues. Another question that came up over the weekend at the shareholder meeting was what the impact would be on Berkshire if it was designated a SIFI, a systemically important financial institution. What do you think about that? First of all, the likelihood of that happening? And second of all, what would it mean?
WarrenYeah, well, I really don't think there's any likelihood. We've not been contacted. They certainly know we exist. And as I understand it, with Metropolitan, and they spent a year before anything became public and had lots of conversations with them.
[1:17:17]
WarrenAnd that just has not been the case. Simply being large is not the reason to be designated as SIFI. Exxon Mobil's large, apples large, Walmart's large. There's plenty of big companies around. And the question is whether you pose a risk to the system because of your interconnectedness with the financial system. And 20% of our revenues are in the insurance business. We don't write in any quantity at all. We don't write life insurance where people can demand their cash and end up. So there is no way at Berkshire that we can have large demands for cash in any period. You can postulate the greatest insured disaster in history or anything of the sort. And we will always have loads of cash, just like we had in 2008. And we do not pose any, any, remotely, any threat to the system. I can think hundreds of companies that would be much more likely to be in that category.
QuestionerWarren, let me ask you about a move that President Obama is continuing to push this week. He is going to be getting aggressive, continuing to be aggressive with pushing, trade pact and trying to convince the House, the Senate in the House, but particularly the House, to go along with some of these issues. His plan, I think, is to go visit Nike later this week and talk about the importance of open trade between Nike and between us and Asia for companies like Nike. What do you think about this? Because there are a lot of Democrats in the House in particular that think this is bad for American jobs.
WarrenI can't tell you anything about these specifics, but overall, I very much favor trade. And it's good for the world. It's good for the world. good for us. It's not good for specific industries at times. I mean, there's no question that if you, the more the world trades, the more specialized certain industries will be in terms of where they'll be located. There are places where there's natural advantages to doing. You better try and raise bananas in Central America and you better not try and raise them in Nebraska. So there, but trade benefits both sides. That's why there is a trade. I mean, you know, you're, you're trading your services to CNBC and they think they're getting something out of it in terms of viewership that makes it worth their while. And trade, we have 13 or 14% of our economy in exports, and we have somewhat more than that in imports. It would be better if we had even more exports and imports. It means countries are doing what they do best, and they're getting things that they don't
[1:19:53]
Questionerdo as well in producing it. So I am very pro trade. I don't know all the specific of the specific act. Mr. Buffett, thank you.
Becky QuickWe are going to continue this conversation, but we have some special guests that will be sitting down with us in just a moment. Welcome back to Squawk Box, everyone. We are speaking this morning with Warren Buffett, the chairman and CEO of Berkshire Hathaway. Also joining us right now is Vice Chairman, Charlie Munger, and Berkshire board member and Microsoft founder, Bill Gates. And gentlemen, it is a pleasure to have all three of you here this morning.
OtherThank you. Thank you.
Becky QuickWe get the time from, from time to time, we get to sit down with you, I've been thinking of this as kind of a brain power hour. You are three of the smartest people on the planet. I know that your conversations with each other often get into world problems, world issues, and how you see them. Sometimes you see them the same, sometimes you differ with each other. And I was hoping we could just kind of have a conversation and let the viewer spy in on the conversations that you three have with each other all the time. So I'm going to throw out issues and then step back and let you guys debate that and discuss it. and discuss it. Why don't we start with energy? Because I know this is an area that all three of you have a lot of knowledge, have a lot of interests. Bill, Tara Power, your fast nuclear program that you've been building. I know that the two of you went to the Canadian oil sands and checked things out there. And Charlie, we have been huge fans of your thoughts about how American independence, energy independence, is a stupid idea. So why don't we start things off with the question, what are we doing right in this country right now? now, what are we doing wrong? And if you were in charge, how much you changed this? Phil, can I start with you?
OtherSure.
OtherWell, the shell oil phenomena is a fantastic thing for the United States and for the world. Those resources, people did not think they could be unlocked, and now the U.S. is the world's biggest oil producer. We still import a lot, but with the right increase, North America as a whole, it's likely to get to a point where there's almost import taking place and that's a good thing. The toughest thing in energy dose is we have climate change and so over time you have to shift to sources of energy that don't emit CO2 and natural gas is a reduction but it doesn't get you
[1:22:14]
Otherwhere you need to go so things like renewables and nuclear need to come in and be a gigantic part of the mix within the next 30 years. Where are you right now in terms of your nuclear project and what the promise is.
OtherIt's early stage. We're hoping in the next couple of years to actually start building it. We're talking with various countries, including China, about where it should be built. And nuclear doesn't move at the speed that computer technology does. Things go well. By 2025, this new design, the prototype, will have proven itself. And so other people will want to build it, and it could become a significant contributor. But it it takes a decade for that prototype to prove itself.
QuestionerCharlie, Bill just said something that I know you disagree with, the idea of American independence on energy, the idea of whether we should be exporting our resources and the idea that we should even be using them. Could you explain why you think that's a bad idea?
CharlieI'm not sure we disagree. I think it's great that we found all the shale oil, but I want to conserve oil and gas in the United States to the maximum extent we can. So I'm not in a hurry to have energy independence. I'm glad to use up the yellow fellow fellows oil and conserve our own. I don't see any real substitute for oil as a feedstock and so on and for running airplanes. And so I want to conserve it. So I'm not, if there were no threat to climate change, I would be totally in favor of shifting rapidly to renewable power, sun, wind, and so forth. And Bill and I would disagree. He may think climate change is more important than I do. But I really want to conserve it. I wouldn't export a damn item of oil or gas if I were desperate of the world.
QuestionerLet's talk about climate change because you did make some comments at the meeting over the weekend where you questioned what some people who believe in climate change are actually doing at this point.
CharlieI'm much more afraid of running out of hydrocarbons than I am of climate change. Climate change, 30% of Holland is under sea level. If we have to spend a few percent of GDP to adapt to climate change. I think we can. I know of no substitute for hydrocarbons if we ever ran out.
QuestionerWarren, where do you weigh in on this conversation?
WarrenI certainly think that if there's a finite, we never, we've always underestimated the amount of oil and gas in the world and now we just had this big revision in terms of what we can do with with shale
[1:24:49]
Warrentechniques. But what on balance, I would use the other guys. I mean, I would always have enough for strategic reserve. I mean, you do not want to be without oil productive capacity or lots of oil if something should happen in the world where you needed to have your own independence. But, but, you know, for something is very precious. Charlie uses the example of topsoil. I mean, we have great topsoil in much of this country, and we wouldn't dream of exporting it, you know. It's imagine exporting the topsoil of Iowa. People would think you're out of your mind. I think the hydrocarbons are just as precious as the top sale of Iowa. Although the argument that comes from people like Boone Pickens is that you need independence and from energy independence from other places because you are taking our money and shipping it to people who don't like us. And that creates problems as well. I don't think he's thinking long-term enough. Bill, you want to weigh in on that? But they're shipping a very valuable asset to us in return for little pieces of paper. And over time, 500 years from now, you know, that will be hydrocarbons needed. And if you really have the long-term interest in the country, you use the other guys. I mean, one of the advantages of being a rich country is that you don't have to use up your most precious assets.
OtherYeah. Energy is fungible. So there's nothing magic about hydrocarbons. You can make, if you have energy, you can make hydrocarbons. So to me, restricting the market, there are people who think we shouldn't be allowed to. to export advocates. I don't see any reason why you would restrict that. I believe in free trade in this and other things.
QuestionerLet's shift the conversation to education. Bill, obviously, you're well known for your support of Common Core, and you have spent a lot of time and effort and energy trying to fix the education system in the United States. But I'd like to hear from all three of you. This is a big problem that we're faced with right now. It's a problem that seems like it's very difficult to move the needle in when it comes to attacking this. But if you were education czar and given free power to change the American education system, what would you do?
OtherWell, one piece of good news is that the charter schools are doing a very good job of educating kids in the inner city, where typically dropout rates are very, very high and very few kids go to college.
[1:27:24]
OtherThe good charters have overcome. have overcome that. And so by using a long school day, long school year, a different way of working with the teachers, amazing results have taken place. But you're absolutely right. We haven't moved the needle for most students. Charters are only a few percent, so we have to spread those best practices in order to get real change. How do you do that in the public school system? It's not easy. School boards have a lot of power. so they have to be convinced. Unions have a lot of power. So teachers need to see the models that are working because although change may be scary, they want to be part of a successful model. And so we need more pilot programs, more dialogue to get all the entities, government, school board unions, moving towards a more intensive education process.
OtherCharlie, you said something several years ago to me that has really stuck with me, where you talked about McDonald's, talked about McDonald's and the role that a company like McDonald's plays in educating the workforce.
CharlieYes, it's fun by the elite academic types in America to say McDonald's is the wrong kind of food and it's the wrong kind of this and the jobs don't pay very much and so forth. I have quite a different view. I think McDonald's is one of the most successful educational institutions in the United States. They take people and give them a first job, which enables them to get a second job, They do a very, very good job of educating troubled young people to be good citizens. And they're probably more successful in charter schools. So I have a big fan of McDonald's. I stopped by there many mornings. I first of all put my order in it. Then I go where I pay for it, and that person is very nice to me. They know me by name now, and we have a nice interchange. Then I go and pick up the food a little further down the line, and they tell me to have a nice day and everything. Those people are learning very good habits. They've got to be there at a certain time. They have to learn how to count money and price items. And they have to learn how to smile at people and have happy customers. And I've seen it work, I see dozens of them just at this one McDonald's I go to over time.
OtherWarren, what would you do if you were at the educations are? If you could change things? We are spending the money. I mean, so it isn't like there's any lack of resources going into it. And it's, it's ungodly in terms.
[1:29:55]
OtherIt's ungodly and tractable, you know, the system. Half facetiously, but half, I would, if every American, if the only choice available were public schools, we'd have better public schools. But the wealthy in many, many cities have opted out of the public school system. I mean, they may vote from the bond issues out of conscience, and they, some of them may engage philanthropically, but with their own kids, they send them private schools. And by having this division, essentially, between rich and poor in schools, the rich get the education they want to get for their kids. And a lot of them have a conscience, so they try to do something for somebody else. But they don't try the same way as they would as if their kids were in those schools.
QuestionerBut you just said that it's not an issue of resources, that we have enough money. You think it's the rich brain power, the educated people not focusing?
OtherNo, no more the figure, but I think we're probably spending $12,000, you know, roughly. and it's a lot of money. And it's gone up over time in real terms, very significantly. And, you know, so that money hasn't, you might argue that the most expensive school system is actually somewhat the worst I've made in terms. Bill and know the figures out a better night. But in the end, the people that don't have their kids in public school and know their kids are not going to go to public schools or their grandkids are not going to have their kids. the intensity of interest across the board. There'll be plenty of exceptions, but across the board, they're not going to care as much about those schools as the ones that have no choice.
QuestionerNo?
OtherThat's absolutely right. You want in every community the top people to really be aware of what is the dropout rate. Why is it that these inner city schools do such a poor job? This is the issue for the country, in my view, that in terms of, you know, that in terms of, you country-wide success and individual opportunity, you know, the promise of our country, this is the most important issue. And we're not making as much progress as I'd like. In fact, of all the foundation areas we work in, I'd say this is proven to be the most difficult.
QuestionerWhy do you think that is?
OtherWell, there are some entrenched practices. It's a very big system. You know, it's over 600 billion a year being spent. a year being spent and it's a system very resistant to change. The best results have come in cities where the mayor is in charge of the school system.
[1:32:35]
CharlieOur higher education is probably, meaning the universities. That's right. It's probably the best in the world. And so that's one of the reasons I do it. I'm not any good at constant failure. I tire easily. Therefore, I don't try and fix the public schools in our schools. the public schools in our worst neighborhoods. It's just you have to be a saint or a gates to do that. And I'm neither. You have to make that distinction. It wasn't a hard bill. Either or. And but our higher education is the best in the world. And I really like making the top. I'm better at making the top better than at fixing insoluble problems. I soon tire of failure.
WarrenBut Charlie went to the public. Charlie went to the public school system in Omaha, as did I. My dad was on the school board in the 1930s. And we had a very good parochial school system in Omaha. But we had no real private system alternative. There was one private school that was really for kids that had troubles mostly. And, you know, everybody cared about the board. My dad cared enough about the public school system to run for the school board, which was a thankless, payless job. I mean, you got nothing out of it, and he just felt it was important because his kids were going to go to school. just because we're going to go to public school in Omaha. And that intensity of interest by people that really are good citizens can make a difference. But in too many cities, the rich have essentially opted out of the public school system. And they're going to stay out. I say a good public school system is a little like virginity, that it can be preserved but not restored. And it's a very, very tough problem.
Becky QuickWell, on that note, we're going to continue this conversation and continue our brainpower hour in just just a moment. But in the meantime, Andrew, I'll send it back over to you.
Andrew Ross SorkinThank you, Becky. Great conversation. We do have some breaking news for you right now.
[1:34:57]
OtherMcDonald's detailing a turnaround plan. Steve Easterbrook says the company's performance has been, in his words, poor. So he is reorganizing the company's structure and he's doing it into four segments. The U.S. international lead markets, high growth markets, and foundational markets. Easterbrook says the new structure will eliminate layers of bureaucracy. And in other headlines, McDonald's is going to be moving to become 90 percent. franchise globally by 2018. Right now, I think it's about 81%. We're going to have a lot more on that story when we return. And we're also going to be heading back to Omaha to continue our conversation with Warren Buffett, Charlie Munger, and Bill Gates. We were listening in to Andrew's comments when we were just hearing about McDonald's. And McDonald's looks like it's changing its corporate structure pretty dramatically. Warren, your comments when you heard were what?
WarrenYeah, well, we earlier talked about 3G and what they did when they came in and making obvious changes. And they did that at Burger King when they came. in and they went from, they reduced the number of company-owned stores dramatically and had them franchised and now McDonald's is doing the same thing. So it made sense of Burger King. I'm sure it makes sense at McDonald's, the difference is that when they come into Burger King, they do it very fast. Incidentally, at Dairy Queen, we have 6,000 stores and we had about 50-some company stores originally. We have three now. They make less sense. But you need somebody that changes the system once they sort of get built. to doing the same thing over and over again.
QuestionerAll right. Let's get back to fixing the world's problems with you three.
OtherWell, Dary Quinn's much more important.
QuestionerWell, let's jump to inequality. There's been a massive discussion on inequality in this country and a debate about how to change that. President Obama has laid out the idea that he would like to see the minimum wage raised. Warren, you are a Democrat, you supported the president, and yet over the weekend you made comments here at the meeting talking about how you're not necessarily a supporter of minimum wage. Why?
WarrenWell, if you increase... the minimum wage dramatically, you're going to change the number of people employed in a significant way. Everybody can give you their own equation of it. Usually it proves what they want to prove themselves. But there's no question that if you make it a really meaningful change,
[1:37:05]
Warrenyou change employment opportunities. And I think that I do want to see people have more money in their pocket, low-income people. And I think the earned income tax credit is a far superior way. It rewards work, and it does not destroy the normal demand supply curve. So, that you keep people employed. In fact, you even induce them to become employed, and you put more money in their pocket. And I happen to think that's the superior way to take care of, take care of the problem we have, which is that we've got a whole lot of people that are very poor. Bill and Charlie, your thoughts on minimum wage and how to try and resolve inequality issues?
QuestionerAbout 70% of the people who benefit from the minimum wage are in households that are not poor. And so if you have a child in a household that's well off and you raise the minimum wage, you're raising the cost of food for the poorest, and only 30% of that money is going into poor households. So it's fine, you know, getting up $9, $10, $11, I don't think we're saying that we're against the minimum wage. But it's the mechanism that's going to get more wealth is earned income. tax credit is absolutely a fantastic construct. There's a good piece in the economist this week on it. Charlie?
CharlieI agree. I think the people who want huge, high minimum wages will hurt the people are trying to help. I regard it as massively stupid. I agree totally with Warren. I think the earned end income credit makes nothing but sense. And I think you want to be very cautious in raising the minimum wage.
Joe KernenOkay. We have some breaking news that's just crossing the watching the watch. Joe, I think you've got a handle on that? Sure, yeah. Cisco today is giving some executive succession details, announcing that the board of directors has appointed Chuck Robbins as CEO taking over for John Chambers on July 26, 2015. He was also elected to the board of directors. John Chambers will assume the role of executive chairman on the same date, July 26, 2015. 15. And that is, that will be just before John's 66th birthday. So he's 65 years old right now. He says this is the perfect time for Chuck Robbins to become Cisco's next chief executive officer. He was selected a very strong leader at a time when Cisco's very strong position. Mr. Robbins has been there since 1997, quickly moving through the company's ranks. He most recently served as Cisco Senior Vice President of Worldwide Operations.
[1:39:52]
QuestionerSo it's a 17-year employee. And Carol Bartz, who is the lead independent director on Cisco's board, says that I've had the opportunity to watch Chuck grow as a leader over the last 17 years. And I'm convinced there's no better leader for Cisco today. He's demonstrated the same energy and passion to make Cisco great that John Chambers has demonstrated during his entire 20-year career as CEO. He's been much speculated about as a potential. There's been a number of articles. What it does, though, mean is there's a number of people who didn't get the job. There was a little bit of a bake-off going on over the past couple of years. Some people had speculated that Gary Moore, who was their chief operating officer, long-time IT exec, was going to get it. He's the same age, though, as Chambers. So he was probably not the person also a guy named Robert Lloyd, Executive VP of Worldwide Operations, had been in the hunt, along with Edsard, Overbeak and Chuck, well, and Chuck Robbins got the job. Question of course is, when these things happened? Do any of the job? those folks end up going elsewhere. We will see. Andrew, Joe, we have some thoughts from our panel on this news, too. We've been listening in. Warren, you want to jump in?
WarrenWell, Berkshire is having a board meeting at a couple of hours, and we don't like to get one-up by Cisco, but I don't think we'll have an announcement on successor management.
QuestionerBill, your thoughts. I mean, John Chambers is somebody you've known in the industry, too.
OtherJohn's done a fantastic job, so it's a big spot to fill. John's, you know, energy and optimism about our industry. John's bringing together partnerships with Microsoft and others. You know, he's amazing, and he's had the job a long time.
QuestionerAll right, gentlemen, we'll send it back to you, but we do have more coming up and other problems of the world, but we're going to tackle in just a little bit. Welcome back to Squackbox, everyone. We are speaking with Warren Buffett, the chairman and CEO of Berkshire Hathaway, Vice Chairman Charlie Munger, and Berkshire board member and Microsoft founder Bill Gates this morning. These, again, are three of the smartest, most educated people on the people. planet's people who are constantly curious about things. So we're taking this opportunity to pick their brains on some of the most pressing issues that are facing not only the country, but the world right now. Gentlemen, we have not talked to financials with you this morning
[1:42:07]
Questioneror anything that's happening around the globe when it comes to the economy. But I think probably one of the most difficult tasks right now would be to be sitting in Janet Yellen's chair and trying to decide whether to raise interest rates and buy how much. We spoke a little with Warren about this this morning. If you were in Janet Yellen's position right now, what would you do?
Greg AbelWell, I'm not an expert on that challenge. It's the environment with low interest rates globally is so unusual. And it really shouldn't persist. It creates problems in terms of leverage and bubbles. But how we get out of it without creating some economic setback, it's very, very, very, very difficult. She faces the fact that most of the other central bankers are still lowering interest rates. So people do expect the U.S. to sort of take the lead in pushing our way out of this situation. But it's not a set of easy choices she has.
QuestionerCharlie, how about you? What would you do?
CharlieWell, I'm deeply suspicious about printing money and throwing it around instead of printing money and building infrastructure and so on. So I get very nervous. I get made very, all these central bankers who have pushed, throwing the money around, as if that were the only two they had. I think there's a lot to be said for physical infrastructure interventions by governments. And I think that everybody is relying too much on these monetary tricks.
QuestionerBut how long do you think you're going to have negative interest rates in Europe?
CharlieI don't have the faintest idea, but it's, The situation is very peculiar, and I don't think it's good.
QuestionerWarren, what would you do? I mean, based on what Charlie and Bill have just said, you laid out the same issues earlier where this is a conundrum. However, there are bubbles that are going to be inflated potentially. Money, a lot of money around means it's got to go somewhere. If you can borrow money at negative rates, it has to be very tempting to borrow. And we borrowed the $3 billion in euros there the other day. I mean, we certainly were affected by the fact that we could get a rate of 1% or something like that bunded for a dozen years. But I do think, and I may be wrong on this, but I think that Janet E. Ellen's hands are somewhat tied by what Draghi is doing. I think it'd be very hard to raise rates dramatically or significantly from here. And have Europe continued to do what it's doing. It would, every person in the world with money would be thinking about.
Warren
[1:44:55]
Questionerdo I move it from X to Y? And those flows could become very uncontrollable, and they could create their own momentum, too, which always happens in markets. I mean, when something gets going, it has a tendency to keep going and go bigger and bigger until some huge counterforce hits it. So I do not envy her job. Where have you, I mean, I assume the three of you have talked about this quite a bit on your own. It's one of the most unbelievable things. Fascinating. Shouldn't be possible to have such low interest rates like this, but negative rates. Have you seen anywhere where you think bubbles might be developing places that it wouldn't be so high? I mean, Warren, you said yourself that stock prices are high at these levels if we had normal interest rates.
WarrenWell, look, I mean, it's affecting real estate in a big way, and you can understand why. A, you can park your money cheaper if you want a finance something, and you're comparing it all the time. We've got all these pension funds and everybody else with huge sums to invest. Usually they either have some kind of an assumed rate to sort of build into it if it's a pension fund or they have what they expect to get if they're a college or something of the sort of sort. And obviously, when they see negative interest rates or flat rates in this country, they say, we've got to do something. And they may finance activist funds. They'll finance almost anything that anybody comes along with that promises of a higher return. But it's changed the value of real estate dramatically. in this country and it's probably changed the prices of stocks pretty dramatically here. And what's happened, of course, is it's gotten more extreme as it's got along. It's that moderating. You have a situation now where when Poland goes to negative, it sells with a negative interest bond. I mean, you know that you, you know, you're not in Kansas anymore. The temptation to, say, borrow 10 year money to buy stock back in is very high because although the P multiples are high by historical standards. Relative to interest rates, they're actually quite a bargain.
QuestionerLet me ask the three of you this. If you had to put a bet, because these interest rates have also been wreaking havoc in the currency markets, we've watched what's happened to the dollar. But if you had to place a bet for the next 10, 20, or 50 years on the dollar versus a basket of other currencies,
[1:47:18]
Questionerwhich would you take, Charlie?
CharlieWell, I'm not sure my judgment on that is better than anybody else's. We have not made our way in life by guessing currency rates.
QuestionerBill?
OtherI'd probably pick the Chinese currency. The U.S. currency has this unique reserve role, which right now is making it stronger than the underlying economics would suggest. And the Chinese currency is more priced to their economics. So not to be disloyal, I love the dollar, but I wouldn't put my bet on it.
QuestionerWarren?
WarrenWell, you said a basket, so I would take the dollar against the basket of other currencies. I think that other countries will, as a group, will behave more foolishly in terms of the currency than we will. I wanted to ask Bill how much Chinese currency had in his pocket here.
OtherI have none.
QuestionerYou do travel to China a lot, though.
OtherI do. somehow I don't end up using cash all that much, right?
WarrenOther people buy things for him. He gets upgraded.
QuestionerOne of the things we've been watching is what's been happening with Greece and the EU, and trying to figure out how this whole situation will end. And Charlie, my favorite line from the entire weekend was your line referencing this when you said, commenting on the whole idea of the European Union, you said, it's not a good idea to go into partnership with the shiftless, lazy brother-in-law and expect it to work out. Can you comment a little bit more about...
CharlieWell, I think that's at a pretty plainly. Did you come up with that on the stage?
QuestionerYes, of course.
CharlieBelieve me. It's... I have this feeling on macroeconomics that the democracies are getting dysfunctional at doing infrastructure intelligently and fast. and fast, and therefore everybody plays all these monetary games. And it looks to me, they're sort of running out of effectiveness. So it's, I regarded, as a hell of a mess. And I think we ought to get better at doing infrastructure vigorously and fast and skillfully. And practically, everybody's terrible. We're getting to be more like India. It's not a good idea.
QuestionerThere's probably not much coming from Washington at this point. I don't think you would get, the houses of Congress or anyone in government to agree to the plan. That's one of the reasons they're relying so extremely on monetarism and why the results are so extreme is that they don't have any alternative. And I think that's probably a mistake. Would the central bankers be better off just...
CharlieWell, they have no power to create infrastructure in the other way.
[1:50:14]
CharlieBut doing nothing, but doing nothing to force the pressure back on the fiscal authorities. It probably is better than they do what they're doing than nothing. But it is by no means sure to work well. Look at Japan. I am.
QuestionerLet's circle back to this question of the European Union. I want to get Bill and Warren's thoughts on this, too. This is a tough situation, and it looks like it's coming to a head with Greece, particularly in May. What happens?
CharlieI think it's more likely than not that the European Monetary Union exists 10 or 20 years from now. But I think that there have been flaws pointed out big time, and I don't think it'll necessarily have the identical membership it has now. that there will have to be more teeth and more homogenization of the members than they thought they would have to have a few years ago, and they may be beginning to realize they need. And the question is whether people are willing to pay the price to stay in it by really adopting a standard behavior a little bit more like was expected when they set it up. But it has to evolve somewhat to work, and I think it probably will, but who knows for sure.
QuestionerBill, you agree with what Charles. Bill, you agree with what Charlie said about the brother-in-law?
OtherI love my brother-in-laws. The construct where you have no fiscal control and your exchange rate is locked, that doesn't work. And some people argue that Greece leaving would sort of enforce that they're serious about rules and they're going to be more homogeneous. homogeneous. It's kind of scary in the short term if that happens because it does disrupt markets. There are people who are assuming Greece would stay in, contracts that were made. You'll have a lot of ambiguity about financial relationships in Greece. So I agree, Warren, there's so much commitment to it. If you ask German voters, you know, should we exit the Euro, you don't have much sentiment even though they, what comes along with that now, in terms of subsidizing the credits of the other. the credits of the other countries. They don't like that. So there's a contradiction there. Are they willing to make some substantial change? Well, there's a sovereignty deficit. Voters don't think of themselves as Europeans. And so it's tricky to move fiscal power to the center.
OtherOkay. Welcome back to Squackbox, everyone. We are speaking this morning with Warren Buffett, Charlie Munger, and Bill Gates.
[1:52:47]
QuestionerWe've been talking a lot of big issues. Gemma, I thought we could talk a little bit about the health care system. And Charlie, I'd like to talk about the health care system. start with you since you are the co-chairman of a major hospital. Just where do you think we stand right now? How are we doing? What should we be doing differently?
CharlieWell, the great trouble with our health care system is it's very complicated and very expensive. And of course, a lot of things are subsidized. We'd be better off not doing, like prolonging death so you can build a government more and more, and hopelessly impaired people. And it's very difficult to get the system to it's a system to work right, but there's a lot wrong with it.
QuestionerIf you had one or two things that you'd like to change that you could, what's at the top of the list?
CharlieI would come down hard if I had any power in the system against prolonging deaths so you can build the government more and more. I think that is, you're not doing the patient any good, you're not having a family any good, you're lining your own pockets in a perfectly disgusting way. I think the health care system has a lot of sin. has a lot of sin to atone for. The pushback that you get any time someone tries to address that is the idea of death panels and no one's going to tell me. I know that. They're buzzwords. But if you actually go into the hospitals, you'll find people just lying there. With huge invoices going out, no possibility they're ever improving. And both doctors and hospitals billing one hell of a lot. I regard this as disgusting and I think it should be faced. They do a much better job in Europe. And it doesn't like they're a bunch of evil uncivilized people in Europe. They just do it better than we do. I'm ashamed of the way our health care system prolongs death to make money.
QuestionerBill, Warren?
WarrenWell, Charlie has been involved in running a hospital and I'm not. The one piece of the system I think about is how we incent innovation in things that will reduce costs. Some innovations raise costs, like very expensive. of chemotherapies that have modest impact. But if you could, say, cure Alzheimer's or Parkinson's, then the, not just the medical care, but the long-term care costs would improve dramatically. And yet right now, the incentives are such that the R&D in that area is way, way below what it should be. So I think there's some works on the incentive system for innovation
[1:55:21]
Joe KernenYeah, totally different. and I want to get it in before we're done. Hey, Warren, I know you're a state of Democrat, and Hillary Clinton is the presumptive nominee, and you're a longtime supporter. I'm just wondering, given everything we've seen, everything you've read, all the recent stuff, servers and the Clinton Foundation, is there anything that gives you pause at this point in terms of ethics or transparency with Hillary Clinton?
WarrenI listen to you very carefully every morning, Joe, so I know the full range of things that things that can be said negatively about Hillary, but I'm 100% poor.
Joe KernenOkay, just wanted, is there anything ever that she could do where you would, where you would waiver? Or just, there's nothing that you could, no disclosure could come out.
WarrenI would say this, I don't know anything that's worse about her than worse about me.
OtherWell, gentlemen, we are out of time, but I want to thank all three of you for being here today. We truly appreciate it, and again, thank you.