Becky QuickWe are in Omaha this morning, live with the Oracle of Omaha, Warren Buffett. He's the chairman and CEO of Berkshire Hathaway. He is just off the report of his annual letter that he writes to shareholders and Warren, it's great to see you this morning. Great to have you here. You know, I was thinking a little bit about it, and we haven't gotten to talk to you since September. Since September the last time we talked to you, the markets have gone haywire. People have been wondering what's going on, and people have actually been clamoring, wondering when we were going to get the chance to talk to you. So what do you think has happened in the last four or five months since we talked to you?
WarrenWell, in a sense, probably not that much if you measure where we are now versus last September. Yeah, we're weaker. People, people, yeah. I never know what markets are going to do. There's never been a time in my life when I, I know what markets are going to do over a long period of time. They're going to go up. But in terms of what's going to happen in a day or a week or a month or a year, even, I never, felt that I knew it, and I've never felt that was important. I will say that in 10 or 20 or 30 years, I think stocks will be a lot higher than they are now.
Becky QuickYou know, I know you look at things like that, but I also know that you look at stocks and try to decide if they're fairly valued, if they're overvalued, if they're looking cheap at this point. And we have been waiting for a correction for an awfully long time. That's finally come. Does stocks look cheaper to you just based on where we've come?
WarrenWell, any time stocks go down, as far as I'm concerned I like it, because I'm a net buyer of stocks. I've been buying stocks ever since I was 11 years old. So when stocks go down, it's good news, just like when hamburgers go down, it's good news, or Coca-Cola goes down as good news in terms of anything I buy. But, you know, stocks are going to down, you can probably look it up as to what percent of the days since I was born, they've gone down, and maybe it'd be 30 percent or something like that. And you can't predict what stocks will do in the short run, but you can predict that American business will do well over time. And just take the 20th century. Stocks went from 66, the Dow average, 66 to 11,497. And you were getting three times as much in dividends as the whole average was selling for at the start.
[2:14]
WarrenAnd you had two world wars, and you had a great depression, blue epidemics, all kinds of things. American business will do fine over time. And if you own a piece of it, and if you don't beat yourself, the only person that can cause you to get a bad result in stocks is yourself.
QuestionerYeah, unfortunately, that's the biggest problem, is trying to fight yourself in some of these situations. Yeah. Have you been buying more stocks lately just because prices have come down? Have you upped your percentages and other things just because?
WarrenWe're almost always a buyer of stocks. So we have bought more stocks since the end of the year. But we had, we earned 17 in a fraction billion last year, and we had our flow go up 4 billion, which is additional money available. And so we're almost always a buyer. stocks than we're a more aggressive buyer when they're going down. I mean, I feel much better when they're going down. But it's hard to think of very many months when we haven't been a net buyer of stocks.
QuestionerLet me ask you this. Part of the reason that stocks have come down so precipitously is because people look at the economy and they get awfully worried with what they see happening around the globe. They see that there's been a recession here in manufacturing and they worry that that's going to spill over to the broader economy. What do you see? What do you see in your businesses and in the companies that you own stakes in?
WarrenThe business, I would say, is a little softer in many places than people, or that I anticipated, will say, four or five months ago. That doesn't mean it's in reverse. But, you know, we've talked before how since the fall of 2009, overall, the economies just kept moving up around 2 percent. And people talked about double dips. You remember hearing that, you know, three or four years ago. And then they talked about it accelerated. about it accelerating and in the end it seems to be gaining about 2% most of the time. And, you know, that is not a bad clip, incidentally. I mean, it'll take you a long way. But I don't think I know what business will do next month or next year. I mean, I bought my first stock in April of 1942. I was 11. And Pearl Harbor happened three or four months earlier. We were losing the war. I mean, you want to talk about a bad outlook for the country. Now, nobody thought we were going to lose the war, but at that time, we were getting clobbered in the Pacific.
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WarrenAnd the Dow Jones average was 100. I mean, you know, and it was a good time to buy stocks. I bought stocks after 9-11. I bought stocks in 1987 after the big crash in the fall. The country's not going to go away. The plants aren't going to go away. The people aren't going to go away. The talents are going to go away. The country will grow in value over time. Now, who gets it is another question. But it'll grow in value. And if it grows in value, businesses will grow in value. So it's a terrible mistake to buy or sell stocks based on what you think business is going to do next month or next, even next year. Although you did say that the economy is a little weaker than you would have expected if we were looking at it for five months ago. What do you think happen? Well, I'm not sure what happened. The people were just more optimistic then. And you've had, the general thinking, I think, if you go back then, was that oil was the low price of oil was going to put more money in the pockets of consumers and that was going to cause a pickup in business and so on. And it was a dividend. I mean, the American public got a big gasoline dividend in effect. That's an interesting point, which, we can get to if you'd like as to why lower oil prices, which should be good for oil importing countries, really may not be in the short run. And we saw what happened on that. Why is that? Well, it's a very interesting thing. I mean, we all learned in freshman economics that if oil went down in price, it was bad for the exporters and good for the importers. And certainly, when we had the oil shock back 40 years ago, it was a tax on America and the Saudis were leveling the tax and so on. There's no question. that it is good for the country to have lower oil prices. But what happens is that the benefit to the consumer feeds in, next time you go to the filling station, gas station, you know, you save 15 or 20 bucks. It feeds in very slowly, but the capital values disappear immediately. So if you're sitting with an oil industry in this country that's producing 10 million barrels a day or something of the sort, That's at $100, you know, 10 million barrels a day is a billion dollars of revenue. $365 billion a year. Capital values may be $2 trillion based on that. Now all of a sudden you take it down to where you're not making any money. And the $2 trillion of capital values disappears very quickly.
[7:17]
WarrenThe bank loans against it gets sour very quickly. They quit buying from the service companies very quickly. So the negative effects to this huge capital. value happened very quickly, whereas it feeds into the consumer very slowly. So even though it's good for the country net when you're an importing economy, it can be very bad in the immediate effects it has. But we're not looking at an immediate effect anymore. We're an anniversarying these low oil prices.
QuestionerRight. So you are talking about an extended period of time. Does it actually change in the point in the economy where we see it coming in?
WarrenIt helps. But of course, the loans again. against the oil companies. They don't go bad the first day and all of that. So there's, you get a lot of, you get a lot of, you get a lot of fallout in terms of capital values that hits fairly fast. And the banks feel it, and the oil supplier, oil equipment suppliers feel it. So all of those things contract very quickly. People lose their jobs in the, in the producing areas. So some very tough things happen. to the economy fairly quickly. And the benefits just keep kind of flowing through slowly.
QuestionerThat explains the correlation that we've seen in weak oil prices and weak stock prices. Is there a point where you think that correlation loosens up, though? And we start to see the benefits instead?
WarrenOverall, it's good for an oil importing country, which we are, that lower oil prices. If oil were free, it would be good for us. It wouldn't be very good for, you know. be very good, you know, you'd have this big adjustment of the oil industry, which would happen immediately. And so it would clobber us in certain areas initially. And housing would be bad in Houston and all kinds of things. And even now, we have a furniture operation in Houston, and we have them throughout the country. Our Houston's furniture operation. The Nebraska Furniture Merritt. Well, this is, this happens to be a company called Star. We're in Dallas. Dallas hasn't been hit the same way. But Houston, we've done the worst in furniture among our various operations. But that's to be expected. Because of the location with Houston being so heavily oil. Because where it is. And you feel that very quickly.
QuestionerWarren, when you say that the economy hasn't been as strong as you had expected, if you were looking four or five months ago, are you talking about from the industrial operations that you watch?
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QuestionerAre you talking about from the consumer? Are you talking about across the board? Because Berkshire is much more industrial focused than it was eight years ago.
WarrenYeah. industrial parts. And, well, you've seen it. Rail was disappointing last year. It got more disappointing as the year went along, and so far this year it's been the case. Although in your annual letter, you really laid out the strong performance at Burlington, Northern Santa Fe based, compared to a year earlier.
QuestionerYeah. But I would have expected the industry to do better, in which case we would have done even better. But we were coming off a bad year, which helps in comparison.
Warrenand we ran the railroad a lot better last year than the year before. But overall, the railroad industry had a disappointing year. It got poorer during the fourth quarter. It's been poorer in the first quarter of this year. And there again, some of that's secondary. The biggest thing has been coal, actually. But in oil, three or four percent of our railroad carloadings come from oil. from oil. But if you look also at frack sand, that's very big. And there's all kinds of ways things ripple through the economy.
QuestionerBack to that key question, though. The question that I think investors have been trying to figure out is that weakness in the industrial areas, does that spill over to the broader consumer? What do you think?
WarrenWell, it hasn't so far, except in certain areas where they've been more exposed. In Houston, for example, or North Dakota or something.
QuestionerYeah. But that shouldn't really concern investors. I mean, if you're buying a farm, if you're buying an interest in a local business, if you're buying an apartment house to rent out in all a lot of people, you shouldn't be looking at the next six months and trying to decide whether now is the time to buy. You should look at what the asset is likely to produce over time and what you have to pay for it. And if you can buy it cheaper, so much the better.
Warrenfor people to try and time stocks is crazy.
QuestionerRight. We're going to talk a lot more about the annual report or the annual letter in just a few moments, if you don't mind. Good morning again, everyone, and welcome back to Omaha, Nebraska, where we are live with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He's just out over the weekend with his annual letter to shareholders. And Warren, how many of you written now? I know you've been running Berkshire Hathaway for 51.
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WarrenYeah, I've written them all. I didn't use to sign him the first. half, five, six years. Sometimes I wish I hadn't signed them later on, too. But I've written all 51 of them. I mean, this is a process that I think takes you most of the year. You start thinking about the next year's probably tomorrow? Yeah, I'm always thinking about subject. I have some subjects that I might have put in this year, but when I got to 16,000 words, I decided I might be losing people, so I'm stored them away for next year. But it's sort of continuing. of continuous. There's some things that are actually just reporting on what happened. And there's other, there's a few subjects that I'd like to sort of mouth off on. Because you don't get enough opportunity to do that? I think my family would rather have me do it in print to do it out that personally.
QuestionerWell, let's start off talking with just the report itself in terms of how the businesses are doing. It was a strong year. Profit was up sharply. How would you just state the overall business is doing right now?
WarrenWell, most of the businesses did pretty well last. pretty well last year. And, you know, our goal is to add to the fundamental earning power every year. Now, that doesn't mean we think the earnings will go up every year because sometimes you'll be in recession or something of the sort. But we want to feel at the end of the year, we've got more fundamental earning power on an average basis going forward than the start of the year. And since we retain all earnings, we ought to do that. I mean, it'd be kind of silly to retain earnings just to stay flat. So every year, last year we were, able to add a couple of important businesses. They didn't actually get done until after the year end. And they will add to our earning power. And then we try to develop further the earning power of the businesses we already have. And that's the goal year after year. The big addition for this year will be precision cast parts. Yeah, it didn't close until about a month after the end of the year. You talk about your powerhouse five, but... Yeah, now we're going to have the powerhouse six. And someday we'll have the powerhouse 80, I hope.
QuestionerYeah. Just in terms of running through those businesses, you did say that Burlington, Northern Santa Fe, you expect will have a weaker year this year.
WarrenYeah, I would say that it's highly likely that all the U.S. railroads have lower earnings in this year than last year.
[14:35]
WarrenAnd last year was a little disappointing for most of them. But again, that's just this industrial recession that we've seen? It's just not as many, not as many car loads are moving. I mean, every week on Wednesday, American Association Railroad, you can look up. the figures and it'll tell you crush stone and autos and grain and all kinds of different commodities how many cars moved the previous week and you can tell exactly what's going on on the artery you can call it the arteries of the economy is that because of the China slowdown it's hard to imagine that a slowdown in China would hurt grain movement here well grain actually hasn't been so bad the big the big culprit's been coal and and that's going to continue it's a exacerbated by the fact that coal stocks at electric utilities are at a very high level. They measure them in terms of days of usage and they were low a couple of years ago. And so there was a somewhat of a catch up. Now there's a somewhat of an undershipment to work off excess stocks at the utilities. What partly happened was that our service got bad a couple years ago, a year and a half or whatever it was ago. And the utilities got very worried about their stockpiles coming down. So they've perhaps overcompensated a little bit and want to make sure it didn't happen again. So coal piles are high at utilities. But even leaving out that factor, coal usage is going down with utilities. And many utilities can shift between natural gas and coal with a lot of their generation. And natural gas prices being where they are just hurts coal a lot. Just running through the report, looking through some of the numbers. thing caught me off guard was GEICO, where the profit fell to $460 million from $1.1 billion. What happened there? That was a steep drop? Well, what happened in the insurance business is pretty interesting, the auto insurance business, is that for the first time in quite a while, deaths and accidents too, but the death figures you've got long histories on, deaths per 100 million miles driven, went up. went up. And it's quite interesting. It was, in the 1930s, it was 15 times, you were 15 times more likely to die in an auto accident per mile driven than currently, 15 times. And then after World War II, the figure got down from 15 per 100 million, roughly to 7 or something like that per 100 million. And then Ralph Nader came along, and cars got a lot safer.
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Ajit Jainand now it's just a little over one per 100 million, and that numbers just kept going down. So we only had a little over 30,000 auto deaths in 2014. But in 2015, for the first time and a long time, the trends started going the other way. And we've just got figures for the first nine months, but the frequency of auto accidents went up a lot last year. The number of deaths went up, the 32,000 deaths, incidentally, about a third. or drunk driving. I mean, if you think about it, almost 10,000 deaths from, out of the 32,000 come from drunk driving. Half of the people that are killed as occupants in a car are not wearing seat belts. But I personally believe that distracted driving, which was listed for about 10% of the deaths in 2014. I'll get that number one up a fair amount. So. Distracted driving, meaning somebody who's talking on the phone or texting while they're driving? Yeah. Yeah. And that's harder to get the precise figures on, but that was about 10% in 2014, about 3,000 deaths. But in any event, the frequency of accidents, the frequency of deaths per 100 million vehicle miles went up quite significantly in 2015. And that's the first time in a long time. And the cars are safer, so people are not driving as well. And then on top of that, what they call the severity also went up. So, as a consequence, our rates were behind experience during the year. I would guess, but this is a guess, we're a couple months into the year, I would guess that now the rates are more adequate for what the current experience is. If I had to bet, and the people at Geico won't like me say, but I think our underwriting experience will be better in 2016 than it was in 2015. Meaning rates at GEICO and probably all the other auto insurers are going up because the deaths are going up. They have gone up. They've gone up. Yeah. And now you get your policy every six months, so you may not see it for three months until you renew your policy. But rates will have moved up and you will see it as you get renewals. And they've gone up because both the frequency of accidents has gone up and the cost of accidents is gone up. And you think it's tied directly to distracted drivers because they've gone up. distracted drivers because they're on their phones. I really think that's got to be a real fact. Now, there were more miles driven last year, too, because gas gets cheap, and that has some effect.
[19:51]
WarrenAnd actually, when employment gets better, that affects driving to some degree. So they were more miles driven. But beyond that, people did not drive as well last year as they had the year before. And it had been coming down. I mean, it is, when you think about it, it's so much safer to drive a car now than, you know, when I was a kid, for example. And even when I was an adult, cars have gotten a lot safer.
Becky QuickOkay, Warren, there are a lot of things you brought up in your letter. We're going to go through many of these things. Fortunately, we have you, for the next two and a half hours or so. But I want to get to not just how the businesses did, but a lot of the other issues that you brought up in the letter, too. Welcome back to Squawk Box here on CNBC, First in Business Worldwide. I'm Becky Quick, and I'm coming to you live from Omaha, Nebraska today. Joe and Andrew are both here in New York, too, and we're all ready to jump in on this. Right now, we want to get back to our special guest this morning. Berkshire Hathaway's chairman and CEO, Warren Buffett. And Warren, we've talked about a lot of different issues. We have not yet touched on some of your holdings, the big four investments and some of the other stocks that you hold. I was looking through the list in the annual report that shows your top 15 holdings. You've got your cost basis, what it cost you for that, and then what the market valuation for those stocks are today. And it's pretty phenomenal when you look at the huge gains for a lot of the stocks that you've owned for years and years. In fact, if you look for you look for the huge gains for a lot of the stocks that you've owned for years and years. In fact, if you look through that list, there's only two stocks that have gone down in value from what you paid from them. One, it's John Deere, and the other is IBM. You've been buying that stake for five years at this point. I think your cost basis for it was $13.8 billion, and at the end of the year it was worth $11.1 billion. That stock has come down pretty substantially, even since the end of the year. Was that a mistake to buy into IBM?
WarrenWell, I don't think so, but it could be. I mean, we've owned stocks we've lost money in, and sometimes when we've lost money in, and sometimes when stocks go down. We're wrong and we sell them and sometimes we think we're right, we buy more, and sometimes it turns out we are. I mean, the Washington Post stock, it's
[21:55]
Warrennot in that list because we disposed to most of it, but we have about a hundred for one profit in it, but it went down by more than a quarter after we started buying it. So we showed a loss in that, but we kept buying it, and the company bought in its stock, and it all. worked out very well. On the other hand, we, I shouldn't say we, I bought Tesco. It went down, and it kept going down, and I was wrong about the company. If I'm right about the company, the stock will do fine, and I love buying more when they go down as well, and when I think I'm right. And, and if I'm wrong, you know, you sell them out and take a big loss. And we've done that on a few stocks and bonds over the years. More often, we've made even more money because they went down initially. I mean, Berkshire itself has gone down 50%, three different times since I've been in control of it. And the first time I was able to keep buying, I had some money left from the partnership, and it went from 90 to 40. And that was terrific. I mean, I was buying it. Some friends of mine didn't think it was so terrific. And that's happened two times since then. So a stock going down is a good thing unless the company itself is losing value. And sometimes that's the case and sometimes it isn't. I don't think it's the case with IBM, but I could be wrong.
QuestionerCharlie Munger, your partner said recently that he'd say the jury's still out on whether the reinvention will work. I think he also said that he's neither a believer or a disbeliever in IBM and its reinvention. When you start looking at things, should I assume that you're still buying these shares? Are you kind of waiting to see what happens now?
WarrenWell, you'll see what we do quarterly a little after the end of every quarter. I can tell you this, we've never sold a share of IBM. You know, he mentioned John Deere, but there's other stocks that we buy. And there's stocks we own that have gone down a fair amount. American Express has gone down quite a bit. That's not really different than IBM. I mean, it may be different in terms of what we paid for it, but what you pay for a stock doesn't mean anything. I mean, what means something is where the company is going to be in five or 10 years. And I think, Charlie's neutral, I think that IBM will be worth more money. But like I say, I could be wrong if I'm wrong, you know, we'll accept that.
QuestionerJoe has a question for you on this front as well.
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Joe KernenJoe? When we have analysts on a lot, they do the buy, sell, or hold idea with this. You sound like a hold on IBM right now. Just from your body language.
WarrenNo, I would say this. We're a potential buyer. You know, we're buying different things at different times.
Joe KernenI understand, Warren. But, you know, I'm trying to read between the lines, because, you know, you've got big positions and people key off of what you're doing, and you want to be careful that you don't say too much. But if you were buying up in the 170s and it's at 130, you would buy twice as much as your original stake to dollar cost average down if you were convinced it was going back to 170. So if in the next filing, we don't see that you, twice as much. I mean, a real commitment, not just, you know, a couple of thousand shares here and there, then that means that you've soured on it a little bit. And the first we'll hear about it, because you don't want to telegraph your intentions. The first we're going to hear is that you sold the entire position. So that's my only point. It sounds like you're a whole.
WarrenYeah. No, and I would say this, Joe, you shouldn't really say we would buy twice as much because, for one thing, we think a long time before we ever go over 10% of a company. Once we go over 10% of a company, A, we have to report every two days, within two days, every transaction. Secondly, we can't change our mind for a year and sell on these stocks and have a short swing profit or we have to give it all back to the company. I mean, you've become in a much different position at 10%. So if you would have us buy twice as much now, I think that would take us to 20% or something.
Joe KernenOkay. All right. But if you could, okay, here's my point, though. There's a lot of investors out there, Warren, that piggyback off a lot of things that you do. And I'm sure. a lot of them bought IBM based on that. Would it be your recommendation that all these people that followed you in the IBM doubled down on their IBM position right now to try and make their money back, or would you urge them not to do that?
WarrenI'm not an investment advisor. I wouldn't ever urge them to do anything based on what we do. I mean, if they want to do what Berkshire does, they probably should buy Berkshire. But I am not an investment advisor. You know, it's an intellectual property that belongs to. to Berkshire what we're doing with the security. So we have no desire to encourage people
[26:47]
Warrento buy or sell stocks at all, except I will tell people that over time, I think they will do very well buying common stocks. And I think the best thing for most of them to do is to buy an index fund. I think they're making a big mistake if they're piggybacking me or 10 other people that they may, you know, whose names appear in the paper. That is not a great strategy. A great strategy is just to buy stocks consistently over a lifetime and not worry too much about whether they go up or down in any given month or year.
QuestionerWarren, let me just get...
WarrenIt's what I tell my wife to do in my, in my will. You know, she's going to put 90% in an index fund and 10% of governments. And I've told a lot of other people to do that over the years, and they've done very well.
QuestionerWarren, let me just get one crack to bat on the IBM issue, which is this. Just to the extent that investors want to understand your time, horizon for whether this turns right or turns wrong. At what point would you say if it did turn wrong, what is it, what would be the trigger at which you'd say, you know what, okay, maybe I did make a mistake?
WarrenWell, I was wrong on Tesco, for example, and I was late in recognizing that. You know, they were doing certain things. I thought when they came into the United States, I thought that was a big mistake, but I did not anticipate that they would lose the position that they had in the UK, for example, to the same extent. I was late in recognizing that. We'll sell a stock for one of two reasons, if we need the money to buy something that we like even better. Now, that's not usually, that's almost never a case at Berkshire because the money keeps coming in. So that was the case 20 or 30 or 40 years ago, but it's not the case now. Now we'll only sell something, basically, if we think that the company is not worth what is selling for.
QuestionerHey, Warren, let me throw on a question from a viewer on IBM, too.
Andrew Ross SorkinOh, Andrew, go ahead.
Andrew Ross SorkinI'm sorry. The only, I just wanted to follow up. The last thing, go ahead.
Andrew Ross SorkinThe only follow-up I wanted to ask was actually about Ginny Remedy and the management of the company, which is to say how much of your faith in the company is in her and how much of it is in IBM proper, meaning the institution that is IBM.
WarrenSure. Well, you have to have faith in both, but the stronger point. always is going to be the business itself. I mean, because a human who's running it, you know,
[29:14]
Warrensomething could happen to them tomorrow. So you love the idea of having a manager that's terrific, but you always have to have basic faith in the business. We love the fact that Matt Rose was running BNSF when we bought that, and that's just buying a stock. We buy the whole side, you know, the whole company. But we really have to like the business. And then we also have to feel good about the person running it. But the business overwhelmingly is the most important thing, because people come and go.
QuestionerWarren, let me follow up with a question from a viewer on IBM as well. Daniel Cabral wrote in, have any of the companies under Berkshire's umbrella gained any competitive advantage by using IBM Watson so far?
WarrenWe have, at Geico, we're doing a fairly elaborate experiment with Watson. And with Watson, and with Watson, you spend a considerable amount of time teaching Watson. I mean, Watson did not come knowing a thing about insurance and never read an insurance policy before we met him, and he was great at jeopardy. But so our job, and IBM's job, is to educate Watson in all aspects of insurance. I mean, Watson learns. And we have been working with Watson quite a while now, and We've got some big tasks in mind for Watson. And we see progress along that line. But it's just like in medicine. I mean, you know, if you've got Morial Sloan Kettering starting to feed information about cancer into Watson, the first day, Watson knows nothing. You know, it's just a piece of machinery. And after a while, it has this ability to remember every article has ever been written and do it in a second or two and take information. from tens of thousands of whether it's X-rays or Gleason tests or whatever it may be. And it becomes an incredibly valuable piece of or store of information and then aid in decision-making. And that can be very valuable in insurance, but it's not valuable the first day or the second day. So is GEICO paying IBM or is IBM paying GEICO? Well, it's an interesting thing on that. They probably would like us to pay them and we would like them to pay us. because we're both contributing to it. It's a partnership initially, and it has to be a part. It's a partnership with M.D. Anderson or Sloan Kettering or any, both sides are contributing a lot to it. I mean, you need a lot of data. You need a lot of human intelligence because you have to decide what gets fed in. You know, you have language problems, have all these things, but you've got quite a smart partner at the end.
[32:05]
OtherAnd obviously, we've put money into it, IBMs put money into it, and we think that there could be a very big payoff.
Becky QuickGood morning again, everybody, and welcome back to a special edition of Squawk Box. We are live in Omaha, Nebraska with Warren Buffett, the chairman and CEO of Berkshire Hathaway. And Warren, in your annual letter to shareholders, you point out that the annual meeting this year is going to be a little different, and that for the first time ever, you are allowing it to be webcast. Right. Why are you doing that?
WarrenWell, for two reasons. One is we sort of maxed out in Omaha last year. We said over 40,000, it may have been 45,000. And the center where we have it, we used, I think, five overflow rooms and filled those. And then we actually had to use a couple rooms in this hotel. So, and the hotels were all full. So we're pretty close to what we can handle physically in Omaha. And then the second reason is that, as I said in the letter, When you have a CEO that's 85 and you have a, and his sidekick is 92, it's probably only fair that the shareholders should get a chance to actually see whether you're sitting there drooling and cutting out paper dolls or whether you can hold your own for five or six hours with a lot of questions and talk intelligently about the business.
Becky QuickI like to see our managers in person, and particularly as they got older. I mean, we've had a couple that have drifted off into Lala. I have to at Berkshire. And in the couple cases, I didn't know it. I mean, so there's nothing like semi-personal contact. And they're the people that own our business around the world. So we'll give it a shot this year and see what happens.
Becky QuickOkay. Other than that, it's business as usual, though, for the annual meeting?
WarrenIt'll be business as usual, yeah.
Becky QuickAll right. Warren Buffett is our special guest this morning. We are fortunate enough to have them with us for the rest of the program. Warren, before we start on. Before we start on everything else, why don't she answer Joe's question? You think Creighton's going to make it?
WarrenWell, I sure hope so, but I'll give Joe advanced word on something that our managers haven't heard this yet. Our employees haven't heard it. Some of our directors know about it, but we're going to announce, we were going to announce to our managers in about an hour, that this year, if you're employed by Berkshire Hathaway or any of its subsidiaries,
[34:33]
Othersubsidiaries tomorrow on March 1st, you're eligible for the ultimate office bracket contest. And any employee of Berkshire can put in a bracket, it doesn't cost them anything. Just go to a website we've got for it. And if they, they're the one that picks the greatest number of consecutive games correctly as they're played, they will win $100,000. It doesn't have to be a perfect bracket?
QuestionerOh, no, it doesn't have to be anything. That's what. You just go further. Somebody wins. They got $100,000. If they're tied, they split it. And we'll, after every game, we'll report how many are left in and maybe what company they work for. But if they make it to the suite 16, if they go through two bracket tests, and they get to the suite 16 only, they get a million dollars a year for the rest of their life. Whoa! Wow. You hiring today, Warren? This is the old, yeah, this is the old of a bracket contest. I love this.
OtherThey're not required to do anything. This is breaking news. We're going to have it. That's amazing. What is breaking news? Our managers don't know about it. It's to go out. We were going to send it out in about an hour or so.
QuestionerCan't a couple other people, Warren. Can't a couple other people get in on this? Becky, I mean, can we, I'm probably not going to get all 16. Right. Let me try, though. I've been watching. I'm prepared this year.
WarrenYou don't have to get all. You don't have to get all. have to get all 63 games right. You only have to get 48 games right to get a million a year the rest of your life. No, that's what I mean. But I want to be able to try. Just give a special dispensation to let me try. Can I be part of that without being a GEICO employee? Or hire us. I'll tell you what I'll do. I'll underwrite you personally. Yeah. I'll underwrite you personally. I think you're safe. If you make it, well, forget about Berkshire-Hathway pay. I'll pay you a million dollars here for the rest of your life.
QuestionerAre you suggesting that Joe's going to choke? Well, I, the only. The only thing. The only thing is you can't check with Watson. You don't have to do this independently. Okay.
Becky QuickBecky beat me so badly last year that your money's safe, Warren. Believe me.
WarrenAnd you usually know in advance when your money's safe. I know that. Well, but somebody's going to win the $100,000 for sure.
QuestionerYes, that's good. And my assistant, Debbie Mosenk, her son works for the Nebraska Furniture Mart and his girlfriend works for the Furniture Mart.
[36:55]
WarrenSo they're going to have three entries among them. And we're going to have a lot of fun out of this, particularly as we go through the games, because when we get We're going to announce how many are live after each game. And then when we get down to where there's maybe a hundred or something like that, we'll have how many are from Geico and how many are from Burlington Northern and so on. And it'll be a lot of fun. I love that. Last year you did the million dollar bracket challenge. That was two years ago. Two years ago. Was it two years ago? Is that what this came out of? Well, yeah. I just thought about it. And it seemed like this would be a lot of fun. And incidentally, we are closing on the purchase of Duracell today. So all the Duracell employees tomorrow will be eligible.
Joe KernenWow. Wow. That's like a lot. Yeah. That's awesome. All right. Warren, while we're wasting time, the only other thing to ask you, I just, the new Geico commercial, how do you do it? You've got 20 of the best commercials. The latest one is Tarzan and Jane, and you've seen Jane asked the chimpanzee whether he knows where the water, and he goes, you've seen that one, right? And then Peter Pan, greatest all time. Greatest All Time. all-time commercial. They just do it again and again and again. It's unbelievable.
WarrenWell, Joe, just remember the ones you like, those were my idea. There are some clunkers in there, that's Charlie's. The clunkers, exactly. There is a couple, but I love the, but some of them make up for all the other ones.
Joe KernenAll right, Becky, get back to the markets. But we digress, but I love the NCAA stuff.
Becky QuickLet's talk some about the markets. I do. And that is breaking news. You're right, Joe. Warren, let's talk a little bit more about the economy. We touched on this before. We touched on this before, but for people who are just tuning in, there have been so many questions. I can't tell you. I've heard from more people in the last few months wanting to know your view on the markets than just about any other time that you've sat down with this. People are very unnerved by what's happening. What do you tell them, first of all, when they wake up in the morning and that they see, you know, the worst beginning of the year that we've ever seen in stocks?
WarrenWell, but that's because we're on some calendar or something. I mean, they've been way worse months. They've been way, you know, you go back to October 19th, 1987, what was it, 22% on the Dow and
[39:03]
Warrenone day or something. It, you know, the people buying and selling, well, some of them, but they basically don't know what day of the week it is or what hour or anything like that, and they react to news. They react to the market itself. The very fact that we talk about the market, you know, on bad days and everything, may tend to accentuate it for all I know. Who knows? It really doesn't make any difference. I mean, if I owned a McDonald's stand here in Omaha, I would not get a quote on it every day. You know, I would try to. to make my service the best. You know, I would hope too many competitors didn't move in close to me, and I would hope the McDonald's did great advertising and came up with some new products occasionally. And what I would think about is, how's this going to work over five years or 10 years? I mean, people are going to keep eating hamburgers, they're going to like ours and all of that sort of thing. And you'd be better off in stocks if you did not get a quote on them, you know, and quotations caused people to do things they wouldn't otherwise. I've got this farm 40 miles from here. If I've gotten a quote on it every day since I bought it 30 years ago, and I might have done something dumb. I mean, as it is, I've never had a quote on it. And it produces a little more every year, and generally the prices of its products. So focusing on the prices and what they're doing is a terrible way to go to invest in businesses.
QuestionerYou said in the annual letter this year that Berkshire Hathaway is obviously an interest rate-sensitive company, and therefore, consequently, when rates go up, the company will do very well? Do you think we're ever going to see rates going up again?
WarrenWell, that's what's happened with interest rates is really extraordinary. I mean, you could go back and read everything Cain's wrote and everything Adam Smith wrote or Ricardo wrote or Galbraith wrote, or you name it. Paul Samuelson, I mean, you won't see a word, in my view, anything I've ever seen, about sustained negative interest rates. I mean, we are doing something the world hasn't seen. It does have the effect of making. all assets more valuable. I mean, interest rates are like gravity in valuations. I mean, if interest rates are nothing, you know, values can be almost infinite. If interest rates are extremely high, that's a huge gravitational pull on values. And we had that in the early 1980s.
[41:18]
WarrenSo we have gone into this period. Well, Berkshire Halfway is sitting with billions of dollars of euros in an insurance company that we have in Europe. And they've been. will bear a negative rate. I mean, we would be better off if we had a big mattress in Europe that we could stick all this stuff in. And if I could just find the person who I trusted to sleep on the mattress, you know, that's what we would do. If we have a billion of euros at minus 35 basis points, that's, you know, three, not a billion, it would be three and a half million euros a year that it's costing us just to have that. Well, that means you don't want to collect your receivables. I mean, why would you want to collect your receivables? It goes into a negative. You know, it distorts everything. Now, there's a good reason why they're doing it, but nobody has really gone through an extended period like this. We do not know how this movie plays out. So when you start thinking of potential scenarios, how do you play it out? Well, I mean, we thought when we started it, that would end fairly soon, and then Europe in particular, needed further, you know, further jolts in the arm. arm and they've extended it and we can't get too far away from it. We talked about that a year ago, the problems of this country raising rates while Europe was at negative rates and what that might do to the dollar and what that does to trade and what trade does the business. I mean, in economics, the most important thing to remember, it's important in other areas of life. But after anything that happens, if somebody tells you this is going to happen, you got to say and then what. There's always, it's like in physics or anything else. There's always an and then what. It's a question I always ask myself, and then what. And in terms of sustained low interest rates, when I say, and then what, I don't know the answer. Maybe Watson knows the answer. I'll ask him next time I see him. Ian Shepardson wrote something today, where he takes a look at how quickly wages are rising and how quickly inflation is coming up. And he said, in inflation in particular, if you just look at the same average inflation we've seen over the last three months or so, if that continues, we're going to be hitting the Fed's target by October. That's two years ahead of time from the Fed's own predictions. And he worries. worries that we're going to be growing rapidly at these points in those particular areas
[43:34]
WarrenWell, I don't know what, I don't, I don't, I don't pay any attention to what economists say, frankly.
QuestionerWell, think about it. I mean, you have all of these economists with 160 IQs that spend their life studying it, can you name me one super wealthy economist that's ever made money out of securities?
WarrenYou know, I mean, just go down the list. No. No, Keynes actually, in his early years, tried to make money in stocks by predicting what business would do, and he gave it up. And then he went over to a Graham-type approach. I mean, it's very interesting to read his history on this, because he thought he could, by looking at various economic variables, pick what he called the credit cycle and make a lot of money, and he broke a couple of times in doing it, had to borrow from people. And then he settled on buying good businesses cheap that he understood in concentrating his investments, and he did very well. It's an interesting history. But if you look at the whole history of them, you know, they don't make a lot of money buying and selling stocks, but people who buy and sell stocks listen to them, which is, I have a little trouble of that.
QuestionerOkay. Forget I asked that.
OtherYeah. Welcome back to Squawk Box, everybody. We are speaking to billionaire investor in Berkshire Hathaway, Chairman and CEO Warren Buffett this morning.
Becky QuickWarren, it is a super Tuesday eve today, and the election has been interesting, to say the least, to watch this. What do you think of what's played out? You're like mud fights. What do you think? Have you been surprised by the direction things have gone?
WarrenI've been surprised by everything, sure. I've been almost fascinated. I've watched virtually all of the debates in town halls. This has been, I've always been a political junkie to some extent. My dad was in Congress, but this is, this takes the cake.
Becky QuickWhen we spoke with you back in September, you were, the first person I remember suggesting at the time that you could could wind up with a brokered convention. It looks a little less likely now because Donald Trump is doing fairly well.
WarrenYeah, tomorrow will be big on that. I mean, you know, tomorrow's proportional. Then they've shipped over to winter take all a little later. And if the proportional, if the tally at the end of tomorrow is such that Trump has 40% of the delegates that been picked,
[45:55]
Questionerand they've been, the others have been assigned proportionally, you know, it could go to the the convention. We'll find out. In terms of Bernie Sanders. Last time we spoke with you, you said that you admired Bernie Sanders. Since then, Charlie Munger has spoken up. He says, as an intellectual, he's a disgrace. You also called him a little nuts. What do you see in Bernie Sanders campaign? And what would you think of him as president?
WarrenWell, what I like about Bernie Sanders is he is saying exactly what he believes. I mean, he is not tailoring his message week by week. You'll find some of the candidates that they've shipped it around, or they've They've shifted around, or they don't answer the questions. But with Bernie, you know exactly what he thinks. And I, in certain areas I agree with him, and in certain areas, I would agree with Charlie.
QuestionerWhat areas are you talking about?
WarrenIf... Bernie is bothered by certain things I'm bothered by, and I would hope other people are. I mean, things like the influence of money in politics. I mean, Bernie would certainly put Citizens United close to the top of the list. He would like change. And he's bothered. He's bothered by the fact that in a country with 56,000 of GDP per capita that so many people are poor, and many of whom are willing and able to work, but just are not getting by that well in this country. And he would like to do something about that. But it's what he would like to do about it, where I think Charlie's probably closer than I. Charlie's closer in saying it's a little nuts. Well, I wouldn't, yeah, I probably wouldn't use that term myself. I would say that Bernie has a tendency to demonize institutions. And he thinks the solution would be simpler. And he would turn the system, I think, somewhat upside down. And there's parts of it that I might agree with him on. I think in terms of campaign finance, I think it should be turned upside down. But I don't think, I think we have a marvelous system in terms of delivering more and more of what people want. I mean, we have a golden goose. goose that's laid progressively more golden eggs ever since the country was started. It's the most remarkable economic achievement in the history of the world is what has happened in this country. So I do not believe in throwing out the baby with the bathwater.
QuestionerIn your letter this year, you really took aim at some of the politicians who have been going around
[48:18]
WarrenWell, America has never been greater. I mean, you can look at, you know, where we stand. I mean, it will be greater in the future, but America's never been greater. I mean, this is the best time to be alive in the history of the world. I mean, in terms of medicine, transportation, entertainment, you name it, or just in terms of aggregate wealth. Now, the distribution has gotten more and more skewed in recent years, and it should be skewed to quite a degree. But I would say that, is skewing has been excessive, but as I mentioned in the letter, I live in a upper middle class neighborhood. I mean, the median income might be 100,000 a year or something like that. And every person in that neighborhood lives better than John D. Rockefeller Sr. lived at the time I was born. In one man's lifetime, an upper middle class neighborhood has evolved to a way of life that's better than the richest man then in what was the best country in the world in 1930. He had power and prestige and all of that. But in terms of medicine, entertainment, transportation, you name it, my neighbors are better off than he was. So this country works, and it's working now, but it leaves, it's leaving a lot of people behind that are very good citizens, and we can do more for them, but we don't want to do it in terms of screwing up the Golden Goose. What do you think of Donald Trump and what do you think of Chris Christie's support of him? Well, my friend Charlie says, never underestimate the man who overestimates himself. And that seems to apply in politics as well as at Wall Street and some other places. I've been amazed at what's happened, but in the Republican Party. I wasn't amazed at all. I, what Christie did was very predictable. I mean, that did not surprise me at all. But Trump's popularity has surprised me, but it's. It's among Republicans. And I happen to be a fan of Hillary's, and I think that she will be the winner in the fall.
QuestionerOkay. Warren, they are wrapping us right now, but obviously we still have a lot of time to get to many more questions and maybe touch back on some of this as well. Was Warren watching the Oscars, and did he root for a particular picture this year? Warren?
WarrenWell, we have an ABC station in Miami that we own, WPLG, so I was rooting for a big audience.
[50:58]
QuestionerI did not watch the Oscars, no. Hey, Becky. Warren, let's talk a look. Oh, sorry. I just, I just, one of the guys who won Best Screenplay said, told candidates not to accept any money from weirdo billionaires. And I was wondering if you, did you give Hillary any money this time around?
WarrenYeah, but that doesn't, you know, you learned in logic, you can't do the reverse of that. You can't say because I gave money, I'm a weird. I know. But there's other evidence that I am.
QuestionerSo Warren, the Hollywood reporter wrote the story. And, you know, I knew you were on today, and I didn't think of you because I don't think you're a weirdo necessarily, but so they picked out three weirdo, they picked out three weirdo billionaires. Here they were. Koch brothers, Ken Langone, and who was the last one? There was three. Oh, Sheldon Aedelson. They called Ken a weirdo? They picked out three Republicans, obviously. They weren't talking about Warren or Tom Steyer or George Soros. And, you know, the Hollywood reporter easily came up with three weirdos. And of course, by definition, they were on the right. Ken, there's no way Ken Lennan going as a weird old. I didn't get your third one, but...
WarrenI agree. I agree, but I just... When I read it, I was just thinking, I wonder if your ears were burning when I read that. That was up what I was going to ask you. Ken Land gone is a terrific guy.
QuestionerHe is. He is. Yeah, we love him too. He's on Wednesday. Warren, let's talk a little bit more. Oh, is he good? I haven't seen him in a while.
QuestionerWarren, let's talk a little bit more about the letter and some of the things that you wrote about. You took a lot of time and space in the letter to tackle the differences between Berkshire Hathways operating style and 3G's operating style. Georgie Paula Lehman, obviously, someone you've done some work with. You guys have partnered on several different deals. And you've put it. I pointed out that as far as Berkshire's concerned, you buy good businesses with good managers. You already like the way they're running. 3G does it differently. They buy businesses where they can go in, make cuts, and try and improve the way of business is running. You also say that you'd never do a hostile deal. So it's fine to lay out those differences. What do you think about that different style, though, which has been criticized pretty heavily in the past, the private equity version of coming in and laying off a lot of people?
[53:25]
WarrenI think every business should be run as efficiently as possible. efficiently as possible. And some are and some aren't. We try to buy the ones that are. We don't think there's a thing that needs doing at precision cash parts that would make it more efficient. They've run it efficiently from the start. Actually, we think Berkshire headquarters, for example, are efficient. We've got 25 people there, and it's the same 25 as a year ago. So I believe enormously in efficiency. I mean, it's the only way living improves is to get more output, unit of input. I mean, we did everything the same as we did in 1790, we'd be living like we did in 1790. So the whole goal, I mean, that's what you try, obviously manufacturing is easy to measure how many cars you get per man hour and all. It's much more difficult, you know, if you're looking at medicine or teaching or something of the sort. But the goal of the society should be to get more output per unit of input. And some companies are extremely efficient now. And we try to buy those because we don't think we can bring it to them. And Georgie Powell looks and his associates, they look for companies where there's a lot to be done to make them more efficient. And then once they are, you have a more efficient economy. And you are trying to free up people. And I use the example in the annual report of farm labor. I mean, we had 40% of the people working on the farm in 1900. And if we had 40% now of our 150 million plus workforce, we'd have 16,000. we'd have 60 million. You know, I mean, and those people would not be producing, you know, at Apple and places like that, things we want. So efficient should she be the goal, whether it's government, whether it's business, you name it. And they're very good at getting inefficient operations working much more efficiently. I wouldn't be good at it. But I'm good at spotting it where people are doing it already, and I'm reasonably good at talking those people at joining Berkshire. And I guess that's my point. That's my point.
QuestionerWhen 3G and other private equity companies have gone in and laid off people, they've generated all kinds of negative headlines. Your point is that this is a necessary task. This is something that has to be done?
WarrenSure. It has to be done. I mean, what you're seeing in the newspaper industry, the people are very people who are writing about it have had to get more efficient as the revenues of decline.
[55:46]
WarrenAnd probably some of them were inefficient in certain ways beforehand just because they were so rich at that time. And a rich economy can afford a lot of inefficiencies, but that doesn't mean it should have them. Because in the end, we've got 320 million people in this country, and the more they are properly placed in the proper jobs that fit their talents and that you motivate them to do the best jobs they can and all of that, the more output you get per capita, the better the country is going to be.
Andrew Ross SorkinAndrew, you have a question too?
Andrew Ross SorkinI do. Warren, a number of activists actually had emailed me over the weekend because one of the interesting notes, notes in your letter this year was you seemed after, I think, years of being relatively critical of activists, you said at one point, to be sure, certain hostile offers are justified. Some CEOs forget that it is shareholders for whom they are working while other managers are woefully inept. So when is it okay and when is it not? And has your view on activism changed?
WarrenNo, it hasn't changed at all. The first time I've written about it in this specific arena, but actually I've talked about it in the annual meetings in the past. I mean, we do not, if you take the Fortune 500, we do not have the 500 best quarterbacks in at each one of those teams. And in the end, part of the success of our economy will depend on having the right managers running the right businesses. And anytime a business is run by someone that's a six, when you could have a nine in there, not only the business suffers, the whole economy suffers. I mean, you need able people. and to the extent you can, the very best people, running businesses. I mean, they deploy these 150 million workers we have and determine how efficient they are. So I've been a director of companies where we've had the wrong person running them. We've owned companies where we've had the wrong person running them. And I do not believe that in dilly-dowling around about making changes on that. Sometimes I've been too slow myself, and I've seen the problems. in widely held corporations. I've seen the problems of getting rid of somebody who's a perfectly nice person, probably helped select you to become a director, you know, treats his family well, treats his directors well, but he's just not doing as good a job as someone else can do. And that hurts not only that company, it actually hurts all of America.
[58:15]
WarrenSo I've always felt that way. It doesn't mean I want to do that job myself. I mean, at, you know, at 85, I'm not around, it's much easier just to buy companies that are already well-run. I mean, that makes it my job is so much easier. But the problem exists out there that certain companies are not well-run, and sometimes the directors don't do anything about it, and then you need somebody to stir things up.
QuestionerWarren, let's talk about a company that has been stirred up recently, and that's Dow Chemical. You own $3 billion of preferred shares that pay $8.5% annually. There is the option of the company to go ahead and convert those back to common shares if the stock price stayed above $53 in change for 20 days in any 30-day period. You've got it. Yeah, you and I are probably the only ones that know that aside from Del Chemical. Well, the company has been trading higher because of the merger that's been pushed through in some of the activities. It didn't traded higher for a couple of days. Then actually it traded lower. If the company were to hit that threshold and decide to go ahead and convert the shares to common, which they probably would just because of that 8.5% that they're paying on it, would you keep the stock?
WarrenWell, the company would like the stock to sell at a level that would allow them to force conversion. That's perfectly sensible. I mean, I would want the same thing if I were in their position. And if it, we are unlikely to be an owner of the common. Because? Because we bought a preferred that we liked, and we did not buy the common, and we did not buy the common. bought the common ever since. So there's other stocks that we would like better as a common stock. So we like the preferred, 8.5% preferred we like. Someday it will get to a level where they can force conversion and they undoubtedly will. And then the question is, would I rather own Dalchemical or maybe DuPont Dalchemical at that time? Would I rather own that than any other stock? And if that were the case, I'd have been buying it already. already. If that's the case, is it because of the changes that are coming? Andrew Livers isn't going to be with the company anymore. If he was there, would you keep it? It's because it's a business that I don't really have a fix on. We've never owned much in the way of chemical businesses. If you look at the history of Berkshire, I can't even hardly recall, I don't think I can recall a chemical stock
[1:00:40]
Warrenon. I don't think I have a fix on that business. I mean, I think of Lubra's all sort of in that. Well, Louber's always, yeah. That's a specialized chemical. But if you look at all the big chemical companies, we really haven't owned them. In terms of what happened there, is that a situation where you think the activists were warranted in getting involved? Well, I don't know about whether they weren't there, but there's certainly situations. It's very tough to tell. I mean, at DuPont, you know, we'll find out whether people can run it better than being run before. But the record is very mixed on that. Sometimes, sometimes the activists come in or bring in somebody that does a much improved job, and sometimes they screw it up.
QuestionerWarren, we'll continue this conversation. Frito Lay is a fabulous business. I love to own it. I eat Fritos, I eat Cheetos, I eat their potato chips. I even meet munchos, which are kind of hard to find, but I always drink Coca-Cola with them. with them. That was Warren Buffett back on March 1st of 2010 talking salty snacks and soda. And Warren, that brings us back to some of your big investments, including Coca-Cola. Charlie Munger made some comments recently where he said that Coca-Cola is a strong company, but not like it used to be. What do you think about Coca-Cola?
WarrenWell, Coca-Cola continues to sell more drinks, wider portfolio than they used to have many years ago. More every year. than the year before, but the growth rate in carbonated soft drinks 20 years ago was a lot greater than it is today. It's still very strong. I mean, I think they sell like 1.9 billion eight-ounce servings of some drink every day, and a lot of that's Coca-Cola. So it's a very good business, but the growth rate has slowed down considerably from where it was, we'll say, 20 years ago. years ago. We know that the company just recently announced that it's stepping up the restructuring of its North American operations. It's trying to push ahead the move to get out of Coca-Cola bottlers. Yeah. Is that the right move? Well, it's hard to tell. I mean, they bought up the bottling operations, I don't know, five or six years ago, with the idea of re-franchising them later on. So, I mean, this is part of a plan. They drifted in 1890. In 1899 for a dollar, they made a deal with three guys from Chattanooga. It was the dumbest deal ever made. They gave in perpetuity the rights in almost the entire United States of these guys for the
[1:03:33]
Warrenbottling operation. And that led to all kinds of things over time. Then those fellows made subarrangements and all that sort of thing. Working their way out of that started 40 or 50 years ago, and my friend Don Keogh had a big part of the job. And as he said, he loved. and threatened and cajoled and pleaded. All these things to try and get this thing into a more logical arrangement. And they've been working on that for a long time, and this is part of a very long-term plan to have the most logical distribution system that fits today's retailing. I mean, there weren't Walmarts in those around 100 years ago. So you have local accounts entirely then. Now you have big national accounts, and it's a different world. But it's been expensive, been very expensive, to reconfigure the distribution. arrangement. What was the purchase of CCE, Coca-Cola Enterprises? Was that the right move back in 2010? They probably felt it was the only move to, but they created CCE, of course, 20 years earlier. I mean, it's been a tough problem to align the interests of the bottlers and the constant, they call it, concentrate manufacturing part of it. And it's different by different countries. It's not an easy puzzle, but they had decided that to have the United States, States in particular, more logically configured, reinvigorated in terms of the bottling partners they might have and so on. They've got a terrific bottle, for example, that they've added in Chicago. I know the people. So the scorecard isn't in on it. They paid a lot of money, and they're not going to get back that much money, it doesn't look to me like, in terms of when they re-franchise it. But that isn't really the key. The real key is how vigorous the system is once it's been put in place. And they've accelerated. the timetable for getting it re-franchised. The company named a new president and chief operating officer James Quincy back in August. Do you know him? I met him once and I've got a dinner coming up with him here pretty soon. Everything I know about him is good. Okay. There's a question from a viewer that comes in asking, this is from Shop 2 Friends. Will 3G buy Coca-Cola in the next few years? I don't think so. No, Coca-Cola is not for sale. for sale. And I would say this, we owe 9% of it, so we might have a little bit to do with it. To say in that? Yeah. Okay, let's turn our attention and ask a little bit about American Express.
[1:06:00]
QuestionerThis is another question from a viewer, Dave Carson, who writes, and how do you rationalize Berkshire's continued investment in American Express, given its troubles?
WarrenWell, American Express started, I think, in 1851, and they had an express business. You transported goods from the West Coast, East Coast to the West Coast. I think they even chained the Pony Express rider to his trunk that he was carrying so that if the Indians came, he couldn't run off and leave the trunk. And then along came the railroad. And now all of a sudden you could stick those trunks on a railroad. And American Express adapted to money orders. And then the credit card came along in the 1950s, and people said money orders could disappear and they adapted to credit cards. Diner's Club looked like they were going to wipe them off the face of the earth for a short period of time. So it's been a business that's had to adapt. But it's been a very fundamental business with a terrific reputation. And when Roosevelt closed the banks in 1933, Traveler's checks were allowed to be continued to be used, so they substituted for banks for even for a week or so. And Ken Chenault has been terrific about adapting in a world where you need to adapt very quickly. But you've got cardholders spending $16,000 or $17,000 per person against, you know, four. $4,000 or so on visa. And it's a very, it's a very, very strong brand, but you are going to have all kinds of people coming at you in payments. And that won't stop. I mean, it'll be this thing today and another thing tomorrow. And so you've got PayPal. You've got the whole works. I think American Express will do fine over time. The Costco breakup of the Costco arrangement was a big deal. But the proprietary cards stay as strong as ever and keep growing. And I like it. I like it fine, but there's no question it'll have an abundance of competition.
QuestionerThe company is going through a restructuring as well, American Express. And people have been told to warn that you could have some up and down quarters as you go through this as they spend more on marketing to maybe bring more people in, more members into the cards. You're prepared to ride that out?
WarrenWell, sure. I mean, I wrote out the salad oil scandal in 1960s. No, American Express, they bought firemen's fund insurance. They tried to build a broker's thing around sure, I mean, they'll make mistakes. They owned IDS and they spun it off at one day.
[1:08:25]
WarrenBut they have the sense to evolve and they keep evolving toward their strengths. And, you know, I've got a card in my pocket that I got in 1964, and it serves my purposes very well, but it doesn't serve everybody's purposes, and they will keep adapting to that. They've come up with lots of new products. So it's competitive. But I'm not. I like the business.
QuestionerOf the big four investments, we have talked about already American Express, Coca-Cola, IBM. We have not touched on Wells Fargo. And that's the biggest one, too. It's the biggest one, and it's the best performing stock if you're looking at those four over the last year or so. Talk a little bit about Wells Fargo, what you see there.
WarrenWell, it's a terrific operation. And John Stuff has done a great job. I keep trying to, he's talking about retiring at 65, and I'm going to go out and have a hunger strike in front of the director's meeting if they do that. He's got a fabulous job. And Wells, you know, it's a very big, I mean, it's a company that makes $20 billion a year plus after tax, and it's in, I don't know how many households, but it's a very well-run bank. When the crisis hit, you know, it took over what I think was then the fourth largest bank, Wachovia. The government didn't have to come up with a penny. to come up with a penny. You know, I mean, stockholders bought some more stock, but Wells was there to take over Wachovia at a time when the world was falling apart. And it didn't have to go to the FDIC, didn't have to go to the federal government. So they've done a terrific job.
QuestionerYou also mentioned Bank of America in the annual letter. It's not one of your big four holdings, although you mentioned that if it was, if it was converted, it would be your fourth largest equity investment.
WarrenYeah. Yeah. Bank America, I mean, Brian Moynihan has done a great job. I mean, he and, he and inherited a bad hand. I mean, they had, when you look at countrywide and when Merrill Lynch was acquired on that Sunday, I don't know, around $30 a share, if they waited a day or two, it probably even 30 cents a share. So, Ryan really took out a tough problem. He had all these mortgage problems inherited from the past, but, and he had the government mad at him, and he had a good bit of the populace mad at him. He's, I mean, he just took it one thing at a time, and he's made improvements, dramatic improvements. I think it's very, very likely. We've got these warrants that expire in a few years, and I think
[1:10:53]
Warrenit's very, very likely we exercise those and remain a very large shareholder of the baby. I think we don't have about 7% of the company or something like that. And I think that will happen.
OtherOkay. We're going to continue our conversation with Warren Buffett. We're watching gold this morning because the precious metal is on track now for its best month in four years as investors seek safe haven. You're looking at gold now at $1,230. In the meantime, we've got to get back to Becky Quick in Omaha with our special guests for the morning, Warren Buffett, who traditionally doesn't like gold. Becky.
Becky QuickWarren, would you like to expound on that? Your thoughts are gold. Last time you asked me about gold was three or four years ago was 1800 or something.
WarrenI said I didn't think much of it. So far I've been right.
Becky QuickWarren, we have a lot of questions that have come in from people, wanting to know your thoughts on Apple and the Department of Justice in this battle that's played out. I'll ask one of these questions. This comes from Nick Malowski. He says in regard to the FBI versus Apple, what would you do in a similar situation, knowing that the value of your company could be affected?
WarrenWell, I want to establish my credentials. This is my phone. I don't know anything about tech, obviously. But my feeling just generally, and I don't know the I don't know the specifics of the pleading to the judge that decided it or anything of the sort. I do think that we live in a very, very, very, very dangerous world. And there I'm thinking about the mass attacks type of thing that we could have in cyber or nuclear chemical, biological. Certainly, if you were in the early days of September 2001, and you were receiving credible information that something, major was happening and you had reason to believe that it might be connected with certain people. You know, I think that in that case, security trumps privacy. On the other hand, I think that if you've got people who are just fishing around on smaller type things for, and low probabilities of finding things or anything like that, I think privacy trumps security. But in the end, if there's a, there's something major, something that, the Attorney General or the head of the FBI would be willing to sign, go to a judge on and say, we need this information, we need it now, I would be willing to trust that official to behave in a proper manner. I wouldn't want that broadly distributed. I wouldn't want every magistrate to feel he had to respond immediately to some local cop or whatever it may be on one item of privacy or another.
[1:13:42]
WarrenBut I do think that the world is very, very dangerous, and I think that anything that it's able to us to minimize the danger of something that's really threatening. I mean, take the anthrax of 2001, if it were apparent that you could determine the area from which that anthrax came, I would want to know a lot about everybody that had access to it. And I'd want to know it immediately, because I wouldn't know when they were going to start putting it in something a whole lot more dangerous than sending it to the National Enquirer, Tom Brokaw, or Tom Dasher. On Apple's point, to Tim Cook's side of things, he says that this is basically the government ordering them to write code. I'm not a technologist either. I don't understand that necessarily. I see, I don't either. I admire Tim Cook enormously. I mean, I respect him as much as any CEO in the country. I would say this, if we have probable cause and whether it were the Attorney General, FBI, the president thought that There was a dirty bomb in New York or something of the sort, and Apple could help us, or Berkshire could have the way we've been asked to help on a certain thing. If they were asked to help, I would think they would want to do it immediately. Incidentally, I think Tim Cook probably would. I mean, the problem is he doesn't want to open it up to where everybody can crack into your phone or my phone and learn a whole bunch of things that really are irrelevant to national security. what may help somebody in some other way. So you have to have some privacy has its limits, and the national security has its limits in the other direction. You can't call everything national security. Andrew, you have a question on this too?
Andrew Ross SorkinWarren, I had a couple, but Warren just piqued my interest because you had mentioned that the government has asked Berkshire prior for certain information. What kind of information was that?
WarrenWell, I would say this, I think almost every large company over a period of years has been asked to help in some way in terms of law enforcement. And when they're asked, they are also that's preceded by an agreement not to talk about it. And I think that's quite proper. I mean, there are things, you know, you could be privy. Certain companies could be privy to something that would be useful. If there were a dirty bomb in a New York or something, that was scheduled to go off. You might be very interested in building maintenance firms or something of the sort.
[1:16:27]
QuestionerSo, well, I know that many large companies have been asked very, it's not been willy-nilly. Nobody's doing it just a pry or anything like that. There's been a reason for it. And I think that almost any large company would cooperate. And I think, frankly, Apple would cooperate if it was a targeted sort of thing that where they felt it was very important in national security. But I don't think they have. want to give away, you know, the, you don't want to unlock, unlock millions of phones out there with people who are people who only just be prying. Warren, I think one of the issues for Tim Cook in particular about the code is it would be the equivalent of the government asking you to manufacture a product, if you will, that you currently don't manufacture and a product that you don't want to manufacture. If the government came to you under those circumstances, how would you feel?
WarrenWell, I would say if it was important. I would say if it was important enough to national security, you know, we would try to cooperate. And I think, listen, I think, I think, I think 99% plus of the Fortune 500 would do the same thing. You'd have to be convinced it was terribly important and that you had some particular ability or expertise that really could make a difference. But somebody came to me and said, you know, you've got some power plants and you've got a lot of plutonium there, which you mind selling us some, you know, you know, the fellow looked like he came from North Korea. I think I'd be quite cooperative with the U.S. government.
QuestionerRight. And Warren, just to put one fine point on it, because I think this makes it slightly more complicated, and this is one of the reasons that Tim Cook feels the way he does beyond genuinely feeling this way on the privacy count, which is the impact on his business, which is to say that unlike many other businesses, if the government came to you and again came to you privately, in this case it's now very public, the larger implication from a business standpoint, is that if Apple were to give or be forced to give up this information, that it might make his business in places like China and elsewhere much more complicated, either because he's going to have to abide by their rules, or they're going to tell him, you know what, you can't do business here. That's a complication, but I would say that I don't know, Tim, real well, but everything I know about him is, he's as high-grade an individual, as you can imagine.
[1:18:52]
WarrenBut, you know, the bank was better. In fact, I used to take out my wife, like she used to cash, I used to take out $9,000 regularly, and the FBI came to see me, you know, and my bank gave them that information. I'm not mad at my bank about that. I mean, that's, that's, but they cooperate with the U.S. government, and it probably has to do with money laundering and a whole bunch of things. And my, I expect my bank to cooperate with the U.S. government. I expect my, you know, I expect my telephone company to cooperate with the United States government. I don't think they should be reasonable in determining to what extent they, where there's really a need to get that sort of thing. But we live in a dangerous world, and if at our railroad, we found mysterious shipments or something going on or something, I would hope that we would make sure that the proper people in government knew about it.
QuestionerI want to know. Do you think the situation has gotten so calm? I want to know what he was doing with the $9,000, Warren. and how many times did you do that? What the heck?
WarrenI did it a lot of time. I did it a lot of times.
QuestionerHuh?
WarrenWell, well, I did it once a year. That's what my wife gets to spend. Once a year.
QuestionerOkay. No, I'm just, no, I did it fairly frequently. I had read some place that, you know, that, you know, that there, the 10,000 was some threshold where they reported it. I thought, why should they report it? I can just say, I'm just getting the money to buy groceries. Me and Andrew here, neither one of us have ever taken $9,000 out that just walking around money. Have we, Andrew?
Andrew Ross SorkinCredit cards, my friend. I use my American Express card to help Warren's account. That's why the FBI got suspicious of me.
QuestionerYou were just under the threshold every time?
Andrew Ross SorkinYeah, well, yeah, you're not supposed to do that. I didn't know that. And they found out you're spending it on Cherry Coke. You know what I mean? And just guzzle on that, like, cases of...
WarrenWell, those two guys looked pretty serious when they came into the office. I wasn't there, but my assistant was there. And, you know, I learned. We were almost back to the weirdo billionaire question again on that, because I was wondering where that 9,000 was going.
QuestionerYeah, well, you got one.
WarrenYeah. Do tell.
QuestionerYeah. Well, we'll save that for the annual meeting. I got to have some news there. All right. Andrew? I'm finished up on my Apple questions.
[1:21:36]
QuestionerI think I'm fascinated by his answer. Have you talked to Bill Gates about this at all, Warren?
WarrenNo, I saw him on Charlie Rose the other night talking about, but I have not talked to Bill about it. I mean, it's a very, very tough question because it is a question of degree. I mean, if I really want to know, if we can crack the 19 guys and find some conversations when they're planning on how to take over a bunch of airplanes. You know, I would like to be able to have access to that information, and I wouldn't want it to have to go all the way up to the Supreme Court while, you know, while it was playing out. And on the other hand, the idea of government just prying and, you know, and using it, well, we had that case with Jay Edgar Hoover, you know. So I, it's a tough question. It's easy to answer the extremes, and it's hard to know where to cut it in the middle. Okay. I think, my guess is Tim Cook. I mean, you know, he cares about the same thing. You know, every American cares about in terms of the safety of the country. And he also cares about not letting people get into a product he's sold unless they've got a very, very good reason for it. Okay.
Becky QuickWarren Buffett, we're going to come back to you in just a couple of minutes. Welcome back to the special edition of Squawk Box. We are live in Omaha, Nebraska with Warren Buffett, the chairman and CEO of Berkshire Hathaway. And Warren, we've talked about a lot of issues this morning, but we haven't touched on some of of the new investments that came in. And I'm thinking specifically of Kinder Morgan. Berkshire now, as of the fourth quarter, had a $396 million stake. I was a little surprised by that, because when we've talked about oil investments in the past, you haven't been that enthralled with most of them overall. This is a pipeline investment.
WarrenYeah, well, I was a little surprised, too. We have two fellows who each manage about $9 billion for us. I look at their holdings once a month, but I, don't have to check with me about that they don't at all so they run two portfolios they get paid based on how those portfolios behave I've never told them to buy anything or sell anything so that was the decision of one of those two and was it Todd or Ted well I I don't think I'll tell us to which one is doing what but they I think when you see a position of that size it's probably there because I'm not going to do anything in all likelihood that doesn't involve at least
[1:24:10]
Questionerpotentially involved a few billion so now that could have been the start of something and I was going to buy more but that's not the case with Kinder Morgan you were involved though in the additional purchases of Phillips 66 right so at this point you had a $14.20 billions that's me what is it that you like about Phillips 60s.
WarrenWell I won't get in the business of doubting stocks but I you know I obviously I like the business or I wouldn't have bought it but I I I'm not recommending anything to anybody else when you it is important some people say that is a reflection how I feel about oil yeah oil refining is much different than oil production there are two entirely different businesses I mean they have they have a little connection in a certain way but but a decision on oil refining or a decision on going in the oil production business they're night and day because well because in in the oil production business it all depends on the price of oil whether you're going to make money in the future and in the refining business it all depends on what's called the crack spread which is just basically what it costs you to buy oil and sell it and you can make just as much money or more with $30 oil with a hundred dollar oil but not if you're a producer so you like the crack spread right now well no it's not so good right now it was better last year What really helps in the oil refining business is when somebody shuts down. For example, the Whiting Indiana refinery, which is a big one, shut down last year for a while, and that helps the spread. Oil refining generally operates in the 90 plus percent of capacity operations. So anytime somebody gets knocked out either there's planned outages, but then there's also unexpected outages. And if you're in the oil refining business, you're, you're in the oil refining business, you're hoping that the utilization is very up there in the high 90s.
QuestionerThere's been a battle in the energy field in which Bloomberg Business Week put you on the cover with Elon Musk, the two of you kind of battling and fighting over this. Him with Solar City and you with NV Energy, Nevada Energy, saying that this is a situation where billionaires are fighting over this and it generated a lot of questions from viewers. I'll give you one that came up from Maricella Giordano says, why is your company Nevada energy trying so hard to stop people from converting to solar power in Las Vegas?
[1:26:40]
QuestionerAnother similar question that came from Mike Wood, says Berkshire's been a leader in solar investment. Why are you preventing or deterring net metering in Nevada? You want to explain that to people?
Greg AbelOh, well, we don't have a problem in net meters. And we're the leading in renewables in the country among regulated utilities. The only way is we do not want our million plus customers that do not have solar, to be buying solar at 10.5 cents when we can turn it out for them at 4.5 cents or buy it at 4.5 cents. So we do not want the non-solar customers, of whom they're over a million to be subsidizing the 17,000 solar customers. Now, solar customers are subsidized through the federal government as we are with our wind and solar operations ourselves. The reason the society believes in subsidizing solar and wind is because of damages to solar operations ourselves. The reason the society believes in subsidizing solar and wind is because of damages to society that may resolve over decades from carbon emissions and and society has an interest in it and subsidized by the federal government society is in effect paying for it. I mean, the people who benefit the whole country. In Nevada, they had an arrangement for a very limited number of people and the Public Utility Commission decides this. They had an arrangement where the utility had to pay way above market for solar produced by these 17,000 homes. For instance, if I have solar electricity that I'm producing, it's more than I need, I can sell it back to you. At 10.5.5. When we could buy someplace else for 4.5 cents or make it ourselves for 4.5 cents. And that costs the million plus customers a price. And the Public Utility Commission, there's three utility commissioners. The Public Utility Commission decided that was unfair to the million plus people who didn't have solar. And they said, it's fine to sell it back, but sell it back at what it can be bought. Sell it back at market price.
QuestionerThat Bloomberg Business Week cover really put this, again, as a battle between billionaires with you and Elon Musk. Is that fair? Have you spoken with Elon Musk about this?
Greg AbelElon called me, yeah. He was unhappy. He, I mean, he's being subsidized with his battery plant big time. Our other customers are actually paying a little more for electricity to subsidize his battery plant. And they were being, charged this higher price for electricity. And now we can lower prices a little bit for the
[1:29:03]
Warrennon-Solar people and the 17,000 can only sell us electricity. This is being phased in over a few years, but eventually they will only be able to sell us at market price. So was Elon upset when he called you? Well, he, he, he would like us, he would like the million people to subsidize the 17,000, just like the rest of Nevada is subsidizing his battery plan. And when you told him that, how did the conversation end? Well, we're polite.
QuestionerAll right, Warren, we'll continue this conversation in just a minute. Warren, we've talked about a lot of what you laid out in the annual letter, but there's still some areas we haven't gotten to. One of those is a significant chunk of space that you took up defending Clayton homes, which is your mobile home producer. The company's been under attack. There have been a series of articles in the Seattle Times. and some that have been in conjunction with BuzzFeed. And there have been charges, the most recent charges, you don't directly take on some of the charges that they brought up. One of them is that you charge minorities, higher rates than white people for sales of mobile homes. What do you say to that?
WarrenIt's not true. There are a variety of factors that enter into the rate charged. The average rate was about 8.8% last year, but these are smaller loans. These are not a quarter of a million dollar loans of service. They're $60,000 loans. And they're made to people with lower FICO scores on average people, lower income people. 70% of the houses bought by lower income people, $150,000 and under houses were manufactured homes last year. But it depends on your down payment. It depends on your FICO score. It depends on your earnings. It depends on the percent of your earnings going to housing. housing, it depends on whether you own the land. There's a whole variety of items. And they're all placed through something that has nothing to do with your religion or your color or anything of the sort. And if you have a lower down payment, on average, you'll pay a somewhat higher rate than if you have a higher down payment. If you have land, you'll pay a lower payment than you don't have land. Because the land's collateral? Well, the land, yeah, if the land becomes part of the part of the collateral for the loan. If you have a higher percentage of your income going to mortgage payments, you'll pay a little more. But similarly, the other way around, if you have a higher one, you'll pay less.
[1:31:39]
WarrenSo there's a range of rates. It's not a huge range, but there's a range of rates depending on your creditworthiness. And we are lending to people who are lower income on average. These people would not have a large. a home otherwise, but at the end of the year, 95.4% of our borrowers were current on their payments. And we will have a home at the annual meeting that I think will cost $78,000 installed, but you have to have the land. And I will guarantee you you'll think that's a very decent, those are very decent living quarters for that sum. I mean, we're taking care of a lot of people that would not otherwise have the chance for homeownership.
QuestionerYou went through very specifically, or the Seattle Times, I should say, went through very specifically and made some charges where they looked at very specific cases where they say people were lied to on tape about whether or not there were other available lenders, situations like that. Have you looked into all of those cases?
WarrenEvery single, we've got a copy in the annual report of a one page item that lists the available letters. It says go to more than one. We don't make all the loans that are taken on our houses. They go, the local bank often makes them, but sometimes local banks aren't keen on making I'm manufactured homes. But in every office of ours, we have it posted on the wall. They read, it's a one-page saying, it's big type, they sign it. Now, does that mean that every single transaction gets handled perfectly known? And that's true. I mean, we've got 330,000 employees at Berkshire, and I will guarantee you somebody's doing something they shouldn't do today. But in terms of the tone at the top, the instructions, and I should point out, in the last two years, We've had 65 examinations, including examinations from 25 different states and federal. And the total amount of fines we've paid is $38,000 or something like that. And we made some refunds of $700,000. But we get, we've got, we've got 300,000 loans. We're constantly examined by all the states in which we do business and by the federal government. And, you know, if you look at our record compared to most lenders, I think it's pretty darned very very. Good.
Becky QuickJoe?
Joe KernenThanks, Beck. Hey, Warren, I love when you talk about how everyone in your neighborhood lives better than John D. Rockfeller, and it's 100,000, and we're going to keep getting greater and greater.
[1:34:07]
Joe KernenI love that. I love hearing that. So you saw that Google robot from last week or something like running through the trees and falling over and getting back up. So we hear that manual labor is probably going to be replaced eventually by robots. We made it through. So there's no more really ditch digging. We have earth-moving equipment, really. In agriculture, you look at what agriculture used to employ, and you look at the way we do it now. We've managed to find a way to employ people as we've gotten better through technology at all these things. My buddy, Andrew, and he's got me worrying a little bit finally about this now. The population of the world keeps growing, throw in artificial intelligence where, who knows, maybe it won't just be manual labor, maybe it'll be average brain-intensive. stuff eventually is done by machines too. You sure that we can keep up, given everyone a job when so much technology is doing so much? Is it still a reason to be optimistic about the future?
WarrenWell, Joe, wouldn't it be wonderful if someday we got to the point where there were robots every place, they were running farms, they were running Apple, they were running Berkshire Athaway, and all you had to do was one person could punch a button at the start of every morning, and all the goods and services that we're getting now would be turned out by robots or whatever. And we'd have the goods. We'd have 18 million cars a year. We'd have a million one housing starts. We'd have all the iPads being sold. And if all of that came from one person pushing a button, would that be a tragedy? I mean, just think how well we'd live. Now we'd have, instead of having to work 35 hours a week, we might work an hour a week or something of the sort. No, I mean, basically, the more output you can get from people, it frees them up to do other things. And one of the things that frees them up to do is work less. We work less than people did 100 years ago. And what we've elected to do is bring down the work week to some extent, but also have a huge abundance of goods beyond what we had at that time. And I will guarantee you that if somebody in 1900, when there were 40 million people working and 11 million more on farms, And some candidate for president has said, 9 million of you, 11 million are going to be displaced by a bunch of machinery. You know, he probably would have won the election on an anti-farm machinery.
[1:36:30]
Joe KernenTicket. Joe, if we get so, you could just press a button and everything is produced, you know, that'd be never-viana. But, Warren, one of the questions that then raises, and I don't, by the way, suspect this is even an issue for the next 20 or 25 years, but perhaps longer term, there is an issue, which is to say then, are you getting into a whole issue of redistribution of wealth? What does it say about individual responsibility, capitalism? Some people talk about, you know, a wage that would be given across the board. I mean, literally that the government would just provide this wage to you. I mean, it sort of raises all sorts of questions the farther you get out with it.
WarrenYeah, and Andrew, I agree totally with that. And as capitalism and the market system get more specialized, it does leave more and more people behind. In 1900, if you could work on a farm, you could earn something reasonably close to the median income. I mean, there was not a huge disparity between one farm worker or another and the wages you could make that way compared to what you'd make in some more specialized occupation. As the economy gets more and more specialized, it pushes more. more of the rewards that the market system offers. It pushes those to people with specialized talents, and it leaves behind people who had talents that were valued 100 years ago, and there's no question about that. But a prosperous society can take care of that. As I point out in the annual report, if we just get 2% a year growth, in one generation, there will be $76,000 more of output per family of four in the United States, $76,000 more. more of GDP per family of four from simply 2% growth. Now it will get the market system left alone will produce more and more of that for guys at the top like me. And it will leave a lot of people behind. But we can solve that. I mean, we should have a country that works for people who are willing to work. I think an earned income tax credit improved and expanded is really called for because we'll have the output. The question is who gets it. We're going to have a whole lot more output. Just like we have six times as much output now per capita. Real output as when I was born. Now, if you told my parents in 1930 we'd have six times the output that they had at that time per capita, they would have said, well, everybody's going to be living wonderfully. And it hasn't been true because specialization pushes more and more to the top.
[1:39:08]
WarrenI mean, the very fact of cable TV, I mean, it makes somebody that is the best middleweight in the country worth, you know, $40 or $50 million for a fight. And, you know, back in the 30s, he got what you could get out of 8,000 people maybe in a room. So all of, it really pushes to the people who have special talents valued by the market. And it turns out more and more stuff. But absent some intervention by government, it will leave all that stuff at the top. And that really, I don't think, is what our country should be about over time. I think there should be enormous differences in results. But I also think that anybody that's willing to work in the country that's getting ever more prosperous should find that that country works for themselves. We had to... And if you want a little unearned income, Joe, if you want a little un-earned income, all you have to do is fill that bracket out.
QuestionerYou don't get to the sweet 16 and you'll get a million dollars a year for the rest of your life. I know. And you know what I'm going to be doing? I'm taking like 9,000 out in cash every week. And I still don't know what I'm going to spend it on. But if I ever get like you, I want to... I just want to touch 9,000. I want to touch $9,000 someday.
WarrenBut, you know, if Larry Summers is right, it's going to be in quarters. That'll be heavy to carry around. Try, try, try you. If you want to get called on by the FBI, take out 9,000 every week.
QuestionerYeah, exactly. You'll have two new friends. I know. I know. I think Spitzer tried that. Let's go. Go ahead, Becky. I think we're going to, you want to take us out of here before I... Go ahead, Beth. Yeah, before we get ourselves in trouble.
Becky QuickYeah. We're coming back. We do have much more from our special guest, Warren Buffett. Welcome back, everybody, to the special edition of Squawk Box. We want to make sure we get more of our viewers' questions. You've been writing in questions for Warren Buffett, and we're going to take some more of those right now. Warren, Gavin Smith writes in, and he wants to know, do you have a view on Brexit? Should the U.K. Leave the European Union?
WarrenI think I'll lead that to the British. I hope they stay in, but that they have to make their decision, obviously, based on what they think is best for the U.K.
Becky QuickWhy do you hope they stay in?
WarrenWell, I just think the stability. I'm hoping the European Union works out well, and I hope the European Monetary Union works out well.
[1:41:23]
WarrenAnd I think that it would probably be some downside of the U.K. Not that they're in the Monetary Union, but the more Europe does learn to work together over time. I mean, I think the European Monetary Union's flawed, as I've said in the past, but that doesn't mean, you know, we started out in our own arrangement with the 13 states. with the 13 states that we had a lot of problems to work through. So I, you know, it's up to the, it's up to the citizens of the UK to figure out what's the best for themselves. My hope is they stay in.
QuestionerYour hope is they stay in because of stability. What do you think would happen to financial markets if they do vote to pull out?
WarrenI don't, it won't make any difference that anything Berkshire does it. I mean, if I was assured by Cameron that they were going to stay in or leave, it wouldn't change one iota what I'm doing in businesses or something. stocks.
QuestionerOkay. Another question that came in from Eric Dabowski. He says that we didn't talk much about negative real rates across must of the world. Shouldn't we be borrowing and buying? I know we touched on negative rates before.
WarrenWell, negative rates affect everybody's behavior. I mean, I probably, well, I know that I paid more for precision cash parts because interest rates are so low than I would have paid the interest rates for six or eight percent. I mean, that it absolutely has an effect. has an effect on my behavior and for people that use a lot of borrowed money, it has a huge effect. So it, I mean, it is a huge stimulus to borrowing. It's terrible on people that are lending. I mean, for somebody I'm just retired and was always afraid of owning stocks or something and therefore kept their money in banks. I mean, they've gotten killed. So you really had the borrowing class getting enormously subsidized by the lending class for these overrun. fighting social reasons. But, you know, it's really rearranged the income, big time, of a lot of the citizens in the United States. And I never would have thought it would continue this long, but I also thought a year ago it would have to continue if the Europeans kept doing what they were doing. It's going to be, nobody's seen this movie before. And you can go back and read all the great economists and nobody talked to. about a long period of negative interest rates.
Joe KernenJoe, you have a question? I'm looking at an FT piece, Warren. And I guess you had, in addition to that Clayton Holmes
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Questionerthat you outlined, that kind of a controversy or whatever you want to call it. There's also some shareholders that are mad that you don't have climate change as one of the key risks to Berkshire Hathaway's insurance business. And people are taking it, depending on what they believe in. and they're using it to put forth one or another opinion. I was going to ask it in a different way earlier. You're very optimistic about the future I am as well. You know that CO2 is going to continue to rise because of China and India for the next 10, 15, 20 years. If you believe the alarmist case, I don't know how you can be quite so optimistic because our ability to deal with it is, you know, is questionable at this point.
WarrenYeah, well, the question is raised. And actually, it's a, proposition that's put forth on the proxy statement of Berkshire by a shareholder, and I'm sure a very well-intentioned shareholder. I mean, this shareholder is worried about the effect of climate change on our insurance business. And in the annual report, I've gone into quite extensively, but the truth is, it's not a risk to our insurance business. In fact, it may very well be a plus. But that doesn't mean that it's not a problem for society, but we write our insurance policies one year at a time. one year at a time. And we adjust the changes in the world. I mean, there are way more automobiles on the road than there were 30 years ago or 50 years ago. Well, you know, somebody could say, well, if all those automobiles on the road, won't there be more accidents and won't you have more insurance claims to pay? Well, of course, but we adjust our insurance rates every six months. And it is not a threat to our insurance operation.
QuestionerBut Warren, I don't even think your premiums have necessarily been raised at this point. And with all we have, hear about supposedly that it's front and center that the effects of this are happening as we speak week in and week out with every adverse weather event. When would you expect to see Miami real estate start to weaken? When would you expect to see insurance rates start to go up as they invariably must if all these things really are becoming more frequent? Why is it not happening?
WarrenWell, I think it's a... In terms of insurance rates, I think it's probably... I think it's probably a long way off. But if I'm wrong, we'll change him. But my friend Bill Gates is... Supposedly already here.
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QuestionerSupposed they're already here. Supposedly already here. Yeah. And no... Pardon me? A lot of the adverse weather events that we see now are tied to it already. So it's not supposedly... supposedly it's front and center right now, if you believe the true alarm is.
WarrenWell, it has not caused a change in insured losses. losses that is any way different than I would expect if there were no talk about it. I mean, it may well in 20 years or 30 years. I don't know. But the one thing I can tell you is it hasn't caused it now. In fact, rates are down, and that's the reason we're not writing catastrophe insurance at Berkshire Hathaway is because the rates have gone down for catastrophe insurance. Florida has gone for longer without a hurricane hitting land than any time since in the early 1800s. Right. So it, you know, it just is not an insurance risk.
Joe KernenThat's one of the benefits of having you on every year, because I remember our conversation after that year when there were... You remember we ran out of the...we had to go to the Greek alphabet because we ran out of named storms out one year. And you were like, I could see it. You're like your Cheshire... You knew rates were going to be up, but you knew the probability was that there weren't going to be that many hurricanes probably the next year. And as it turned, you were... it's been the longest period in history without a Category 3 making landfall. And you've been ranking in the premiums. You've got a future with us as an insurance underwriter, Joe. You're the one that you understand. No, you understand that if 2 12s come up in a row, it doesn't mean the chances from a 12 coming up have changed from 1 in 36. You knew. You knew. You knew. You knew in spite of everything, all these other, you know, Bill 9. But you knew. Anyway. Thanks.
OtherOkay. We're going to come back to Warren in just a minute. Welcome back. We are live with Warren Buffett from Omaha, Nebraska this morning.
Becky QuickWarren, Joe was just asking about why climate change wasn't in the risk factors. But that was an interesting thing you put in the letter this time. Risk factors that you normally don't lay out. One of the risks that you laid out was an issue like how driverless cars could have an adverse impact on both GEICO and on your auto companies. You know, you think through. how you get around that. But if driverless cars are driving everybody around, what would you do?
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WarrenHow do you evolve the situation like that? Well, the only way they'll be driving everybody around is probably if they're regarded as a lot safer. And we'll find that out as we go along. But there have been faster advances in this than I would have expected a few years ago.
QuestionerYeah, I would say that. But I would also say, if you asked me to take the over or under, on 2030, what percent of the cars on the road in the United States or or driverless, I would take the under on 10%. But I may be wrong. There's a, there's a long bot, long bets.com you can go to on the internet, and you can make a bet on something like that, as I did on the hedge fund bet. But I would take under 10%, but I may be wrong. And there's no question if you have 50% driverless cars or 75% driverless cars, the premium, auto premium volume would be very likely be far less, and probably the dealership arrangements in the United States. in the United States would be changed in some way that's hard to predict. I understand the GEICO issue and the GEICO threat that comes with that, the dealerships. I mean, people would still need cars. Well, I think, well, we'll see, but maybe. But driverless cars would seem to me to be appealing on things much more than style and that sort of thing. I think that it would become a more homogeneous product. I may be wrong, but that's my impression.
QuestionerYou know, I have a car. couple of quotes that I wanted to run by you. Someone tweeted, don't take vacations. What's the point? If you're not enjoying your work, you're in the wrong job. It sounded a little like something you might say, but it was something that Donald Trump tweeted.
WarrenWell, I don't know whether he feels that he's in the wrong job now, and that's why he's looking for something else. I absolutely advise students. I had students last week, 160 of them from Harvard and South Dakota State. I just tell them, try to find your passion. And, you know, I mean, may not find it the first. first time, but you know, don't sleepwalk through life. Find something that you really enjoy doing if you can do it. And, you know, not everybody's lucky enough to be able to find that, but it's, it ought to be your goal. But to make $10 a week more doing something that you don't feel good about compared to something you'd feel good about, you know, make the change.
QuestionerYou said you watched Bill Gates on Charlie Rose last week, and I did too.
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QuestionerBill said something I thought was really interesting. He said, the thing you do obsessively between age 13 and 18, that's the thing you have the most chance of being world-class at. Bill said his one thing was coding. What was your one obsessive thing?
WarrenWell, I was pretty interested in investments. Bill and I, his father, many years ago, right after we met, had a group of about 20, right down on the sheet of paper, one word that they thought accounted for their success. And Bill and I, who may only met twice, didn't know what the other one was writing down. We both wrote down the same word, which was focused. And he was focused on software. I was focused on investments. And it gave me a big advantage to start very young. There's no question about it.
QuestionerWell, Warren, I want to thank you for your time today. We really appreciate having you.
WarrenThanks for having me.