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OtherGood morning, and welcome to a special edition of Squawk Box. Becky Quick is live in Omaha, Nebraska, with iconic American investor Warren Buffett. The Oracle of Omaha joins us for three hours to answer our questions and yours. We'll cover it all from Berkshire's new stake in Apple and Airlines to tax reform and job growth. It's an interview you can't afford to miss, and it starts right now.
Becky QuickWarren Buffett is with us in Omaha to this morning at the Nebraska Furniture Mart. Warren, this is 10 years now that we've been doing the Ask Warren show where you've let us come out, bring questions from viewers along with us. We want to thank you for that and for taking the time to be with us once again this morning. It's always been fun. It has always been fun. We have a lot of questions, as Joe was just alluding to this morning. But why don't we start talking about the letter, the letter that was just released on Saturday morning. A lot of people had a chance to look through it. How many is this 53 for you now of letters? 52 years?
Warren52? Well, I don't know. It's been more than 50. I remember. Well, yeah. It's been maybe 53, yeah.
Becky QuickAll right. So in this letter, you start things off with a message that is a familiar message for you, the American dynamism, just how powerful this country is. It's unbelievable. It's a very common message for you, but is there a reason that you chose to put it so high in the letter this year?
WarrenWell, I usually put it pretty high in the letter this year. Because it's, it's a very high in the letter. It's the dominant theme that's run through my life since I bought my first stock in the spring of 1942 when I was 11 years old. And it overwhelms everything else over time. I mean, we have hiccups in the economy, and we even had a panic in 2008. And we had a war during that period that when I started. We were losing the war, actually, in the spring of 1942. But this country always comes back and wins. And it's astounding when you think about it. What's happened in 240 years. That is less than three of my lifetimes. And just look at this place. I mean, there wasn't anything here, you know, 240 years ago. And civilization had gone on, you know, for centuries and centuries and with people making very little progress in their lives. And then America showed the way. And we have not lost the secrets of awesome. In terms of what the message is you want to get across to people,
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QuestionerI mean, what the message is you want to get across to people, I mean, when we're looking at markets at such high levels, as Joe was just alluding to, it has a lot of doubters and a lot of people saying, wait, it's too late for me to get in. I've missed it. We're passed down 20,000. Now I have to wait for the pullback. What would you say to someone like that?
WarrenWell, I would say they don't know, and I don't know. And if there's a game that's very good to be into the rest of your life, the idea to stay out of it because you think you know when to enter it is a terrible mistake. I don't know anybody that in time markets over the years. A lot of people thought they can. But if you were buying a farm and you decided that farms are going to be worth more money 10 or 20 or 30 years from now and that would be a productive asset, you'd go out and buy it unless it was just at some absurd price. And the best thing with stocks actually is to buy them consistently over time. You want to spread the risk as far as the specific companies you're in by owning a diversified group and you diversify over time by buying this month, next month, the year after the year, after the year after. the year after. But it's making a terrible mistake. If you stay out of a game that you think is going to be very good over time because you think you can pick a better time to enter it.
QuestionerAlthough you have had times where you thought stocks were incredibly cheap, like in 2008, 2009, when you talked about that even on our program, you thought that there were times that stocks were greatly overvalued where you said forget it, don't do it. Are we near an inflection point right now, as best as you can tell?
WarrenWell, it's been, I've been talking, this wife, for quite a while ever since the fall of 2008. I was a little early on that actually. But I don't think you can time it. And we are not in a bubble territory or anything of the sort. Now, if interest rates were seven or eight percent, then these prices would look exceptionally high. But you have to measure, you measure everything against interest rates basically. And interest rates act like gravity on valuation. So when interest rates were 15 percent in 1982, they pulled the value of any assets. So what's the sense of buying a farm on a 4 percent yield basis, if you can get 15 percent of governments? But measured against interest rates, stocks actually
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Questionerare on the cheap side compared to historic valuations. But the risk always is, is that interest rates go up a lot, and that brings stocks down. But I would say this. If the 10 years stays at 2.30 and it would stay there for 10 years, you would regret very much not having bought stocks now.
Joe KernenJoe, this sounds like a perfect jumping in point for what you had just been talking about, where you were watching what's happening with interest rates. I think it's as much as we talk about economic nationalism, it is still global. And I don't know. When the rest of the world's headed one way, it's just, you know, the money's going to come in here for our bonds. And as long as that happens, I guess we stay low. You know, I was thinking about something else, Becky. And I don't want to take this too far afield. But with Warren, I was wondering what it is about us about the United States. And I wonder that is so different from historically the way, you know, countries have prevailed war. And I wonder if eventually we can't just assume we'll always be this dynamic or was it, is the Constitution and the way they set things up, those guys were that smart? Or is it the people that we have? Is it that we brought in so many people from around the world that came from places where, you know, they didn't want to be and they came to this great spot here? Is it, I mean, have we selected genetically for people that are entrepreneurial and work? I don't know. Have you got your finger on what it is? If any, if you don't, I don't know who does. You've had plenty of time to think about it when you're not old, but you've had a lot of time to consider these things.
WarrenYeah. If you go back to 1790, Joe, there were four million people roughly in the United States. Of whom 700,000 were slaves. There were 900,000 people around the world. We had at that time a half of 1% of the world's population. And it was a friendly country in terms of the soil and the minerals and the temperature and all of that. But there were other friendly spots around the world. And so why did these 4 million people do something that 900 million people hadn't been able to do before, where progress had been very slow? And I would say that it was a combination, none of these perfect, But I think the market system was absolutely essential to it. It was not a planned economy. And I would say that that rule of law was important, never perfect,
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Joe Kernenbut far more than many places. I would say that equality of opportunity was a factor. I would say that immigration did select for people that, to some extent, selected for people that were ambitious and really wanted a new life. But I would, if I had to pick one thing, I would say the market system, was the overwhelming factor that contributed to it. Life is weird, too, because I think it's weird that Adam Smith wrote that book in 1776. And that's not a coincidence. That when you're able to own an idea and you've got like a court system that will back up your ownership of patent law, and then you can commercialize it, I think maybe that was it. I think intellectual property and property rights and things like that. that, because prior to that, after 10,000 years of spinning our wheels, no one, what was the average GDP per person? And then all of a sudden, starting when you were able to own an idea and commercialize it, suddenly it exploded GDP, like in multiple times. It unlocked human potential, Joe. I mean, you know, we aren't smarter now than they were 240 years ago, and we certainly don't work harder. But once you started opening up human potential, it, it, it's, you know, it, it's smarter. it's the sky's the limit and it's just starting you know there there are times warren where you hear pundits or other people saying look things are at risk at this point our American way of life our system is under threat and I've heard this from all sides at all different times is there ever a point where you thought that was the case
Warrenno I and it you say you've heard it at all times from all times from all sides I've been hearing it in all my life and And in the spring of 1942, I was 11 years old, and the Dow was at about 100. And we were losing the war in the Pacific at that point. It was early, shortly after Pearl Harbor. And there was no doubt in this country where it was going to win over time. And people said, well, let's wait until things are clear. Let's wait until we start winning the war. There's always a reason to wait. And I've listened to that all my life, you know. When I got out of school, the Dow had never been above 200. There had never been a year when the Dow had not been below 200 during the year. Even in 1929, when I got it the 381, the low was below 200. Never been a year. But so what? But that was a big subject at that time. And then, you know, we ran into price controls, we ran into oil shocks, you name it, just all kinds of things.
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WarrenAnd that's, those are diversions. So all my life I've been hearing, you know, maybe they've been hearing. there's a better time to invest, you know, or things are more unpredictable. Now, they're always unpredictable. I can't predict what's going to happen tomorrow. I mean, you could have anything happen tomorrow. We've had October 19th, 1987, 22% down in one day. So I can predict what will happen in 10 or 20 years in a general way, but I have no idea what will happen tomorrow. And the important thing is if you've got these wonderful assets out there to own them and which ones do you own. I mean, if you've saved money, you can buy bonds, you can buy a farm, you can buy an apartment house, or you can buy a part of American business. And if you buy a 10-year bond now, you're paying over 40 times earnings for something whose earnings can't grow. And you compare that to buying equities, good businesses. I don't think there's any comparison. But that doesn't mean the stock market can't go down 20% tomorrow. I mean, you never know what it's going to do tomorrow, but you do know what it's going to do over 10 or 20 years. And people talk about 20,000 being high. Well, I remember when it hit 200 and that was supposedly high. The Dow, I mean, the Dow in your lifetime, you know, you're going to see a Dow that certainly approaches 100,000. And that doesn't require any miracles. That just requires the American system continuing to function pretty much as it has.
QuestionerYou know, you had made some headlines when you said maybe a month or two ago that you had spent about $12 billion in stocks since the election. Have you continued to spend since that time?
WarrenWell, I'm not sure exactly when I said it, but we've certainly bought in two groups. adding them together now. We spent 14, we probably spent since a little before the election, maybe, because we were, maybe 20 billion even.
Questioner$20 billion? You're just counting the billions in your head as you sit here doing this?
WarrenWell, I was, yeah, yeah. I quit when I got to 20.
QuestionerAnd why now? Again, is there a reason for this or is it just you look at individual stocks that you wanted to own and you bought them?
WarrenI absolutely look at individual stocks. stocks. It has nothing to do with the Federal Reserve. It has nothing to do with the election. It does have, it would have something to do with infrastructure rates if they did something extraordinary. It hasn't had because they haven't been, they haven't changed that much.
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WarrenBut there just were a couple of things I wanted to do. And we had the money. And I like investing. And I would much rather have that $20 billion in these companies. And I don't look at it as being in stocks. I look at it as being in businesses. small pieces of businesses. And I would so much rather to have that than have the money in Treasury bills, which is my alternate. I don't have any problem with the decision at all.
QuestionerWhat are the businesses? Should I assume it's Apple and the airlines based on what we've seen?
WarrenI think that's a good guess.
QuestionerBut $20 billion, is that more than what we have been told based on the A-13F filings?
WarrenI've just gone back at...
QuestionerYeah, it's more than showed at December 31st because we've spent a lot of money since December 31st.
QuestionerOn what? Is it more Apple, more airlines?
WarrenSince we're not buying it now, and it's at a price different than I would buy it now, but we bought a lot more Apple after year in.
QuestionerThe holdings that you had, Apple was already, was it the fifth biggest hold of, third?
WarrenI think we showed 59 million or something like that year.
QuestionerYeah, I'm sorry, I'm just looking through the report right now to grab that page. That the, yeah, it was already your fifth biggest holding as of December 34th, 31st at some. seven billion dollars how much more did you buy seven billion
Warrenyou know we can change our mind tomorrow and all of that but we have not bought apples in the last well since the earnings report came out because it shot up some then but we would have uh there's one of the fellows in the office has about 10 million shares and i have for berkshire's account about 123 million so we got about 133 million shares
Questionerone of the fellows that's Todd or Ted
Questioneryeah would you care to say
WarrenI never identify which one does which.
QuestionerSo one of them bought and then you as a result bought some additional?
WarrenOne of them had had 10 million shares and then I bought another 123 million shares or something like that.
QuestionerWhy?
WarrenBecause I liked it.
QuestionerYou know, you've always said that you're not a technology investor and now when you start looking through the earnings, through the holdings. Say I'm not a technology investor. Wait, they can't hold that up higher, they can't see it. That's your goal. There's a vast untapped market out there. I mean, 86 year old guys who haven't got it yet. So you say you're not a technology investor, but you're buying shares of Apple, which is now Berkshire's fifth or maybe even larger than that based on how many that you've put in since then.
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QuestionerHow many you've bought since December 31st?
QuestionerIBM is your third biggest holding, too.
WarrenWell, I would say Apple, I mean, obviously, it's very, very, very tech involved. involved. But it's a consumer product to a great extent, too. And I mean, it has consumer aspects to it. And one of the great books on investing, which I've touted before, is one that Phil Fisher wrote back around 1960 or there about. It's called Common Stocks and on Common Profits. It had an effect on me. I went out to meet Phil Fisher after reading the book. I found him in this little office in San Francisco. And I recommend any investor read that book. read that book. It's still in print. And he talks about something called the scuttle butt method, which made a big impression on me at the time, and I used it a lot, which is essentially going out and finding out as much as you can about how people feel about the products that they use. It's just asking questions, basically. And Apple strikes me as having quite a sticky product. and an enormously useful product to people that use and not that I do. Tim Cook's always kidding me about that. But it's a decision-based, but again, it gets down to the future earning power of Apple when you get right down to it. And I think Tim has done a terrific job. I think he's been very intelligent about capital deployment. And I don't know what goes on inside their research labs or anything of the sort. I do know what goes on in their customers' minds because I spent a lot of time talking to him.
QuestionerHave you spoken with Tim Cook? About this?
WarrenNo, not about this. Not about this. He would have seen our 13F filing. And he would have seen the one before. So he would have known somebody at Berkshire owned some shares. And then he would have seen the 13F filing. And I usually see him maybe twice a year. I see him with Sun Valley and perhaps one other time.
QuestionerCan I ask you? You said it's how many shares that you own 133?
Warren133 million.
QuestionerMillion. Yeah. I'm sorry. How many did you own as December 31st that worked out to $7 billion?
WarrenI can't do it back in my head. I think we had $59 million at year end.
QuestionerSo you've more than doubled it since that time?
WarrenThat's correct. We actually, it's amazing how much you can buy of some of these things. We had bought that the added, the added $70 million plus. We bought that all by the time they reported their earnings. their earnings. So it was done probably in 20 business days there.
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WarrenAnd their earnings were better than people had expected and the stock jumped as a result? I don't think they were that much better than people expected. I mean, the company... Stock was up after the earnings report. Yeah, they did jump and that's why we quit buying. We would have probably want more. But the stock, they tell you every quarter what they expect in sales and in gross margins. And they've been pretty accurate on that. So I don't think the first. fourth quarter, well, in the fourth, I mean, the December quarter, they're on a fiscal year. I don't think that was that big, or should have been that big a surprise. But they've got an extraordinary business. Wow. There's always people trying to knock you off. And the market system, one of the things it does is if you've got something good, you've got a lot of people that are gunning for you. And you've got some very smart people that are gunning for them.
Becky QuickYou know, we can talk more about this in just a moment. If you don't mind if we sneak in a commercial break. Okay. For anybody who didn't think we were going to get to big news very quickly, you're already missing a lot. Warren Buffett already telling us he's been buying more stocks since the beginning of the year, since the last 13F filings, telling us he's bought more than double the amount of Apple that they had disclosed at that point. Stick around because you never know what's going to come out of his mouth. We'll be back with more from Warren Buffett in just a moment. Warren Buffett has already told us this morning some secrets that nobody else knew until just now. Warren Buffett and Berkshire Hath had been buying a lot of shares of Apple. In fact, as of the end of the year, to SEC filings and the annual report. It was the fifth largest holding of Berkshire at $7 billion in that stock. Warren just told us that he had continued buying that stock even through the beginning of this year. And at this point, he now owns $17 billion worth of Apple's shares. That gives him about 2.5% of the shares outstanding of Apple and is now the second largest holding after Wells Fargo for Berkshire Hathaway. Yeah, it'd be very close. Very close to Coca-Cola. Very close, neck and neck with Coca-Cola, but it looks like it edges it out, at least where the price is right now. Warren, we were talking a little bit about how you came about this decision. And I assumed you had people who would go out and do some of these channel checks for you and do some of these things.
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WarrenWell, yeah, I learned that from a fellow named Phil Fisher, who wrote this great book called Common Stocks and on Common Profits. And he calls it the scuttle button method. And Phil was a remarkable guy. And I first used it back in 1963 when American Express had this great salad oil scandal that people were worried about it, bankrupting the company. So I went out to restaurants and saw what people were doing with the American Express car. And I went to banks to see what they were doing traveler checks and everything. And clearly, American Express had lost some money from this scandal. But it hadn't affect their consumer franchise. So I ask people about products all the time. When I take my great grandchildren to Dairy Queen, they bring along friends sometimes. They've all got an iPhone. And I ask them what they do with it and whether they can live without it. And when they trade it in, what they're going to do with it. And, of course, I see when I come to the furniture market that people have this incredible stickiness up with the product. I mean, if they bring in an iPhone, they buy a new iPhone. It just has that quality. It gets built into their lives. Now, that doesn't mean something can't come along that will disrupt it. But the continuity of the product is huge. And the degree to which their lives center around it is huge. And it's a pretty nice franchise that with a consumer product.
Joe KernenHey, Joe, you can relate to that. The stickiness of the product and being hooked into the Apple ecosphere, right? So many different ways, too. I think it's funny that Warren doesn't have one, but it's, weird because you're walking around, you're walking around with the Encyclopedia Britannica on your back, but it's the size of this little thing. And anytime, anywhere, you need to look up anything. I mean, you could be, I mean, you could be on Jeopardy, and if people didn't see that you were looking at your iPhone, you'd get every question right. And I can listen to every song that's ever been recorded. And I, you know, I used to live in LA, and I was afraid to leave the freeways because I had no idea. idea I'd get lost, so I'd just sit in that traffic for like 11 hours to get, you know, to go five miles. All of a sudden with this, you just press it in and I got all the surface streets,
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Joe Kernenall the street. It's so bizarre, it's so life-changing. But the thing that I, you know, you don't buy stocks, Warren, for 10, 20, 50 percent normally. You like to buy stocks that over time double and triple. So you're fully saying that this $700 billion company is going to be $1.3 trillion. Then it's going to be $2. trillion. Right? It's 700. Okay. You're saying it. I'm hearing. Okay. But you're not worried about the law of large numbers because it's over, it's the most valuable company in the world right now at something like 720 billion. So you have no problem thinking that it's going to be the first company to go over a trillion dollars in market cap. And I mean, sooner or later it's got to happen, obviously.
WarrenI won't make any prediction of that, Joe. But what I do know. is when I take a dozen kids, as they do on Sundays, out to Dairy Queen, they're all holding their apple, and they barely can talk to me except if I'm ordering an ice cream or something like that. And then I ask them how they live their lives. And the stickiness really is something. I mean, they do build their lives around it, just like you were describing. And the interesting thing is, when they come into, when they come in to get a new one, they're going to get overwhelmed. they overwhelmingly get the same product. I mean, they have their photos on it. I mean, I know you can make some shifts and all that, but they love it.
Joe KernenRight, but at my point, I mean, you do, you see what I mean about the law of large numbers. It will be a trillion-dollar company event. It's only got to go up 40% from where it is now. So, I mean, I don't think you'd buy it if you thought it was going to peak at 800 billion.
WarrenWell, or they could, Joe, which they, you know, which they, you know, they bought in shares quite aggressively. Buyback, yeah. So they could, you could have a lot fewer shares outstanding at some time and still do very well on a per share base. They bought in about 4% of the company last year, and they've been pretty aggressive on that. So my guess is they've got about 5.5 billion shares out now, but my guess is that 10 years from now they'll have substantially fewer.
Joe KernenLet me ask you a question. What would you put a bet on? Which company goes to a trillion dollars first? Apple or Berkshire. Hathaway?
WarrenI've been on Apple just because they've got a stronger position. And if Tim wants to shop, swap it even up, you know, I've got an 800 number for him.
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QuestionerI can't believe your poor.
OtherWhile we're on the subject.
OtherOh, go ahead, Joe.
Joe KernenNo, I was just thinking that one of your guys, you wouldn't say which one, you know. I mean, did you really have to do that, Warren? I mean, would you say he had like, well, yeah, I've built up quite a position. I've got, what did he have? What did he have? How much did he have? Ten million shares? 10 million shares. Yeah, I like it. I've really, I mean, I love it. I've got, I've got 10 million shares. And you go, yeah, I like it too. I got 133. I mean, that's just cold, Warren. It's just, you know what I mean? It was his idea. It's his idea. And then he had 10 and he was feeling good about himself. And you bought another 123 million on top of him, seriously? He gets to go first, Joe. He was feeling good. Yep, I'm a big investor. I'm a big investor. Warren. Look, if Warren Buffett takes your ideas and follows you, man, I think that would make you feel pretty good. That's true. Walking around with that. Right. All right, let's talk about another thing that you've been buying a lot of, and that is the airlines.
WarrenWe just found out, at least at the end of the year, how much you owned in each of them. And they were pretty significant stakes for the four majors. That would be American, Delta, United Continental, and Southwest. At the end of the year, we were reporting that you had stakes of about six. about seven to eight and a half percent for some of these airlines. Where are you now?
WarrenIt's about the same one. It may have been tweaked just a shade. There again, one of the fellows in the office has essentially one of those positions. He, while he was building that position, he owned a couple of the others just because he wanted to get the money invested and then he was going to shift over. But one of them has, he has the American Airlines position. the American Airlines position and I have the other three. Those positions, as you mentioned, we're fairly close to 10 percent. We don't want to go over 10 percent virtually on any stock. It complicates live force. We do it occasionally, but it's a big decision to make the weather to go over 10 percent.
Joe KernenWhy does it complicate it for people who aren't familiar with the rules on what you can and can't do once you go over 10 percent?
WarrenOnce you go over 10 percent, you become subject to what they call the short swing rule. So if you buy. If you buy and sell a stock that you have over 10 percent of in six months, you actually have to give any profit to the company.
[26:58]
WarrenActually, if you sell and then buy or buy and then sell and they take the lowest purchase price and take the highest price. It's been on the books a long time. And it can complicate things. Plus you have to publish what you do within two days or so after you do it, which is not the case when you're below 10 percent when you report quarterly. So we don't go over 10 percent very often. And with the airlines, all four of the ones you named are repurchasing their shares. Now at Wells Fargo, we went over 10 percent simply because the company repurchased its shares. We didn't buy any stock. Well, you couldn't. For a financial company, you're not allowed to buy over 10 percent. Unless you want to become a bank holding company. Right. There's more laws on that. In any event, on the airlines, if we own 9 percent, we might find we were 9 and a half or something like that because of repurchases. So we will stay under 10 in all. 10 in all probability. And that's where we are now. And like I say, one fellow owns the American and I own the other three.
QuestionerAll right. Let me read a couple of things back to you. In the past, you've said things like, I have an 800 number that I can call if I get the urge to buy an airline stock. My name is Warren and I'm an aeraholic and then they tuck me down. You also said that if a capitalist had been present at Kitty Hawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.
WarrenThat's not true. He didn't save him a lot of money. If you look at the last 30 years, you can look it up on the internet, I think there have been almost 100 airline bankruptcies. I mean, that is a lot. So it's true that the airlines had a bad first century. I mean, they're kind of like the Chicago Cup. You know, everybody has a bad century now and then. And they got that century out of the way, I hope. But it's been a disaster for capital. I mean, it's got glamour to it. So you can always get guys to put some money up for an airline. to the internet and look at 100 of them that failed. And all of them now that are operating, you know, with the exception, Southwest, I mean, they've been through bankruptcy. And I bought into one called U.S. Air. That was my previous investment in the late 1980s. Ed Kalandi, who was the CEO, came out here. We had dinner at Garatza and I gave him $358 million. And it disappeared almost before we finished dinner.
[29:11]
WarrenI mean, the airline, U.S. Air had some favored routes, but Southwest was coming at them over time. And I tried to sell that stock at 50 cents on the dollar. It was a preferred stock. Fortunately, I wasn't able to do it. And then they had this blip. So we actually made quite a bit of money. I mean, we're one for one on airlines, actually, but not because we were smart. And then it went bankrupt twice afterwards. U.S. Air did. It's part of American Air now. So why in the world do you buy back in now? If you are so sure that this was a horrible business, what's changed? It's a very tough business because it's got the marginal cost. of a seat is practically nothing. You have these huge fixed costs, and yet if you take one more person on, there's virtually no cost to it. So you're very tempted to sell that last seat too cheap, and if you sell the last seat too cheap, it becomes the first seat in a way. So it has this dynamic to it. And unless the airlines operate in the well over 80% capacity, what kills you is when they're they really have too many airplanes around. I mean, they do what anybody else does. If they got too many airplanes around, they just, they get down to marginal cost, and marginal costs cause you to go broke over time in the airline business. I, the hope is that they, they will keep orders in reasonable relationship to potential demand. And lately they've been operating in the 80s now for a while, but it's a business you can always mess up. You know, Charlie Munger was, your partner, your vice chairman of Berkshire Hathaway, was speaking at the Daily Journal meeting just a couple of weeks ago. And he talked about how you guys are in the airlines at this point and then said, you know, I just went on and bought a ticket to Europe for $400 and I thought, what are we doing in this business? Was Charlie on board with this decision? Well, Charlie generally goes along with me. I mean, he may say, well, this is the, well, you know, I've never heard you come up with the worst idea award or something like. But when Charlie says that to me, I know he's going along with me, so we get along very well. He's okay with both these decisions. But as he would say, and correctly, it's not like the old days. But I've been hearing that a long time, and it's true.
Joe KernenJoe? If you're going to go to Brad, I was just thinking about the irony of this. So he loves Apple and doesn't own an iPhone, doesn't know anything about it.
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Joe KernenAnd he loves the airlines, but hasn't been on a commercial flight since the Wright brothers, I don't think. You know absolutely nothing about. You're giving you away my secrets. Huh? What? When's the last time you're on a commercial flight, Buffett? Tell me.
WarrenWell, we'll save that for after the show. Fair to say it's been over 30 years. My family brings up the same thing to me, so I've been hearing this before.
Joe KernenWas the in-flight movie that just released Casablanca?
WarrenActually, it was Birth of the Nation.
Joe KernenAll right. I just thought about that. I don't mean, obviously, to use these things to have an investment opinion. But it's amazing. It's amazing. It's very interesting today, Warren. I'm enjoying this. I haven't left, and I'm going to stay here, but I'm all alone.
WarrenYou got to realize, I started in textiles and department stores, so some of these things look good to me just on a comparative base.
Joe KernenYou know, Warren, it does occur to me, though, if you're building up such a significant stake in all the major players, is that anything that's like monopolies? that's like monopolistic behavior. Is there any concern to think that you would say something to the airlines to make them make sure that they're not competing on prices quite the same? What would keep somebody from worrying about that?
WarrenYeah, I've never met, I've never met the CEOs of any of the four airlines. I may have met one down at the Texas Business Hall of Fame things to shake his hand. I mean, Herb Keller was down there for sure, but I have no communication with them. And index one's own significant percentage of each one. And we'll see how it turns out. I mean, if the orders that they have now would not look excessive. I mean, they usually take options and they can delay deliveries and so on. But it can be brutal. And I mean, you've got lower cost airlines, you've got startups that can come at them. And historically, the pricing has been a very tough game. I do like the fact that they used lots of money to repurchase shares. Most of them had these huge tax carry forwards, too. So they had a lot of cash coming in for a while. They've used up to carry forwards in general. But the idea that you're buying something because that is a huge tax loss carry forward is not the best signal in the world. Getting into a wonderful business. But they bought in a lot of stock. I like that. And we'll see how they do. We bought them at lower prices and we're not buying them now.
[34:13]
QuestionerAnd I don't want to run out and buy airlines. But you're a passive investor.
OtherOh, yeah, totally, totally.
Becky QuickOkay. Folks, we will have much more from our special guest, Warren Buffett, when we come back after a very quick break. Welcome back to Squawk Box, everybody. We are in Omaha, Nebraska this morning with Berkshire Hathaway's chairman and CEO, Warren Buffett. And Warren, thank you again for taking the time to walk through a lot of these issues with us. We have some questions from viewers. And I'd like to start with one right now. This comes from Michael Kahn, who wrote in, I believe this came in on Twitter. He says, have there been any stocks you purchased that you changed your mind about and sold before they could even show up on a 13-5?
WarrenWell, that's probably happened sometime, but I don't remember.
Becky QuickOff the top of your head?
WarrenNo, no. That would be quite unusual. And of course, it could be that there'd be one of the other two guys in the office might have done that. But I don't really remember that happening with any of us.
Becky QuickThe reason I ask. that question just now is because Dow Chemical preferred shares. They called those the preferred shares on December 30th.
WarrenRight.
Becky QuickAnd from what I read it said that it should have translated into about 6% of the shares outstanding of the company. 72 million shares, yeah.
WarrenI did not notice Dow Chemical on the 13F in this most recent filing. We timed our sales so that once it got above the conversion price, we timed our sales, or tried to time them because 72 million shares would be a lot of shares to get. And we did not want to own the common stock. We don't own any common stocks of any chemical companies. So as the stock went higher, we sold it more aggressively because we wanted to get 72 million shares done by the day, which was becoming more probable all the time that they would call it. And they called it exactly when we thought they'd call it. And I think our last shares were sold the day before, the day after the same day. I mean, we timed it to be out of 72 million shares when we received those shares.
Becky QuickI was going to say, so you didn't sell 72 million shares on December 30th and 31st.
WarrenWe didn't want to be in that position. But you did, you had been timing those shares all along.
Becky QuickExactly. When it got above it, and it became, you were in a very strong market. And as Dow kept moving up, we would get more aggressive. And so toward the end, we might have been selling a couple million shares a day when it got up the 56 or some price like that.
[36:33]
WarrenThat we were hoping to get out of it, out of the common by the time that we, they handed us all the they handed us all the common. And like I say, it worked out to the day. That was, we were kind of lucky on that. I mean, it could have been, we could have ended up with 10 million shares, but we were going to quit, obviously, when we got to the amount that was going to be handed to us.
QuestionerWhy don't you like Dow or the other chemical shares?
WarrenWell, we've never owned chemical shares. We own a chemical, especially chemical company at Lubasol, but I can't recall a chemical common stock we own. We bought the preferred stock of Dow, I mean, because we wanted a preferred position and we held it. It's kind of interesting. that stock in July of 2008, the preferred. And they were going to acquire, Dow was going to acquire Roman Hawes, and they needed some money for it. And then the world fell apart in the fall and Dow wanted to get out of the contract. They sued Roman Hawes to get out of the contract, but it was held that they had to stick with it. So we closed the deal to buy the preferred stock in April of 2009, by which time the market had totally disintegrated. So at the time we closed that, we bought three billion worth. It probably wasn't worth tops more than 60 cents on the dollars. So we showed up with three billion for something that was worth about a billion eight maybe at the time, which is one reason people offer us deals. They know we'll be around at the closing. We showed up for the Wrigley closing, too, with the Mars family. That was on October 4th or something. But during that whole period, we had these commitments. And that kept me from doing some other things we might have done at that time, the fact that we had this $3 billion going out the door.
QuestionerWhat did you ultimately end up making on the Dow Chemical shares?
WarrenWe ended up making about a billion dollars plus we had about 8.5%, well, we had an 8.5% coupon on it for those years.
QuestionerSo you made a billion even before the preferred dividend that was paid throughout that?
WarrenYeah, we had a billion dollar of capital gain, very roughly. And then we had $255 million a year of dividends during the time that we owned it.
QuestionerWow. Okay. I have a few other questions from viewers that I'd like to get And Joe, by the way, jump in if you want to as well. But in the meantime, why don't we ask a question that came from Curtis Carson.
[38:42]
WarrenHe says, how many suits do you have in your closet at home? I bet my wife fewer than five, most over 10 years old. Well, he would be right, except for the fact that I met a woman in Dallion, China, many years ago, Madame Lee. And I arrived at this hotel in Dalyan at about 11 in the morning. And immediately, two guys jumped into the room. A couple minutes later, I thought what's going on. They started sticking tape measures around me and everything. And then they showed me a book with a couple of, a whole bunch of samples and said, pick out a suit. Madam Lee wants to give it to you. And I never heard of Madam Lee, so I picked out one. They said, pick out another. And then I met Madam Lee, and she had started with a sewing machine 15 years earlier. And she employed, or more than that, and she employed 15,000 people. And she was a marvelous woman. So she just started sending me suits. I was thinking, opening up a men's clothing store for a while, but everybody would have to be by size. So I literally have, certainly have, I have probably close to 20, but they were all made by Madame Lee for me. And I'm very grateful to her. She's come to the annual meeting once or twice and brought her family and she made Charlie a suit. She made Bill Gates a suit, I think, at Walter Scott. Because you guys can't afford any of your own suits. Well, not if we don't have to buy them. And Joe had a question here as well. The old expression warned that, you know, if you have have money. A lot of times you can make money. So back during the financial crisis, when people would love to have Berkshire sort of as a, I don't know, an endorsement or at least if you invest in it, you don't think they're going out of business. So you don't even have to like a chemical company, do you? I mean, if they're going to give you 10%, you just, is all, at that point, all you think about is that they're going to be able to make good on those dividend payments. You don't have to like the financial, or you don't have to like the financial, or you don't have to like the prospects for growth at that company, do you? I mean, anyone in a 2% world, if they can get 10% that they know they're going to get, it's like a no-brainer for you, isn't it? Well, it's a fixed income decision. So you have to lie. I mean, it's a credit decision more than an equity position. But the equity part enters in, but you're making, first of all,
[41:00]
Warrena credit decision, which is what I made back in 2008 on Dow Chemical, and I made it on U.S. Air back in the late 80s and it looked like it was very, very, very, they passed the dividend while we owned it. Fortunately, we had a clause in the U.S. Air preferred where any dividends they didn't pay us compounded at a pretty good rate.
QuestionerThat's unbelievable. Other people can't get that kind of deal, obviously, and I guess, I mean. Go ahead.
WarrenThey could have had my U.S. Air deal at 50 cents on the dollar, not very long after that.
QuestionerThat's true. That's true. And you're double your money in seven years. You don't need, all you need is a credit decision at 10 percent. You know what I mean?
WarrenWell, I haven't gotten 10 percent. We got eight and a half on the dollar.
QuestionerWhat did you get in Goldman or G. What about Goldman and GE? I thought you got almost 10 on those, didn't you?
WarrenYeah, we got 10 on Goldman and G.E. We got some warrants there. But I will tell you, in September, late September of 2008, I don't think there were any other buyers around for it.
QuestionerThat weren't. That's true. But if the world ended, you know, we'd all be, I mean, you might as well have done it, you know. Either the world doesn't end and you're fine or the world does end and then we're all screwed, right?
WarrenYeah. What's the difference between, yeah, if the world's going to end, what's the difference between dying broker, dying $100 billion? I heard it only can end once, so.
QuestionerThat's something to keep in mind when you're invested in the stock market. You know what I mean? It's not going to, if it ends more than once, so I'm not thinking about it right. Walking dead. I'm with you.
Joe KernenOkay, right. Joe, we're going to continue this conversation in just a moment. And folks, when we come back, don't forget, we have much more to talk about with Warren Buffett. We've got today's top stories. We still haven't talked Unilever. We haven't talked Donald Trump and politics. Stick around. You can still get your last minute questions in with the hashtag Ask Warren. Squabucks will be right back.
OtherBecky is in Omaha, Nebraska this morning, speaking with the billionaire investor and Berkshire Hathaway chairman. He's a lot more than just those two things. Becky. He's funny. He's witty. He's a little bit wild at times, I think. You can probably, you can probably confirm that.
QuestionerWarren Buffett CEO is a CEO. This year, Warren, I was watching Creighton the other day, and I was hoping
[43:23]
WarrenCreighton was going to win. They got a pretty good team. But I can't, these brackets, I told Becky, I may not even do them this year. We're going to get to the futures, but it's so hard. I don't know who's good. Kansas. I don't know. Yeah, it's the season when they'll standout. Creighton started very fast, as you know, but we are going to announce again, probably the next week or so we'll send it out to our managers. We're going to have the same contest among our employees that we had last year. I love that. And if they manage to make it, if they can get to the sweet 16, if there's only, if there's only, only one of them, whoever it is he or she gets a million dollars a year for the rest of their life. Now, we also have a prize of 100,000 for whoever gets the furthest. And last year, we had two fellows that tied. One of them knew a lot about basketball. The other didn't know anything about basketball, but they each got $50,000 out of it. And we're going to do the same thing for Berkshire employees this year. We had 85,000 entries last year, but I'll bet we go over $100,000 this year. That's so fun. That's so great, too. And I, you know, getting all 16 of the 16. I mean, it's like, please, I mean, I've tried. I've tried. It's like if you get, well, if you get 10 or 12, you're doing pretty well.
QuestionerYeah, but it's not, it's not impossible. I know. And somebody's going to win. Somebody's going to win 100,000 or they'll divide it up.
WarrenAnd actually, some of our individual companies then, they, last year, they joined in with a tournament of their own. So, I mean, it really caught fire. And what's particular fun is you can go to this website we have and you can see at each each, after each game, how many are left and how many have gone for, in the next game coming up, gone for Team A or Team B. And we have a good time. It is good. Gonzaga now lost. And, you know, I like Jesuit schools like you. And Xavier, we lost. Edmund Sumner, he was so good. And he got torn ACL. I mean, that killed me. And then, you know, I was going to start watching Cincinnati. And then they lost yesterday to Central Florida. It's hard. It's hard, it's hard, anyway. I'll tell you what we'll do. Joe, Joe, send me a ballot. I'll have one of the people put it in under their name. I mean, you could be, I get it. Last year, he offered to let you be in it, and you didn't, you didn't send it in.
Joe KernenYou know what? Remember? Because Warren is very smart. And, and, you know, he, the side of the trade that he takes, I want to be him. I will, I'll give people money.
[45:46]
Joe KernenIf they get them all right. That's like selling calls or say. He's always on the right side of these trades. No one's going to do, do it. No one's going to do it. He's safe. He's safe. He's safe. It's like those people that insure the hole in ones. You know what I mean? I'd like to be the insurer. I don't want to be the person swinging. Anyway, we'll get back to this. That's usually a good idea. Yeah, exactly. I like to be the house. Let's check on the markets. The house is where to go. Yeah, the house. You know, I'm going to see, I thought the Dow might turn up because you're going to juice Apple today. There's no doubt about it, Warren. And I thought the Dow might turn up at Apple. I mean, who wouldn't buy Apple after hearing that type of financial outlay that the greatest investor?
Joe KernenJoe, I want to emphasize.
WarrenGo ahead. I want to emphasize, we have not bought it to this price. I mean, we quit buying when the earrings came out. So if I were buying now, I wouldn't be talking about it for one thing. You know, we're certainly not selling either, but I wouldn't be talking about it. But the, but we're not, we're not, I don't want anybody to think we're buying it at this price. And, you know, now, and your IBM stock, yeah, that call is looking much better at this point, too. I'm sure we'll talk about that, Becky, a little bit more. You can, we'll probably have a whole segment on IBM, but, and that, you know, $172 billion, not, not $720 billion. So that, who knows where that could, could run if they get it going there. Anyway, back to you.
Joe KernenYou know what, Joe, ask about IBM right now, because we have so much stuff, I'm afraid. I don't want to miss anything. But if you have a specific question on IBM, why don't you jump right in on it right now?
QuestionerYou're right, that is a much higher price than where we bought it now. Yeah. that to it. What has started, is it been the cloud part of the business has gotten to be a larger part of, you know, of the results at this point. So that some of these initiatives are starting to bear fruit, Warren? What do you think happened?
WarrenYeah, Joe, I, you know, well, the whole market has moved so much, you know, to start with. And they increase the dividend. I think there's been some more interest in dividend stocks than they increased it here recently. But I've got no, I've got no, I've got no interest. information for you, IBM, except those two factors. But a lot of stocks, I mean, they
[48:03]
Joe Kernenreally moved in the last few months. Yep, they certainly have. I guess that would be a good segue to lead into President Trump, maybe, Beck, because you can attribute it to a lot of different things. I have people every day come in here that said the market was going to down 5,000 points if he got elected. And they're all like, you ought to see them dance now, explaining this. war and they're right it's uh yeah yeah no it's it's the equinox or so i mean they it's the witches they come up with all kinds of stuff to attribute why the market's up they'll never they'll never say that maybe some of these policies could be pro-growth but some of them are pro-growth you must like some of them last uh year at our annual meeting and um you know i was clear i was for hillary but but but i got asked a question about the market based on who got elected and uh that does not and i and i said the america is going to do fine under in terms of economically under either candidate as president and people who mix their politics up with their investment activities uh i don't think that makes sense i've watched it all my life and obviously uh probably half the time of my adult life i've had a president other than the one i voted for but that has never taken me out of stocks i mean the american economy you know we're up to number 45 or so and and and we've done awfully well if you mix your politics with your investment decisions you're making a big mistake although in terms of just charlie munger sorry go ahead go ahead just one last thing that you talk about how great democracy in this country is and the dynamism and i have seen people uh you know in the journal op-ed or wherever just people that say that democracy is ending they look at this election they say wow this is like the way it happened another uh orderly transition of power you know and it was the way that it was done it like they brought tears to their eyes in terms of this is still an this is this is a prime example of how well things work and in that democracy is alive and well right yeah joe in 1951 i proposed uh my wife and and and my father-in-law was the most conservative guy in nebraska except maybe for my dad my father-in-law said i want to have a talk with you so i went over to his house to have a talk and he sat there and he said warren he says i just want to absolve you from any worries you're going to fail
[50:37]
Questionerand the reason you're going to fail my daughter may starve to death and you're going to fail but i'm not going to blame you because it's because the democrats are in and they're all communists and i listened to this thing for three hours and i almost withdrew my proposal at the end but i have seen people make economic decisions based on their political feelings and it is not the way to do it well without warren if if bernie sanders got elected i might make a few investment decisions i'm sorry but that that's that's just me
Warrenyeah yeah i understand well all my friends feel that way one way on one side or the other but i grew up in a household where when roosevelt got elected for the third term my dad said you know there'll never be another election we couldn't have dessert at our house if you were a kid unless you said something nasty about roosevelt and but i bought i bought that stock in 1942 when roosevelt was president and it worked out pretty well
Questioneryou know charlie munger made some comments also at the daily journal annual meeting just a few weeks ago warren and he said that look he's mellowed on donald trump because he had some things that were not so nice to say about him before he also said look not everything he's doing i disagree with uh he is in favor of some of the things he said about social security and some of the other moves he's made have you mellowed as well
Warrenwell i would say that i would agree with charlie on that in terms of the entitlements and social security and and i certainly you can't help but feel if you're in business every everybody you know there are a lot of regulations that i think probably have gone too far so i will judge president trump after four years based number one on on how safe the country has been kept i mean that is the number one job of the of the chief executive of the united states and and that's not an easy job and i'm not thinking of of random killings or anything like that i'm thinking of weapons of mass destruction i mean that is that's my number one worry and that's that's the number one test i have secondly i'll judge them to a degree although they have less control over this well they have they need a little luck on weapons of mass destruction too but the economy does overall and then third i'll judge him on how if the economy does well which i expected to do how wide the participation in that in a better economy extends and uh
[53:05]
Warrenthose are the three primary tests i would have applied to hillary clinton or to donald trump meaning that if he passes on all three of those you would consider voting for him in four years well it depends who he's running against i i would say it would be it'd be unlikely but but those are the three tests i mean those would have been my test for hillary clinton i i think the being president the united states is the most important job in the world it's not all powerful and you need luck but we've had weapons of mass destruction kennedy got us through the cuban missile crisis and somebody else might not have and there's when you look at north korea you know trying to get an i cbm that can hit the west coast and with warheads and everything i mean it is very very very very important that you have a president for whom that's the number one priority too and i actually think that with both Hillary Clinton and Donald Trump they they have an understanding of that and if that's number one and i think the odds are good as i said last year the annual meeting that will have prosperity in any four-year period it's not a cinch i mean there's certain times when the economy has hiccups but the odds are pretty good that any president has a reasonably good economy and then i would like to see more people share in that good economy
Questionerall right let's go through this one by one in terms of trying to keep us stay safe part of that must be appointments like secretary of state what do you think about rex tillerson in that position
Warrenwell i don't know any of the appointments well but i certainly think rex tellerson makes a lot of sense i mean you've got an absolutely outstanding person and incidentally i would say this too because you get a lot of this in politics rex tellerson is going to be working for the united states in that job i mean people that get all upset because he was with ExxonMobil or because he's got a fair amount of money i've seen a lot of people enter high levels of public service and i think the great majority of them take it very seriously that they their employer is the united states and so i don't worry at all about the fact that somebody comes from the oil industry or that they've got a lot of money or anything of the sort i do think most people rise to the occasion to quite a degree not always but to quite a degree so I don't know, I'm sitting next to him one time at dinner, but I, you know, he'd be the kind of person I would choose.
[55:28]
QuestionerThere's also people like Wilbur Ross, Stephen Mnuchin, Gary Cohn, who are all in these cabinet-level positions too. Yeah, they're Wall Street guys, they're smart guys. And again, I would say that those people, none of whom I know well, but I know of them and I know people who know them and I know people who know them. And I would say that they will take very seriously the fact that they are in. public service. I mean, you know, you may run into an exception every now and then. Spiro Agnew didn't come through too well in the past. But I think people take it seriously. In terms of judging the economy, a lot of that's going to be done based on, we've seen the stock market run as Joe brought up to this point. The next thing people are waiting to see what happens is tax reform. Before that happens, they're going to be looking at Obamacare for a repeal of that. All of these things will weigh on the economy. What's your overall take of the direction that we are headed right now?
WarrenI think just on a probability basis, not specific to actually to any given administration. I think the odds are very high that any administration ends up better four years with the economy better four years later than at present. I mean, but I would say that absolutely.
QuestionerBut what about the specifics of what have been proposed in terms of potential border adjustment taxes, in terms of immigration policies, in terms of regulation policies, in terms of regulation rollbacks, all of these. things.
WarrenI would still say I think the economy will be better off four years from now, even though I disagree with some of specific policies, but I disagree with the policies of most administrations of some policies. Border adjustment tax. I mean, it's an import tax and an import tax is a sales tax. You're looking, we're at the Nebraska Furniture Mart. The store, it's in several buildings, does over $400 million a year. 75% of what you see is imported. I mean, if we pay an import tax on it, our customers are going to pay for. It's a sales tax. And it's a sales tax, in this case, on items that are not yachts or anything like that. There are things that the ordinary person buys. So it would be a big sales tax. I think, I think the president said initially that it was maybe too confusing or too complicated or something. My guess is that the Republicans, you know, you don't get a shot like this where you control both houses and the presidency too often.
[57:51]
WarrenThey'll want to do things. I mean, McConnell will want to do things, and Ryan will want to do things. And my guess is that they will find doing something really comprehensive will be too difficult. They'll want to get something done. Do you remember Russell Long by any chance? I know the building. The law building in Congress. Russell Long was Huey Long's son. And he was head of the finance committee. He is the center. He actually owned Berkshire Hathaway Stock. And I knew him just a little bit. He's the guy that coined that line. Don't tax you, don't tax me, tax that fellow behind the tree, you know. And if you're going to be revenue neutral without the craziest dynamic scoring in the world, if you're going to be revenue neutral, it's going to get very, very tough. You'll have everybody in there saying, tax the fellow behind the tree. And I think they will end up going for something not as dramatic as they might even like to do because they simply don't want to spend the time in the political capital getting it done. But people realize that. who control the whole place, you better get your stuff done at that time. And they look at the first term, you know, of the last, of the Obama administration. And you use up capital and use up time. And pretty soon they're thinking about the midterm elections and everything. So I just have a feeling when the Treasury Secretary says, we'll try and have this by August or something, you're not going to get a really 1986 type overall or a 1954 type overall or a 1969 type overall. in that kind of a time period. Meaning you think something gets passed with lower rates, but not a border adjustment tax or something that we haven't tried. Right. I think, I don't think it's likely to get terribly complex. Because I think as soon as you try and make a revenue drool and you change one big segment, you will have every lobbyist in the world in there who says that isn't reform. My idea is reform, but not your idea. So that's just, who knows? I mean, you've got some master legislators in McConnell and Ronald and Ron. on that we'll be handling things so as to get as much as possible of what they would like through. But I think it, if you're trying for speed and you're trying for complexity, I think complexity will give way to speed. But that's, I don't know any more about this than your viewers. You know, you mentioned that the border adjustment tax would be something that's a tax on consumers.
[1:00:13]
QuestionerI can certainly see that happening. But you also have American manufacturers who say, we're not competing on a level playing field. we're the only one of 35 OECD nations that doesn't have some sort of a border adjustment, some sort of a vat or something along those lines. And as a result, it's hurting us. And we are not able to create jobs here as quickly. And that has been an issue that's been very important to the president. Is there another way around that?
WarrenWell, I wrote an article for a long time ago on import certificate as it's too long to describe here. But there are various approaches. And I actually have one I kind of like, but it would take a long time to explain. But the, I understand there's an article today by Marty Feldstein, I may be wrong on that, about how the dollar would adjust upward enough so that you really would be buying these things cheaper. That's the idea that in theory over time the dollar would adjust, but it's never been tried. I would not bet on that. For one thing, that kills exports. So free trade is wonderful for the world and for the United States. But its benefits are diffused. among 320 million people. You buy your bananas cheaper because we don't try and produce them in the United States. But the penalties from pre-trade are terrible to specific industries. And as an investor, I can own, make a dumb decision on owning a shoe company. But if I own a good insurance company, I can diversify away the problems. If you're a 55-year-old steel worker, you can diversify away your talents. I mean, you had it. or shoes become subject to total, it all moves off offshore. So you want to have free trade, but you also have to take care of the people who, through no fault of their own, has spent their life learning one profession, and you can talk about retraining and all that, but it just isn't practical. And just take Berkshire Hathaway. We started with 2,000 employees in New Bedford Mast, turning out textiles. And that business was doomed. And we had workers there who really, they didn't have alternatives at age 50 or 50. A fair number of them just spoke Portuguese. They didn't have a chance. And a rich country that's prospering because of free trade and as the world is prospering, should keep the free trade as much as possible, but they also should take care of the people that become the roadkill, you know, when an industry move.
QuestionerWell, apparently that's been a problem.
[1:02:43]
WarrenIt's a real problem. The election was a huge referendum on that. Sure. And both the Democrats and the Democrats and the people. Republicans are moving away from the idea of free trade, depending on the free trade that we've seen as free trade to this point. Some of them will say this isn't free trade. Yeah. But what happens now? You've got to take care of those people. And if I were somebody that had spent 25 years in shoes or textiles or you name it, and somebody came around to me and said, this is great for the world and it's great for those guys on the 4th 400, but it's just too bad because you lose your job and that makes, we can buy our shoes. we can buy our shoes a little cheaper, our underwear a little cheaper, or steal a little cheaper abroad. I would say that a rich society should figure out a way to take care of those people. Okay.
Becky QuickWarren, we're going to continue this conversation in just a moment. Our guest host again this morning is Warren Buffett, and he's been talking with us for an hour and half at this point about things that have been going on. And Mr. Buffett, I can't believe it's been an hour and a half, and we have not gotten to a massive piece of news, and that would be the Unilever deal. Right. It was, I guess, just a little over a week ago, that, we first heard about this deal that Kraft Hines and 3G would be putting together. Deal came out on Friday, some news broke on it. Stocks for a lot of the other suitors that would not, were not being considered. Stocks like Mondalees and Campbells dropped. Stocks of both Kraft Hines and Unilever Sword. By Monday, all of that had been kind of doused. What happened? What happened?
WarrenI can tell you what happened. Most of what I can tell you, I can tell you for sure. and then others, a couple of things I have to draw inferences on. But Alex Bering, who's chairman of Kraft Hines, and part of the 3G operation with George E. And they and I agreed on making a friendly offer for Unilever if they were open to it. And Alex Bering went over to London. London, I don't know how long ago, maybe four weeks ago, or whenever it would have been, and met with their CEO and had a conversation. And he brought up the idea of possibly making an offer late in the conversation. And he didn't get it, yes, he didn't get a no, he got perfectly applied conversation. And the CEO, and the CEO. The CEO actually, Greg Abel and Bercher known him 20 years ago, I mean, we had nothing but good reports about him.
[1:05:24]
WarrenWe felt fine about it. So Alex came back and said that he hadn't been thrown out. And so would we want to go ahead? So he went to see him again and maybe two weeks later. And he had a letter that was an outline of a deal, which he thought if he got a, a, a, a, a, a, a neutral response he would give, but if he got a negative feeling, he would not. And he went over and felt he got a neutral response, and therefore gave the letter. Now, I might mention, it reminds me that old story about the difference between a diplomat and a lady. I don't know whether you've ever heard that or not. No. Well, if a diplomat says yes, he means maybe. If he says maybe, he means no. If he says no, he's no diplomat. And if a lady says no, she says no, she's no. she means maybe and if she says maybe she means yes and if she says yes, she's no lady. So he probably got a maybe and didn't know whether it was coming from a diplomaturally essentially. I mean, that's what frequently people get. I don't work on acquisitions that way myself. I just go in and say, if you want me to make an offer, I'll make one. If you don't want me to make an offer, I won't make one. And I'll tell you a price if I do it. But there's usually much more of a mating dance than that. And so you get this, I'll take it to the board and all that. And you're dealing with different kinds of people. Some people are different cultures. They're more polite than others and so on. So Alex took it as being a maybe and gave this letter outlining a deal to Unilever and it was said it would go to the board. Well, it became very apparent that Unilever did not want this offer based on, within a few days, press reports. For one thing, it leaked somehow on a Wednesday prior to the Friday one, and so on Saturday one. And so on Saturday, I got, after that Friday, I got calls indicated that the offer was unwelcome. And I said, if it's welcome, and George Apollo said the same, I mean, it's unwelcome, there is no offer. I mean, it was only intended to be presented if it would, if it, there was a possibility. Now, it was never intended as a hostile offer? No, zero. And on the other hand, it may have been interpreted that way. And I, you know, I can't, I can't argue about that. If people say we don't like the price, that's usually a maybe. I mean, and... Is that what was said in this case? Well, that was said the first time. It wasn't said the second time because they, when I was called about it by a representative of Unilever on Saturday, I just said, you know, I just said, you know, I mean, if this is regarded as hostile or unfriendly, you don't have to worry about it.
[1:08:10]
WarrenThere isn't they offer. But if it's simply because you're negotiating, which people often do, when they take it to the board, and they say, well, it's not enough money and all that. And then, you know, I'm not a negotiator myself, but the 3G people might, are more that way. So, but once the three of us learned that it was regarded as unfriendly, we had no intention to making one. And I think, I think the Unilever people understand that now.
QuestionerIs this a case you're saying of the Unilever CEO being exceedingly polite? And that's what...
WarrenWell, it can be, it can be, it can be polite. I mean, it can be, it can be, it can be, it can be, it can be, It can be differences in culture even in the way people express themselves. I mean, Alex's second language is English. I mean, I've seen misunderstandings before. That's one reason I like to do it the way I do it. I mean, when I went to Precision Cast and Mark Donegan, I just said, I will make an offer if you want me to and if you don't want me to, forget it. I just said the same thing at BNSF. But that's not the way it's usually, there's usually more of a dance back and forth, and part of that's sort of what subtle law is. Now, the law is much different in the United States than in the UK. But in any event, within an hour, we just got across to them that we were not making a friendly offer, so we would go away. That clears up a lot because we had many questions that came in from viewers saying, is this the first time that you've done a hostile offer? Should we expect more to come? No. We don't do hostile offers.
QuestionerYeah. I don't have, I don't have many. I don't think they're more wrong or anything. I think there are plenty of companies that could use them shaking up. And sometimes it takes a hostile offer to do it. I mean, there are companies that deserve hostility, believe me. But Berkshire doesn't do it, and Unilever wasn't one anyway, but we don't do it. So what happened in terms of Unilever, what attracted you to that company? What made you look at it and think that's a great company. And I think they'll do fine things. I wish them the best. With Unilever off the table, does that clear the way for a potential backup deal, something like a Mondalees or a Campbell's, that the market anticipated as a potential.
WarrenYeah, there isn't any backup deal. I mean, there was a, that was the only one that certainly I seriously thought about that made sense. So no, will there be another deal with Kraft Hines someday?
[1:10:35]
WarrenMy guess is yes, but who knows when, you know. I mean, there's no backup deal. And again, it would have to be friendly. And frankly, the prices in that deal make it very, very, very very tough to make an intelligent deal. Unilever was more undervalued than companies like Mondalese or examples? Yeah, it was. That's why Mondalise went down the next day, and Unilever went up. But that's just my opinion. I mean, somebody else might have a different opinion on that. But Unilever looked more attractive by some, and it was larger. And we always like size. Is that to say that you have as a group, you and 3G have looked at all these other companies and are constantly assessing them? Well, you always look at everything, yeah. But that doesn't mean you're going to do anything at all. But you can't help with being in the business and be aware of what various companies do, what they're selling for. I mean, that's a wonderful thing about investment. I mean, there's thousands of choices out there, and they change in price daily so that the relative of attractiveness can change. But there's nothing in the works. I had someone tell me recently that simply the activities of what Kraft Heinz and 3G and Berkshire's involvement with that, simply by them being there and watching 3G's operations, has put pressure on all the other food companies in that arena to make sure that they are shoring up their operations too so they don't become an easy target. Does that make sense to you? I think that's true. No, I think that when people see what the 3G management is accomplished, you know, it may make. shareholders of other companies somewhat unhappy. I mean, you've heard it expressed in a couple places. One thing I would emphasize about 3G, they are wonders at productivity. There's no question about that. But I've been on 20 boards. I have never seen anybody any better about marketing and product development, all of that. I mean, that is what we talk about at board meetings. And it's hours and hours. And I've been on other consumer goods company boards. And they're nothing like the intensity they bring it. They don't just bring it to productivity. They bring it to new products. They bring it. I learn about what's going on in the marketing world a lot when I'm at the meetings of Kraft Hines because it's their game. And that's interesting that you bring that up because the detractors of 3G, those have been on the
[1:12:59]
WarrenNot true. Well, I mean, they built the big of their company in the world starting with nothing. And I was at the last meeting just a month ago. A, we spent hours and hours. I don't know what's having different channels and the online retailers versus the brick and those they really understand their business. I mean, it's so much more of an informed discussion than I've heard at most board meetings in my life. It's night and day. And I might say that they've developed a new dessert, which I had three different helpings of. So they are working on the right thing as far as I'm concerned. They are. Every aspect of management they excel in.
QuestionerWhat's the dessert that has caught your fancy?
WarrenWell, it's, it's, I don't know how much I'm supposed to talk about new developments, but it involves, it's, it's cheesecake. But I can't go beyond that, but I did have three helpings, and then I took four or five of them home as well.
QuestionerSo they've won your vote, at least. 170 calories each, I had three, that's 510 calories, the best 510 calories I've had in a long time.
QuestionerWhen did you start counting calories?
WarrenI don't count them. I find them interesting just in terms of evaluating the product. But it's not something you're worried about with your own. I don't pay any attention.
QuestionerOkay. I thought we had some new diet that was going on here.
WarrenNo.
QuestionerWarren, in terms of how much money you have in cash equivalence, the annual letter that you just wrote laid out $86 billion. Yeah. That is money that is piling up at this point. I hate it. Do you have an itchy trigger finger at this point?
WarrenNo, you can't afford to have an itchy trigger finger. But I'm, well, you can't afford to have an itchy trigger finger figure figure. But I'm, well. Well, in one sense, you can say I always have an initiate one in the sense that I'm always looking for things to do. But it doesn't change your standards in terms of having, but I'm always looking. If we only have the $20 billion we regarded as our minimum, I'd be looking because we could sell some things if I found something attractive enough to do. But if you have $86 billion, if it doesn't change your standards, it certainly broadens your horizons. We can do something big. Yeah. And we'd love to do something big.
QuestionerAre you working on anything right now?
[1:15:10]
QuestionerI'm always looking, but I would say that there's nothing close. Nothing close?
WarrenI don't think so.
QuestionerOkay. I want to go to a few questions from viewers. There was one that was sent in, sorry, just jumping through, one sent in from Ken Millott. This is T-13 control room, if you guys want to follow along. It says, you only find out who's swimming naked when the tide goes out. Do you feel that there are many naked swimmers right now?
WarrenWell, it's not like during the Internet boom and various real pigs. I've written a couple of times when I thought things were getting out of hand on the high side. And that's not now. Now, if interest rates change dramatically upward, then these valuations would come down in my view. But I don't see the games being played on a big scale that you had. in the late 60s or that you had around the internet time. You know, I don't see lots of just fallacies being promoted or games being built on accounting tricks and that sort of thing.
QuestionerIs it fair to say, though, you point to interest rates, is it fair to say that much has been built on the idea that interest rates are not going to necessarily rise rapidly or dramatically anytime soon?
WarrenYeah, low interest rates push stocks up. You know, I mean, the 10-year bond is selling at 40 times earnings, and it's not going to grow. And if you can buy some business that earns high returns on equity and even got mild growth prospects, you know, at much lower multiple earnings, you are going to do better than buying 10-year bonds at 2.30 or 30-year bonds at 3 or something of the sort. But that's been true for quite a while. I've been talking about the whole time. I said people were idiots in 2008 to put their money in cash. I mean, it was the one thing that wasn't going to go any place. And interest rates are enormously important over time. And that's, if bonds yield a whole lot more a year from now than they do now, stocks may well be lower. You know, interest rates, though, the Fed has been talking a tougher game this year than they had been before. The Federal Reserve meets again this month or later this, in March they've been meeting and they could raise rates as quickly as then.
QuestionerAnd do you think that this is a position, we're getting into a position where the Fed could raise rates rapidly or not?
WarrenWell, I don't really know, but I do know that when you've got Europe and Japan with the rates they have, particularly Europe, I mean, that's, the spread gets, you've got to be thinking about the spread.
[1:18:00]
WarrenYou're not going to have an 8% rates in the United States and 1% rates in Europe or something of the sort. So Europe is a big factor. And, you know, you know, you, you widen it out. the dollar gets stronger, that hurts export. I mean, there's a lot of consequences, everything. You never can do just one thing in economics. You always have to say, and then what. And if I were the Fed, I'd probably be saying, and then what if I got too big a spread against Europe. Right.
Becky QuickOkay. We're going to continue this conversation in just a moment. Welcome back to Squawk Wax, everybody. We are live in Omaha, Nebraska this morning with Warren Buffett. You all have been sending questions in, and we want to run through a bunch of these as quickly as we can. Warren, first of all, I had someone write in, Gary Gambino, The folks in the control room, it's T26, says self-driving car technology continues to advance rapidly. How do you see it affecting GEICO earnings?
WarrenWell, self-driving cars will be adopted if they're safer. If they're safer, there's less in the way of insurance costs. That brings down premium volume significantly. So if all the cars, if a safe autonomous car had been developed, then there's 260 million vehicles on the road, so it takes a time to break in. The average age is about 11 and a half years or something. But if the day comes when a significant portion of the cars on the road are autonomous, it will hurt Geico's business very significantly.
Becky QuickIt sounds like you potentially see something like this happening sooner maybe than you had anticipated a few years ago.
WarrenThat's the case with me. It's the last 1% though that's a problem. I mean, it's going to happen one way. But, you know, who knows? You had that situation in St. Louis a year ago. And if you were driving down the road and somebody took control of your car, only one or two experiences like that can slow it down a lot. But it'll come. If I had to take the over and under 10 years from now on whether 10% of the cars on the road would be self-driving, I would take the under. But I could very easily be wrong. You've got very, very, very smart people. A lot of them. Working on it, you've got the big auto, it's something that billions and billions and billions of dollars are being spent on and brains are being involved in it. So it could easily come sooner than I think, but it will be negative for auto insurers.
[1:20:28]
QuestionerLet's go to a question, T-129 from Paul Howard. He says, what would you do to tackle the country's debt? Would you like the 50 or 100-year bond idea?
WarrenWell, I think that when rates have been where they've been the last five or six years or even a little longer. Selling very long bonds makes sense for the same reason. I think it's dumb to buy them. I wouldn't buy a 50-year bond in a million years at these rates. So if it's that dumb for me to buy it, it's probably pretty smart for the entity to sell them if I'm right. So I would say that the Treasury, I would have been, there's a lot of considerations they have, but I would be shoving out long bonds. And of course, at Berkshire, you mentioned we had 80. some billion dollars in very short stuff. I mean, everything we buy in the way of bonds is short. It's short term.
QuestionerOkay, one more question. This was T-70. The question is, what does he think of the Fannie and Freddie lawsuits and housing reform?
WarrenWell, I think that Freddie and Fannie were broke in September of 2008, and they were a big cause of what happened in that month. They were the first of the really big dominoes. I mean, Bear Stearns had been some months earlier, but those were huge dominoes, huge dominoes, holdings of their paper around the world and everything else, and they were broke. And the people that encouraged policies that caused them to go broke deserve some responsibility for what happened subsequently. For various reasons, the government didn't want to take over 100% of it. But for one thing, I think they'd have to show it in their balance sheet and all of that. So they came up with this conservatorship. They have changed the game when they went into this sweep arrangement here. And they just did it overnight. They just said, we're just going to take all the money out so that there can be no recovery, essentially, for the Freddie and Fannie securities. That's getting tested in court. And you're going to argue that if you go all the way back, there wasn't that any equity at all for those securities. The government made the equity by coming through with huge amounts of money. But the courts have decided.
OtherI want to revisit some of the stuff that we want to revisit some of the stuff that we were. we've talked to Warren about because, you know, he knows insurance in and out through and through. And it's such a great business for a guy like Warren. We already talked about, you know,
[1:22:56]
Questionersome of the ways he can, you know, he can do things where he, it seems like he's going to be on the right side, like the dealer. It seems like he's just by definition and be on that. And insurance is such a great thing. Isn't it? If it's done right, insurance, like you get a... If it's done right. If it's done right, if it's done right. Just do this now. Just jump in. Let's do this now. Warren, you got one year where you get, we ran out of letters for the named hurricanes, you know what I mean? And so it's like, oh boy, this is for good. And then you're like going, you're like this, you know, the premiums are going. And then the next 10 years, you got not, you know, basically not a single category. So the way that it can be done is pretty amazing. But I hesitate to delve into this. But you have said in the past that you haven't seen catastrophic events. increasing in terms of the insurance business, right, and year after year. Is that fair to say it's been sort of static or it's been predictable?
WarrenWell, it's not predictable, but it's been the frequency of Florida hurricanes, for example, has been quite low for the last 10 years or so compared to history. That's not been true in, you know, in Asia. I mean, New Zealand had a quake a while back that would have been equivalent to, in relation of their population, probably three times or so, what we've ever seen in the United States. But most of the cat covers do relate to the United States, you see, and Matthew came close last year to being a big one, but it's been remarkably benign in terms of Florida, Texas, the southeast, for quite a while. But that doesn't tell you anything about next year.
QuestionerI know. But the prices went to where we don't want to ride it. I mean, we did not feel like the house anymore, as you put it, when race got to where they are now.
WarrenRight.
QuestionerThe reason I'm bringing in it's up, I'm also thinking about, I mean, have you been paying off more in flooding or, do you know whether the increase of tornado damage has stayed relatively flat? Has it gone up? How about wildfires? How about the idea, the notion is that all these things are happening with this great freak. now? And I'm just wondering, is that true in terms of insurance? And I could understand how damages would go up because there's more people, and they're populating the coast, and there's just more people around for tornadoes to hit. So I could see that.
[1:25:28]
CharlieBut do you know, is the incidents absolutely increasing as a show that we're screwing things up? Well, last year, tornadoes were unusually frequent. And if you wrote comprehensive auto or you road homeowners in Texas, you probably lost a lot of money on that line. We have, I don't 25 auto dealerships or thereabouts in Texas. And we had losses that were, I think, seven or eight times the premium we paid, for example, on cars damaged at our auto dealerships through tornadoes. So Texas got hit hard. Well, a lot of places got hit hard. So what you've seen in the last few years is more toronto. than you might expect and fewer hurricanes. But who knows what's going to happen next year. You know, you've seen, you actually had a big quake over New Zealand not that long ago. Yeah, quakes. Like we had a few years ago. Yeah, I mean, we haven't quite started attributing quakes to increase CO2. That's coming, I'm sure. But now, I'm just trying to get a feel for weather. I'm trying to get a feel for weather. I saw, you know, one of the, the, the, the most vocal. advocates of anthropogenic global warming, this Michael Mann, gentleman, so we don't need to really measure things anymore because we can just see things, we can see the catastrophes happening so that we don't need to actually do it. You look at any data. We know it's real because it's happening. And I don't know. I remember things happening when I was young, too. So I don't know whether the frequency is higher or not. Sure. No, I have not seen anything yet that would cause me to change the way we look at evaluating quakes, tornadoes, hurricanes, by hemisphere. Right. Yeah. More snow, less snow, more, you know, it's just, it's unbelievable. Okay. That, I, you know, I'm not going to ask you anything else beyond that because, I mean, there's nothing more important, obviously, than things like clean water and clean air and keeping chemical, and, and, you know, the EPA has a lot of work to do with waste sites and all these things. I just don't know whether it's a slam dunk that we've changed the entire climate at this point. That's my only point. Yeah, the only thing I've changed my view on is I would now, I now charge a higher rate for whole and one insurance when you're playing in the tournament. I mean, we have done that, but that's been the only major change in our underwriting policies, Joe. When you're sarcastic, it doesn't,
[1:28:10]
Questionerit doesn't work well, Warren. Okay, okay. I'll back. I'll back off. You're so safe. You're so safe. The only thing you're safer is if I've got a wet, if it's a weds, then you're even like a sandweds. We've written a lot of hole in one insurance over the years.
WarrenWell, that's perfect for you. It is. That's like your perfect thing. That's like you. It is. You should. That's why for you to win that that final four March thing, make it a billion dollars. You've got it. No one's going to do it. Just make it even better. What do you got? Just make it more headlines. Make it a billion dollars. dollars. Well, I'd rather get more premium. Forget the headlines. I want more premium.
QuestionerAll right. Warren, I want to give you a moment to follow up on what we had just ended talking about. Fannie Mae and Freddie Mac.
WarrenYeah, one point I'd like to make is that I think it's enormously important for the economy that we have readily available 30-year government guaranteed mortgages. I mean, I think this country will function better. where homeowners will borrow for less with a government guaranteed mortgage. I think the problem comes when you try to mix up the private sector with the government because serving two masters is tough. And you had the boards of Freddie and Fannie with some government representatives. You had Congress telling them what to do and you had Wall Street telling them what to do. I think that's a bad model. But I do think it's important that we have a government guaranteed 30-year mortgage. I think that's good for our citizenry and I think it's good for the economy. But you don't think we need Fannie and Freddie to do it.
QuestionerNo, I don't think that you need Fannie and Freddie at all to do it. I think I think you need a program that is government-sponsored and you may want to have private insurers have to take 2% of everything they do or something of the sort. Just as a check on pricing and all that sort of thing. But basically it's got to be the government.
QuestionerWarren, I want to get back to the annual letter. And something that jumped out at me this year was a phrase that you put in that you don't hold stocks forever. You just wanted to make clear there was a section, a small section that you put in, just said, look, people have said we own stocks forever. That is not the case. Why did you put that in this year?
WarrenWell, there's a section in the report which has been there for 30-some years saying that we won't sell a business just because we get offered a fancy price for it or anything.
[1:30:36]
WarrenBut if it ever has one of two things happen, either that it promises to live. lose cash forever. Or we have major labor problems of some sort we would consider selling. But I've gotten calls on businesses saying I'll pay away more than it's worth and I said I'm not interested. People have interpreted that. In fact, one of our directors had interpreted that as meaning it applied to stocks as well. Well, the truth is we keep selling stocks. And our favorite holding period is forever. I mean, it'd be nice to find stocks. I've owned Berkshire forever, I mean, for 52 years. So I followed myself and a lot of my families followed it. But we don't commit to owning anything. Stocks forever. We do commit when a fellow sells me is business. I commit that we're going to keep it. We're not going to resell it to anybody. We're not a private equity firm. And if it's disappointing, we'll keep it unless it gets in those two categories. But that one section in what I call the ground rules had proved ambiguous is approved by the fact that one of the directors actually mentioned it to me. So I just thought I better make it clear it up. Is, should that lead us to think that you might be selling any of your ultra long-term holdings, if I think of Wells Fargo or Coca-Cola or American Express, stocks that have seemed like you've known on Farmer. We've got no intention of selling those. On the other hand, let's say the world's greatest deal came up. I mean, I have not, there's no self-imposed ban on selling those. I've got no plan to sell them. But I just wanted to clear up that one point because it was, the way I'd said it earlier, it wasn't clear.
QuestionerLet me ask you a question. This is T20. Control him. I'm going out of order on this. T20 comes from Chris, who writes in, what are your thoughts on the border adjustment tax? We've talked about that already, but he does want to know, was this a factor regarding your recent sale of Walmart? Maybe you could talk a little about the sale of Walmart and why you did that.
WarrenWell, Walmart's a fabulous company. And what Sam Walton's successors did, I mean, that's one of the great stories of American business. I think retailing is too tough for me, just generally. We bought it a part. apartment store in 1966, and I got my head handed to me. I've been in various things in retailing. But we bought Tesco over in the UK. And I, it wasn't we. I bought Tesco over in the UK. I got my head headed to me.
[1:32:53]
WarrenRetailing is very tough. And I think the online thing is very hard to figure out. Now, we own a, we're sitting in a retailer we own that does very well. I mean, I think this particular business is relatively immune from the online business, although we do a lot of online business here. But this does very well, and I think it will continue to do well. But I think that I think Amazon in particular is someone that's going, it's an entity that's going to have everybody in their sites. And they've got delighted customers. And it's extraordinary what they've accomplished. And a lot of people like, they like the delivery. They, you know, and that is a tough, tough, tough competitive force. not Walmarts pushing forward online themselves. And they have got all kinds of strengths. But I just decided that I'd look for a little easier game.
QuestionerA major investor I spoke with recently asked me this question. I'm not sure if it was supposed to be on the record or not, so I won't use the name. But this investor said that he or she had heard you recently making some comments about Amazon, where you were very complimentary of Amazon. As founder, Jeff Bezos, said he's probably. probably the best manager you've ever seen.
WarrenI think maybe he is. Yeah. You know, I, I've said that. I mean, it's remarkable. I mean, here a guy, you know, gets in a car with his wife to try, leaves Shaw and starts driving across and he thinks, how am I going to take over the world? Maybe I'll sell books online. It's, he is one terrific business person.
QuestionerThat investor then asked me, why don't you own shares of Amazon?
WarrenWell, that's a good question, but I don't have a good answer. Obviously, I should have bought it along. a goal because I admired it long ago, but I didn't understand the power of the model as I went along. And the price always seemed to more than reflect the power of the model at that time. So it's what I miss big time.
QuestionerIs it too late or you just don't know?
WarrenI just don't know. Yeah. Retailing is tough for me to figure out. I mean, if you go back to when I was a kid, in every town, the guy that owned the big department store was king. I mean, whether it was Marshall Field or Dayton or Hudson in Detroit or Frederick and Nelson, Seattle, or you name it, J.L. Brandeis in Omaha. The apartment store was king, and people said, what can happen to it? You know, it's down there where the streetcar lines crossed, and the women took the street car to shop there,
[1:35:22]
Warrenand they could see 500 spools of bread and 500 wedding dresses, and they couldn't see anything like that. It offered this incredible array of goods. And then somebody came along with the shopping center, and instead of making it vertical with all this display owned by one person, They spread it out, owned by many. And now comes the internet, and that's the ultimate variety of things that you can get to very easily. So people love variety. They love low prices and all a bunch of things. So it just keeps evolving. And the great department stores, many of them have disappeared, and the rest are under pressure. It's a business that has changed rapidly, and it reminds me of another business you're invested in, newspapers. Newspaper, the publisher used to be the king of the town as well. What's happened to newspapers? Newspapers. There are only two papers in the United States that I think have an assured future because they have a successful internet model to go with their print model, and that's the journal in the New York Times. And I'm not saying it'll even be easy for them, but they have developed an online presence that people will pay for. Now, the third that may do it. again, going back to Bezos, is the Washington Post. And he's improved dramatically their situation online. And so it's conceivable that their math works. But if you look at, there's 1,300 daily papers left to the United States. We've got 31 of them. There were 17 or 1,800, not that many years ago. And it was an incredible business when you were first in everything. I mean, you could tell people how their stocks closed. I learned how my stocks closed by looking at a paper. I learned who won football games. or what the box scores was at the paper. I learned all kinds of things with the paper first. And now you've got, you know, you've got an internet. And aside from the ones I've mentioned, 14-13 or 1,400 papers haven't learned, I haven't figured out a way to make the digital model complement the print model in such a way as to guarantee the future. So circulation is going down significantly advertising. I mean, it used to be dozens and dozens of pages. and dozens of pages of help wanted ads, it basically disappeared. And no one has found the answer to that yet. President Trump has looked at the media as a potential enemy. Steve Bannon has said they are the enemy. You've had a long relationship with these newspapers that you read every morning.
[1:37:55]
QuestionerYou've been invested in newspapers like the Washington Post and many other newspapers. What do you think about that?
WarrenWell, I think that every president I've known, President I've known, and every politician virtually I've known, one way or another, doesn't like them. They just are smarter about how they handle it maybe in terms of covering him. Or maybe he's smarter taking him on. But in any event, the media is looking for things to write about that, and they should. I mean, that's their job. But who wants somebody looking at everything you do with a critical eye? And the higher the office, the more they're going to look at it with a critical eye, the more time it's going to have and everything. So he expresses his feelings. But I would say, is not unique in having those feelings of a politician. Not at all.
QuestionerYou know, you are not somebody who has embraced Twitter, although you do have a Twitter feed. How many times have you tweeted?
WarrenWell, I think there's seven tweets up there, but I haven't done any of them. I have this friend that talked me into getting a Twitter feed. She's put up a couple things, but the answer is I've never tweeted anything really myself.
QuestionerDo you find yourself following, though? Anything on Twitter? I mean, I know you don't have an iPhone, but I know you have an iPad, right?
WarrenI have an iPad, somebody gave it to me, though. gave it to me though. Do you ever? No, well, I would say this. There's two things I was told in life many, many years ago that turned out to be terrific advice. One is to praise by name and criticized by category. Somebody told me that 40 years ago. And Tom Murphy, 40 years ago, said, Warren, you can always tell somebody to go to hell tomorrow. You haven't lost the option. Both of those pieces of advice have been very good. And I would say that both email and Twitter really can cause you to stray from that very easily because if you can just whack out something, it's very easy to tell somebody to go to hell in 10 seconds if you get mad at them. And the very act of having that available instead of writing a letter or doing something of sort, I think has made a lot more things come out in the, the people shouldn't have said. I think they do better following my philosophy, but I think it's harder to do that if you can tweet something out in five seconds or go to email and do the same thing.
QuestionerSo how often do you think that guy's an asshole but not to
[1:40:04]
Questionertell them.
WarrenWell, I certainly thought that over the years. That hasn't always been guys either. Did you just think that about me? No, no, no. No, I think, for one thing, sometimes you really do feel differently the next day. And you haven't lost the option. You know, people have done things where you feel like, you know, exploding over it.
QuestionerHow many times have you had to use your own advice?
WarrenA fair number of times. Yeah. For one thing, it's reinforcing in the... It's reinforcing in that you see that it works. A lot of people have said things in emails or whatever that we stand and said. They didn't need to say them. You know, I mean, and they don't lose the option. You can tell them to go to hell tomorrow.
QuestionerIs that a more important lesson in business or in life?
WarrenIt's very important in both places. You learn about that. I mean, I think, who was it, Kirkregard that said life can only be understood backwards, but it must be lived forwards, basically. And you do learn about a lot of dumb things, including writing letters in the past, but now including tweeting and emails. Your first impulse is not necessarily your best course of action.
QuestionerIs that why you don't email and you don't tweet?
WarrenWell, it's probably just don't I'm inept, but that is a good rule not to, but it's a good rule to follow. I mean, I would say that if you had a delay system on every on every email or tweet. And it couldn't go out for two hours, I don't think they all would go out that people send. The trouble is we all still have our mouths that get us in trouble.
QuestionerYeah, definitely. I'm a walking example of that.
WarrenNo, it's really is a mistake to give an instant reaction, you know, to everything that comes along with, because you're going to have some things that are irritating for one reason or another. But, but, But people will tweet and they will send emails. And I sent, you know, the one email I sent in my life, I ended up in federal court.
QuestionerTell people about that. What was that?
WarrenWell, what happened is that Jeff Rakes, a friend of mine from Nebraska was in a top position of Microsoft. And in the 1990s, on my one email, he emailed and said, doesn't Microsoft meet all your tests for a wonderful business and laid out some reasons? And I emailed them back as to why I didn't buy Microsoft. didn't buy Microsoft. And I also threw in some comments on Nebraska football. Well, I guess the U.S. government decided this email that he'd sent me or I said him had some meaning
[1:42:44]
Questionerin terms of Microsoft's position in the economy. So one day in the Wall Street Journal, I see my email is posted for the world. And I thought, I didn't worry about what I said about Microsoft that word. I'd said something negative about Nebraska football and would have to leave the state forever. Fortunately, I didn't. Joe is somebody who shares your concern about Twitter. about Twitter, who tweets very rarely. And Joe, I know you want in here too. I block. I block. That's the best thing about it. You can block people very quickly. So in the past, Becky, whenever I wanted to use that word, I would say someone is a royal a hold. And that's a company. It's slipped. It's slipped. I meant, I know, but he said tell people to go to hell. And the other phrase jumped in my head. Well, it shows the problem of quick response. Here's the deal. I have said, ask, because isn't it? I would ask, isn't an ass a donkey, isn't a donkey, so I can say ass? It is. And I say whole all the time. So can I, can I, if you're going to start, Becky, if you're going to go here, I would like to use that word all the time. If it's now a fair game, I'm going to just, well, I may just, it may be in every sentence. You not take that as fair game. That was a mistake. Do you want to illustrate it? Did y'all were examples? I thought he said the other. I thought he said the other. I thought I was repeating his words. Well, Charlie and I have a code word we use when we see some guy that we really think is a jerk. We will say to him, boy, you think like a CPA, and the guy kind of gets all pumped up and, and of course, our code word is crooked, psychotic, and you can fill in the last. Can I fill in the A? I'm still in. Don't. Don't. Royal Ahold. It was actually bought by doubt. Thank you for harping on this. I looked over and we were both like... Is that the only thing you wanted to jump in on? I thought you had something else. No, I want to know, I want to start using it. If it's okay now, I want to, because I need it. We've lost our PG rating. No, I've used that before. I've used that before. And you know, I say shih Tzu all the time. I say shih Tzu all the time and I will continue to because that's a dog. Let me out of my embarrassing snafu. Let's go. It wasn't a snafu. Ask something else. Go ahead. Ask something else. Oh, oh, ask something else. No, no, no. Okay. Have we exhausted the talk about the 10-year war?
[1:45:10]
Joe KernenThis topic? Yes. No. You never answered me whether it's weird to see the bond market so well-behaved when so many people are suddenly worried about reflation or, you know, deficit spending. You know, we're not going to do anything with entitlements. We're going to increase military spending. We're going to spend a trillion dollars on infrastructure. We're going to cut taxes across the board. Why do you think that the bond vigilantes, which is Becky, that's the way she likes to say. I like it too. But why do you think that it's so quiet, Warren?
WarrenI, it absolutely baffles me who buys a 30-year bond. I just don't understand it. And they sell a lot of them, so clearly there's somebody out there buying them. But the idea of committing your money. of committing your money, you know, at roughly 3% for 30 years. Now, I think Austria has sold some 50-year bond here, you know, at below 2%. I just don't understand the... In Europe, there's certain inducements actually for the banks in terms of capital requirements to load up on governments, but it doesn't make any sense to me.
Joe KernenYou just said that a 50- or 100-year U.S. Treasury might be a good idea for the Treasury to sell, but is that an indication? that you would not be a buyer.
WarrenAbsolutely. I would not be a buyer.
Joe KernenYou wouldn't necessarily recommend anybody else buy it either?
WarrenNo. But, that's why I think the government should sell it.
Joe KernenRight. He's a bad buy. Okay. Warren, we're going to continue this conversation. There's so much news we still haven't gotten to. One of those being Wells Fargo. We haven't gotten the chance to sit down and talk to you since everything happened with Wells Fargo. And we had some viewer emails that came in. emails that came in as well. I wanted to ask you one of them. This comes from Norm. Guys, this is T-31. He says, to ask you, given your ownership of Wells Fargo, please explain your criticism of management why it's been muted for Wells Fargo versus the Solomon Brothers incident.
WarrenWell, it might be muted under any certain. Well, the company was failing and might have been out of business the following week with huge repercussions for Wall Street. So that was a whole different thing. They asked me to come in. I was on the board. But with Wells Fargo, because they repurchase shares, we're actually owned slightly more than 10%. We have to be a passive investor there by law, unless we want to become a bank holding company,
[1:47:46]
Warrenwhich we don't want to become. So I might well have been just as passive anyway, but I can tell you that I had to be passive in any event. They made a huge mistake. The huge mistake was not necessarily the dumb incentive system. I mean, everybody comes up with, I mean, up with, I mean, incentive systems are fine. Sometimes they incent the wrong things, and this certainly incentive the wrong things. The problem was they didn't do something about it when they learned about it. I mean, it was the same thing of Solomon in that sense. And, you know, I just keep preaching to our guys. If you see a problem, attack it immediately, it isn't going to get better. And a huge mistake was made at Wells, not in cooking up the incentive plans. Cross-selling is fine. I mean, you want to have incentives for people to do it. incentives for people to do it. But you don't want to have it lead to crazy behavior, which you did. And the big mistake was when they found out about they didn't do anything about it. I think their fine was like $180 million or $185 million. I think they saw that wrongly as in the light of $5 billion fines that were put on for mortgage practices at some other bank and $3 billion fines. So they saw the problem as sized by the size of the fine, and it wasn't at all. and it wasn't at all. I mean, you know, anytime you have people making up accounts and doing all the things they were doing, it isn't the size of the fine that measures the customer impact and how your reputation will suffer. It's what you were doing. And it was wrong. The fine came five years later after they'd been doing it for five years. Yeah, right. And clearly, they knew what was going on to some extent, and they didn't do anything about it. And I will say this. If the top guy to do anything about it. doesn't do anything about it, the people down below. John Stump is a perfectly decent guy in my opinion. I'd have mistrust you in my will and I wouldn't worry for a second. But somehow, when he saw the evidence, he didn't do something about it. Now maybe he thought somebody else was going to do something about it. That part is similar to what happened in Solomon. I mean, John Goodfriend thought that he postponed calling up Jerry Corrigan. And that was late April. On May 15th, another government bond offering came along. And the guy that was behaving badly, behaved badly again. and now it was too late.
[1:50:04]
WarrenAnd I think to some extent when you get behind the eight ball and you don't do it immediately, you keep thinking, well, maybe it'll go away because if I come in now, they'll say, why didn't I come in six weeks ago or six months ago? Whatever it was, it's a terrible mistake to, when you see a problem not to attack it immediately. You know, it can be unpleasant, but I say get it right, get it out, get it, get it right, get it fast, get it out, get it over. And I keep telling our managers that and I'm sure something is being done wrong now with 367,000. at Berkshire and I just hope I find out about it and do something about it.
QuestionerWhat do you think of Tim Sloan, the new head at Los Parle?
WarrenI had lunch with him once. I haven't launched with him again in a week or two, and I think he's doing fine. And they made a big mistake and they're correcting it. I don't think in terms of the earning power of the company five years from now. It's material, but that's... Tim Sloan was there at the time. Did he have any involvement in it?
QuestionerWell, not that I know.
WarrenI mean, what I would guess is that there's consumer banking and, goes up a chain and that there's a person who's got a very responsible job ahead of consumer banking that should do something about it. But if that person doesn't, then the CEO has to do it. And the board isn't going to know anything about it anymore than, you don't learn about that sort of thing at board level.
QuestionerRight. Can we talk about Bank of America?
WarrenSure.
QuestionerThat is another large holding. You don't count it in your 15 biggest holdings because of the different way that it's structured.
WarrenYeah, we own warrants there that come in through.
QuestionerSo you talked about it in the annual report about when you might or might not go ahead and exercise those warrants. You want to lay it out for people who didn't read that deeply?
WarrenYeah, we can use our $5 billion of preferred as the payment for the warrants, which are $700 million shares at $7.14. So we can have a cashless exchange. We're getting $300 million a year from owning the preferred. If we use that preferred to exercise the warrants, it would only make sense if the common we received paid us more than $300. million. And the magic figure on that is 44 cents. I have no idea whether they will pay that or not, but I just want to be clear in the annual report that that would cause us to exercise the warrants earlier than their normal time, which would be a day before expiration.
[1:52:17]
QuestionerYou also use the annual letter this year to really lay in to investment managers, hedge funds in particular, and people who think that they can get ahead by relying on experts when it comes to investing. There was a viewer email that came in, and the gentleman said, if you were looking at these issues, you talk about the no-nothing investors a lot of times. All you have to know is that America's going to do okay, yeah. Well, the no-nothing investors. I think he may have taken a little umbrage to that. What is a no-nothing investor? What does that mean? This person who's not a professional. I'm a no-nothing doctor. I'm a no-nothing dentist. I'm a no-nothing obstetrician. I mean, I'm not in that business. that you're going to be the game that you're not even necessarily trained for or spent your life at or anything like that. It's not saying the guy has a zero IQ, you can have a 200 IQ, but not be involved in investments. I don't know why light switches go on. You know, I think I'm generally reasonably intelligent, but I still don't know. I'm a no-nothing physicist. But your point is for investors who don't do this for a living, it's really, really difficult to beat the indexes.
WarrenWell, they're not going to. I mean, and, you know, one may be lucky for a while. But the beauty of it is, you're going to do wonderful with American industry. You don't have to, you don't have to be an expert. And the experts aren't going to do it in large measure either, but you're going to do fine. So it isn't like I'm saying, you know, the no-nothing investors just going to be left out on the street or anything. They're going to get a great result. And, you know, I've mentioned the past. When I die, I've told my wife that have 90% of her. and the trustee to have 90% of an index fund. It will do better on balance than what they will get if they go to professionals. Because? Because the professionals don't know how to, after fees, they don't know how to get a better result. If you take half the people in the country and they don't do anything, they just own the average, they're going to get average results, right? And if they don't have any expenses, they'll get those both gross and net. The other half by definition have to do average, if that other part is, I mean, the average is left for them. average is left for them and they're going to incur all kinds of fees and they're going to do way better.
[1:54:35]
WarrenI'm way worse than the people who do nothing. And I made this bet in order to just illustrate it. And, you know, the difference is incredible. I mean, the amount of money that people have wasted on getting investment advice is just ridiculous in this country. You mentioned that there are 10 managers maybe in your lifetime you have met, but I want to let Joe in on this conversation and then we'll come back to that point too.
Joe KernenNo, it's just going to say a lot of those hedge fund guys are assholes. I'm, Becky, I'm going down with you, baby. I'm never going down with you. I'm going down with you. I'm all on record. Sink or swim. We're going to sing. Maybe next year I'll be doing this. I'll be doing this show by myself next year. I'll be doing this show by myself. Uh-oh. Seriously. Seriously. Two and 20, Warren. Two and 20 and they can't beat the index. the index. I mean, that's something that you were showing, and I'm glad someone finally showed that. I mean, some of them are good. Some of them year after year are good, but there's a lot of naked emperors there that charge in two and 20, and they have a couple of good years, and then they give it all back. They keep their two and 20, but then they lose it all for the people that are there, right?
WarrenNo, the two and 20 is going to make a lot of people rich, and it's going to make very few investors rich. It's actually kind of, you know, it borders on obscene. As I said in the letter, I've known ten or so people that with modest amounts of money, I would, I've done a lot of money that they would do better than average. And I say that there are hundreds and maybe even thousands. But there are thousands and thousands and thousands of hedge fund managers. Charging 2 and 20 is just ridiculous. And you don't get better because you charge a lot. I mean, that does not make you a better judge of securities, anything like that. And so the good salespeople, overwhelmingly, are the ones that attract the money rather than the very few who are extraordinary in managing money. Phil Fisher, who wrote that book, Common Stocks, and he was going to do better than average. Charlie was going to do better than average in investments. Bill Ruehne, a friend of mine, was going to do better. There have been a few, but they're very, very few. And then only if they work with fairly modest sums of money. Is that why you don't want to tell us anybody we could actually invest with right now?
[1:56:58]
WarrenWell, partly being 86, my crew is, you know, the fellow you never heard of Herb Wolf, probably if I'd picked one guy to manage money, I would have had Herb do it. But Bill Rowan was outstanding, and I recommended him to my partners, and my partner, Sandy Goddessman and many things. There's no question he was going to do better than average in life, but very, very, very few people. Well, when we were looking for a couple of people to hire at Berkshire, I think you were on that trip, CNBC was when I had hundreds and hundreds of and hundreds of applications from people. And the truth is, I let anybody in the world that wanted to challenge me nine years ago come up with $500,000 for their half of the bet. And on all of these guys who make billions of dollars a year, they didn't want to put up $500,000 in bet on themselves. You know, it's amazing what's happened in investment management.
Joe KernenJoe? I have one more philosophical question, Warren, and it goes against what you normally speak to. But just in terms of what you normally speak to. of looking at the market and whether it's had like a run where it's done too well and it needs to regress to the mean or where it hasn't done well enough and it'll come back. If you look at an eight-year analysis, let's say it's tripled in eight years. That's like 16% a year or something, I think, because it doubled twice or, no, not quite, but if it tripled, that's one way of looking at it. But if you go back to 1999, 17, 17 years, it's only double. So that's only 4% a year. So which is it? Has this market gotten ahead of itself because it's tripled in the last eight years or it's taken forever to go from 10,000 to 20,000 so we aren't necessarily in this rarefied error. Do you have an opinion on that?
WarrenYeah. Well, I would bet my life. Well, it doesn't mean much when I'm 86 to bet my life on a 30-year bet. But I would bet my life that stocks over 30 years. years outperform the 30-year bond. I would come close to doing it, betting that over 10 years, they'll do better than the 10-year bond versus the one-year bond or two-year bond. I have no idea whatsoever. But stock, if you look at American equity, basic business of America, American equity earns a tremendous return on tangible net assets. That's what the business is about. That's what the farm is producing. Now, a bond is limited to what it can produce. But when you say reversion to the mean,
[1:59:26]
WarrenI'm not sure what the mean is. I mean is. I mean is going to going to be based upon returns on equity, the amount of equity, reinvested and reemployed. And I would say there, the prospects are so much better than than fixed dollar investments that, you know, admittedly, I like stocks a lot better a few years ago. And I've said that on this program. But the, but stocks versus bonds right now, it's not close. Now bond yields can change a lot. If bonds go to 15 percent, I may be recommending bonds.
QuestionerWarren, were you considering yourself among those 10 people that you thought? could outperform indexes. Did you always know that you were going to be able to be?
WarrenI always felt I would. Yeah, that's kind of disgusting. But I really did. I mean, I retired when I left Graham Newman with $175,000. And I thought that would be enough to provide me a good living, you know, the rest of my life. And I had a couple of kids then. And, uh, uh, uh, no, I, I, I thought I was right for this business. Now I thought Charlie was right for this business. I thought Bill Rowan. I mean, I knew 10 or so people, Waltersloss and, uh, uh, uh, uh, uh, uh, uh, uh, uh, and, uh, uh, uh, I thought, But, uh, and that's, I didn't think they were the smartest guys necessarily in the world. Well, maybe Charlie is, but, uh, but I thought they were well adapted to the business. People have different talents. I mean, you look at chess champions or British champions. They, sometimes they're not so good in other areas. And I'm wired for this business to some degree. So, and I felt that, yeah. And I learned from the, the greatest teacher you could have.
QuestionerWhat would you have done? What other jobs did you consider besides going to work for Ben Graham?
WarrenWell, when I got out of Columbia, I only applied for one of, I went to Graham and said, I worked for nothing and he turned me down. But I did go down to Merrill Lynch. I went down to Merrill Lynch. And this woman said, she put me in this little room to wait. And about, well, there were a couple guys in there already, already, and they got called up. But then there were about three or four that came in after me. And these guys were all really fat. And they kept getting called in ahead of me. And I finally decided Merrill Lynch had some minimum weight requirement. So I left. And if they called me in earlier, I might be working for Merrill Lynch today. But I just got tired of all these fat guys going out of me.
[2:01:42]
QuestionerAnd I thought I must be in a pro football to tryout or something. So I only weighed about 135 or 40 pounds at the time. So I decided that there was some requirement in Merrill that they hadn't told me about. And oh, how different your life might have been. It different.
OtherYeah.
QuestionerYou keep talking about the 10 guys, maybe, 10 people. maybe that you've seen that could outperform. Is there anybody who's actively managing money today who investors can still get in with in that group of people?
WarrenWell, I'm sure there are. But they will only be effective in all likelihood with fairly modest sums of money. And, of course, they'll attract more money. The reason I keep coming back to this is because that's got to be a question everybody's saying. Who do I go to to beat the average?
OtherYeah,
WarrenI hired two guys who I thought were very good. And they are very good. Time and ten.
OtherYeah, but they're running ten. billion each and they would do better if they were running one billion in terms of percentages then they will let's just that we have a lot of money around so but added funds work wonders for the general partner who's getting the two and 20 and they're totally against the interests of the of the limited partners beyond the point
Questionerthere was a question that came in from a viewer and I don't know the number on it and you guys if you can find it the the just of the question was is the market does the market still have plenty of Geico's out there that you could find and that are are great investments that are going to continue to grow phenomenally? Or is it just a different market?
WarrenIt's a different time. It's tougher than it was obviously 50 years ago. I mean, my best year actually was 1954. So you can see how far. I peaked very early. But I was working with tiny amounts of money and in a market that was not combed over the same way as presently. So there are way way more people looking to compete with. And I still think because of temperamental differences, I think there are a fair number of people that with small amounts of money can do well. But the chances that the average person is going to be pick them out or that the person sitting across me are trying to sell you as that person is betting against the odds, significantly against the odds.
QuestionerYou mentioned in the letter, though, that's something that your wealthiest funds just don't want to hear, though. That is a very interesting phenomenon. I've talked this way and people with
[2:03:58]
Warrensmall amounts of money say that sounds good to me and then they just go and they buy index funds. They keep buying them. And they've done better than the people who have gone to hedge funds. But if I say that, I get asked various pension funds. Sometimes they're local. I've been asked by very big retirement funds, some other states. And I say the same thing to them. And they basically can't stand the idea that their big money won't buy special performance. And of course, they get called on by these people all the time. You know, they're going to fall for good salespeople. And what really gets me is sometimes they hire consultants. They say, well, I don't know enough to pick good managers, but I know enough to pick a good consultant. I've never quite figured out. Why if they can't figure out a good manager is, some guy comes in and says, well, I'm a good consultant. So it's really sad, but they're really outclassed in many cases by the salespeople. I mean, that's true in a lot of fields. But in investments, you're talking big, big, big money. And somebody's got a billion dollars. They want to have a family office. They want to feel special. And the truth is you don't need to be special.
Becky QuickOkay. Warren, if you don't mind, we're going to slip in one more quick break. When we come back, folks, we're going to talk a little bit more with Warren Buffett about some issues concerning the markets and some of the securities that he's been bulking up on. You're going to want to hear this. So stay tuned. Squackbox will be right back.
OtherWelcome back to Squackbox, everyone, where we are live in Omaha, Nebraska, with Berkshire Hathaway's chairman and CEO, Warren Buffett. He's been answering questions for the better part of the last three hours.
Becky QuickAnd Warren, again, thank you for your time. time today. Before we go, I'd like to make sure we hit a few points for people who weren't up three hours ago, right at the very beginning of things. The one question everyone asks me, when I come back from talking to you on one of these things, is what does he think about the stock market right now? There are a lot of concerns from investors who have watched things run very rapidly over the last few months. We've watched the Dow go past 20,000, watch the S&P go past 2,300. And there are investors who feel like, wow, I missed my chance. I've been sitting on the sidelines. Now I have to wait for a
[2:06:00]
Warrenpull back. What would you say to those investors? Well, I don't have the faintest idea what the stock market's going to do tomorrow or next week or next month or even next year. I do know that over time, we'll talk 10 years or something of the sort, that equities will do better than bonds, which is the main alternative or bank deposits or whatever, it may be fixed dollar investments for people. And they're not going to be able to pick the time to come in. I don't know how to pick the time to come in. I bought a lot of stocks in the last couple months that may turn out that the stock market goes down 20% or 30%. But that won't bother me if I like the businesses I bought. You know, there are a lot of people who think you need to be balanced. If you're going to be in stocks, you also need to have balanced in bonds, maybe 6040 or 80, 20 or whatever it may be. I have money and Fidelity retirement. I have everything in S&P 500 index funds like you've written, like you've told people to do, with the exception of Comcast shares, which I own, but everything else is in S&P 500 index funds. And I get a red signal back from Comcast, from Fidelity saying, this is dangerous. you should not be invested in stocks. Are they right to warn me on? No, I think that's totally wrong. I mean, it's been, obviously you shouldn't be invested in stocks with money you might need to use. It's a retirement funds. Yeah. But if you're going to need, you shouldn't borrow money against stocks. And you shouldn't, if you're going to need some money for college or something in a year, you don't want to be in stocks because you don't have any idea what stocks are going to sell for in a year. It's inappropriate. Stocks are safe for the long run and they're very unsafe for tomorrow. If you call unsafe being, will you be bothered by a decline in market prices? But Berkshire, three times since I took over, it's gone down roughly 50%. Did I feel poor? Then no, not at all. I mean, but I didn't know it on borrowed money. I knew it was going to be worth more over time. American business is going to be worth more over time. That's what you're buying as a business. You're not buying a stock. You're buying a piece of a whole bunch of businesses. Are those businesses going to be worth more 10 or 20 or 30 years from now? Of course they are. If you think you can jump in and out or that you know the time to come in, I think you're making a mistake.
[2:08:06]
QuestionerIn my lifetime, you said you wouldn't be surprised to see the Dow go to 100,000?
WarrenYeah, well, you're probably, what, 30, 35, and you've got another 50 years or 60 years left. You're kind. You'll see it. No, I mean, it's going to go. I mean, they retain earnings every year. Just retained earnings. A fellow named Edgar Lawrence Smith wrote a great book about that in 1924. It was the rationale for the great bull market at the 20s. But he pointed out how retained. earnings actually add the values. And if you owned a private business and you retain the earnings every year, Berkshire's done that. And it gets to be worth more money, and that's what's happening in this world.
Becky QuickYou told us early in the program, you've put probably $20 billion to work just since around the time of the election because you've liked two areas. One of those areas is Apple. One is the airlines. And we do have a question that came in from a viewer, James Lee. It's T-51 folks, who says, why do you believe that managements in boom and bust industries like the airlines will act prudently and rationally for a long time.
WarrenNo, that's the question, but it's certainly easier to act rationally when you're doing 80 plus percent load factors than if it was a lot less. So the big problem is if they get too many airplanes around, you know, you can be sure that it'll be a lousy business for a while.
Becky QuickDoes that mean that's a number you watch kind of like the canary in the coal mine?
WarrenWell, you can see what the orders are and all of that, and deliveries are expected to be. and airline usage, seats sold, will go up over time. You know, not necessarily dramatically, but that will increase. It isn't like demand is ever going to go away. If you get too much supply, you've got a problem.
Becky QuickSpeaking of supply and demand, crude oil is another one that we've watched very closely. I know you mentioned in the letter that Marmon Industries, things like the rail car, the leasing business that was there, it's been down significantly. You said it was not just because of crude oil. What are the factors that go into that?
WarrenWell, crude oil is a factor, but general heavy industry has not been super strong. It's very interesting. Since the fall of 2009, we've had about a 2% a year growth, you know, year after year. And people get more optimistic than that sometimes, and strengths and weaknesses have moved a little through the economy.
[2:10:17]
WarrenBut the oil business, you know, it looked terrific a few years ago. And more oil products in the United States are going to move with a hundred dollar crude. than move with $50 crude. And people got very excited about ordering tank cars a few years ago, and then they've gotten less excited. Actually, there's been a little pickup lately.
QuestionerI can't believe we've gotten to this part in the program, and we haven't asked you your take on the economy. Where is the economy right now?
WarrenThe economy is, everything I see has been the same since 2000, fall of 2009. It keeps moving ahead at a couple percent a year, which is terrific, incidentally. It's not as terrific as 3% or 4% would be. But if it just stays at 2%, you'll add in one generation, 19,000. of GDP per capita to our present economy. We'll have so much more stuff than we have now. It'll be fabulous, one generation away. So your kids are going to live better than you do. But people would rather have three or four, and maybe we'll get it. But two are two are moving forward. We just spoke with Treasury Secretary Manusian last week. And he said he sees a way for us to get to 3% growth based on a few things. If it's tax reform, if it's cutting regulations, some other things that go along with that.
QuestionerDo you say us getting back to 3% growth?
WarrenI just don't know. I mean, I wouldn't bet on it, but I, but I, 2% will be, we'll do terrifically 3% be better. Anything they can, I shouldn't say anything, but a lot of policies that might bring it to 3%. If they do, I'm all for it.
QuestionerWhat do you think would help us improve growth?
WarrenWell, productivity is the only thing gives you growth. I mean, if we hadn't changed productivity since 1776, we'd be living like we were in 1776. If 80% of the people had to be on the farms to feed us, we wouldn't be producing much of anything else. So it's all productivity over time that counts.
QuestionerWe've got a lot of people who wrote in about artificial intelligence and robots and where you think they are moving along. Are they hurting our productivity?
WarrenYeah, I don't really know anything about robots, but I'll put it this way. If you eventually got the world, so one guy could push one button and everything that's being produced now would be produced from him pushing that button. It'd be a better world. Now you'd have to make sure that guy didn't keep all the output. But the idea of getting more productive. It benefits everybody.
[2:12:28]
WarrenAnd I shouldn't say it benefits everybody. Benefits society. It can hurt individual in their given industries. But we should long for more productivity. That'll give few hours worked. It'll give more output per capita. It'll get better living for people. And that's what we've done, actually, in this country. We saw it dramatically in farming. I mean, that's just unbelievable what has happened in farming. And we now have 2% of the population working on farms doing way better than when we had 80%. But if we didn't have tools and fertilizer and all those things, we'd be an agrarian economy and we'd be living like we did in 1776. Very quickly, the dollar has continued to climb. Is that good news or bad news for Americans? It depends whether you're an exporter or importer. It makes it very tough if you're exporting. But it's, you know, with interest rates being what they are in Europe, you know, compared to here, the dollar just has gotten stronger. And when people tell you what the dollar is going to do, they'll be very close. going to do, they'll be very careful. I mean, just suggest they take up currency trading for a living and see how they do.
QuestionerWarren, I want to thank you very much for all your time today.
WarrenThanks for having me.
QuestionerAgain, this is our 10th annual Ask Warren Show, and we can't thank you enough for hosting us and having us here. It's been fun.