Becky QuickWarren Buffett is our guest this morning. He's the chairman and CEO of Berkshire Hathaway. And this is his first interview sitting down since he spoke to 40,000 or so Berkshire shareholders over the weekend just across the street from here. Warren, thank you very much for joining us this morning. I was kind of thinking back, and this is 52 years now that you've been doing the annual meeting. And the annual meeting has changed quite a bit over that course of time. But in reflecting back on the weekend yourself, what was your headline out of this weekend? What was your takeaway? And what did you think?
WarrenI would say people continue to have fun. I mean, you know, it's kind of half-martigra, half-annual meeting they come for, and I see thousands of them. They hated a steakhouse last night. There were a couple hundred there. And they're all smiling. And, you know, there were planes that didn't fly and a few things that they'd run in inconveniences. But they have fun. And they meet a lot of people that that they saw the previous year. As a matter of fact, when we went to the Stakehouse, the directors all went there. The same guy picked up our check that's probably picked it up for 10 straight years and he's happy there, you know. I'm trying to find out where he's eating today, actually.
Becky QuickSo that you can buy him lunch? Or so that you can show up and get another free lunch on it?
WarrenYeah, but everybody's in a good mood. I mean, they're clapping at the Steakhouse and they come because they expect to have a good time and we try to to disappoint him.
Becky QuickWell, we watched a lot of different things and heard so much from the Q&A this weekend, and I was trying to figure out a theme myself. One of the ones, the themes that stuck out with me is technology, and how much that was discussed this weekend. For a guy who claims that he's not really a technology guy and, in fact, doesn't even own a smartphone, you spent an awful lot of time talking about technology investments that you made or didn't make that you missed out on. I was thinking in particular about Apple that you quite a bit about why you got into that, IBM, why you are selling some of that stake. But you also talked about companies like Google where you said you missed it. And maybe you could tell us a little bit about that for people.
WarrenWell, I did miss it, but Charlie actually brought up the fact that we missed it too. And Google, I should have had some insight into because Geico was a heavy user very early on.
[2:23]
WarrenSo here we saw value in something at that time, I have no idea what we're paying per click now. But we were paying $10 or $11 a click for something that had no cost of goods sold, and we were going to keep doing it. I mean, we could see that. So I should have had more insight into that. Now, whether Bing was going to come along or other people were going to take away the market, that's another question. Whether you had sort of a first user advantage that would prevail, and there is a lot of technology to it. So somebody could have come along with a better technological product, and I would not have had had any insights into that. I certainly had insights into the benefit to the user. I think a blazer surgeon or something like that, I think it may have sold for 60 or 70 bucks or something of the sort. And mesothelioma, I mean, I don't know what it brings now, but just imagine having something every time you just hit a click, you know, the cash register run somewhere out in California. So it was an, and is an extraordinary business, and it has some aspects. of a natural monopoly. I mean, it's very easy for me when I go to the computer. I've worked with Google before, but I'm looking for information for the annual report. I used to have to mail away to federal agencies or go down to the public library, and now I can get it in 10 seconds. So it's a hugely valuable device, which the other guy pays for it. The user of the computer doesn't. The answer is we missed it. And I knew the fellows, they came to see me before. before they did. Sir Gary and Larry came to see you. Yeah, and actually Eric did too. And Eric. Yeah. I liked them. So when you say you missed it, that suggests that it's now at a valuation. You understand the company, but it's now an evaluation that doesn't make sense to you. Why don't you just buy it now? Well, if I was forced to buy it or short it, I'd buy it. Same way as Amazon. But it's a little hard when you look at something at X and it sells at 10X. To buy it, it shouldn't be. But I can just tell you psychologically it's harder. If you look at it, it's harder. in the first place and passed it at X to then buy it at 10 X. That's cost people a lot of money in Berkshire. I mean, they saw it at a lower price. They just said if it ever gets back there, I'll buy it. That's a terrible way to think. The train has left the station as she likes to so frequently point out.
[4:43]
QuestionerHow come you don't feel that way about shares of Apple? How come you feel like that's a different story?
WarrenWell, the shares, when we bought them at least, were much more reasonable in relation to current earnings. Apple didn't have to do a lot better in the future than they were doing. than they were doing at the current time. When you get into a Google and Amazon, you're paying for the future more. But they may well have a better future. I mean, that may be more than justified. But an Apple, I wouldn't say it's easier for me to understand that Google now, perhaps, or Amazon now, certainly would have been five years ago. It's amazing where apples and... Well, where Apple's ended up with consumers. I mean, I can very easily determine the competitive position of Apple now and who's trying to chase them and how easy it is to chase them. We happen to be well situated in terms of having these massive home furnishing stores. And I can learn very easily how consumers react to different things there. things there. Probably easier than I can trying to pick out what's really happening at Amazon at any given time.
QuestionerSo you use your research at the Nebraska Furniture Mart to tell you that consumers prefer Apple over Samsung? Or, I mean, what type of thing are you?
WarrenWell, the interesting thing is if you come in to buy a TV set, the Furniture Mart, a price is extremely important. Now, obviously, pictures, but there's all those great pictures just sitting up there. So you're going to have Samsung. going to have Samsung, you have all these different ones, and if you put on a sale and you drop the price of Samsung 10%, we can fill that department with people to come out for it. You can't move people by price in the smartphone market remotely, like you can move them in appliances or all kinds of things. People want the product, they don't want the cheapest product. And the loyalty is huge. Now, that doesn't mean somebody can't come along with a product that just jumps the field in some way. But, and then once you have the product, the degree to which it sort of controls your life. I mean, it's a very, very, very, very valuable product to the people that build their lives around it. And that's true of eight-year-olds and it's true of 80-year-olds. People who have questioned Apple's future have said things like, well, right now people are paying $800 for a small. smartphone. And the other reality in technology is that prices eventually come
[7:28]
Questionerdown. And unless you're adding more and more value to that product, the price will come down. So what happens if people, I mean, I guess the question is, will people always be willing to pay $800 or more for a phone or will that wind up being a cost that comes down and down just as technology changes?
WarrenIt can be that way, but usually because there's competition between different products and some manufacturer decides that they can't beat, say, Apple on their own terms. so they drop of $100 or $200. Some products are very susceptible to that and other products are not. And so far, I mean, you've had smartphones and big differences in price categories. And people come back in and if they had an Apple before, you're going to have a much cheaper cell phone selling right next to the smartphone selling right next to it. And they don't look at it. If you have a cheaper TV, a picture, looking at you and you say, what's the difference? And you buy the cheaper TV. And that's true. I mean, most items are price sensitive. And it's not to say that an Apple isn't, has somewhat price sensitive. It's very, very, very little. But somebody could come wrong and leapfrog something in the way of the technology and adds some benefits that that would be the more competitive threat to me than price competition. It would be benefit competition.
QuestionerYeah, I don't know what that is. You know, Apple gave me a whole lot of things that I never realized I needed until they came up with them. And somebody else was trying to think of some other things to give you along the same line. Right. Let's talk about just the stock price again. You said that it made sense to you when you started buying into it. Shares have appreciated since then. That's the problem. Yeah. I'm cheap. And there's always an anchoring problem with buying stocks. If you get used to buying them at X, it's harder to buy them at higher prices. So does that signify that you? you've stopped buying an Apple because of where prices of it fell?
WarrenWell, maybe, maybe not. But you slid it in there and I saw it. I tried. I guess when you see things like the earnings that came out, you had mentioned to us the other day that you weren't bothered or disappointed by the earnings. When you see stock price pullback, you probably like it at that point. Oh, yeah. I mean, Apple with a non-new product, I think they sold something like 50 million, you know.
[9:52]
QuestionerThat's a lot of units. lot of units to sell of something at $700. And a lot of those are going to people that are actually replacing a present apple. But they do know that a new product is going to be out in six months or something. And, you know, who knows? Maybe they got promised an Apple for their birthday or their graduation. But I would be tempted if I were going to buy one to wait until the new model comes out. What do I lose by doing it except the use of one in between? That's a lot of product to sell with a new model coming out when you think about $50 million.
Becky QuickWe've talked to you pretty extensively about IBM. Andrew and I got the chance to ask questions from the stage at the shareholder meeting this weekend. But we each only asked about six questions and we got thousands of questions from shareholders. One question that did come in from a shareholder that I didn't get the chance to ask you was about IBM and Watson. And you'd been pretty public about the fact that you were using Watson at GEICO. at GEICO, he wondered if your sale of IBM was related in any way to the performance of Watson?
WarrenNo. We've been experimenting. There's a lot of possibilities with the Watson at GEICO. And we've experimented with various different possibilities. And so far it's done certain things and it hasn't done certain things. But that same kind of experimentation is going on at hospitals and going on, you know, and a whole bunch of various. H&R Block worked with it this year. And Watson is a pretty amazing invention that it has, and it is getting put into use. A lot of places that app riders are working on. So it's a really interesting product. And I'm sure the revenue is growing very significantly, but from a very small base. But I would say that you've got other very smart people They've been given some time to work on other products. And I would say that when you get into that area, you do have to worry, maybe even more than with the phone. You have to worry about somebody jumping the utility of something like that. Where it really becomes valuable, I mean, it's obviously valuable in being able to look at x-rays and all that sort of thing, much better and faster than humans can, and read all the literature. you know, billions of pages and all that. I would think the real, the biggest value will come in is when it actually replaces human labor. I mean, that is so quantifiable and, you know, machines don't come around annually and ask for higher wages
[12:33]
Warrenand they don't need, they don't need health care, and they may need a little maintenance. But it, if they replaced, if it should replace people in a big way, it would have a lot of value, unless somebody else has some other private. products to do the same thing. So it's artificial intelligence, but it's very much still in the artificial emphasis on artificial in that. Yeah, I think they call it something slightly different than that, but you and I had a sort of common language would call it artificial intelligence. And it is intelligent. The question is how much better results can you get with it than using human beings or how many human beings you can displace in getting it, or can you get some entirely new form of information that humans are actually incapable getting, because they can't keep every word that's been written about prostate cancer or something in their minds, and they have read everything up to what was published yesterday. So it's, I think it's got great potential. It has not come along as fast commercially as you would have hoped on that. It's probably growing at a very fast rate, but the base is probably fairly small, and there are people who are going to be chased.
Otheryou. Andrew and Joe, we're going to have much more with Mr. Buffett today, but right now we'll send it back to you for a quick update as well.
Joe KernenOkay. Warren hasn't seen any actual indications of any malevolent intent from Watson yet. Has he, I mean, just the idea of Watson controlling, like what's going on and, you know, I just remember what happened to those astronauts, you know what I mean? The ones that were actually in the, you know, he just slowly, how, how turn? down all the, you know, life support. I mean, no, have you seen that yet, Warren? That's what I worry about with Watson. I mean, does he seem like a nice guy?
WarrenWell, I've sat in the same room with him for hours, and I kept an eye on him. That's what I mean, you know, because when they don't need us, why, why, you you said it, health care, we ask for raises, we eat food, we, I mean, we're pretty superfluous to some extent. And I just, I don't trust Watson as far as I can. and he's probably fairly large, I mean, the server, right?
Joe KernenWell, we all know what happened with Hal in Space Odyssey.
WarrenYeah. The, actually, I've talked with some very smart people, not at IBM, just about the whole idea of artificial intelligence.
[15:10]
OtherI see him out in Sun Valley, and they're really smart. And, you know, they all go different directions on this, but it's not about Watson, specifically, the whole subject of artificial intelligence and and you've read about it too
Warrenyeah I mean they some people are worried people genuinely word I'm just kidding some people are worried
Otheryeah genuinely
Warrenyeah yeah some people are worried me down the road really we probably do need to think about it
Joe Kernenyou know and Joe I've got the cure for it I got the cure for it
WarrenI'm 86 you won't worry as much under those circumstances
Joe Kernenexactly yeah it might be a far off thank you for doing this war your your voice we're just talking about what What amazing, what you do for three or four days is like superhuman almost. And three or four days a week, three or four days a year, I work.
WarrenYeah. And when I work, I make sure everybody's knowing and that I disappear.
OtherAgain, we are live with Warren Buffett this morning in his first sit down since speaking to the Berkshire Hathaway shareholders who made it here to Omaha this weekend, about 40,000 or so of them. Warren, Joe just mentioned at the top that the mark. the markets are probably not all that surprised by the results with the French election. Macron winning, Le Pen, going ahead and admitting defeat in this situation. When did you find out about the French situation? When did you hear about Le Pen conceding?
WarrenWhen they hear about Le Pen conceding, yeah. I wouldn't have been pretty early. It wasn't something that you were necessary. My point is it wasn't something you were sitting around waiting on. No, no, not in the least. No, I can't think of what I've, really done much about purchases or sales in connection with any election. I mean, when I was a kid, every time a Democrat got elected, and like Roosevelt or anybody, you know, there was a wake in our house and my father would start storing sugar in the basement or something like that. So I have learned to not put too much weight in any given election. This was not something.
OtherIf things had gone the other way, do you think the market reaction would have been as swift as some pundits had anticipated.
WarrenWell, it might well have been, but people do get fooled on market reactions, as we saw. Well, just with the Trump election, it went down a whole lot and then came right back up in a matter of a few hours. So I don't think I'm any good at that.
[17:39]
WarrenI mean, I, there'd be people would be a lot faster if I was on the floor of an exchange, you know. I'd probably starve to death. You're going to make those knee jerks. reaction. No, I just think of all the events that have happened in 100 years or something, or even in the 75 years I've invested. And if I'd reacted to everyone, my reaction percentage would be terrible and I have a lot more of the way of costs. And I'd be out of the market at times. I never really want to be out of the market. It isn't a question being in the market. It's a question of owning businesses. And if I wanted to own farms, I wouldn't keep buying and selling them based on some election result or something like that. And I'd own farms and I try and figure out the best place to own them and get the best tenants I could on them and all of that sort of things. So I look at businesses the same way.
QuestionerLet's talk about the U.S. economy because there have been a lot of questions about just how we're doing. We had that first quarter GDP number that came in with a really lousy 0.7 percent. Does this feel like a 0.7% economy to you? What do you see?
WarrenWell, I don't know. It doesn't feel like one. I don't think it is one. I think since the fall of 2009. And I think we've said this every time I've talked with you. It's more or less grown at a 2% rate. And I think deviations from that are as likely to be through problems in collecting the information or having the proper seasonal or by the fact that quarter to quarter, it's measured rather than over a year ago's quarter. And so you multiply by four a change. So a two-tenth change becomes an eighth-tenth annual type figure. And I do not look at those figures with a lot of interest. I mean, obviously when you get into 2008-9 period and when the economy is falling apart, it's a pretty good gauge of how fast it's falling apart compared to some earlier recession or something. But I have never done, I've never made a trade in a stock based on a GDP figure.
QuestionerLet's talk about the figures that you do pay attention to. And those are the numbers that you see coming back from the businesses you own outright or that you own major portions in, something like the railroad. Let's talk about what you're seeing right now.
WarrenWell, railroad figures, which you can get every week. I think the AAR puts them out on Wednesday. I got them Wednesday morning. And they show 20 different categories plus intermodal.
[20:05]
Greg AbelThey show them by railroad. They show the Canadian roads. So the short line roads. And basically, the economy is doing okay. And when I see, I say, okay, I mean sort of the same 2% rate. Now, it's not that precise for the rail figures, but one thing that's helped with rails is that natural gas has gone up in price. And there's a lot of coal that doesn't move at $2 natural gas that moves at $3 or $3. I mean, a lot. There's a whole lot of electric generation that they flip a switch, basically. And it's the input. And right now, natural gas is. I think it was $3.25 on Friday. And that dictates the use of coal a lot of places where if it was $2.25, they'd be running natural gas. So coal shipments are actually probably up the most percentage-wise of any of the 20 categories. They're certainly up the most up dollar-wise. On the other hand, petroleum products would be less. Grain is moving more this year. There's just a lot of crops still out there, and there's going to be more coming on. So at the NSF, we move 13,000 cars of grain and they move at $3,000, $3,500 or something like that. So to get an extra thousand cars of grain, you've got an extra $3 million of revenue. But that's a product of low prices for grains, so the farmers wanted to store more big crops, and we'll learn. in the fall this year, whether you have another big crop, and we'll carry a lot of grain if it happens, and if for some reason there's a low crop, it comes down. And they're just category crushed stone. I mean, you name them all. One of the things that surprised me that I hadn't realized until we spoke with Matt Rose of BNS this weekend, is that the truckers, who I always thought of as the railroad's biggest competitor, didn't realize they're also their largest customer, that they're shipping so much for them. That's true. That's true. of drugs, you know, they load those babies on there and double stack them. And the, they are five biggest customers. I mean, you've got, well, J.B. Hunt would be the biggest, but Schneider, which just went public here recently. Those are big customers. I mean, they have an advantage just to start with in loading in a huge percentage of cases. But if you really are going to move heavy traffic, hundreds and hundreds of miles, bulk traffic. They're better off sticking them on our railroad than picking them on the other end at Christmas time. You know, UPS or people like that, a lot of it will move by rail.
[23:03]
QuestionerAlso, when it comes to housing, you've got a pretty good idea of what's happening there. Not only do you have a realtor company, you've got Acme Brick, Shaw Carpet, Clayton Holmes, Benjamin Moore Paint. I was trying to think through all of the components of housing. Where do you see the housing market right now?
WarrenIt's getting better. I mean, it isn't booming, but both in resale of existing homes. Clayton homes sales, that's a manufactured home product. They're up significantly this year. We have three site-built builders. Clayton has started to go into that Kansas City and Tennessee and Georgia. And they're all doing fine. Now, it's not done. boom time for any of these, but it's a lot better than it was three or four years ago. And it's better than it was last year, and I would anticipate that it continues to get better. It looks, there was this huge shift after 2008 and 9 for people to rent rather than to buy. I mean, we had 69% home ownership, and I think it dropped to 63 or something of the sort. And there's some reasons why maybe it will stay lower, for one thing, when people bought it. houses in the early 2000s, they thought for almost for sure they could sell it into profit later on. So they had flippers or people that at least were convinced that they couldn't lose. People don't feel that way after what happened. And then anytime you have a recession, it affects matrimony, a whole bunch of things. But that's wearing off. And home building is what will be the best in this year, in my view, since. since things went to hell in 2008. And millennials are actually starting to buy homes?
QuestionerYeah, and I can't really get into specific age groups too well, but I see the aggregate figures. And that's true, you know, brick sales will be better in the earliest they have been so far this year. And they were better last year. And now people are changing their minds about what kind of a covering they want. a covering they want for their floor, they're going more to hardwood. There's been some change in preferences. But when new home sales pick up, you know, flooring sales pick up, when houses change hands, paint picks up, there's a big system there that feeds. And we see improvement, we're not seeing boom times or anything, but you can get some feeling for that part of the economy. And we've got 80 plus auto dealerships and you would know what was going on that anyway because the car companies report so frequently as the unit sales.
[25:57]
QuestionerThe economy is getting better. The economy was, economy was, has been getting better since 2009. In terms of what you see from the industrial side of things, you've got Marmon, IMC, I just think through a lot of industrial areas too. Have you seen a pickup in that part of the business?
WarrenWell, that was slow. up to the reason. But we saw a fair uptick, not huge, but noticeable, in March. And we'll see how much carry-through there is to that. The industrial stuff, in many cases, went into the energy, oil and gas business. So they slowed down in oil and gas, affected a lot of different times. types of industrial activity. It backs up through a lot of equipment. So it was definitely affected by that. But the most recent figures would be encouraging but incomplete.
QuestionerI'd like to just ask you, we talk all the time about the animal spirits that started moving. You saw the stock market run up after Donald Trump's election. Does that show up in your numbers anywhere? Animal spirits are shortened, our shorthand for saying, you know, people got more optimistic, businesses got more optimistic, consumer confidence rose, the stock market rose. Does that show up in the sales lines?
WarrenWell, it certainly shows up. I mean, you look at charge card in the first quarter with Visa, American Express, you name it. I mean, get those figures. They got, they were quite strong and got stronger in March. So, and those are big numbers. I mean, people charge lots of stuff on credit cards. And if you, American Express lost a Costco account, so you're not comparing apples to apples there. But if you make adjustment for that, and suddenly that was around the world. I think these figures are announced by American Express, so I'm not telling anything new. But the UK was up 17 and a half percent for American Express. Well, you know, American Express has been around a while. They're up 15 percent in Japan. I'm talking local currency. I mean, these, and, and the U.S. was very good, better than I anticipated, and it got better through the quarter. And certainly, through the first quarter or the fourth quarter?
QuestionerThe first quarter, first quarter.
WarrenAnd, you know, J.P. Morgan Chase is doing very well with their card. And I just think as you see, I mean, you can see what the consumer is doing. Credit card volume is, we'll tell you a lot about the consumer, what their attitude. Do you see that showing up at your consumer businesses, too, in the stores at Nebraska
[28:50]
QuestionerFurniture Mart, at Seas Candy, at Dairy Queen? How does that kind of play out? They're doing well, but the furniture mart, and we have other furniture, sorry, I mean, we have them with R.C. Willey and the West, and we have it with Jordans in Boston, and they show decent gains. Okay, great.
Becky QuickWe're going to have much more from Warren. And by the way, guys, if you want to jump in, feel free to do that. But we're going to have much more from him coming up. We still have to talk to him about 3G in the political environment. And airlines and some of the controversy that's happened there. Welcome back to Squawk Box, everybody. We are live in Omaha, Nebraska with Berkshire Hathaway's chairman and CEO, Warren Buffett, who is sitting down with us for his first interview since speaking to the Berkshire faithful, who made their way here, about 40,000 shareholders who were here in Omaha over the weekend. And Warren, thank you again for sitting down with us this morning.
Becky Quickout. There were a lot of questions that were brought up by shareholders this weekend, and some of them had to do with 3G, the private investment firm that you all have been so active with in a lot of different ways. It's not new controversy. It's been issues that have been brought up because 3G operates a little differently when it buys a business than you have, when you've bought a business in the past. They're all about operations and getting things streamlined very quickly. Usually when you buy a business, you like to have the management there, you keep the management and you let things continue to run. But it did bring some questions and again from shareholders this year, including questions about how politically savvy it is to be doing doing business with a company that's going to be laying off employees in this political environment with this president who has said he is very much in favor of protecting American jobs. How do you respond to that?
WarrenWell, it does get a political response, and it varies depending on whose president or how much the particular layoff gets or whatever it may be. If we had not changed any ways we did business, we would be living as we lived in 1776. I mean, productivity gains are the only way that consumption gains come. If productivity per capita stays the same, consumption per capita stays the same. Unfortunately, over a couple hundred years, in farming, for example, we literally came up with tools, we came up, we got rid of the horses and
[31:19]
Warrenhad tractors, we came up with better sea, better fertilizer, all of those things. So whereas 80% of the people had to be working on farms, just to feed the country a couple hundred years ago, we now have less than 3%. And that means 97% of people can turn out other things that you want. So productivity, everybody understands productivity gains are the key to living better. But when they happen to you, very understandably. you feel that you're getting the short end of the stick. Society may be benefiting, but you're getting hurt. And we've always, we tried buying a few businesses that had troubles and all of that, and it wasn't any fun, eventually getting rid of 2,000 people working at Berkshire's textile mills or other businesses we were in. So we've tried at Berkshire to buy businesses that are already very productive and keep them that way. keep that way. 3G has come into businesses where they really could do the same level of business with a lot fewer people. And they've made the changes very promptly when it happens and they've been good about severance pay and all of that. But they have followed the standard capitalist formula, market system formula, of trying to do business with fewer people. And that that benefits everybody, it particularly benefits to the owner. But it's a painful process. And sometimes there's a big political reaction to it. GEICO, which now employs 36,000 people in the early 1970s, or right after a fellow named Jack Byrne came in, who cleaned up the problem, cut almost half of its employees. I mean, it got rid of thousands of people, and it was painful. It was because of a management mistake, the people that got laid off, no fault of their own at all. They'd just GEICO management had come up with the wrong prices, and they were losing. money that were going to go bankrupt. And the general named Jack Byrne came in, and he saved the company, but in the process of saving the company, he laid off thousands of people and had lay them off promptly. So there will be readjustment. Well, the railroad industry, after World War II has something like 1.6 million people working in it. Now, it has less than 200,000 now from 1.6 million to under 200,000. And it's carrying considerably more freight than a one. was at that time. Now it's true there was a passenger factor then. But the improvement and productivity has been dramatic. Otherwise, the railroad business, there wouldn't be any railroad
[33:50]
Warrenbusiness if it was existing like it did in 1946. But you are, if you're, if you're, that's easy to talk about, but it's the same problem as trade. Trade benefits people in invisible and small ways, and to the person that puts out of business, who spent 25 years learning a trade as a steel worker or as a manufacturer's shoes. It is a disaster. And a rich country, and we're ungodly rich as a country, 57 or 58,000 of GDP per capita, we have to take care of people who are the roadkill in better output for all the rest of us. And I don't blame anybody for voting against the system that they think is bypassing them and just throwing them aside. Because if you're a 55-year-old steel, worker, a 55-year-old shoe manufacturer, you are not going to earn a new trade and you're not going to have another job that's good. And yeah, society has to take care of them because it's achieving as a societal objective, which is to get more output per capita. Andrew has a question on this as well. Andrew?
Andrew Ross SorkinHey Warren, to the extent that 3G is successful at using its zero-based budgeting to bring more efficiencies out of the companies that it owns, how much pressure do you think it's going to put on other units of Berkshire or companies that Berkshire owns, for example, example, Coca-Cola, which may have to follow the same type of model to keep the same type of margins, given the success the 3G may ultimately have.
WarrenYeah, James Quincy, the new CEO of Coca-Cola, designated new CEO, has already said that there'll be 1,200 jobs reduced at headquarters at Coca-Cola. Now, Coca-Cola has been a very, very, very profitable company over the years and could afford to have lots of people around who aren't really changing productivity that much. But volume is leveled off, more or less. But I would argue that even if it was prosperous, it shouldn't have more people doing it than are needed. I mean, that's the guts of capitalism, is, you don't have a lot of people doing something when fewer people can get the job done. You free those people up to work in other areas. for them so that they bring out new products and people live better when there's more output per capita. So you don't gain anything by having thousands of people around. You can afford to do it in some cases. But Coca-Cola is doing exactly the right thing if they look at their operation and say, how many people do we need to do the job right?
[36:35]
WarrenAnd if you're very prosperous, the cigarette companies were this way in the past. I mean, they were so prosperous, it really didn't make any difference. the name of the fellow that flew around with his, sent the airplanes for his dogs and all of that sort of stuff. And they can afford to do it. But that output for America, you know, goes down when that plane flies around with a dog in it. And prosperous companies tend to be sloppier than companies that are in tougher businesses here, forced to think harder. And packaged goods generally has been a very profitable business. I mean, if you look at the great companies in that field, for decades and decades and decades, they earned high returns on capital. And so you probably found more sloppiness in employment than you would find if you ran a very tough retail business like my grandfather's grocery store. You just couldn't afford it.
QuestionerDo you still like these companies where you see the margins coming down pretty significantly in industries like consumer packaged goods, companies like Coca-Cola, like Kraft? You've got major investments in these areas.
WarrenWell, craft the margins have come up because they're doing just as much business. But they're not, they don't have people there that they don't need. And Coca-Cola, James Quincy has announced 1,200 people in headquarters. I will guarantee you they won't sell less Coca-Cola because those 1,200 people are gone. I mean, and we have in Berkshire's businesses, some of them, a certain amount of slop. You know, I mean, we don't, we don't drive it as hard as we could, but that's no tribute to me. It just means I don't, that isn't something I like spending my time on. I don't like a lot of inefficiencies, and some of our companies are extremely efficient, but it is, they are not as efficient as if to feed myself tonight, I had to have them running a maximum efficiency. But that's a defect of mine. I mean, that's something to brag about.
OtherLet's get back to Becky, who's in Omaha this morning following the Berkshire Hathaway annual meeting, and she's joined by none other than Warren Buffett this morning who, Becky, you don't need, like, to know about a company. You don't necessarily have to use their products and stuff. I'm just thinking about, you know, Warren opining on the airline industry. You know where I'm going with this. I mean, I thought you were talking about Apple, because he doesn't.
[39:10]
Joe KernenHe doesn't have an iPhone either. Or Apple, but, you know, I love to hear his comments on the airline industry because, you know, friends have been telling him about what it's like to be at one of those airports and stuff. And you would walk on and they'd be like the kid, the rich kid, that says, who are these other people, dad, when they finally fly on. You have no idea, Buffett. I mean, don't pretend to, so you've read up on it, I guess, right? Is that, that's about the extent of it. I would make a small bet.
WarrenJoe, that I have taken more commercial airline.
Joe KernenWell, you're 86 or 86. Okay. All right. Okay. All right. You've taken more breasts than me, too. That's not going to do it, Warren. That's not going to, you, I always say that. The last movie you saw in flight was, was a, was it just come out, it was Casablanca. That was the last movie you saw on an in-flight commercial.
WarrenHuh? I saw Soling the other day while writing got a plane. This is about a plane that goes down. But after then, it was not a commercial plane.
Joe KernenHey, Warren, let's shift gear to you. We're going to talk about something else, but let's talk airlines right here, since Joe just gave us that great entree, point to it. Sort of an easy.
QuestionerExactly. I can answer this now, following up. You are, through Berkshire, the largest investor in four major airlines, including United. And we have seen the troubles at United. really gotten the chance to talk to you too much about that. What did you think as the largest shareholder when you saw the video of Dr. David Dow being dragged off? And then the response from Oscar Munoz, who was called in front of Congress last week to testify on this, along with some other airline CEOs.
WarrenObviously, it was a terrible mistake. And you actually stated that, you know, I saw the event with a fellow being dragged off, and then the response. I kind of wonder whether Oscar had actually seen that when he made the response. So it was a bigger mistake by far than if he hadn't seen it. And I don't know the answer to that. But the natural tendency, if you've got 80,000 employees and you hear about some incident is to defend your employees, but it wouldn't be your natural tendency if you'd seen the tape. So I don't know precisely. In either case, it was a mistake. In one case, it was an egregious mistake. And, you know, he's a policy. He's a policy. He's a policy. many times, but your first reaction is going to get a lot of attention.
[41:49]
QuestionerI understand what you're pointing to it. United has had some employees that have been unhappy since the merger. They've had some issues, some legacy issues and things they've been trying to deal with. He has been concerned about trying to make sure that the employees feel good about things. But again, that video and that tone-deaf response made a lot of people feel like they have forgotten that these are customers, paying customers. customers. It's a color. No, I mean, and I worry about that with 367,000 employees as well.
WarrenSomebody stands on their feet all day selling candy and people are yelling at them and, you know, it's Valentine's Day and they're trying like crazy to keep up. There'll be certain people that may blow up, you know, late in the day. I mean, we have actually sometimes just walk off the job. They just get tired of it.
QuestionerOh, really?
WarrenYeah, sure. Well, what really gets them is that we hire lots of temporary help, obviously, at holidays, and the customers know more about the product than the people we hire. I mean, we'll hire people who have 100 different pieces and maybe educate them a little, but the customer's been coming in for 30 years. And psychologically, it's hard to handle when the customers start selling you. You don't know what you're doing, you know. So a certain number of people may behave badly and what you hope is don't behave real badly and not too many people do it. But we will have, we'll have somebody do something, we'll have more than one somebody do something. If we have thousands and thousands of retail transactions, for example, some people don't follow the rules. We had an accident, you know, I'll hear a while back on the railroad that somebody didn't follow the rules and and, you know, the penalty is huge, I mean, in terms of injuries and so on. You do the best you can on it. you can on it.
QuestionerYeah.
WarrenYou know, the first report I get from Matt Rose every quarter, the first topic of safety. The head of BNS. The head of BNS. The first report of safety. And the injuries have been driven down and down, but he says he's not happy to get to zero. Well, I know that's what he wants to do, but you can't get them to zero. But you really, you want people to be treating everybody. everybody they meet in business as if it's the person they love the most. I mean, at Geico, we got thousands of people on the phone and they're just getting calls all the time.
[44:25]
WarrenI like them to have a picture of whomever they love the most. You know, be their mother, their wife, their dog. Whatever it is, be talking to that person, because it really comes through. You know, you mentioned that on Valentine's Day, maybe you have somebody on their feet all day, they get fed up and maybe they walk off the job. You can understand. why airline employees get frustrated because everybody in the airport is bad, because conditions in the airport, getting through TSA. And then, frankly, what the airlines have done themselves with their own policies, where you're charging people for bags, you're cramming people in with less and less leg room. It's become very commoditized, making the people feel like, maybe more like cattle than, like, customers coming through here. But part of that, the airlines are responsible for. Not all of it. Not all of it. But the airlines themselves have created some of those situations. One of the things they filed. is that a very high percentage of people are very price conscious. So, you know, they may become like cattle cars, but people would rather be treated like a significant percentage would rather be treated that way and fly for X than have far more leg room and more, you know, all kinds of things, and travel for X plus 25%. So to some extent they try to segment segment. Have they pushed a little too far along those lines? Well, it's so the customer will tell them, you know, basically by flying, you know. The customer would tell them by flying somewhere else, but the problem is with airlines, you often don't have a choice. Often don't have a choice. More than 70% of the airlines, the flights that originated out of Newark are United Airlines flights. I don't have a choice when that's my home, my home place to go. But some people, I mean, we suggested to people actually that came to the Berkshire meeting. to the Berkshire meeting because the prices went up a lot. The demand went up a lot. They put on thousands and thousands and thousands of extra seats, the airlines told me. So I actually put in the annual report every year. You can fly to Kansas City during the annual meeting time, way cheaper than you can fly to Omaha, and you can run a car there and be here in a couple of hours. And a fair number of people actually do that. But a lot of people don't. I mean, people have different preferences, but there's no question.
[46:41]
QuestionerI mean, I would hate to run an airline. airline. People are traveling. They're hoping to make a wedding. They're hoping to make a business appointment. It's important to them. It is. And I understand all of those issues. I guess I'm asking you as the largest shareholder. It sounds like you have not had any conversations with Oscar Munoz. I've never met him and talked to them. So I'm asking you if it concerns you when reactions like this get the heads of these airlines called up in front of Congress.
WarrenIt's bad. Would that potentially change the investment strategy? It wouldn't change the investment strategy. It's bad. I mean, how bad it is. I don't know. But there is no way that you aren't going to read about some airline incidents. Now, the one thing going for the airlines is they've become unbelievably safe. I mean, I never would have dreamt. But they have also worked toward having higher load factors. When they have load factors in the, you know, like they did in the past around 70, I mean, they don't want bankrupt. And they need high load factors. and high load factors mean a fair amount of discomfort. And it has kept prices from going up. But as you point out, I have not written a commercial airline for a long time. As Joe points out, not me. It's a job I don't want. I'm running an airline. I guess the only question is, do you think Congress would do anything that would make your investment less worthwhile? They could. I don't think it will likely. But the interesting thing about it is, if you think, If you regulated the airlines, re-regulated them, you would have, well, whatever they decided to regulate, but you could have more leg space, you could have no overbooking. I mean, you can regulate all kinds of things. The cost will go up. And that's the trade-off.
QuestionerAndrew, you had a question too?
Andrew Ross SorkinIn the similar vein, Warren, I had actually two questions. One relates to just whether you think, forgetting about regulating the airlines. per se, but just the idea that at least in certain markets, you could see some pressure to open up more slots or effectively to take slots from different airlines and try to give them to others, what you think the risk is to the investment thesis from that perspective.
WarrenYeah. Well, if you get more planes around, call it seat miles, too many seat miles around, it just gets to be brutal. I mean, they all went broke. If you put in bankruptcy and airlines in search, you'll see in a hundred names or thereabouts just in the last 30 years.
[49:21]
WarrenAnd you'll see, you know, all the big names you won't see Southwest or Alaska. But you'll see the big names. I mean, it's a brutal business because the incremental cost of one extra person in an empty seat is practically nothing. And the problem you have is keeping the pricing of that incremental seat from infecting all of the seats in the plane. And everybody knows the prices every day. So there's no way to dress it up or anything of sort. There's ways of offering different combinations like whether you charge for this or that. And some people like that and some people don't like it. Everything you do, though, your competition can copy. Now Becky mentions a point. If you've got enough of the gates at a given airline. Then you have some protection as long as people want to fly from there. But people travel to other airports too under those circumstances. It's a very, very tough business. If you want one figure that really counts in determining how well the airlines are going to work economically, it's going to be the percentage of seed occupancy, basically. I was a director of U.S. air. It was a really dumb investment on my part. I made it all by myself. I didn't even consult Charlie. And by the time the ink was drying, I knew it was dumb. And then it got dumber. And that airline actually went broke twice. Fortunately, there was a blip in between. And we actually made a pretty fair profit out of the stock, but we didn't deserve it. And it went broke twice. And they would have a route like, and I'm pulling this out of the air, obviously. but, you know, Philadelphia, Pittsburgh, or something like that. And as long as they were the dominant carrier with a lot of gates at each end, they did fine. And then Southwest or somebody would come in, and they would look at 14 cents a seat mile and ribbon a mile. And they could do it for 12 cents. And a big enough price differential, move people over. And, of course, the industry is looking for all kinds of things through loyalty points and all that to make it stickier. But in the truth, when people are going to fly from X to Y, they can go to their computer figure out very quickly how much it's going to cost them. And it's a tough, it's a tough business. It was a suicidal business for a long time. Having the consolidation that came about through the bankruptcies has made it an extremely competitive businesses. I don't think it's a suicidal business anymore. But if they get down to running a 70%
[52:09]
QuestionerYeah, Warren, real quick. The other thing I was curious about is many of the U.S. airlines have lobbied the Trump administration and have lobbied other Washington lawmakers against part of the Open Skies Agreement, arguing that a number of the Middle Eastern airlines, like Emirates, have effectively been subsidized in dumping their services in the United States at prices that are below what it truly cost them. About a $50 billion subsidy they've described. Do you agree with that, assessment? What do you think should happen if that?
WarrenThat's true. I don't know the facts on it, but I, but I would say that over the years, there's been a fair amount of below-cost pricing. And anytime you're in a business where your competitors is getting into below-cost pricing, and there's not huge difference in the public's minds between flying airline A or airline B, the timing of their departures and all the rivals may make some difference. But people are very price sensitive. And if people are pricing below costs, when I was on the border of U.S. Air, we had a lot of planes out in the desert. And if you get a lot of planes out of the desert, you've got problems. And so I, and I would say that if you, you should try to figure out the best system for having reliable, safe planes operating. It's better if they're overall operating profitably that if they're operating a loss, because if they're operating a loss. operating a loss, you're going to have a bankruptcy situation and you're going to have to redo union contracts and all sorts of things like that. Incidentally, one other factor in the airline industry currently is, I mean, you really do have a pilot shortage to some degree. And pilots come in from the military and they're just not coming in as much. What does that mean? Well, it just means that the pilot's unions gained some strength relatively. Now, there are differentials as you work for the smaller airlines and all of that. But if you're running a big airline, one of the things on your list of things to worry about is... Labor costs going on. And you need to experience pilots. I mean, you have high requirements of hours for those people to be in those seats.
OtherWe're going to have much more coming up with Warren Buffett. Welcome back to Squackbox, everyone. We are live this morning in Omaha, Nebraska, with Berkshire Hathaway's.
[54:43]
Becky QuickBerkshire Hathaway's chairman and CEO Warren Buffett. He's been sitting down with us going through a lot of issues. This is his first interview, since talking to the 40,000 or so, Berkshire shareholders who showed up here in Omaha this weekend. One of the items that came up with a little bit of controversy over the weekend was Wells Fargo. That was the first question that was posed to you from a shareholder. And the questions, a lot of them came in, and they were all kind of were related to what you thought about well Fargo. Now, in the past, you've run that clip from your congressional hearings over Solomon Brothers, and the very famous clip is where you say, lose money for the firm, and I will be understanding. Lose a shred of reputation for the firm, and I will be ruthless. I did have one shareholder who wrote in a question asking why you weren't ruthless when it came to Wells Fargo.
WarrenWell, the CEO lost his job and gave back to space, and I was not a director, so I mean, I would say that the CEO feels that. feels that his life has been an important way ruined. I mean, and incidentally, I know John Stump, I don't think it had anything to do with him making money. But I, and I don't know what happened because I maybe would talk to him once a year or something of the sort. But they obviously came up with an incentive system that incented the wrong things. Now, most businesses do that from time to happen. We've done it at various things. businesses. I mean, you think you've come up with a brilliant idea, and then you'll find out that it gets, it's probably happening in your family. I mean, you know, in terms of what, deciding what allowance to give or what, you know, things, not everything works out as you anticipate. That's okay, but you get signals back that it isn't working and you got to stop it. The big mistake was whenever sufficient information had come back that this is producing a counterproductive effect. It's not resulting in more cross-selling. recall, resulting in all kinds of games being played and phony accounts and all that sort of stuff. That's the moment of truth. I mean, that is, that's the big moment, because you have to stop it then. And you just got to say, what's wrong with the system and how do we correct it? And believe me, that happens at Berkshire, that happens every place. If you don't do it immediately and you let it run for a while, now you've got the ultimate problem because you,
[57:09]
Warreneverybody that comes in says, well, yeah, but why didn't you? you do this when you first heard about it. So that is the key time. And we have a hotline. We have about 4,000 complaints of one sort or another that come in on the hotline. Everybody works for Berkshire has access to it, comes into Omaha. Most are frivolous. The person next to me has bad breath or something like that. Well, they've got to work on their own. Some of them, a good many of them should go back to the human relationship. departments of the companies. Now, if they don't do the proper thing, then we have to do something about it. But mainly there are things that are at that level. And then a few are really, really important. And they're anonymous and there's no retribution. And you would certainly think that in any big bank, including Wells Fargo, or any big institution of any kind, the hotline is bringing in lots of information. And whoever's in charge of that now at our place that's the head of It's the head of internal audit, but it can be the general counsel to me. There should be people looking at that and they should be deciding which to send back to subsidiaries, but they should be deciding which one should go to the CEO. And I've had a reasonable number of actions that came to me either through the hotline or anonymous letters to me. And you can tell when it might be something serious. We've spent a lot of money investigating. investigating things that come in like that because we turn it over to an outside person frequently. And a pretty percentage, a good percentage of the time, it led to something pretty big. And they, at Wells Fargo, you know that some stuff was coming up for the branches and people. Somebody didn't pay any attention to it. And if you wait a year, you know, it's just totally bad news. Have you lost confidence in the bank as a result? Do you think the bank's reputation has suffered as a result? And would you ever sell any share? or sell any shares as a result? Well, the reputation has been hurt. The fundamental earning power of the bank over a period of years has not been hurt in any material way, but the reputation of the bank has been hurt. I would argue probably that better systems would be in place there now, just like they were at Solomon, then probably exist at most of the competitors. And that's true, and other banks get slammed down on whether it's mortgage things or some trading
[59:40]
Otherthing. I mean, that does focus the mind. And it focuses the directors. It focuses the media. So in general, I would bet on the practices being better in any operation that's had that kind of attack and scrutiny and deserved attack and scrutiny than it might be if you were just kind of sailing along thinking everything. I worry about getting complacent.
QuestionerWarren, we're going to take a quick break. Warren, we have been sitting down and talking with you for the last hour and a half, which has been wonderful. been wonderful, and I haven't pushed you on this yet, but this is something you spent a little time talking about at the annual meeting this weekend. Probably the question that we get from viewers and from shareholders more than any other is where do you think the market is headed and what do you think of market valuations right now? It's not something that you often comment on in-depth. But this weekend you did talk a little bit about how it's getting harder and harder to find deals, how there are a number of factors that have certainly driven up the price of businesses. Can you tell us what's happening right now? What's going on?
WarrenWell, the first part, where the market's headed? I don't know. It'll be higher 10 years from now. It'll be higher 20 years from now. It'll be higher 30 years from now. But I have no idea what the market will do in the short term. If I thought it was a productive area of exploration, I'd do it. But I don't know how to do it. My partner, Charlie Margaret, doesn't know how to do it. So we think about businesses. Now, unfortunately, Right now, the largest, quote, business, end quote, we own, we've got about $95 billion in, and it's selling it 100 times earnings, and the earnings can't go up, which sounds like a pretty dumb investment in it is. But that's what we get on Treasury bills, basically, and we literally have, it's not all in bills, but we have 95 in cash and course, mostly bills, and we are paying 100 times earnings for something, like I say, who is earning. like I say, it was earnings can't go up. You get 1%. And that does not make me happy. And I'd like to buy businesses. We will buy businesses, but it makes it much tougher when there's 1% money around, and the people who, many of the people who buy businesses use as much borrowed money as they can. And when they get that at rates that are based off that very low rate of 1%,
[1:02:05]
Warrenthey can pay a lot more money. than we can using pretty much all equity money, because that's the way we look at money. So we have not made significant acquisition now for 15 months or thereabouts.
QuestionerYou're getting a little itchy?
WarrenOh, I'm always, if it goes for 15 minutes, I get itchy. But I can't afford to give in the fact that I can't scratch. I get in big trouble. Once you buy a business, the business doesn't know what you paid for it. you paid for it. So it is not going to earn some appropriate amount just because you paid export. And if you do something dumb going in, either in terms of the kind of business you buy or the price you pay for a perfectly decent business, the results are with you forever. So it's my job to allocate capital and it's a very tough period in which to allocate capital. But that's okay. It makes a game. That's why I come to work every day.
QuestionerYou did say over the weekend that if the Seas Candy seller had tried to get $5 million more from you, you would have said no and walked away and that would have been a mistake. Are you still that cheap?
WarrenNo, I'm not as cheap because that taught me something. I'm still cheap. But not as cheap as I used to be. And Charlie saved us on that one. The seller saved us because he did come down. But Charlie also was pushing me somewhat. And you can afford to overpay a bit for a really fine business, depending on your degree of certainty that's a really fine business and it's going to stay one for a long, long, for a long, long time. And you can't make that decision about most businesses. I mean, it's just not given the man to be able to foresee 20 years out on most businesses. On the other hand, if you pay big prices for something, you're counting on earnings. You're counting on being right, a very high percentage of the time, on projections of earnings that go up, and of course the best kind of earnings are the ones that go up without more capital investment. It's very easy to have greater earnings in the use. have great earnings in the utility business, you just put a slug of money in and you get a return out of the return isn't that great. So you're really looking for something that will grow. And I did mention one thing at the meeting, which I don't think people appreciate it at all. If you take, say, the five largest businesses in the country by market value, you're probably, and assuming Berkshire isn't in there,
[1:04:29]
Warrenit flips in and flips out, let's assume we're out. Those five businesses have a market value of two and a half trillion or more. starting with Apple, you could run those five businesses with no equity capital. So you have close to 10% of the market value, perhaps, of the United States, in five extremely good businesses, that essentially take no capital. Now, that was not the case in the past. I mean, if you were at the turn of the century and you were talking about U.S. steel and the big railroads and all that, you made large sums or a rocker full of the oil business, business by earning money with refineries or steel mills and finally earned enough so that you bought another one and you borrowed some money along the way. But you had to build up equity capital dramatically as you went along. And even if you go back to the Fortune 530 years ago, the companies that were big took big capital. Now you've got the five highest valued companies in the country. They don't take any capital. Even IBM has no. has net no tangible assets. And if you take the equity, gap equity, subtract the intangible assets, it's less than zero. And if you take businesses, you know, you take a Google, I mean, they may invest some money in fixed assets and all, but they actually need no equity capital. So you could have a $2.5 trillion dollar business in the United States and not need equity capital. And that is a different world in the past. You, over the years, over the last, over the last 10 or 15 years have become a much more industrialized companies, things like the railroads that do require more capital equipment, more capital investment.
QuestionerWhen did you notice that the top five market cap companies required no capital investment? When did you make this realization? And does that explain your investment in Apple?
WarrenIt doesn't explain it. I've understood that for a long time, but it's become more and more concentrated. It used to be Exxon Mobil up there and some. So the shift has been taking place. place. And essentially, the great, great, great businesses have become businesses that don't take capital. And that really wasn't true. I mean, the auto industry took a lot of capital. The aerospace industry took a lot of capital. The railroad industry. These are huge industries that affected America. I mean, they changed our country. Now you've got companies that have huge market values changing the country.
[1:06:55]
QuestionerThey don't take any money. There's companies for the way, for people who are listening on radio, we did just show a chart of that, or a full screen of it. full screen of it. It's Apple, Microsoft, Amazon, Google, and who am I leaving out? And Facebook. Right, and Facebook. Those are the five. And Alphabet, obviously, the parent company of Google. That's a huge shift. Would you like Berkshire's businesses to be more reflective of that sort of new paradigm?
WarrenI love it. I just wasn't able to build. I got seized candy and I haven't had one since then quite like that. We've got a few. But those are the ones. Those are the wonderful business. The businesses that grow and don't require money. And of course that's why they're awash in cash and to the extent they made it abroad. Some of it, they'd have to pay some tax if they brought it back. Now, they use some capital. I mean, they build headquarters and they have small amounts of inventory in some cases. Research and development for some of these issues. But if you took, you don't need it. Absolutely. I could run those businesses and they could run them a lot better with absolutely no equity capital. In fact, a huge deal. negative acre of capital. You can't run ExxonMobil with negative capital. You can't run U.S. Steel, you can't run the railroads, you can't run the utilities, all these massive industries, really what the country was built on up until not that many years ago. And now there's this huge shift to intangibles. And they produce products that people love. So I'm not saying this is in any way, frivolous or anything of the sort that it happened this way. But it makes a big difference when people talk about capital. shortages and how we need, you know, bring the money back. Because there's a whole bunch of things that are sort of built on this conception of how business was 50 years ago. And sometimes it's useful for the people in those businesses to sort of play up that fact and not what really has happened in the way of change. But it is a big change.
QuestionerYou're talking also about the shift away from an industrial economy, away from more towards services, more towards blue collar or white collar jobs in a minute. of these instances too. And if you can find businesses that don't take capital and earn a lot of money, that's how you can become rich very easily and very early. Now, this is always easy to come up with it, but you can get the capitalized value of something
[1:09:18]
Questionerand nobody says, yeah, but it's going to take $100 billion to build it. I mean, if Google had come along and the infrastructure required would have taken $100 billion, you know, that would be a different situation. In fact, Jeff Bezos has talked about that in Amazon. He said, look, with Amazon, he said, we needed the internet. Somebody else spent billions of dollars developing it, but it wouldn't have worked without the internet. He said, we needed transportation. Somebody else had already built in railroads and UPS and all of that sort of thing. And he said we needed payment systems. That would take billions of dollars to build, but that had already been done by Visa and a long line. So he took three huge requirements where the other guys had spent the money, and then he combined him in a way that he didn't have to spend the money. And it's brilliant. I give him great credit for you. You have talked extensively over the last several days, even the last several months, about how Jeff Bezos is the best business leader you think we have right now in the United States about how Amazon is a brilliant company. And now you're talking about how it's one of five companies that take no capital to continue to build. How come you don't buy shares of Amazon?
WarrenStupidity. I was impressed with Jeff early. I never thought he could pull off what he did. And it was really. I mean, I thought he could pull off something, but on the scale that has happened. I mean, it's changed your behavior. You know, it's changed everybody in the office's behavior. And the remarkable thing about Jeff and everything else is he's done it in two industries almost simultaneously that really don't have that much connection. I've never seen any person develop two really important industries at the same time and really be the operational guy in both. And he's done a good job with the Washington Post on the side, just on it personally. But here you take cloud services. I mean, he, there was a Charlie Rose show on this that he did three or four months ago. He thought he would have two years a runway. He got seven years. You do not want to give Jeff Bachels a seven-year-head start. Before the competitors jumped in on cloud services. So the same time he's shaking up the whole retail world. He's also shaking up the IT world simultaneously. And, you know, I take my hat off to them. But by not buying shares right now, it suggests that you think maybe they're too rich,
[1:11:39]
Warrenor is it that you don't understand the company's valuation? It's a big valuation. It's very hard when you thought about something at one-tenth the price to buy a 10th. We do it occasionally. And, you know, you're talking now about getting multiples from the hundreds of billions. And but if you told me, that you were going to shoot me at the end of 10 years if a short worked out better than long. I mean, I would take the long side. I'm not buying any. But these are powerful, powerful ideas with big potential. And he's executed. And he's executed on it. And that's what you tip your hat to.
QuestionerNow, have you been in the process of looking for other companies?
Questionerback to your $95 billion. I thought it was $90 billion, you told me last week. It's $95 billion in cash and cash equivalents?
WarrenWe put our 10 queue over the weekend. And I think if you add up the cash every place. Now, I don't really count all of it that's regulated in this. But if you take the balance sheet and add up Treasury bills, cash and equivalence, and it goes up every month. It's higher now than it was on March 3rd 1st. And again, the arenas, you're looking for deals anywhere, but probably something north of $5 billion. dollars, the type that you really?
QuestionerFurther north, the better.
WarrenI'd like to be at the North Pole.
OtherOkay. Guys, we're going to have more from Warren Buffett in just a few minutes, including when we come back. We'll ask him what the most important factor is in determining market valuations right now. It's a question that we'll put to him right after this break. Good morning again, everybody, and welcome back to this special edition of Squawk Box. We are live in Omaha, Nebraska, with Berkshire Hathaway's chairman and CEO, Warren Buffett, in his first sit-down interview. in speaking to the Berkshire faithful, the 40,000 or so shareholders who convened here just across the street this weekend.
QuestionerAnd Warren, you mentioned something to me in the commercial breakback before, that there is one essential factor that will determine what you think about market prices and market valuations. What is that?
WarrenYeah, I can tell you the right question. I can't tell you the right answer necessarily. The most important item over time in valuation is, is obviously. obviously interest rates. I mean, if interest rates are destined to be at very low levels, not necessarily as low as they are now, but very low compared to 100-year averages or 50-year averages.
[1:14:15]
WarrenIt makes any stream of earnings from investments worth more money. I mean, if you're, the bogey is always what government bonds yield. Now you can pick your maturity. And you see it in real estate. Real estate yields adapt quite quite quickly and fairly directly with interest rates of an appropriate length. But stocks don't do it as much, but it's the same principle. Any investment is worth all the cash you're going to get out between now and judgment day, discounted back. Well, the discounting back is affected by whether you choose interest rates like those of Japan or interest rates like those we had in 1982 before Paul Volker took a sledgehammer to the economy. When we had 15% short-term rates in 1982, it was silly to pay 20 times earnings for stocks unless you felt that the world was going to change in a very material. Well, it's a huge bargain to buy stocks now if you knew these interest rates would stay at this level. And you could buy 30-year bonds. I mean, in Europe they've been selling 50-year bonds. So, I mean, people are making a judgment every day. I mean, And the yardstick is there. It's just a question of whether you believe the yardstick or not. But that is something we don't like to incorporate into what we'll pay for a business, but it is incorporated in the market. It's not fully incorporated in the market. The stock market is dirt cheap now if these interest rates were guaranteed for 10 or 15 or 20 years. And of course, a 20-year bond. You are, in a sense, making that kind of commitment. But that's the big thing. That's the big thing investors have to think about. When you start thinking about that, Ben Brunanke was on with us just a week ago on Spock Fox. And he talked about how he thinks interest rates are going to be much lower for a long time to come. It's kind of the new normal theory around 3% or so. Does that sound like something that you would buy into?
WarrenWell, it's something I'd consider. But nobody thought we were going to. And in 2009, nobody thought we would have a recovery like we've had in an employment coming back a couple hundred thousand a month after month. I mean, the economy is doing well now. And no, I don't think people thought we're going to have that for seven or eight years. And rates only inch up as much as they have. Now, in part, I do think that's because Europe is so low that the degree of difference you want to have from
[1:16:54]
Warrenthere and the consequences for the dollar and then the consequences for export industries, all kinds of things enter into how large a differential we really would want from. a place like Europe. But nobody thought Japan, if you go back 30 years ago, nobody thought Japan was going to have these rates, 30 years hence. And I didn't think in 2009 we would have these rates seven or eight years hence. Ben Bernanke said the same thing, that he didn't think rates would still be this low at this point. If there is something about this world that is going to cause interest rates to be very, very low, stocks will look very cheap and I will have passed up buying some businesses I should have bought. We've had a guest on who posited he thinks that interest rates will go back to 0% sometime in the next five years because he thinks we'll hit a recession. And when you realize how long it has taken us to build up, there's not a lot of dry powder there. It's not outside the realm of the possible. Well, we'll have recessions from time to time. But we had a recession when one rates were 15% short term, too. So I don't think anybody can predict them. That's the problem. I certainly don't think I can predict them. I obviously have range. in my mind and all sorts of things. The one thing I know is I don't like them for the standpoint of investing Berkshire's capital at this level.
QuestionerYou don't like treasuries, you mean?
WarrenWell, they're a big, big, big, drag on returns. And I will pay more for businesses when they are this low after I've sort of become used to this. I mean, I don't think it's unthinkable that they stay low for a very long time. And by low, I mean 100 basis points higher than where they are now. now. And it's the big variable for investors. I mean.
QuestionerYou said you have a range in your mind that you kind of keep out. What is your range that you're thinking out for how many years?
WarrenIt's not that good. But I would say this. Anybody that prefers bonds today to stocks is making a big mistake. I've been saying that year after year after year. Now, I won't say that under all circumstances, but it is ridiculous, in my view, for somebody to buy a somebody to buy a 30-year bond and some countries 50-year bonds and so on at these rates in preference to buying stocks. Stocks will bounce around a lot more and they can go down 50%. But a 30-year bond can go down 50% too at these rates. And bonds are a terrible choice against stocks.
[1:19:19]
QuestionerAnd I've been saying that a long time. And it's just dictated by mathematics. Okay, great. Warren, again, thank you for your time. We're calling this a meeting of the minds today. Three incredibly intelligent people who are sitting down with us who have expertise in a series of some of the biggest issues facing our nation today. Charlie Munger is the vice chair of Berthshire Hathaway. Bill Gates, the co-founder of Microsoft and the head of the Bill and Melinda Gates Foundation. Warren Buffett, of course, is still with us. And gentlemen, I was thinking that we could sit down and put all that brain power to work with some of the big issues that's facing. that's facing our country right now. You all have spent a lot of time thinking about these issues, investing money in these issues, and working on these issues. And I thought we'd start with health care, not only because the health care bill that was passed last week in the House, but Warren, you made some comments about that over the weekend at the meeting. And Charlie, you followed up with a few comments of your own. So I thought we'd jump right in when it comes to health care. Warren, you mentioned that when it comes to business, when it comes to the nation, but even for business, businesses, health care is more important than tax reform is because it's such a big chunk of GDP and such a big chunk of businesses' costs. Why don't you lay out what you think about where we stand right now with health care and what you think about the bill that was passed?
WarrenYeah, you'd probably hear more from business leaders about corporate taxes, causing them to fight with one hand tied behind their back in terms of foreign competition. Corporate taxes, a percentage of GDP have gone down from about 4% in 1960. percent in 1960 to 2%. So they've been cut in half as a percentage of GDP. But health care has gone from 5% of GDP to 17% of GDP, and business pays a lot of the health care costs. So you've lost 12 points, and there's only 100 cents in the dollar, but you've lost 12 points. Now in other countries, the most industrial countries, a number of them are also around 5% in 1960, and some of those have gone up to maybe 11 or something. to maybe 11 or something of the sort. But in terms of costs of manufacturing and really everything throughout the economy that gets related to health care, and health care is one-sixth of the whole economy, we've had a 12-point movement
[1:21:44]
Warrenagainst American business, and it continues. And I don't see anything necessarily in the horizon that would cause that number to be I think it's more likely to go up than down unless we change something fundamental. When something has happened to that extent, you better not count on reversing itself from natural causes. There's a reason why it's happening and you better attack the reason if you care about changing the course of the cost.
QuestionerCharlie, let's get your perspective on this. You are the head of Good Samaritan Hospital. You're the chairman of Good Samaritan Hospital in Los Angeles, so you know health care on a very first-hand basis when it comes to this.
CharlieThe whole system is cockamamying. It's almost ridiculous in its complexity and it's steadily increasing cost. And Warren is absolutely right. It gives our companies a big disadvantage in competing with other manufacturers. They've got single-payer medicine and we're paying it out of the company.
QuestionerYou've also said, though, that there are some incredibly good aspects about our health care system that you're better off being sick here than anywhere else. We have the best medicine at the time. and we invented 60% of the world's good drugs. You know, we're an amazing place, but if you don't get it up close, the amount of waste from over-treatment of the dying is just disgusting. It's a lot wrong with the system. How would you fix it?
CharlieI would go to some for some of Medicare for all. I would place it pretty hard to keep out the fraud. Which is universal health care system, essentially.
QuestionerYeah, with more anti-fraud. Yet the same thing. In the workman's comp, there's a lot of fraud and abuse in the workman's comp system. And the only way to keep it out is to be very tough on it all the time. And of course, the government's not very good at that. It's a good. What's the incentive for some employee for the government, fighting some poor guy with a broken back? Who's lying about everything? And so it's a very serious problem.
CharlieBut I think we should have single payer medicine eventually, and I think we should squeeze a lot of the fraud and fall off. a lot of the fraud and folly out of the system.
QuestionerYou're a Republican, so...
CharlieYes, but I'm not a normal Republican.
QuestionerHow would you get us to that point?
CharlieWell, it's very hard, but I think if they go to these cockamamie systems, taking care of all the insurances, it just gets more and more complicated.
[1:24:17]
OtherAnd there's a lot to be said for having a basic health care, like Medicaid, that's for all. Bill, you want to weigh in on that?
OtherWell, there's sort of two issues. There's how much money is there to help people with health care. And then are you changing the system so it's more efficient in some way? And it's a bit disappointing we don't have more ideas about bringing costs down. I think it's a super important problem. I think a lot of both politicians and non-politicians should come together on that. But the issue. of the taxes and access, which are also important, but they're getting most of the debate. So efficiency, even during the Obama years, was not the primary discussion. One of the interesting things is that Kaiser Permanente, a nonprofit bureaucracy, if the whole nation had Kaiser Permanente care, the average quality of the care would go way up, and the cost would go down. So some people are doing a pretty good job. What do they do? What is the secret? Well, they don't overtreat the dying, and they have very good internists and pediatricians that they hire right out of medical school. It's just a very good system, and the people who have the Kaiser Permanent Care like it. Charlie, do you worry that if we went to single-payer health care system, we would lose the good parts of our system?
CharlieNo, I think you would have an alternative system that people could use. We already have that. We have a lot of our best doctors have opted out of Medicare. care. They just go to concierge medicine, they just leave the system. We have various ways that people who want to pay more and have somewhat better care, they think. And of course we'd want that, it's a safety valve. And that's what Europe has. You can opt out and buy your own. You can go to some other country and get your medical care, or you can take the state. But nobody in any of these advanced countries, including Canada, has the least interest of giving up Medicare for Medicare. I mean, medicine for all. Warren, you pointed out. And it hasn't ruined their capitalism either. But Warren, like Canada doesn't have any capitalism.
OtherWarren, you did point out over the weekend, though, that our medical system subsidizes all those other nations. I believe it was you. Maybe it was Charlie. Someone said this over it. That in terms of innovation.
WarrenWell, I think it's true. I think somebody else may have emphasized that. But we get paid for it.
[1:26:54]
WarrenBut Bill would know far more about this than I would. But in terms of the. of the major improvements in medical care or medicines for 320 million people out of 7 billion. We've probably done quite a bit more than our share, but I defer to Bill on that. Bill?
OtherWell, it's absolutely true that the companies here in terms of inventing new procedures, drugs, vaccines. They've done a great job. Those are sold globally. You could say there's a small factor that because of the we go first and because of the way the pricing system works, that a tiny bit of our medical costs do accrue to the world. It's an industry in which the U.S. is strong and the number of jobs in that area have actually shifted into the United States instead of out. It's a bright spot. It's an unusual system, though. And the innovation and heavy research and all that is very, very, very, very. largely concentrated on coming up with better products, which we'd love to have. But you don't see them handing out any awards for bringing down costs. I mean, if you have a steel business or a retail business, I mean, you're trying to offer a better product all the time to your customer. You're also trying to bring down costs with a vengeance at the same time. And that, I don't think that exists in the medical business, and it's 17% of the economy. Bill pointed out that there are two ways of looking at this. One is you have to look at the cost efficiencies to bring down the prices. prices. The other is decide how much money you're going to be using to fund all of this.
QuestionerAnd Warren, you said over the weekend that your tax bill would have been 17% lower, had the proposed tax plan that the House has now passed been in place last year.
WarrenYeah. Based on the House bill, I'm a lot healthier now than it was a week ago, financially. They, if the bill were enacted as written, and I don't know all the provisions, but I do know this provision, and although it's received really a very minor amount of press, I just did my tax return a month ago. And my income tax was a little less than $4 million. And there's line 62, and there's $680,000 or something like that on there. And line 62 disappears under this bill. So I save $680,000 on a little less than $4 million. And I haven't done anything this week. I mean, I just watch people vote in Congress. And I would say this, if this elimination of a tax applies on net investment income.
[1:29:41]
WarrenIf you have, if a couple has $250,000 a year or more of income, I think it would be very interesting for the constituencies of every congressman that voted for that bill to ask question. Just one question, are you above $250,000 on your adjusted? income. And if you were, how much would you have saved from what you paid last year from this bill you just passed? Meaning that they are voting for a tax cut for themselves personally while they're... Anybody that has over $2.50 and has some net investment income, and the numbers get very big. I mean, I've had years when there have been a lot more than $680,000. But I'm $680,000 better off if everything else is equal just because of what happened this week. Now it has to go to the Senate, make it change the conference, and a lot of other things. But it was huge. huge what they did on cutting taxes for the rich in this. I mean, if there's one clear-cut message that comes out of that bill, it is we're going to cut the hell out of income taxes for the rich on investment income.
QuestionerBill, have you analyzed the bill, the health care bill? And do you agree with that?
OtherWell, Warren's correct. There's a 3.8% tax that kicks in at a very high level of capital gains. The Obama's surcharge. The Obamacare surcharge. And that goes away. So that's a super progressive tax that may not continue. It may too.
QuestionerYes. Because this has to go through the Senate and then be...
OtherRight. Right. You already have something like Medicaid for everybody. If you are so impaired, you need to be in a nursing home and you're out of assets, you automatically qualify to have your nursing home bills paid. And they don't let your doctor come by and walk by 20 beds and bill $40 to the government every three days. He's only allowed to come by and bill very seldom. We have a system that polices the caregivers and provides Medicare for rent and Social Security disability. If you're sick enough, you're total, you're in Medicare. We're, we've already gone a long way toward single-payer. It's not a revolutionary idea.
QuestionerWould you agree with that? Bill and Warren, do you agree with the single-payer idea?
OtherI personally do.
WarrenYeah, I think you do have to police it.
OtherYeah, it's got to be policed. I mean, you have Veterans Affairs that's like a Kaiser.
QuestionerNo, it's worse.
OtherOkay, fine. It's like Kaiser. I certainly agree. Kaiser is an exemplar as an exemplar of and they've gotten the incentive systems quite right.
QuestionerRight. It shows it can be done.
[1:32:40]
QuestionerThey're incentive systems, if I'm correct, or they pay doctors a salary. Right. And doctor does not get rich in Kaiser, but he has a very nice life. Right. How many people, don't they, it's more than 10 million?
WarrenOh, sure. Yeah. I mean, this is not a small system. But the doctor has a set number of hours. It's not working. What happens is they give the doctor a life. You know, you can be a woman doctor and you can work 50 hours. you can work 50 hours a week instead of 90. And they've got good people. It's a good system. Yeah, it's really a successor to the Health Maintenance Organization, which was not policed well, but it gets rid of the incentive for overtreating. Now they've done it and done it really well without any of the problems the HMOs had historically. Germany doesn't overtreat either. They just, they just, they just, they just, The system is just made sensible. When you talk about overtreating, you talk about the way that we pay per transaction. We let the caregiver, the hospital and the doctor, decide what should be done when they're getting paid for it. And naturally, they decide that a lot of things should be done. Instead of caring for the outcome to try and get patients healthier and better.
QuestionerIn fact, Charlie, you mentioned over the weekend a hospital that had incredible rates for heart surgeries. In Reading, yes.
CharlieI said that nobody goes through heart surgery better than the man who doesn't need it at all. at all. It's a good way of increasing your success rate.
QuestionerYeah. But can you expand for the people who weren't listening this weekend who didn't know about that? There was one hospital in particular. Yes. And the doctors thought they were doing the Lord's work. It shows the capacity of the human mind to the lute itself. Because they were doing surgeries on... Totally unnecessary surgeries. And nobody died because they weren't sick in the first place. And they were just huge volumes. huge volumes and the system didn't catch it. That is wrong. Our system should get.
WarrenOne of the guys who's good at this stuff, as he told, go on to Harvard Medical School. He's doing a lot of good in medicine. What types of things is he saying? Well, he wants everybody to use checklists and make fewer errors and not have perverse incentives. He was the one that blew the whistle on McAllen, Texas. The doctors aren't there were just totally abusing Medicare. They just cross-referred to everybody for
[1:35:06]
Warrena lot of unnecessary stuff. And so they were all getting paid very heavily. And that one little place was spending twice as much as ordinary places. And when Atoll blew the whistle on them, they stopped doing it.
WarrenWhen Charlie read that article. We need more of that. When Charlie read that article, yeah. Actually, you sent $25,000 to the New Yorker to give to the author of it just because you thought he made a contribution to society.
OtherYeah, he sent it back, and I finally got him to take it, so he gave it to somebody else.
QuestionerCan we shift to tax reform? And where you all think about this, how much time, if any, you've spent, Warren, I'm guessing you've spent some time thinking about tax reform and what you think needs to happen.
WarrenWell, corporate, let's start on the corporate. Just the word reform. I mean, reform is usually when your taxes are cut. It'll be tax change, but whether it's a better tax system or not, depends on how it's constructed. Well, our taxes are the cost. corporate taxes something that is a competitive disadvantage for American corporations. Not much, not much. No, I can't think of any business we're in where our tax rate puts us at a and we're in a lot of businesses, a significant disadvantage with foreign countries. For one thing, ours aren't as high as we think they are in many cases. They're not as low. Corporate taxes are two percent. Instead of paying 35 percent, many companies are paying much lower. Sure. And 2% of GDP is not a high by U.S. standards. And then when you compare it to 17% for health care, I mean, it's, you know, every business person is going to go there and say, our taxes are too high. And if they really try and make it revenue neutral, you know, my guess is it won't pass because the people who, for whom it goes up are going to argue against it harder than the people where it goes down. I mean, it's great for lobbyists and all that. So if they talk about it being, they always talk about it being tax neutral. Tax neutral is one way, but other people that we've talked to, including Stephen Mnuchin and others have said that, look, we have dynamic scoring that can bring this in. And as a result, we think we can bring taxes far down and not necessarily have a pay for as you go along with that.
OtherWell, of course, everybody's gotten the idea based on the world success in printing money and not paying too much of a penalty. Everybody has a notion you can just cut taxes and you don't have to raise revenue.
[1:37:35]
WarrenThat is a very dangerous thing to do. The fact that it's worked pretty well, some of the time, does not mean it always will. Dynamic score. I've never seen anybody in his dynamic scoring that says that things will come out worse than just indicated by the figures. And clearly sometimes it does. I am very suspicious of dynamic scoring. Do you agree that there's some sort of a laffer curve, though, where you raise taxes to a certain point and it is a law of diminishing returns? You get taxes to 100 percent. Actually, some people would work done by very few. But that is not an argument for changing my taxes at all, you know, except upward. It's everybody that wants its cut in taxes, they hire some academics. And they look for dynamic scoring and they say the country will really be better off if I pay less sex. And it's very, I mean, I don't blame them, it's understandable. And so be very, very, very suspicious of dynamic score.
QuestionerIf we had a simpler tax code, one that would not allow for so many loopholes, one that would not make it worthwhile for big companies to employ legions of accountants to try and make use of those loopholes, would that not be better? If it did nothing other than just even it out so that everybody's paying the same. If you free up labor that is now engaged in a lot of senseless procedures and put them to work. work in a market system and things that the market demands, that is a plus.
WarrenThere's no question about it. Well, there's another issue which is the certainty of the tax code and leaving it alone. If you create, if you're constantly switching and say, no, this switch may have gotten rid of a few accounts now, this switch gets rid of them, then you are getting, everybody has to learn the new stuff and uncertainty is not good. You know, you'd like, once you picks a tax system, to leave it alone for a long, long time.
QuestionerWe've heard business leader after business leader, though, say that this is an uncompetitive situation. If you're an American manufacturer, you have things that are coming against you. If you are a technology company, maybe you have a lot of money that you're keeping off shores. Bill, do you think that it would be better if the tax system were reformed? You've been a little quieter on this.
OtherI don't think that the success of the technology sector will be improved by some tax. change. The tech companies are not starving right now. And this only comes up when
[1:40:13]
Questioneryou have profits, and these companies have very high profits. So it's not like we're going to be stronger in the tech sector by making owners of those stocks richer. Apple has a quarter of a trillion dollars that it's keeping much of it offshore. Would it make sense to have that money brought back to the United States? Does it matter?
WarrenI would say yes. It does matter. And I don't see why. We don't want people artificially shifting money to some foreign place to avoid U.S. taxes. But it's not an artificial if you're really making the money in the foreign place and they don't have high taxes. Why would you do we care if somebody makes a lot of money in some foreign place and brings it back at a low tax? I think there's a lot, having all this money pile up abroad and then borrowing against it artificially. It's a concompanies system. So how do we fix it? Oh, I think they'd bring it back if you had it one time forgiveness and I don't think that would hurt anybody.
CharlieThe tax holiday, we tried that in the Bush administration. Yeah, it worked. Work temporarily. Yeah. But if you have a holiday, then that encourages more investment abroad, particularly in artificial places. To wait for the next holiday. We'll bring it back later on. I mean, there's some countries that are very small. countries that are very small countries that have an awful lot of businesses have done in. And if the consequence of doing that is you get a big break occasionally, you're going to try and figure out how to do more of it. It doesn't increase investment in the United States. It increases investment in some place where you still got a low right and maybe we'll get it back again. I'd go down, come down hard on all that stuff, where you shift some patent that was invented here and send it over to Liechtenstein and collect a lot of patent royalties. It's it's gaming the system. But assuming you actually have made the money abroad and the taxes are a broader low, I don't see what I should impose a big tax on them when they bring it back.
QuestionerCharlie, you would be a pretty strict dictator if you were running things, wouldn't you?
CharlieHe certainly is at Berkshire. I don't like, if fraud runs rampant, saying, Irwin's comp. It just feeds on itself like cancer. So you've got to constant. We've got to constantly police it. A lot of people just won't do the work. It's a huge mistake because you're ruining your country
[1:42:40]
Warrenas everybody gets sucked into the fraud and they do it because everybody else is doing it. So I'm a great believer in coming down hard on that stuff. Way harder than the government does and other people do.
QuestionerKind of like Singapore?
WarrenYes, well, I'm a big admirer of Singapore. You're right about that.
QuestionerCanning. He's also in charge of public relations at Berkshire. Bill, just in terms of...
OtherThat canning actually leaves the scar. They're quite serious.
QuestionerI never noticed that. They haven't lived in the Mungerville. Bill, very quickly, just the idea of a constant tax code, as you mentioned. A tax holiday doesn't necessarily lend into that idea. And I'm guessing you're getting at the idea that American businesses want to know what the rules of want to know what the rules of the road are before they will invest on a long period over many, many years.
OtherYeah, a lot of government policies, including taxes. You want great predictability. And so it'll be interesting to see what they do. The overseas money, although it's kind of a complicated thing, it's not like when that money comes to the U.S., people will start building factories that they weren't building otherwise. It doesn't change the profit potential of capital investment.
QuestionerThey're more likely to do something with it.
OtherYeah, but someone was already lent to us, or it's lent to XYZ Corporation. In other words, when companies go to the market in the United States, foreign subsidiaries of companies that have so-called trapped cash buy those bonds. I mean, so it actually goes from an industry that doesn't have much use for the capital for the capital to somebody that really does have some plans for the capital under the president system.
QuestionerAll right. Gentlemen, if you'll bear with us for just a moment, we're going to slip in a quick break. Welcome back to a special edition of Squawk Box, where we are live in Omaha, Nebraska, with Charlie Munger, Warren Buffett, and Bill Gates. We are calling this a meeting of the minds and trying to tackle some of the big issues facing our nation and our world today. We've already spoken about health care here in the United States and the tax reform that's underway. Bill, I thought we could talk a little bit about the budget process because this is something that matters to you at the Gates Foundation. You spend, what, about $5 billion a year in programs trying to improve people's lives. I think there's something like 122 million children's lives that have been saved through vaccinations
[1:45:25]
Questionerand nutrition provided by the Gates Foundation over the years. When we start hearing things about cuts in the State Department, an 18% cut to the State Department budget, what does that mean? What would that happen to the projects that you have worked on over the years?
OtherYeah, what's amazing is the success that our foundation working in partnership with the U.S. and others has had at improving health and that helps stabilize these countries so that they can get out of their poverty trap. It also lets us see any health problems like a pandemic coming out of those problems so we can protect Americans from that. There was a proposal that the State Department would have been cut 28%, which for these health-related things would have been a much bigger cut. And so we're glad that, you know, looks like the Congress won't make those cuts because they don't think we're so weak that we need to withdraw the malaria bed nets or the HIV medicine. I'm very lucky that I get to go and see the great success. And then, you know, say to the U.S. taxpayer, hey, we are performing miracles here. 122 million children's lives saved, over 10 million people who are alive because we help provide the drugs, the HIV drugs, the PEPFAR program that started under President Bush. So I think we're strong enough to help stabilize these countries, see the pandemics early. And I think the Congress will maintain these investments. So I'm, you know, I think that's very smart.
QuestionerWe are getting close to a goal that you've been after for some time, which is the eradication of polio. How many cases this year?
OtherWe've had five this year. Every day I get up, you know, check to see if there's a new case. Right now, all the cases are in Pakistan, Afghanistan. We're still making sure in Nigeria where Boko Haram is, we're still a little worried. have we missed some cases there. But those are the two hotspots. And so with luck, this will be the last year where we have any cases.
QuestionerIf you go a year with no cases, then it's declared eradicated? How does that work?
OtherActually, they make you go three years, which is wise, because they want to make sure you don't miss any. And so we'd start that three o'clock at the end of this year if things go well, which right now is on track. I'll be going to Rotary for their hundred anniversary in June in congratulating them because they've been very involved in this. And if their workers have volunteered, they've raised resources, they've spoken out there.
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WarrenOne of the big heroes in this whole effort. You know, there was a big shift, I think, in overall thinking. The election, this past election reflected that. Americans are worried about their own jobs. There's big chunks, swaths of the country where they feel like jobs have left. They have not been replaced. and we talked about this little earlier about job training programs that haven't been there. But people who have suffered through these issues of job losses here in the United States probably will look at it and say, we need to take care of ourselves instead of looking abroad. Charlie, what do you say to people like that?
CharlieWell, there's a long tradition of Americans going after the worst poverty and disease abroad. John D. Rockefeller was the most philanthropists that ever lived. And Bill is following his example, place after place. Rockefellers saved more damn lives. And of course, Rockefellers helped bring in the miracle grains. Private Philanthropy has a good record. And what I like about what Gates and Buffett are doing, is they're tackling stuff that other people don't.
QuestionerJoe has a question as well, Joe. It's on this topic, and it's for Bill Gates. I promised I'd ask this question, Bill, for. a gentleman that runs a school in one of the poorest parts of the world. And I think you've kind of answered it already. It's hard to, you know, if you have health concerns, it's hard to have education. But his point is that he wishes that you would focus even more on education. He says that poverty is a bigger concern than health. And the problem is, if the economy is too small for the number of people in it, there's no way to do anything about, you know, these lives that these people have unless you grow the economy. So his point is that you get a better return from education than maybe from health care. But I think you've already answered it. It's hard to get an education if you're dealing with health problems as well. It's a chicken and egg thing, I guess.
OtherThat's right. You really need both. If a kid is malnourished, they're not developing either their body or their brain. So first is health, then it's education. education, then third is a government that creates opportunity. And when those three come together, you get out of this poverty trap. And so the U.S. government funds we've been talking about, some of those do go to international education. And that's why a lot of aid recipients like India, Brazil, Mexico, even South Korea in the 1970s,
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Questionerthey have gotten out of poverty, and now they've turned around and they're contributing. We need to do that same thing for the poor countries in Africa. Okay. Warren, you spent, I believe, $2.9 billion that you gave back to the Gates Foundation last year and the other four family foundations that you have. This has been several years, many years that you've been doing this. I know you believe very strongly in the foundations cause, trying to make sure that all people have healthier and improved lives. But when you start thinking about it, when you start thinking about that, it's massive amounts of money that you all are spending on this. But why is the government money so important to go along with this? Can philanthropists just do it by themselves?
WarrenWell, $5 billion is a lot of money. But if you're talking about percentages of budgets, Bill can give you better figures on this. The United States actually lags behind a number of countries in terms of the percentage we use for foreign aid and that sort of thing. But the answer is, we were, all three of us, we're so lucky to be born in this country. I mean, it's incredible what has been accomplished here. And that can be, maybe not replicated 100% around the world, but if you believe every life has equal value, I believe that, and Bill believes that, Melinda believes it, my children believe it, the question is what can you do? to push that along. So not only does every life have equal value, but every life has equal opportunity. And health enters into that obviously huge. Governmental policies do. Education on health is the one that you can see the impact on. Bill can give you the figures on the number of kids five and younger that die every year in the world. It's been cut in half in, what, 30 years or something like that, Bill? his goal is to cut it in half again. I mean, just think of the difference. I mean, if you have children of your own, you know, how would have been if they'd lived in some terrible part of the world? So it just seems obvious that you help people around you and you help people around the world.
QuestionerBill, you're a bit of a statesman. You travel the world, bringing this mission to other countries. You also probably spend some time in Washington. What have you, what have you thought in terms of, in terms of what Washington is thinking these days about foreign aid missions?
OtherWell, the history is the U.S. has been generous.
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OtherNot at the level of other countries, but because we have a large economy. In absolute, we give the most. So it's $30 billion a year going to help these poor countries. Germany and the U.K. are tied for second at about $18 billion each. And so the scale of government resources is what lets us get the bed nets and the HIV medicine out there. Philanthropy alone couldn't do it. It can try out new things in an innovative way, but only that government-level generosities let us achieve these incredible goals. And as I've met with the Congress, I've been impressed at the commitment to continuing this by both parties.
QuestionerHave you spoken to Rex Tillerson, the head of the secretary, criteria of state.
OtherI have, and I'm sure I'll be talking with them a lot more because we're in partnership with the part of the State Department called USCID that is delivering that 30 billion. And we're always getting smarter about how we measure it, how we do it in a smarter way, and so he'll be a key partner for us.
QuestionerOkay, we're going to slip in a quick break right here.
OtherWelcome back to Squawk Box, everyone. We are live in Omaha, Nebraska. Omaha, Nebraska this morning with Warren Buffett, Charlie Munger, and Bill Gates. And we've been talking about a lot of different issues this morning, but one thing, gentlemen, our viewers are always keen to hear, are your insights into the markets, where you think about things. Warren already told us this morning that he thinks interest rates are the one key factor that determine whether markets are valued too rich or not. And just wonder if you two could add some comments to that. Bill, what do you think about the market's valuation these days?
OtherWell, the multiples are fairly high. fairly high, and that's because, as Warren says, it's all benchmarked to the interest rates. So if interest rates go up a lot, you'd expect some retreat from these levels.
QuestionerCharlie, when you look around, is it hard to find deals these days? Is it hard to find opportunities?
CharlieOf course it's hard. We have an army of people in frenzied finance, and we've got an army of people in so-called so-called shadow banking who are financing these people buy any companies they want with liberal leverage. And of course they pay high prices. They get part of the upside and they don't take any of the downside and they get fees off the top. So it's fee-driven buying and it's very extreme. Of course it makes it hard for us to buy companies.
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QuestionerDo you find more opportunities in the United States or elsewhere right now?
WarrenWell, we're not, we have long periods and we don't know much anywhere. We're thinking of space now. That's why we have so much in the way of Treasury notes. $95 billion, roughly, cash and cash equivalents in work. We don't like that. But there are times in finance when people just throw the money away and so it was confetti. I think there's a lot of idiotic deal-making and venture capital now. And there's a lot of idiotic deal-making and venture capital now. There's a lot of idiot. recession. I think a lot of this levered finance would present a lot of agony.
QuestionerDo you think so I don't think that the future is just guaranteed to be all rosy. Do you think a recessions in the cards or?
WarrenNo, I don't think any of us know. Anybody that isn't modest about his theories about economics hasn't been paying attention in the last six years. People have been utterly surprised in things they deeply believed or fixed in a granite weren't fixed at all. Who would have guessed that we could print all this money and not have any inflation?
QuestionerDo you think we've gotten out of this or is this still a movie that has yet to? Or do you think that this is still a movie that we haven't seen the ending on yet?
WarrenI think it's always a movie where you haven't seen the ending. One thing you know is there'll be good stretches and bad stretches in the future. All three of you are in the positions you're in because you have had phenomenal successes in investing and in business. But you didn't get there without some hiccups along the way. When we got ahead, we're pretty conservative. I asked this just because Warren has talked about his worst trades in the past. And Warren, I believe you said it was Berkshire Hathaway itself. It was your worst trade.
WarrenYeah, but I have plenty of other competitors. The three basic businesses, there are three companies came together for Berkshire, actually, diversified retailing and blue chip stamps were two others. And the base companies of both of the other two's totally failed, disappeared. So we're three for three in terms of our building blocks. And we thought they were okay at the time, didn't we?
QuestionerWell, we bought them so cheaply that we could return them more money than we paid. And then we took the money and bought these other companies. So it wasn't as though we lost big chunks of money.
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WarrenIt's just that it was such a double. It was such a dumb way to do business scrambling around to those unfashionable dying businesses. Textile mills in New England. The power costs in the south on the TBA country were 60% lower than they were in New England. Textile is a congealed piece of electricity. What kind of an idiot would go into textiles in New England? The guy on your right.
QuestionerYes. Charlie, if you had to go back through the years, what would you quantify, as your worst trade that you've ever made?
CharlieWell, I went way back. I could find your trades when I levered a bunch of convertible bonds. You know, if you go back to the very earliest munger struggling for rationale, you'd find some dumb trades. Every smart guy is tempted by leverage.
WarrenYes. And some of them are broken by it. And it's somewhat capricious in terms of which ones get broken. Would you say, Charlie?
CharlieSure. And Charlie came close.
QuestionerIs there one that stings in particular?
CharlieWell, every failure stings, it took a long time. I made a tech company investment. And we damn near went broken. We hovered on the edge of a precipice for about three or four years. And it was agony. And it was a lot of money to me at the time. Now we scrambled out of it with a pretty good profit. But it wasn't the world's smartest investment. And it took a lot of intelligence scrambling to rectify the situation. I'm not looking to repeat the dumb decisions that got me there. We'll find new ones.
WarrenYeah, we will.
QuestionerPhil, how about you? What's the worst trade you think you've ever made or one of?
OtherWell, my expertise, our purported expertise, is more in software. And so things like my role in not having Microsoft lead in search or not lead in the phone operating systems. Or in the cloud. Right. We were number two there. We started five years late. Yeah, so those are the ones that I think about at night, more than stock trades. I do have a heavy weighting in terms of the investment team I work with in Mexico. So we're not looking too smart right now, but I'm optimistic that will turn around quite well.
QuestionerAndrew, I think you have a question as well?
OtherThank you, Becky. Really, this question is for Warren. It comes from a number of questions. shareholders who sent in emails after the annual meeting who said that we, meaning Becky and I and Carol, missed asking you directly what your views were of Donald Trump and his performance as far as the president when it relates to the economy.
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WarrenSo I thought I would just ask it straight up. Well, I don't think he's had an effect on that much of an effect on the economy yet. And I said a year ago at the annual meeting, I was 100% for Hillary and did a lot of fundraising raising and all of that sort of thing. And discuss to some of my friends, I said, I thought Berkshire would do fine under either person as president. And now, that doesn't mean you can't have recessions under either one. But the president is probably overemphasized. Presidency is the most important job in the world, but it's still overemphasized in its relevancy to stock market fluctuations or even business prosperity. business prosperity. We'll see how all plays out. But I do not make investment or business decisions based on who is president or who I think is going to be president.
OtherWarren, one follow. Have we ever made it? Oh, excuse me. Okay, go ahead. No, no, no.
QuestionerOne follow-up came from another shareholder who asked, given, given the, well, I'll read it to you, given the many CEOs that have been supportive of Trump and it seemed to have his ear now as president, do you think that you're supposed to? support of Hillary Clinton has had any impact on Berkshire's ability to influence policy?
WarrenNo, I have never called the president in my life, never. And I've never really sent messages to a president to a cabinet member or anything of the sort. So, and obviously I've not done so with Trump either. So our, I've never, Berkshire Hathaway parent now, at the subsidiars where they have the subsidiars where they have specific interests in railroads or utility. They've employed lobbyists, I know they have, and they've made political contributions. Berkshire Hathaway Parent has never, to my knowledge, employed a lobbyist and certainly has never made a contribution in 52 years to a political candidate from the dog catcher up to the President of the United States. My idea is that generally there's way too much hatred in American politics, and the parties hate each other so much that they both get quite irrational. And I try to avoid that kind of dense hatred. Why should you expect perfectly rational behavior from a politician, whether on the left or the right? And what is so constructive about this miasma of hatred, which you see all the time? It's quite counterproductive for the country. And all these politicians are partly right. I think Trump was exactly right when he said he ought to get along with China and he stopped talking about trade all the time.
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Questionertrade all the time. He frequently does some learning that's quite admirable. In terms of learning, gentlemen, the three of you have spent an awful lot of time together, and you learn from your mistakes, but I guess you also learn from each other. Is there something that you can say that you've learned along the way, and Warren, why don't I start with you?
WarrenWell, I'd be crazy around people like Charlie and Bill and wasn't learning. I mean, that's been the part of the great fun I've had with you. the great fun I've had with both of them. I've known them now both a long time. And when we have the annual meeting and Charlie sits it down next to me, I'm going to learn something during the ensuing few hours. And the same way with, when I met Bill, I think we spent about 10 or 11 hours there and we were regarded as antisocial by the governor of the state of Washington because we wouldn't come out. So I can't think I'm much more fun than learning from other people. These guys are, you know, they're unlimited resources in that way. They're much broader than I am. And so I've got way more to learn from them than they have for me. And I take advantage of it.
QuestionerWhat did you learn from Charlie yesterday sitting next to him?
WarrenWell, I learned from Charlie. Charlie was... Or two days ago, I should say. I know he hasn't. I'd have to go over it, but I'll guarantee you I did, Becky. Just this morning we're talking about, you know, essentially Kaiser. essentially Kaiser. I mean, these are things I know something about, but it helps when I hear Charlie articulate thoughts. I mean, it helps when I hear Bill articulate thoughts on what could be done to improve the world.
QuestionerBill, how about you?
OtherWell, it's been really unbelievable for me to have the friendship first with Warren and then with Charlie as well. Because they come at things from more of an economic business point of view and I'm more on the technical side, the fact that we often see things. the same way is kind of amazing. And the world's unfolded in all these surprising ways that take the financial recession. People still don't understand that, but as I sit and talk to the two of them, I get a sense of, okay, what would make that happen again? Also, even beyond numbers, just the way they think about people, the way they think about integrity, setting an example. I am a much better manager because I've known that. because I've known the two of them.
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QuestionerCharlie, you mentioned over the weekend that your wife wondered why you were spending so much time being so impressed with a young guy, Warren Gumpet. With a crew cut, it wouldn't eat the carrots. Or broccoli or spinach, your brussels sprouts, or all that other stuff.
CharlieNo, I just told her that's a very unusual young man. The wonderful wife that they tried. She wasn't automatically in favor of her crew cut young man. There's only do everything. everything, operating from his sun porch. She came to appreciate you, but it wasn't immediate.
QuestionerWell, I appreciated her immediately. With better reasons to have you. What have you learned from Warren and from Bill over the years?
CharlieWe've all learned a lot from each other and from the world. It's amazing having worked so hard to learn how much we don't know. We don't know what's going to happen to inflation. inflation five years out. We don't know whether we're going to have another recession. We know we're going to have another one just went. Yeah. We don't want to be another something, yes. And I do have one, my only controversial idea apart from my notion, that we'll eventually get single-payer health care. And that is that my fellow Republicans that want to take away all this regulation of the major finance, I think that's bonkers. I think that if you're using the government's credit, to maintain your deposits, you should behave in a pretty careful, standardized way. Let the people want to swing for the fences get in a different form. But I don't think we want our too big for fail places swinging for the fences. The arguments... I think they've got a duty to behave conservatively. This is Berkshire behaves conservatively. We could have made so much more money with no trouble by being just a little more leverage. Do we really miss it? I don't think that... What difference is? Does it make whether Warren has another few million dollars?
QuestionerThe arguments in favor of rolling back some of the regulation on the banks are that as a result, it's tougher for businesses to get access to credit, it's tougher for consumers to get access to credit, and that in turn slows down the economy, and hurts consumers and businesses along the way.
CharlieYeah, but they like the frenzied finance, some of the normal finance they worry about. It is true that some of the new regulation has taken banks out of finance. leveraging buyouts directly. And that we have shadow banking instead to do that. I think that's fine. What's wrong with the shadow banking?
QuestionerWell, because you waited for the last two minutes for that controversial thought, we don't have more time to push you on that, so we'll let you have the last word on it. But Warren, Charlie, Bill, we want to thank you very much for your time today. We certainly appreciate it. And we appreciate your generosity with your time.
OtherThanks for having it.
OtherThank you.
OtherThank you.