OtherLet's get straight to our Becky Quick, who is live at the annual Glyde luncheon in Midtown Manhattan with a very special guest. Becky, take it away.
QuestionerHey, it's Sarah. Thank you very much. Yes, I'm at Smith & Wollinsky in Midtown Manhattan, and we are here with a tourist today. Warren Buffett, the chairman and CEO of Berkshire Hathaway, is here to pay off on a lunch that was auctioned away for Glyde. And Warren, thank you very much for being here today.
WarrenThanks for having me.
QuestionerI know that this lunch is very important to you. This time around, the auction went for $2.679 million for this lunch today. Over 18 years that you've been doing with this with Glyde, you've raised over $25 million. It's a little unusual for you to focus on a charity like this because you have given so much to other foundations that give away money. Why is this charity so important to you?
WarrenWell, it's run by a very special man, Cecil Williams, who in the early 1960s, was assigned as a minister to a a church that was on the way down. It was in the tenderloin district of San Francisco. It had about 110 or 20 white parishioners, and Cecil was black, so the 120 went down very fast when he arrived there, and so he started from scratch, and he built a remarkable church, but really a remarkable social organization. He helps the people that the world has given up on, and he never gives up on anyone. There was that movie, The Pursuit of Happiness with Will Smith that showed the glide operation. My wife told me a lot about Cecil, and I thought this sounds too good to be true, and I'm a suspicious guy by nature. So she didn't sell me, but then she took me there one time at the glide, and I got to meet Cecil. I got to see what happened with the kind of people he was helping and how he was helping him. They served 700 and some thousand meals last year. And they really take people who have hit bottom and help bring them back. And he's been doing it for decades. And he's a remarkable man. And if we can help out and raising some money for him, I enjoy doing it.
QuestionerThat's great. I was wondering if we could talk a little bit about another area of the country that is in pretty dire straits right now. That's Texas, Houston specifically, and now Louisiana, as the rain continues to fall from Hurricane Harvey. I've seen some pretty enormous estimates of damage. And obviously, the human loss has been heartbreaking. What's your sense of this storm of the damage that's been done here?
[2:37]
Ajit JainWell, it's sort of unbelievable. I saw a figure the other day of 14 million, 14 trillion gallons of water being dropped from the skies. That's equal to 2,000 gallons of water for every man. woman and child on the planet. I mean, so it's, it's staggering. And the insured loss will be large. There'll be a lot of uninsured loss too, because flood, a lot of people have coverage with the national flood operation, but in the case of our particular company, we write about 10% of the auto insurance in Texas. So if you have comprehensive insurance, which covers flood, and about 70% of the people who buy auto insurance get that. You may very well have a total loss. We probably have 500,000 or so cars insured in that area for GEICO, which would be about 10% of the total. There probably be 5 million cars in that area. And we don't know at this point, but I wouldn't be surprised if we had 50,000 losses, and most of them will be total losses. That number is about the same as we had in Sandy. But our market penetration up here in New York is higher than in Texas. But we have to get tens of thousands of cars in there because a person's got enough trouble with their house and everything else, but they need a car. And we want them to have a full tank of gasoline, so we've been taking on big tanker's on gasoline. It's how you perform at a time like this that really defines whether your insurance company is doing the right job.
QuestionerYeah, I have seen some estimates of losses. J.P. Morgan was suggesting maybe $10 to $20 billion in insured losses. The CEO of Farmers was on our air yesterday and suggested that it could be $150 billion in uninsured losses. Do those sorts of numbers make sense to you? How much of a field do you have for this?
WarrenWell, nobody has too good a field, but those don't strike me as silly in any way. There will be a high proportion of uninsured losses to insured losses compared to most events. Because there's just a straight hurricane, everybody collects on their homeowner's insurance. But fortunately, they did have some warning, a fair amount of warning on this. So there was a lot of evacuation that took place. But it's just got to be devastating. We have six furniture stores, star furniture in the Houston area. And I was with those people yesterday, the day before yesterday. And they hoped to open up on Saturday. But it's, you know, the effects of this are going to go on for a very, very long time.
[5:30]
QuestionerWhat other exposure does Berkshire have, aside from Geico, aside from some of the furniture stores that are there?
Ajit JainNot like we used to. We used to write a lot of what we call Supercat. In fact, we were the biggest writers of Supercat some years ago. And then they didn't have any hurricanes for a long time. It's been 10 or 11 years since a hurricane hit land in the United States. And you can go back to 1840 or so, which is the longest. record we have. And there's really never been that long a period without a hurricane coming ashore. So the rates kept coming down and down and down and down. And the wind doesn't know what the rates were. So if you get the wrong rate on an insurance, you're going to lose money over time. And so as the rates went down, we got out of the Supercat business pretty much entirely. So it does not hit us big in reinsurance like it was. would have been 10 years ago.
QuestionerIs that part of the problem with the National Flood Insurance Program that is looking at some massive amounts of debt that it owes to the U.S. Treasury, something like $25, $26 billion.
Ajit JainYeah. The problem with flood insurance is that the only people that buy it are the people that are going to need it, where it's going to happen. You know, if I have a house that's higher up in Omaha, I'm never going to buy flood insurance. So you don't get the spread of risk that you get with auto. or homeowners. Nobody knows what a fire is going to hit a house or something of the sort. That's random. But it's not random on floods. And so people that live in flood planes are the only ones who want to buy flood insurance. And the normal insurance industry can't take care of it when you get adverse selection like that. So the government stepped in. They're already in the hole before this happened. And there'll be a lot further in the hole when this gets through.
QuestionerUsually what happens after a hurricane hits land like this, though, rates can come back up for insurance. If that's the case, would you start insuring again?
Ajit JainI don't think they'll go up that much. But if Supercat rates get to where we think that the odds are in our favor, we'll write it. But it's been five or six years since we've written in a real amount of Supercat here in the United States. The rates just keep going down and down and down. And there's more and more houses on the coast and they're worth more money. And there's been a lot of money come in from outside the insurance industry with cat bonds.
[7:58]
QuestionerSo it has not struck me as a good business in recent years. Let's talk about the potential impact on GDP. We had Mark Zandi on today, and he suggested that it would probably not be a massive impact on GDP. Would you agree with that assessment?
WarrenWell, yeah, I would say it. I don't think it would be a full percentage point for a year or anything like that. But it has a real effect. It destroys wealth. And if there's 150 billion or something of uninsured losses, that's real wealth. But we are a very wealthy country and we create wealth of them at a big grade, too.
QuestionerLet's talk about GDP because we did get a second quarter read on the second quarter GDP today. It was 3% and that was quite a bit better than people had anticipated. Does this feel like a 3% GDP economy to you?
WarrenNo. It's been about 2% a year now for, since the volatility. 2009, eight years. And it's been remarkably close to that most of the time. The way they report those quarterly numbers is they take the quarter and change and multiply by four. It's not year over a year. So it gets a little tricky that way. If you're off by a tenth, it makes it four tenths in the annual figure they report. And with seasonal adjustments and everything, you never want to take any quarter to seriously. I would guess we're in about a 2% growth economy now. And as I've said, every now and then we think it's accelerating and every now and then we think maybe there's a double dip or something. And it just seems to be a couple percent. And certain industries will pick up quite fast. The auto's caught on faster than homes, but now they're tailing down. But 2% is not bad, incidentally.
QuestionerNo. 2% will make, if we had 2% for a generation 25 years, you would have a 19,000. dollar GDP gain per person in the United States. It's not bad, but how do you explain a tenure that hit 2.1% yesterday?
WarrenHow do I explain what hit the 10 year, no, hitting a yield of 2.1% yesterday? If I had known that was coming, I'd have done a lot of things that were intelligent five years ago. No, it's it's sort of unbelievable that rates have stayed down. I mean, it's not what anybody expected, at least I didn't expect it and the other people that with Berkshire didn't expect it. And, and it's, you know, I can remember when I was at Solomon in 1991, and they thought that the surest trade around was the short that Japanese 10-year bond because you couldn't have
[10:37]
Questionerraised that low. And 26 years later, those people are still licking their wounds. They used to call that the widow maker that trade. You know, Warren, let me ask you about North Korea, because I know that this is an area that you've had a lot of concerns about. President Trump tweeted this morning, and he said, the U.S. talking to Korea and paying them extortion money for 25 years, talking is not the answer. What do you think about that and how concerned are you about the situation right now, given the missile launch that went over Japan this week?
WarrenI've been concerned since 1945 when the first atomic bomb was used. We have developed over these 72 years since August of 1945 the ability to, around the world, other people who have helped the ability to almost destroy civilization. And it's the only real cloud on her horizon. I mean, we've got a million problems always in the country, one sort or another. They get solved. This one is the ultimate problem because if Kennedy and Khrushchev hadn't behaved well in the 1960s, there might have been millions of Americans killed. Who knows what can happen? And you have people. around the world. You have individuals, you have groups, and you have maybe a few nations who would like to inflict enormous damage on us or others in the world. And we can be successful 99.9% of the time in thwarting those efforts, but it's a worst case problem, and the damage can be huge. And North Korea is a classic example. I mean, here is a relatively poor country. poor country spending a lot of their funds on developing an ICBM, maybe that can hit the United States. Well, that doesn't make any sense if they're doing it just because they like to play with thinker toys or something. And the more people that have that have that ability, the more generations you go through of different leaders, you know, the more likely is that eventually something happens. It's the equivalent of what's happened in Texas in the last week. week, something that's a very remote probability. You roll the dice enough times and something finally happens. And North Korea is, who knows what's in the mind of that fellow. And who knows what will be in his mind five years from now. It's a more dangerous world, obviously, as more people get those weapons.
QuestionerWarren, I know we're tight on time today. Jim Kramer has something that's called the Lightning Round. And I wonder if you'll play Lightning Round with me for some of your stockhold.
[13:20]
Questionerfor some of your stock holdings so we can run through some of these. First of all, shares of Apple. You're the largest shareholder in Apple.
WarrenI'm not sure we're the largest, but we have two and a half percent.
QuestionerTwo and a half percent. And you have been very positive on this stock. Do you continue to look at it as a very positive holding? What are your thoughts on it and have you continued buying?
WarrenWell, originally about 10 million shares of Apple Excuse me. Yeah. Originally, about 10 million shares were bought by one of the fellows in the office. Todd or Ted.
QuestionerTodd or Ted.
WarrenAnd then I looked at it, and then I bought considerably more. In the last quarter, the one we reported here not long ago, June 30th, he sold some of his shares. I bought more than he sold. Our overall holdings went up, but his holdings were reduced by about two-thirds or thereabouts. So there was a net gain for Berkshire, but that was composed of the fellow who bought it, deciding he needed money for something else. He manages 11 billion, but both of the two manage about 11 billion that worked for me. But that's all they manage. So when they get some new idea, they have to sell something. to sell something. I've got a lot of excess money around. So he decided that he wanted to go heavier into something else. But I've never sold a share. And I've bought, I've bought stock.
QuestionerAre you continuing to buy?
WarrenWell, I don't think I'll tell you that much. But I certainly was buying last quarter and I don't pay attention to the calendar when I'm buying.
QuestionerWell, let's talk about another holding. Maybe we'll try this one more time. On the Flipcoin, IBM, the last time we had talked to you, you had sold many shares of IBM. Are you still dubious about IBM's recovery process?
WarrenWell, they may well, do extremely well in the future, but I was wrong in my original analysis. And, you know, that's my fault. So five or six years ago, I thought that their prospects were going to be better in the next five or six years than they turned out to be significantly better. And so I decided that that I had made a mistake. That doesn't mean, sometimes I make two mistakes. Sometimes I make a mistake when I buy and when I sell. But so I still don't know that much about the future, but I feel I know more about, I feel more certain about the future as I look at a company like Apple than when I look at IBM now.
QuestionerHave you continued to show IBM shares?
[16:12]
QuestionerWell, there again, nice try. We'll have to wait for the quarterly filings. Yeah, exactly. Let's talk about the bank stocks. Just last night, Berkshire went ahead and converted its warrants into shares of Bank of America, making you the largest shareholder in Bank of America and in Wells Fargo, two of the top three banks. What's the profit there? $11.5 billion, is that correct, over the last six years in that stock? And do you continue to have faith in Bank of America?
WarrenYeah, I actually said specifically today that a long, long time before we sold a share of Bank of America. We're very happy. We got 700 million shares. And, you know, I like the business. I like the valuation and I like the management very much. So I think you'll see that for a long time in our holdings.
QuestionerIs it a similar story with Wells Fargo? Tim Sloan just came out recently and said that because of a third-party review at Wells Fargo, there are probably going to be some negative headlines that create more negative headlines for what's been happening there, their management policies.
WarrenWell, what you find is there's never just one cockroach in the kitchen. You know, when you start looking around, that was what used to terrify me at Solomon is what they'd find after the first one. Because any time you put the focus on an organization, it's hundreds of thousands of people working for it, you may very well find that it wasn't just the one that misbehaved that you found out about it. And of course, it was more than one in the Wells Fargo case. And in the Solomon case for the Wells Fargo case.
QuestionerAre you comparing, are you comparing Wells Fargo and Solomon?
Warrencomparing the shock sort of of a huge financial institution that all of a sudden people view in a different light. And once that, once you put a spotlight on and start looking at everything, you're likely to find something additional.
QuestionerIs that enough to concern you in terms of your ownership of the shares?
WarrenNot in terms of long-term investment. No, no. It's a terrific bank as is the B of A. And there were some things that were very wrong done there, but they are being corrected. And my guess is if you look at any institutions around Burk I mean, something is going wrong at Berkshire right now, and I wish I knew about it, but I mean, and we have methods of trying to make sure we do find out about it. But I can guarantee you with 367,000 people, you know, every one of them isn't behaving in a way that I would like
[18:47]
Questionerlike. Warren, let me ask you about Amazon and Whole Foods. I'm asking in the context of Kraft Heinz. And I realize that there are not a lot of Kraft Heinz products that are sold at Whole Foods, but this merger and the lowering of prices at Whole Foods has put some enormous pressure on the shares of grocery sellers, something like $12 billion in the top four grocery sales stores, shares was lost in market capitalization just last week. That puts a lot of pressure on those grocery stores to then improve their margins. They're going to do it on the backs of companies like Kraft Hines. Do you worry about how profitable that company can be with all this pressure that's out there?
WarrenWell, there's always a huge struggle. It's going on for decades and decades and decades between brands and retailers. I mean, and to some extent, retailers try and create their own brands. That's why they have private label. But brands are hugely important and the retailer is hugely important. And the retailer is always trying to get the upper hand of those negotiations, the brand manufacturer is trying to do it through advertising and through all kinds of things. So it's always a struggle. And when you get particularly strong retailers, a Walmart, a Costco, and now on Amazon, and they keep getting stronger, their position improves. And particularly packaged goods have had more trouble building followers through advertising in recent years. Martin Sorrell was just talking about that the other day. So that struggle is tilting perhaps toward retailers. You've got the big German operations coming in on discount and they feature their own brands. So that'll always be a fight. But right now, the retailer is doing better in this round of the fight. Yet generally the way to fight against that is to get even bigger. So would Kraft Heinz go after a company like a Mandalay. whose shares have improved just in the last recent sessions. That doesn't really help you that much in the fight. I mean, you know, P&G was always thought of as having the ultimate muscle because they were so big in so many brands. But it does help to have a group of big powerful brands if you're negotiating with a big retailer. But what they really care about is the strength of the specific brand. I mean, and, you know, we have DuraCell batteries. And the real question with people carrying that versus carrying some other brand is what they have.
[21:15]
Warrenfeel the consumer feels about that brand when they walk in. And so if you have five items that might be served at dinner, that doesn't really make you a lot stronger than having one.
QuestionerAre you saying that Mondalise's brands are not worthy?
WarrenOh, no, no. No, I'm just saying that there's not the additive factor if you have 10 big brands versus one. I mean, if you decide to buy a Coca-Cola or a Sprite, both from Coca-Cola, And the one doesn't influence the other. Probably don't even, many people don't even know that Sprite is made by Coca-Cola. So you're positioning within the retailer. All he cares about is what's going to move, basically. And having a group of brands doesn't translate to that much more bargaining power.
QuestionerSo I'm not asking this directly enough. Would Kraft Hines buy Mondalese?
WarrenI think the answer is no on that.
QuestionerOkay, there's a direct answer to that. answer to that. Would you go back after Unilever?
WarrenOh, no, no, no. No, no. That was a misunderstanding, basically. We will not make hostile takeover offers, and we did not intend that to be hostile, but it turned out it was. And we immediately, the next day when I learned about it, we called it off. It was a misunderstanding.
QuestionerWarren, very quickly, I want to go back to Tim Cook at Apple, the CEO there. He has been fairly outspoken recently about about some of his disagreements with the Trump administration and with some of the actions of Donald Trump, the president. You have been uncharacteristically silent. In the past, you've been pretty outspoken about your politics. Why have you been silent now?
WarrenWell, I worked for Hillary. I raised money for Hillary. I voted for Hillary. I was disappointed when she lost. But we have a president. And we have North Korea, we have a whole bunch of things. I am. None of the business of attacking any president or do I think I should be. I've lived under 15 presidents, believe it or not. There have been 45 presidents of the United States, and I've lived under a third of them. And I bought stocks net under 14 of the 15. The first one was Hoover, and I was only two when he left, so I hadn't gotten active at that point. But Roosevelt came next and I bought stocks under him, even though my dad thought it was the end of the world when he got elected. And I bought stocks. under 14 out of 15. So this country will move forward. But it is important the government functions well. It's important that both from the government side and from the private side, that they try to figure out how to maximize the degree to which this country move forward.
[24:03]
QuestionerSo I'll take a position in the 2020 campaign, the 2018 for that matter. But I won't say if my candidate doesn't win, and probably half the time they haven't over the year, that, you know, I'm going to take my ball and go home. You know, you mentioned the 15 presidents you've lived under. That's because you're 87 years old today. We want to tell you happy birthday. And Smith and Lewinsky has put together a cake for you that they wanted to show you. And we just want to wish you a very happy birthday here today. Too bad there's not enough there for you, but That's great. They put together all of your favorite things. This is my guy, Bronco. He always delivers. They put together some of your favorite things. And I think you'll get a kick out of this today. But we want to thank you very much for your time.