OtherLet's get to Omaha. Becky is there with a very special guest. Good morning, Becky.
OtherGood morning, Joe.
QuestionerWe are here this morning with Warren Buffett, the chairman and CEO of Berkshire Hathaway. And Warren, we want to thank you very much for your time this morning.
WarrenThanks for having me.
QuestionerYou know, we're just coming out of this story about Las Vegas. And while unfortunately, it seems that we as a nation are becoming more and more inured to hearing about shooting stories, this one is different in the scale, in the scope of it, in the stories that are coming out right now. Do you have any reaction to what you heard?
Warrenget in your and the one thing I would say is that I heard that the shooter got off 200 rounds and 90 seconds or something like that and I think the Las Vegas Metro police did an incredible job in getting there I mean when somebody's shooting at that rate the police force may have saved maybe even hundreds of lives by reacting as fast as they did but you've got 325 million people in this country. And a certain percentage of them, their brains don't work like brains should. And you see a situation like this develop. Obviously, our hearts and our thoughts are with the people of Las Vegas and the people who have traveled around to be there today. But we are talking about business too. And as much as we should not become inured to this, if you look at the markets, it's hard to see much of a reaction. The markets have ignored just about any potential bad news lately. With the Dow setting, another record yesterday. and with eight quarters in a row now of gains for the markets. Is that a market that makes sense to you? Do valuations here make sense?
QuestionerWell, the valuations make sense with interest rates where they are. I mean, in the end, you measure laying out money for an asset in relation to what you're going to get back. And the number one yardstick is U.S. governments. And when you get 2.30 on the 10 year, I think stocks will do considerably better than that. So if I have a choice of the two, I'm going to take stocks at that point. On the other hand, if interest rates on the 10 year were five or six, you'd have a whole different valuation standards for stocks. And we've talked about that, you know, for some time now. I've been years that you've been talking about how this is in relation to gravity pulling the markets down and how it's not happening here. Yeah, interest rates are gravity. If we do interest rates
[2:30]
Warrenare going to be zero from now till Judgment Day, you know, you could pay a lot of money for any other asset. You would not want to put your money out at zero. And I would have thought back in 2009 that rates would not be this low eight years later. But it's been a powerful factor. And the longer it persists, the more people start thinking in terms of something close to the race they've for a long time. So the one thing I'm sure of is that over time, stocks from this level will beat bonds from this level. If I could be short the 30-year bond at 3% or something and long the S&P 500 and just have it put away for 30 years, stocks are going to far outperform bonds. And the question is which variable is going to change? And everybody expects interest rates to change, but they've been expecting it quite a while.
QuestionerSo does that mean, if the one factor is interest rates, we know that the Fed is looking at raising rates, it's going to do so slowly and gradually over time. At least that's what they've been telegraphed to this point. Would you bet on that continuing for the next couple of years? I mean, 2.3% to 5% is a long way when you're moving in quarter point increments.
WarrenYeah, that'd be a long way. And I might, I would guess. I don't try and guess the sack market. I just buy businesses I like. But if I were to guess, if interest rates, if the tenure moved up to 5%, I think stocks would be somewhat cheaper. If, but you're not betting, you're not betting that that's going to happen in the next couple years.
QuestionerNo, no.
WarrenOver time, I'm going to own stocks. I mean, it's been so wide. I've written about it in the annual reports. I mean, stocks have been so much more attractive than bonds for a long time now. And that's partly intentional on the part of the Fed. I mean, they, they want to assets to increase in value. And the way to do it was to reduce that gravity force of higher interest rates.
QuestionerThe Fed has been sounding a little more hawkish. Even Janet Yellen has been sounding a little more hawkish. Does that concern you? Or are people getting complacent thinking rates are going to be low for an extended period of time here?
WarrenWell, I think they expect them to increase. But the question is how much? I mean, if three years for now, interest rates are 100 basis points higher than the stocks will still look cheap at these prices. If they're 300 or 400 basis points, they won't look cheap. And Janet Yellen doesn't
[5:06]
Questionerknow what she would do three years now. I mean, she's got more of a job than that simple factor of the stock market. It's really interesting because the Fed has said that they'd like to see 2% inflation. I mean, that's fairly recent. That was Paul Volker would not have slept of that. You'd ever heard that in the 80s. But If the U.S. government is borrowing 10 years from you at 2.3%. And their own instrument, the Fed, is saying we would really like money to become worth 2% a year less. They're not promising you very much in terms of real terms for saving. Right. So Janet Yellen, you said she's got a big job. The question is, does she keep that job? Or does President Trump appoint someone else? And it seems like two of the leading figures right now are either Kevin Warsh or Jerome. Tom Powell. As an investor, do you have to spend some time thinking about who's running the Fed to think about what stock prices are going to do if interest rates are the most important factor?
WarrenI don't spend time thinking about it. But it wouldn't be any good to think about it. I wouldn't know the answer in the end. And most of the time, the Fed is not that important. Occasionally, it's everything. They've been awfully important in the last eight or nine, ten years. It can be the only game in town. There was only one point. There was only one point. person that in September of 2008 could walk out like the sheriff into the street and say, you know, that this isn't going any further. We're going to do whatever is necessary and have the power to do it. I mean, the Fed has got of enormous importance during a panic. And people tend to hang on their every word in between. We don't pay any attention to it.
QuestionerBut you have said that interesting. rates are the most important factor. So anybody who's trying to play the market and figure things out, maybe not as long of a tournament investor as you're going to be with these things should be thinking about this.
WarrenWell, but if they think they can figure it out, they might as well play the bond market. I mean, they don't really have to get over to the stock market. So, but I can't remember a decision we've ever made based on the Fed, except for the fact that I felt that Bernanke and Paulson and Geithner, but I felt the Fed would do. the right thing in the fall of 2008. We had an incredible economic machine that was in the hospital and the Fed could bring it out.
[7:43]
QuestionerI realize that interest rates are not something that you often think about other than on a very broad scale. You've also said that taxes aren't something that you think about other than on a very broad scale. Is that the case this time around?
WarrenWell, I think about them plenty right now because we may may not have a change in the tax code. And we have lots of stocks with lots of gains and we have a few stocks with losses. And here we are in October. And if something happens that changes the tax rate significantly on January 1st, it would pay me, assuming that they would reduce rates on capital gains or corporate rates, it would pay me to sell the losses now and defer the gains until next year. I think there's a lot of that going on because I think there's an expectation that if they reduce, that if they have a tax act, it will be, they will cut the rates, certainly corporate rates, and it'd be kind of foolish to have a gain now and pay 35% tax on it if by waiting a few months you were likely to pay 25%. So it actually very seldom enters into our thinking. On balance, we'd rather sell things with losses than gains. Right now, we're sitting and watching because within three months, actually less than that, we'll know the answer on this as to whether this was the year to take losses and not gains. And we've got actions on both sides that we would take. And I think the market...
QuestionerSo you're actually stopping what you're doing as at Berkshire. This is not just your personal account. At Berkshire, you are actually holding off potential losses. Potential sales. Potential sales or potential purchases. And realizing losses. So that's an actual change in your behavior that I've never heard you say anything like that.
WarrenIt doesn't happen very often. That there's a, during the month of October, with a major tax act being a real possibility. Who knows whether it's a 20% chance, 50% chance. But one thing I know about it, I'll know the answer within a month or two. I mean, there's not that many days left to legislate. And I would feel kind of silly if I realized a billion dollars worth of gains. have paid $350 million of tax on it. If I just waited a few months, it would have paid $2.50. Now, if enough people are doing that, that may mean that the market's being affected, surely substantially.
QuestionerRight. That's what that, what, what is the broader play in the markets as a result? Because if you're doing it, you've got to imagine lots of people are doing it.
[10:22]
QuestionerI think that's true. I think that's true. You're talking about billions of dollars of potential sales. Well, maybe hundreds of billions or something. I mean, yeah, probably billions for people alone. And you may be talking about people that it would, it would, it would, it would, it would. It would tend to depress stocks that have behaved badly because people would be taking the losses now. And it would tend to defer gains and reduce the sellers currently that would be in stocks with very large appreciation. So how... I can tell you, it's an actual factor at Berkshire and it's very, very, very, very seldom. By 87 years, there's ever been a factor. So what might we see if... But first of all, what? What do you think the odds of a tax plan getting passed are?
WarrenWell, I personally think they're higher probably than most people think, because I think that having had the health care bill go the way it has. And just generally, and no infrastructure, if you take maybe the three big items, this is the only one left to do this year. And I would think the Republicans controlling both houses and the presidency, they would not want to have a shutout. in the first year and of top priorities. And I think they can get it done. I mean, it's not a tax reform act, it's the Tax Cut Act. And I think that any politician that can't pass a tax cut cut, probably is in the wrong line of business. I mean, it's a different thing with the health care act. But I think there could be a lot of compromise, and I think it could be a lot of compromise. And I think it could be... bipartisan to a degree.
OtherOkay, I know Joe has a question, but before we get to it, Warren, I know that we've had some issues here. Let's get that back in before Joe asks this question. But Joe, just make sure that this is working before. Is that okay?
QuestionerI think so.
OtherOkay, Joe, go ahead. Try that out.
QuestionerIt depends what Joe asked whether it's okay.
OtherYeah, if you don't like the question, you can say, well, I don't work.
QuestionerNo, Warren, you know I'm jealous. I'm already practicing. Yeah, exactly. You know I'm jealous, envious. But sometimes I see you do things where, I mean, I would, if I could buy Flying Jay, I wouldn't care if I ever made any money. I would just like to own Flying Jay. I'd like to own, do you ever do things just because you can? Just, I mean, are you going to make money on this? Or, I like, like, you look at Dairy Queen.
[12:51]
QuestionerYou buy Dairy Queen. I don't think you're trying to make money there. You like Dairy Queen. What about Seas Candies? You like Seas Candies? And I want to own, why Flying J's? I love those places. There's showers. There's restaurants. I mean, you're out on the road. You're like a cowboy and with the truckers and everything. You do things just because you can, I think, right?
WarrenWell, Joe, if you feel that way, I mean, bring money. I'll send you a map of all the locations and you're a kind of guy.
QuestionerI was just looking. Do you, you've stopped there, right?
WarrenBecky, have you been in a flying, Jay?
QuestionerI mean, there's a lot of times. I have. I've been in plenty of them. It's like an oasis. There's one right on the interchange where you get off 295 in New Jersey and get on to exit seven and there's one right there. But I was just talking to the Flying J CEO, the pilot flying J CEO, who happens to be here and will be our guest in the next clock. He just buys cool things. About all the ones out to Indiana back. So my question is, does it have to be a good investment, Warren? You just buy whatever the hell you want because you like it?
WarrenWell, they're not mutually exclusive. I do like the products of virtually all our companies. I suppose if we ever bought a funeral parlor or something, I wouldn't be as enthused. But generally speaking, I like our products. But I kind of like good economics to go along with them, too.
QuestionerNo, you do. I mean, obviously you've been, how smart are you in terms of like, I mean, how profitable is like Geico? I mean, you do, you got an eye for things that are really, really profitable. But there are times where I just wish I had a lot of money. money, I just say, you know what, I really like that place. And you just, you know, I like, remember that guy, Victor Kayam? I liked it so much. He bought, he bought the razors because he liked the way they shaped. Maybe, you know, maybe when you get to a certain point, you just do that, you know?
WarrenWell, if you do it, you do it with your own money and not Berkshires. But I wouldn't argue against that. I mean, if you have a lot of money and there's something you like and it isn't profitable, you buy it, but you don't buy it with Berkshire's money. You buy it with your own money.
QuestionerYou know, most of Berkshire you own anyway, Buffett. What are you talking about? How much a Berkshire is yours?
WarrenWell, every single share is going to be given away.
[15:09]
OtherI know, no, I know. I know. But it's fun. You get to do cool things. It's fun. It's fun. That was my point. Absolutely. I mean, the high point are bricks, Joe. I sent you a brick. I know you did. I know you did. I've never wanted to say this publicly, but you really not show the proper appreciation. No, I know. Thank you. It would not, you know, you own net jets. And, I mean, you didn't ask for one of those little. Like it would, like it would, like it would, really break the bank if you send me a few hours on a net jet plane? You know, you sent me a brick instead? Well, I didn't get any response from the brick, so maybe I'll try a net jets. Okay. All right. Can I get it? I know. Yeah, I can't see your face, but I think you did send me one. It just had nothing. It just had my name, but it was not good for anything. It was like one of those, you know, like a Taco Bell card that's been all used up. Anyway. Sorry. Thanks, Beck. I do have Dairy Queen cards. All right. We are going to be back. in just a moment. We're going to take a very quick break here. When we come back, we will be joined by the CEO of Pilot Flying J to hear more about this deal that's just been announced from Berkshire Hathaway taking a minority stake in that company today. Jimmy Haslam's the CEO, and he'll be with us in just a moment. Squackbox will be right back. Good morning, everybody, and welcome to Squawk Box. We are live in Omaha, Nebraska this morning, with two special guests. We already introduced you to Warren Buffett, who's the chairman and CEO of Berkshire Hathaway. But joining us right now is Jimmy Haslam. He is the CEO. He is the CEO of Pilot Flying J. And just this morning in the last 15, 20 minutes, there was a deal that was announced that Berkshire Hathaway is buying a 39.6% stake in Pilot Flying J. Jimmy, thank you very much for joining us. Thanks for having this on, Becky. So how did this deal come together? What happened? Explain. How did you two mean? No, you do it, Jimmy. We have a mutual friend, Byron Trot, who Warren has actually known longer than we have. And Byron's company, BDT, He owns 5% of our company, and he introduced the two of us back in May. And the last several months, we were able to put together a deal that we think makes a lot of sense for both companies. Let's talk through that deal. A 39.6% stake that will then go to an 80% stake in the year 2023. Why that structure?
[17:21]
OtherYeah, I think it's 38.6. Yeah, 38. But I'd be glad to make a 396. He negotiated hard for 396.
QuestionerSo why set up that structure? I mean, Warren, this is not a situation where you're short of cash. where you're short of cash?
WarrenWell, we've set up a lot of different structures that fit what the managing party would like to have. And, you know, with the bumpkins we did it in 1983, it's the same structure. So their situation in terms of their family and their partnership and everything made this logical. And we have this two-step arrangement. And we've had other two-step arrangements. And Marmon, with the Prisker family, we had a three-step arrangement. Sure. So we tried to do that. to fit what the seller would like. And with families and everything, you can have different arrangements.
QuestionerJimmy, this is a situation where this is a family-run company for almost 60 years. We're talking about the number 15 on Forbes list of private companies in terms of size, 750 retail locations in 44 states. Some of the metrics are pretty amazing. Fourth largest tanker fleet in the nation, just by what you're sending around to make sure you have enough fuel at all those stops. Talk about the company, how you built it, and why make it? Why make this transition?
OtherIt's like a lot of companies Warren has bought. It's a family-owned, family-run company. Started by dad in 1958 with one gas station. We've changed over the years. Gas stations, C stores, truck stops, and we're now a huge distributor of fuel, gasoline and diesel fuel. We sell more diesel fuel over the road than anybody in the United States. And it's a big logistics company. Every 22 seconds, we drop a load of petroleum somewhere in the United States or Canada at one of our stops. Also a big food company will sell over a billion dollars. a billion dollars in food and over $2 billion retail this year. We're in 44 states and U.S. and Canada.
QuestionerWell, you must have a pretty good idea of what's happening in the U.S. economy at any given point, given some of those metrics.
OtherWarren and I were talking earlier. I think we'd say it's pretty good. It's pretty good. Particularly strong in Florida, particularly strong in California. And of course, Texas with the return of the oil boom and fracking is really strong. So it's certainly better than it was several years ago.
QuestionerTwo of the states that you just mentioned are states that you just mentioned are states that
[19:31]
Questionerthat have just been hit pretty hard by the hurricanes that came through. Do you see a blip on the screen for that? Is it something that's picking up or how do you measure that?
OtherHurricanes are obviously very unfortunate for the people involved. From a business standpoint, it does create more business. There are homes that need to be rebuilt. There's new cars being sold, et cetera. So our business is up substantially in both Florida and in Texas.
QuestionerWow. Why does Berkshire seem like a good fit for you?
OtherLong-term investor. I think I'm right, Warren. Of the companies you bought, not equities. I don't think you've ever sold one, I think you told us. Is that right?
WarrenYeah, that's right.
OtherSo long-term investor, hands off. He truly wants us to run the company. Wants us to maintain the culture. And of course, if there is an opportunity for us to grow the company substantially, he's got plenty of capital. So it's just a marriage that we thought made a lot of sense. Jimmy's based in Knoxville. And we bought another company in Knoxville 14 years ago. Clayton Holmes. their employment has gone from 5,000 to 16,000, and they've seen me exactly once. They might have done better if I hadn't gone down to one time. But Jimmy knows, and the families know each other. And so they've had a chance to check and see exactly how much we do interfere with operations. And through this, I wouldn't know how to build a manufacturer at home or a truck, travel center. We depend on management. Jimmy, you have seen some pretty phenomenal growth. I think you increased the number of stores you've had in the last two years by 10%. Is that correct?
OtherYeah, we've been a growth company, like I said, from the get-go, and we have a pretty large market position now, but we're always looking for opportunities, Becky, to grow either organically to buy a single stop or last year we partnered with Marathon Petroleum on 41 stops in the southeast. Over the last couple of years, we've added 71 stops and still think there's an opportunity to continue to grow the company.
QuestionerWhere are you not right now that you'd like to be?
OtherWe're really, we're in 44 states. We're not in Alaska and Hawaii, in some of the northeastern states that are small are tough to get in for the truck stop standpoint. So I think the growth will continue really in all segments of the country. Texas, obviously, with the natural growth Texas has, coupled with the oil industry, presents, I think, great opportunities.
[21:48]
OtherGreat. Jimmy, we want to thank you so much for joining us today and hope to see more of you in the future.
OtherGreat. Thanks, Becky. I appreciate you having us on.
OtherWe appreciate it.
OtherJoe and Melissa, I'll send it back to you in the studio.
OtherThanks, Becky. We've got to go. Send me, how many has Jimmy been to? I just wonder out of the 750. I'd like to visit. Just cool.
OtherAnyway, we will have much more with Becky. Jimmy, you got an answer?
OtherAll but one.
OtherJoe, he said all but one. And when I just named one, I said, there's one in New Jersey. I described kind of where it was. He said, oh, yeah, I'm Borden Town. He knew exactly. We just opened one in Lathrop, California. I hadn't been to it yet.
OtherThat's unreal. There's a lot right next to her house. See, that's worth it. We make a terrific location. That's worth it right there.
OtherJust, I think, Alaska, I was thinking Alaska would be cool. But people aren't really driving across, you know, that's a destiny. It's not really like going somewhere. But think about it.
OtherAnyway, we're going to have much more from Becky Quick and Warren Buffett throughout the hour. Stay tuned. Squawk Box will be right back.
OtherWelcome back to Squackbox, everybody. We are live in Omaha, Nebraska today. And our special guest is Warren Buffett. He's the chairman and CEO of Berkshire Hathaway. We've been talking about a lot of different issues this morning. Warren, want to thank you for your time again. But while you're here today, it happens to be the same day that Wells Fargo's CEO's CEO, CEO Tim Sloan is headed to Capitol Hill. This has been a long, messy process of trying to find out what happened at Wells Fargo. Tim Sloan is just the latest person who's being called before Congress with this. But already, there's been a lot of sand and fury before he gets there. I want you to listen to a sound about coming from Senator Warren, who was speaking with Jim Kramer recently on Mad Money. Go ahead and let's listen to what she had to say.
OtherYou know, we had a hearing a year ago. a year ago when John Stump, who had gone on your program, first one out of the barrel, and said, hey, listen, I take personal responsibility for what's gone wrong at Wells Fargo. And then it turned out what personal responsibility meant was firing thousands of people who made $15 an hour. So we got John Stump in front of us, asked a few questions. Stump is no longer the CEO of Wells Fargo.
[23:59]
QuestionerBut let's face it. There are still a lot of folks running Wells Fargo who were there at the time of the crisis. Again, that was Senator Warren speaking to Jim Kramer of Mad Money very recently, talking about what he can expect coming in today. What do you think about what Senator Warren has to say on this front?
WarrenWell, I didn't hear all of what she had to say. But he's absolutely right that you should, same situation I had as Solomon. I had 8,000 people and four or five of them that caused the problem. And the job is to remove the stain from almost all of the 8,000 and get it where it properly belongs with the people that either perform the acts or condone them after they were performed. And that's what we did at Solomon. I think that's what they've been working at at Wells. And you can't do that necessarily in a day or a week.
QuestionerSure. You can't do it in a day or a week, but it's been quite a bit longer than that. Would you say that the actions that have taken place to this point, with John Stump getting clawbacks, with the other woman who was in charge of the banks getting clawbacks with some of those issues, John Stump leaving and new people being put in these positions, is that sufficient, in your view, of what happened?
WarrenWell, I proposed actually in the annual report of Berkshire, maybe four or five years ago, sometime after 2008. The problem is that the bank gets fined. the shareholders are the ones that pay for it, they didn't have anything to do with it, basically. And I suggested that probably more extreme actions than Senator Warren in terms of clawing back all the director's fees for, I think, five years. And I think that you really want, as much as possible, you want the people that were responsible to pay. And ideally, you would have the people that were innocent not pay. but it doesn't work that way in the American judicial system. I think that if you have a company, a very large company, Berkshire's large, you have a hotline. I think the CEO has to be very attentive to what comes in on the hotline. Now, most of it's silly stuff, but there's real stuff comes in too. And you get anonymous letters and you've got to follow through on the ones that actually sound like they have real meaning. And clearly, you couldn't have activity as broad as it was at Wells without the hotline here. And so somebody messed up and the job is to find out who messed up and ideally to make the penalties be such that it discourages other people
[27:01]
Questionerin the future from doing similar things. Part of the concern has probably been how the news has dribbled out over time when it comes to Wells Fargo. That it wasn't just the fake accounts that we heard about at the beginning. It turned out that was more widespread than we'd realized. It turned out that there were auto insurance that was auto insurance that was being sold to people who didn't need it. There was life insurance being sold to people who didn't need it. That continual drib-d-drab just eats away at the reputation of the bank.
WarrenYeah, sure. And I say when you've got a problem, and you're going to have problems, I mean, if you've got a very big, you can't have 280,000 people working without something, and most things are minor, but if you get something systemic, you've got a big problem. And once you find out about it, you've got to get it right, get it fast, get it out, get it over. And getting it right is hard, I mean, because, you know, you turn over rocks and sometimes you find some things. It's very seldom there's just one big thing going wrong at a big institution or something like that's going on. So you've got to get it right. And the one thing you know out of it is put out of thing and be wrong about it. A lot of the things that you just said are not exactly how things have gone at Wells Fargo.
QuestionerYou're the largest shareholder in Wells Fargo. Do they still have your faith? Are you still behind the bank?
WarrenYeah, Tim Sloan has my faith. Like I said, it happened to me at Solomon. Well, Solomon had my faith. that doesn't mean every person that Solomon had my faith after I got there. And I got, and I had some surprises. I mean, I was worried about surprises every day. But the truth was that 99% of the people were perfectly decent people. They were just like the people working at Goldman or some other place. And somebody had gone off, totally gone off the gone haywire. And other people didn't report it fast. But when you find a problem, you have to jump on it. I mean, that is, that's just basically. You just said that Tim Sloan has your confidence. It is, have you spoken with him before he goes before Congress?
QuestionerWell, I actually, I was in Las Vegas last week talking to about 400 Wells people. And Tim was head of this. It was their top group from around the country. I did the same thing about five or six years ago for Wells in Chicago. I did it for B of A, maybe seven or eight years ago.
[29:28]
WarrenI mean, every now and then they asked me to come around just so that people can see who owns a lot. who owns a lot of shares. So I've talked about, I must have talked for at least an hour just last week.
QuestionerAnd did you talk to him at all about this, his testimony before Congress?
WarrenI gave, I mean, he knows that I testified many years ago in connection with Solomon, both to the House and the Senate, and I told him something of my experience, but it's all on tape in terms of being able to see it anyway. But I gave him, I told him what I would do. If he has your confidence, are we right to assume that you have not sold any shares of Wells Fargo?
QuestionerIf he has your confidence, are we right to assume that you have not sold any shares of Wells Fargo?
WarrenOnly enough to stay under 10%, which was something that the Fed requires. And since Wells repurchases their shares and we were right up against 10%. In fact, we went over because they repurchase shares, not because we bought. So we keep, we will sell enough to stay at around 9.8. But that's, that's, that's, that's, you know, That's to avoid becoming a bankholding company act. So if we see the SEC filings that show you're selling, we should not assume that you'll find we're just keeping a little below 10%. We've not sold the share except for that purpose.
QuestionerOkay. You are a major shareholder in Bank of America, too. That's true. What's your favorite bank?
WarrenWhat's my favorite bank? Well, I'm not so sure. What's your favorite child? But Bank of America is not a sensational job under Biden, right hand. Brian had all kinds of problems when he came in. I mean, they were not of his own doing, but he had a ton of problems, and he had a lot of rocks to turn over, and it cost a lot of money. And he just set out step by step to bring the bank back. And he's gone from 280 or so,000 people down to 210,000. He's gone from a run rate of expenses into 70 billions down to 54 billion. I mean, he has really done a job. And we will be holders of B of A stock for a long, long, long time.
QuestionerWarren, we're going to take a quick break right now. I will send it back to Joe and Melissa. We have much more to come with Warren after this.
OtherAll right, Peck, thanks. We're going to go to break. And then we'll be right back with more from Warren.
OtherGood morning, everyone. Welcome back to Squackbox here on CNBC. We have a special program where we're live in Omaha, Nebraska this morning with Warren Buffett, who's the chairman and CEO of Berkshire Hathaway. talking about lots of issues today from the market to what's been happening on Capitol Hill.
[32:03]
QuestionerAnd Warren, we touched briefly on taxes earlier, but we didn't dig deeply into what you think about what's happening with this tax bill right now. This is an area that you've written on that you've spoken on pretty extensively in the past. You said earlier that this is not a tax reform bill, it's a tax cut. What do you think about it?
WarrenWell, I don't think I need a tax cut, but for example, the current proposal, a limit. the estate tax. And it's not a death tax. There are going to be 2.6 million people die this year in the United States, and there'll be 5,000 tax returns, the states that pay tax. So if you start going to a funeral every month, it's going to be 40 years on average before you go to one where there's any estate tax due. It's a very pejorative term. The truth is, if they pass the bill that they're talking about, they're talking about, I could leave $75 billion to a bunch of children and grandchildren and great-grandchildren. And if I left it to 35 of them, they'd each have a couple billion dollars, they could put it out of 5%, have $100 million. I mean, is that a great way to allocate resources in the United States? Because that's what you're doing, through the tax code, is you're affecting the allocation of resources. So if they were lucky enough to come out of the right womb, have the right name, Buffett, they could sit there and build tombs for themselves like Egyptians, pharaohs never dreamt of, they can do anything. And capitalism is all about intelligent allocation resources. Now some people say, well, you don't have to worry about that because they'll blow it all. But if they blow it all, that means that they've done some dumb things with some important resources. And that's not good for capitalism. I don't think it's good for the children. I sure don't think it's good for a society where there's a ton of inequality to start with. with. And so I think that's a terrible mistake, for example.
QuestionerHowever, play devil's advocate here. Sure. You have three children who have foundations that each of them are running. Do you think that they're a better allocator of that money than the federal government?
WarrenI do. But I don't think that setting it up so children, grandchildren, let's say I died when they were 20. I don't think they'd be the same individuals that they are. I didn't encourage them. encourage that foundation program until they were in their 40s.
[34:29]
WarrenAnd I'd seen what they'd done with their lives. And they had a chance to live for a long time, going to public schools, living just like other people in Omaha live. But I just think that I don't think we should have our Olympic team 20 years from now be the eldest sons of the Olympic team currently. So it's the dynastic impact of money. I don't think a dynastic. I don't think a dynastic. system with huge sums of wealth. And bear in mind, the wealthy are so much wealthier now than they were 25 years ago. We're talking about the 400 now having 2.4 trillion against 90 billion, 25 times as much money. So you have sprinkled around, you have these children and grandchildren that just with those 400 could have 2.4 trillion passed down to them. That's a lot of the resources in this country with a $20 billion, not even quite a $20 trillion, dollar GDP. I think it goes totally against what's built this country and what this country stands for. And if those 5,000 people can't stand to spend the 20 or 25 billion, they've got lots left over, believe me. Incidentally, it would be bad for philanthropy. I mean, a certain number of people would elect to set their kids up with billions and billions of dollars rather than rather than have to go to philanthropy. But I don't think that's the primary reason, but I do think that would be a byproduct. The estate tax is just one part of this. Let's talk about the corporate tax, first of all. Corporate taxes from 35% to 20%. Yeah. Well, if I haven't lost all my friends by now, I'll finish it off. We have a lot of businesses, 60 or 70. I don't think any of them are non-competitive in the world because of the corporate tax rate. corporate tax rate. I mean, American business earns a return on tangible equity under the present tax system that is extraordinary compared to history, the last 100 years in America. I'm talking about tangible equity, but that's the money actually invest. You could add the five largest companies in the United States by market value that's almost 10% of the value of the market. They don't need capital. It is not like the old days where there's big steel companies and auto companies and oil refineries where huge amounts of capital were needed. But we do not, we do not, we do it, we are among the high earners of the world in terms of return on tangible assets. But just looking at the tax code, 35% is what we're supposed to be paying, what corporations are supposed to be paying.
[37:18]
QuestionerMost of them don't. A lot of them don't. A lot of them don't. And the ones that do are penalized. because they're not taking advantage or they're not able to take advantage of the massive number of loopholes that have been built into the system. Isn't there an argument for saying, let's simplify this, let's level the playing field, make sure everybody's paying the same amount that you can't snake your way around into a lower rate? Right. And let's set up a tax code that, by the way, doesn't incentivize companies to keep cash overseas. Bring it back here and potentially put it to work right here in America.
WarrenYeah, but if you make it very easy to take back money from jurisdictions, in which you pay very low rates, that's going to encourage even more investment over there. Because you'd still have a higher rate in the United States. It's American, listen, on a personal basis, and for Berkshire Hathaway shareholders, I hope they do change it downward. I mean, I would like it in the sense that it would be good for a million shareholders of Berkshire in terms of their net returns. But I do think some of the arguments. I think people may find their nose growing a little bit after they make them.
OtherMelissa has a question too. Melissa.
QuestionerYeah, Warren, I completely get your argument that a lot of companies don't actually pay the going tax rate. But Wells Fargo, for instance, pay as a tax that would be higher than the proposed corporate tax rate of 20 percent, right? Their effective tax rate as of the second quarter was 27 percent or so. So it would benefit. So broadly speaking, what do you think that tax rate to 20 percent would mean for the broader markets. Would that mean, you know, a 5 percent increase in stocks? I mean, what's your estimate?
WarrenWell, a decrease in taxes would mean an increase in profits. It might not be totally the amount of the decrease in taxes, but it would increase earnings. There's no question about it. So the question is whether that's already built into expectations. I doubt if it fully is built in the expectations. So no, the lower the taxes will actually, if you had a negative tax rate for corporations, it'd really be great. But you're right about banks, incidentally. Banks tend to pay a pretty full rate unless they, you know, they own some tax-exempt bonds, but that's not a big item. Some of them do some low-income housing tax credits and that sort of thing. But the tax rate on banks is right up there among the top of various industries.
[39:46]
WarrenBerkshire, most of our income is taxed at 35 percent, but we do have. a lot of unrealized appreciation and securities close to $100 billion that hasn't been realized yet. But if we were to sell all of the stocks we own today, we would pay 35 percent on about 80 or $90 billion. So it, but I can say this, the banks are doing okay. They're not doing as well as they were eight or ten years ago. That's primarily because of the capital requirements. Capital requirements can kill the return on equity in banks. And they reduced it significantly from what was available 10 or 12 years ago.
QuestionerSo, so Warren, no, I'm just trying to just get exactly what you're saying, Warren. So if the money came back, it would be a good thing, but you don't want to go, you don't want to induce them to send it over there in the future. So if you really did go to 20, and you really did bring it back, and because you're at 20, and there's no longer an inducement to go over there, there, why can't you just say outright that's a good thing? Why do you have to say, well, people are hyping it and their noses are growing? Why can't you just say, if we did it, 20% would be better here, and it wouldn't go over there anymore, so the money might stay here and the jobs might stay here? Why isn't that a good thing? Why don't you give us an endorsement of that if they could do it?
WarrenWell, let's just say, let's just say the, the rate in some country was 2%. And you charge people 10% for bringing it back and you had a domestic rate that was 25 or something like that. It's not 2%. It's not 2%. It's the lowest is 12 probably in Ireland.
QuestionerYou think there'll be a race to the bottom if we do this? Is that, is that?
WarrenOh, there's rates lower than 12. I are, you're right about Ireland, but there's, there's rates a lot lower than 12.
QuestionerOkay, so then it's a race to the bottom. You think there'd be a race to the bottom then at this point?
WarrenWell, there's some of that. And one thing, interestingly enough, Joe, So the money is coming back to some extent. When Berkshire Hathaway sells a bond issue, guess what? The foreign subsidiaries of certain very cash-rich American companies buy those bonds. So the money comes back to Berkshire Hathaway. We pay interest to the foreign subsidiary of the cash-rich country over there. But that money ends up in the United States. There's trillions over there, though, right? I'd rather have the...
[42:15]
QuestionerIsn't there two or three trillion? I'd much rather have that back here. There's some infrastructure. Let's say you have two companies, Company A and Company B, and they both have a trillion dollars over there. And Company A borrows a trillion from Company B, and Company B borrows a trillion from Company A. Now you've got all two trillion back here, and it's available for investment. See, you're so smart. You know how to do all these things before they actually get done. That's why you love that second-a-dye insurance. You don't care about estate taxes, you've got more things going on to get around it, then you're just too smart. You're too smart. If everybody had you running their money, we wouldn't need any tax reform.
WarrenYeah, I can tell you exactly the secret of not having any of state tax. Just give it all away.
QuestionerRight, right. It'll eliminate all the state tax. Exactly, that's true. But Warren, just one follow-up, just to underscore point, you said that a lower corporate tax rate will increase profits. Does that mean that you also believe that a lower corporate tax rate will cause the market to go higher?
WarrenWell, anything that increases profits tends to push stock. I mean, there can be 10 other variables happening, you know, for other, but as a single variable in the equation for profits and profits determined stock prices over time, no, it is a plus for American business. You know, like I say, I've got a million, I got a million shareholders of Berkshire. And they would all love to see a corporate tax stock.
QuestionerAnd you also said, if my... You also said if my kids had grown up quicker and become mature quicker than I would want them to keep it and not give it to the government. I mean, there's all these qualifiers in some of your arguments, Warren. So if you could keep it in the private sector, but you didn't have crazy 20-year-olds blowing it on God knows what, then you would. So you see what I'm saying? And you, maybe we should have a wealth tax on you. Maybe we should have taken 20 percent. of what you have right now, because you've got too much right now, you can't possibly use it. So maybe we should just take your, you know, just start reallocating it now. So you don't need that much.
WarrenWell, we're doing, I'm with you, Joe. Okay. Oh, no, not a wealth tax. Actually, I'll be safe. I'll tell you, if you can tell me how to have your kids mature at age 20, send me the secret.
[44:43]
QuestionerHow about maturing at age 60? I'm, you know, I don't.
OtherNeither am I.
OtherThere's no guarantees. There's nothing like an immature billionaire. I mean, that old one.
OtherGet to do whatever you get to do whatever you went, like by Flying J because you like their truck stop.
OtherWe'll put one right next to your house, Joe.
OtherI love those places.
OtherWe'll really make it convenient.
OtherI can shower there.
OtherYeah, we'll give new meaning to the term convenience store.
QuestionerHey, Warren, let's talk about the markets again, because you have a long running bet that's almost up. it's in the final stages, the last year of the bet about what does better? The S&P 500 index over 10 years or someone who you made a bet with for a million dollars who got to go pick five hedge funds. He created a fund of funds based on five hedge funds. And between the two of you, the S&P 500 index has been the massive outperformer over the nine and a half years of the bet.
WarrenYeah. Yeah, it'll absolutely kill every one of the fund of funds. And bear in mind, each one of the fund of funds had a strong financial incentive to pick the best funds they could find 10 years ago. I mean, it meant real money to them.
QuestionerYeah. So it, it was overwhelming.
WarrenAnd passive investment, you know, I've written about it, a passive investment in aggregate is going to beat active investment because of fees.
QuestionerYou did this as a result because you wanted to show people that they didn't need to be trying to beat the market all the time, that they could just be investors over the long haul and that would be a way to make money. And that they didn't have to pay two or three percent a year to somebody to get those. And average results were going to be very good. And they were good. They've been good all my life. And in these 10 years, they've been good. You've done perfectly okay with passive investment. Actually, you've done great with passive investment, especially the last seven or eight years.
QuestionerThere are people out there who are saying, oh, he just got lucky. He picked the right 10 years. He did it right before quantitative easing came wrong. There's a guy Mark Yusco at Morgan Creek who's been saying he wants the next 10 years bet and thinks he can outperforming that time. What do you say to something like that?
WarrenWell, they'll put up a substantial part of their net worth. I get letters all the time from people who say, I'd like to do it. I'll put up $100 in, you know, or something. They'll become famous. So they love
[47:01]
Warrenthe idea of me giving them a lot of publicity. If anybody wants to put up a significant percentage of their net worth. A million dollars? Does that cut it still? It just depends on their net worth. But if they want to put up a significant percentage of their net worth, their family's net worth, and they want to make a bet on 10 years on active versus passive, you know, maybe that my estate has to be the one to settle with them. I mean, at 87, anything involving 10 years is kind of a triumph of hope over statistics. But the, nevertheless, the ones that have written me, they really want to get their name in the paper, you know, basically. But you'll take anybody who puts up a substantial portion of their net worth, you'll take that back. They can pick a group. You've got to pick a group, because I'm picking a group of 500 in the S&P. And they can pick the date of the start. The data to start had nothing to do with it. And the truth is, the markets behave fairly typically in terms of aggregate return for the decade. This is not some extraordinary period in the least. There's nothing unusual about this. The thing that was unusual was the size of the fees, and that's ate them alive, basically. The managers of these funds did very well during this period, and the managers of the underlying funds did very well, and the managers of the underlying funds did very well, and their investors got killed compared to something they could have done. You know, one quick story. It's picked up around this week that Oprah may be considering a run for the presidency. I know you know, Oprah. Have you talked to her about this? No, I haven't. I haven't. I haven't talked to Oprah for quite a while. Have you had any Democrats who have come to you who are looking to fundraise to run in 2020? Nobody's come to me to fundraise. I'm not a great prospect on that either. No, it's going to be a very interesting run-up to 2020. I mean, there are going to be a lot of people that think about getting into this race because when you have somebody come from totally outside politics to get elected president, it starts the wheels churning with a lot of people. It does.
QuestionerWarren, I want to thank you so much for your time today. It's really been a pleasure.
WarrenThanks for having me.