OtherIn our top story this morning, this is great to have Warren today, but Berkshire Hathaway making some big changes to its board. Let's get to Becky quick in Omaha. She joins us now with a very special guest. Yields, Warren, I'm sure we'll want to weigh in on that. I think insurance companies have to invest a bunch of stuff, don't they? Becky, I mean, it might be better to get a little bit higher. Low yields have been very painful for the insurance companies, for the pension companies, and yeah, I'm guessing that's probably good news. You want us to God? Huh? Yep. You want to see? Take a shot. Take a shot. Take a shot. Take a shot of Warren. There. He's here. That's not Tom Cruise with one of those masks on, like with the mission. That's really... Nope. Not like Mission Impossible. Hi, Warren. Thanks for joining us. Don't send me a brick. Okay, Joe. Don't send me a brick. You'll get two. You'll get two of them. We got a special this week. He was watching earlier this week. He was watching earlier this. morning, Joe. He's already mentioned. Oh, he did? He's smiling. He's still smiling. Yeah? Yeah, he was watching. He heard everything. Folks, that's right. Warren Buffett, the chairman and CEO of Berkshire Hathaway, is with us this morning. And this is on a morning that Berkshire Hathaway has some big news. Two new appointments to the Berkshire Hathaway Board, Greg Abel, who runs Berkshire Hathaway Energy, and Ajit Jane, who runs Berkshire Hathaway Reinsurance. They will now be responsible. They will both be promoted to Vice Chairman, be named to the board and will each have their own portfolio that will run in the company. Greg Abel, you see there, who is 55 years old, is going to be running all the non-insurance parts of Berkshire Hathaway. And Ajit Jane, pictured here, who is 66 years old, is going to be running all the insurance parts of Berkshire Hathaway. And Warren, we made a little bit of comment about this earlier today. This is the closest that we've ever heard to a succession plan at Berkshire Hathaway. Is that how we should be reading this?
WarrenWell, yeah, it's part of a movement towards succession over time. And they are the two key figures at Berkshire. They, I mean, this would have made sense five years ago, too. They're both got Berkshire and their blood. They love the company. They know their operations like the back of their hand. So it's really, it's very good for Berkshire and it's even better for me.
[2:26]
QuestionerYou know, you mentioned yourself that this could have happened five years ago. Oh, sure. There have been people who have been pushing you to make public your succession plans for quite a bit longer than that, which raises the question, why now?
WarrenWell, like you say, it probably should have been done a few years ago, but everything's been working fine. And on the other hand, there's some value in having both of them in those positions and getting more familiar with the ones they haven't been in the operations they haven't been in contact with before. And I've got a certain amount of institutional knowledge. and I can tell them the strong points and the weak points and this and that of the various operators. So it's just, it's a transition period that may last a long time, or if something happened to me, it could happen very soon. But there's nothing magic about the time. It's kind of interesting, actually. I talked to the directors one at a time before we had this meeting last night, and the degree to which they jumped at the suggestion was a little alarming.
QuestionerWanting you to go ahead and make it. you to go ahead and make this. Oh, yeah.
WarrenThere was no persuasion needed. You just said that this could happen. It could last a long time or it could happen more immediately. Should people be concerned about your health? No. I'm remarkably going to help, particularly considering the life I've led. Everything physical gets a little, your balance isn't as good, and your endurance may not be quite as good and all of that. So I've slipped in all these various ways. But I wasn't much to start with. So the amount of slippage has been fairly minor just because I started from a low base. No, I feel terrific. And I love what I do. I can't wait to go to the office in the morning. And no, there's been no change in that. And incidentally, if there was anything about my health, and this has been true since I took over, I would tell the shareholders immediately, I'm not reluctant to talk about my health. In fact, I think you have a duty to do that when you're a CEO. So how will this change operations at Berkshire? You will now have three vice chairman, Charlie Munger, Ajit Jane, and Greg Abel. What does that mean? Well, it means nothing in terms of physical change. I mean, he lives in New York, works in Connecticut and also in New York City, and Greg lives in Des Moines. And Greg lives in Des Moines.
[4:51]
WarrenThey won't change anything. There's no change in our office. CFOs in Omaha, and there won't be a change in one person in Omaha or really any place else, except somebody will move up to the head of Berkshire Hathaway Energy.
QuestionerI guess the question becomes, if this is the succession planning kind of opened up, does this mean that they would both be running Berkshire Hathaway at some point, somehow, sort of the way you have your investment potential set up with Todd and Ted, Todd Combs and Ted Wechler, each running two things and kind of operating together. Is that how we should anticipate succession planning at Berkshire Hathaway would work for the CEO job?
WarrenNo, when I'm not CEO, there'll be another CEO, and there will be a CEO. And how that CEO will organize things will be up to him in this case. And that will, he'll figure out the best way to do it. way to do it and it won't change very much. It'll change a little, but it won't change very much.
QuestionerDo you know which of these two would be the CEO if this would have happened overnight?
WarrenWell, you never know, but our directors know what they would do tomorrow morning if it happened, but they don't know what they would do four years from now, we'll say, if it happened then.
QuestionerI guess that raises the question, does this raise a little bit of a horse jockey in competition?
WarrenThere's no horse race at all, these two fellows. They know, they know each other well, they like like each other well. They both have their areas especially. I mean, Greg would not want to be running insurance and Ajit would not want to be running the other operations. They are extremely good at what they do. But those are two pretty different businesses. And they're roughly equal businesses. There's more, there are more people on one side. But the insurance business generates over $100 billion afloat, in addition to having well over $100 billion invested in it. in terms of net worse. So there's more or less parity of earning power and importance.
QuestionerThat's what I was going to ask you about because we've been looking at some of the measures this morning just from analyst notes on some of these things. If you look at 2016 profit and break it down, the insurance company represents about a quarter of the business, at least for the profits for that year. And obviously insurance profits can swing pretty rapidly. But you look at it a little differently.
WarrenYeah. And if we have a hundred billion plus of float, that means those interest and
[7:27]
Warrenand a fair amount of capital gains over time come from the insurance operation. So there really are pretty equal importance. I'm not sure if we were to sell one side or the other which one would bring more money. They both are enormously important to Berkshire. The key is, it's kind of the secret behind Berkshire Hathaway from all these years. The insurance company creating the float that then you can turn around and invest, either in purchasing other businesses or in purchasing. businesses or in purchasing securities and bringing them in.
QuestionerHow does that work when it's not the same person who's kind of responsible for overseeing all of that?
WarrenThey would have to be people who would work well together. Well, they certainly have to understand each other's operation. But I invest the capital and Charlie does it with me. But in our insurance operations, totally nicely at Geico, he doesn't think for five seconds about how the money is getting invested. And actually the same way with the Jeep. same way with the Jeep. Their job is to develop good insurance business, create more flow over time, and then my job is to invest it. And they, there's really three functions in the business. There's two different types of operations and then there's the money.
QuestionerWhy didn't you do this years ago? What was the reasoning behind that?
WarrenProbably lethargy bordering on sloth or something of the sort. of sort. There wasn't a reason to do it particularly. You can say there isn't a reason today, but it will be valuable to anybody that succeeds me to have had more experience in the overall management of a large area. And we have so many different, both insurance operations. We have a lot of different ones in insurance. We have even more than the other operations. And just in terms of the history of which we have a lot of the insurance, the history of which managers really don't need any help whatsoever, and which ones, if they're doing bold on acquisitions, may need more input than others. There's a lot of different individuals running our different businesses, and they have different strengths and weaknesses. And over time, on both the insurance side and the non-insurance side, each of those sellers will pick up. They'll know a lot more a year from now than they know now. And they will have those businesses reporting, through to them. To them. And they'll decide the compensation of the people underneath.
[10:01]
WarrenI mean, certain people we have compensation arrangements with that we will have enforced for their lifetimes because they, we made them at the time of acquisition. But aside from the ones that are fixed, those decisions will be theirs. And smaller bolon acquisitions will probably be theirs. If there's a large bolon acquisition, Charlie and I will get involved. You will get involved in making the acquisition, but I would assume that any future acquisitions would report through, those divisions would report through to one of these two gentlemen. That's correct. Will that make it more difficult for you to make acquisitions because one of the big lures in the past has been being able to report to Warren Buffett? Yeah, well, it isn't that I disappear. I will tell all these fellows and women to send me the statistical information they get. It's like, you know, looking at baseball scores or something. from my standpoint. So I'll keep getting the information, but I will not be setting the pay. I mean, they will be working for the, either Jeet or Craig. But I'll be as interested as ever, you know. There's not a drop of Berkshire blood that's leaving my body.
QuestionerYou said that this is something that you feel great. Terrific. Your health is in perfect health. Yeah. Same thing, are you tired? Do you not want to be doing as much?
WarrenNo, I'm down on, I'm at the office on Saturday. Any Saturday I'm in town unless there's something very unusual going on. I love it. I love Bertrande. I look forward every morning to being there. And it's a great, you couldn't have a better job that I've got. I've just made it one notch better now.
QuestionerThere's a J.P. Morgan report from September of last year, and the analysts there points out that Succession has always been a big question. The next link of who's going to be there has always been a huge question, but she also points out that she wouldn't be surprised to see you running things for the next 10 years or so. You have an actuarial brain. You run these things through. What do you think when you start thinking about how long you'll be running?
WarrenTen years would be a long time. But every time I see one of my doctors, I say, just guarantee me the next five years. It's sort of a running extension. It's like a whole long. Running it now is exactly like it was 10 years ago or so. I mean, if there's a deal someplace, I'll get on a plane, you know, as soon as I leave here.
[12:29]
WarrenI love what I do at Berkshire. There's nothing I'd rather be doing, because I could do anything else if I wanted to do something differently. But it's more fun than anything I can imagine. And how did this decision come about? I just wasn't, you know, I've molded various times exactly when I'd do something like this. And maybe six weeks ago or so, I just decided why not now? And as I say, I talked to me. I talked to the directors one or the time individually before we had this vote last night. And they jumped all over and that was, you know, yeah, I was hoping to be a little dissent or something. And then the meeting took about 15 minutes yesterday on the phone. So it just makes sense now. I mean, there's, I know that if I were in the position of those two fellows, I would just assume, have some of the stuff. I'd like to get some experience with supervising a whole group of businesses before I eventually took over. Yeah, and potentially making sure that they feel comfortable with all of those issues, too.
QuestionerCharlie Munger's not going to be sharing the title of Vice Chairman. He'll be joining us a little later this morning. How does he feel about sharing that title?
WarrenOh, hey, it was his idea, actually, in terms of the title. I got about halfway through the first sentence sentence, which is more than I usually get through. with Charlie before he comes up with a better idea. He just says, let's just have three Vice Chairman.
QuestionerWell, we will be joined by Charlie Munger later this morning to talk about his perspective on all of this as well. When we come back right here in Omaha, we will have more from Warren Buffett. We're going to talk to him about what he sees in the markets in the beginning part of this year, what he thinks about interest rates this morning and much more. Again, we are live in Omaha, Nebraska this morning with Warren Buffett, the chairman and CEO of Berkshire Hathaway. News this morning and much more. We'll be back with more after a quick break. Welcome back to Squackbox, everybody. We are live in Omaha, Nebraska this morning with Warren Buffett, who is the chairman and CEO of Berkshire Hathaway. Big news out of Berkshire this morning, but also, obviously, people wonder, Warren, what you think about the markets at any given point, particularly now seeing what's happened. The S&P has had its best start to the year since 1987. Stock markets continue to keep going up, and it's got people.
[14:55]
Questionerboth wanting to participate and then also wondering if we are seeing something that the end is near, that we are getting into overpriced territory. I know that you don't always look at markets on a case-by-case basis, but if you're just looking, broadly speaking, do the markets seem richly valued to you?
WarrenThey're not richly valued relative to interest rates. You know, stocks are worth X if interest rates are the long-term rate is 3%, and they're worth quite a bit less than exit the long-term rate is 7%, and there's panic in stocks if the long-term rate is 15% like it was in 1982. So, interest rates are the gravity to value, basically. Everything is worth on an investment sense, the present value of what is going to, cash is going to deliver in the future, and obviously, if rates go up, that present value brings the number today down. So we've had low interest rates now for a very long period, and we've had a bull market since, well, since March of 2009 when I was on, and Joe asked why I wasn't buy more American Express at 12, and I told them that I would buy it except we weren't allowed to. So, and it's, what has happened in the market has been very sensible. I mean, nobody thought we'd have these kind of interest rates for a long time. Now, additionally, you have the Tax Act, which is a huge factor in valuation. I mean, if you had bought, we're in Omaha, let's say you had, that bought the Union Pacific Railroad yourself, like we bought the BNSF. And if you bought it a year or two ago, you could have bought 100% of the stock, but the U.S. government would have had a super stock that was entitled to 35% of the earnings. And they have just changed that without you paying them a penny to where they now have 21% of the stock. In effect, you bought in their 14%, 40% of what they had for nothing. I mean, it'd be like I gave 14% of Berkshire back to Berkshire for nothing. Would that make the remaining shares more valuable? Of course it would. And so you've had this major change in the silent stockholder in American business who has been content with 35%. Now, there's various things about foreign earnings and all that, but 35% of our basic businesses. And now, instead of getting a 35% interest in the earnings. They get a 21%. And that makes the remaining stock more valuable. I have not heard anybody explain it just like that. When you say something like that, we're constantly asking, is this baked into the market? Is this reflected in the market?
[17:40]
QuestionerWhen you say something like that, that makes me think, no, that this is a much longer term, much bigger deal than the run-up that we've seen in the last month or so.
WarrenWell, it's a big deal. How much of it's been baked in as people started thinking maybe there would be a tax bill? And how big would it be? I think that 21% was not baked in. That's a huge, huge reduction. If you and I were partners in a business and you own 35% of it, I own 65, and then you showed up one day and said, I'm giving you 14 of my 35 points. Now my interest has gone from 65 to 79%. That's more than a 20% increase in the earning power. And you've just given it to me. Nothing's changed in the business. It's a big factor. Now they can take it away, too, go the other direction. They, look, we're looking at this new change. It's just been on a case-by-case basis that investors are trying to figure out what this means for companies. And we're just beginning to hear the very early pieces of this.
QuestionerYou're basically saying that this is good news for shareholders across the board, because sometimes this is painted as something that's a giveaway to CEOs or to corporate executives, things along those lines.
WarrenPeople who own the businesses, they now own 20% more of the domestic earnings. I mean, the foreign stuff gets more complicated. But it's good if you own the foreign stuff, too, foreign earnings. We happen to be overwhelmingly U.S. oriented at Berkshire. But it's an interesting point. The government doesn't own the assets of the business. We own 100% of the assets of BNSF, but we don't know 100% of the profits of the profits. And we went from 65%. 5% to 79% of the profits of BNSF, and that is a more than a 20% increase. It's 14 points on 65. So it's a big deal.
QuestionerWhat does it mean specifically for Berkshire Hathaway? There was an analyst who just put out a note, Jay Gell, who said that it's a $37 billion book value increase for Berkshire Hathaway instantaneously.
WarrenYeah, well, it doesn't mean a dime of cash today, but we have a huge amount of deferred tax liabilities. For example, we probably, I'm pulling these figures out so don't file a suit if I'm off a little bit. But we have perhaps $100 billion of unrealized appreciation and securities we own. And if you own securities that have gone up, you don't have to pay a tax just because they've gone up, but if you saw them, you do. And if you kept your books on an accounting basis, you set up a liability for the tax on your
[20:16]
Warrenunrealized gain. Well, our tax on the unrealized gain on $100 billion would be $35 billion, and then that goes down $21 billion under the new tax loss. So anybody that has a lot of deferred tax liabilities, gets a big kick-up in book value. A company like Citigroup has a big deferred tax asset, and the reverse is true there, because that tax asset is not worth as much. What it does is it reduces their taxes in future years, and that reduction is worth $0.21 on the dollar instead of $0.35 cents on the dollar. So it depends whether you have a lot of deferred tax liability or deferred tax assets, among other things, but that's a big one with us. I mean, it's a change in accounting, but what does it mean instantaneously? Or it's just a description of how big of this. Well, it does mean if I sell some stock that I was going to sell in December, and I wanted to sell it. I didn't sell it in December because I would have had a 35% tax on the profit. And by waiting until January 1st, if I sell it today, I have a 21% tax on it. So I get 79% of the profits for Berkshire this month and last month I would have gotten 65%.
QuestionerYou know, you hinted at this in October when we talked to you and said that if the tax late changed and you were one of the ones was actually betting that it would at that way, which was against conventional wisdom.
WarrenYeah. As early as, I think it was October 3rd the last time we sat down with you, and hinted at this whole idea of what you would be potentially selling or not selling as a result. Are you selling stocks now that... Net we're buying.
QuestionerNet you're buying.
WarrenYeah, net. I've lived under 15 of the 44 presidents of the United States, and I've bought under every single one of them except Hoover. I was only a toddler, but less of a year. But we're basically buyers over time, Becky. That doesn't mean, there can be conditions under which we're sellers, but that's not... For one thing, the money keeps coming in, you know, so we basically keep buying. Let me ask specifically on one stock, IBM, are you a buyer or seller of that? Because we've talked with you in the past when you were selling. Yeah, well, around the middle of February, we have to report what we did in the fourth quarter at But, well, it was advantageous if you had a loss in shares, and we did in some IBM, it was an advantageous to sell last year rather than this year. So does that mean you're not selling IBM this year?
[22:38]
WarrenWell, it would certainly mean that if we had high-cost IBM and we were selling, we would have sold it last year, and if we had low cost, we would have waited until this year. And we had some of both. So that sounds like you're selling all the way around?
QuestionerWell, on February 15th, you'll be selling. the first to know whatever that date is it's mid-February sometime I tried back to the tax law very quickly what does it mean just in terms of what what it will be in just on cost of business is it going to mean Berkshire earns a lot more are you going to raise
Warrenwell it depends on it depends on the business if you're talking about regulating utility business none of it flows through because all of it goes to the customer and as it should then in some businesses it will tend to get competed away and in other businesses it will be like likely to be competed away. There's a big difference in how it affects different kinds of businesses and you can't totally anticipate it exactly. I mean, you know that certain types of business tends to get competed away fairly fast. Other businesses.
QuestionerWhat types of businesses does it get computed away?
WarrenWell, it's the one where people are looking at after-tax returns on capital and pricing accordingly and accordingly and maybe where their suppliers to import companies and those suppliers say you know now you're only paying 21% of the tax so we want some of it we want a cut of it I mean that capitalism is competitive but it's much more competitive in certain industries and others and some there will be decisions made where people make their decisions based on after-tax return on capital and and those will be made on more marginal projects presumably there's not a lot of that I would think in the railroads it's a little a more set in stone issue because you're not a monopoly but if people want to continue to use those routes yeah our competition is truckers and other railroads I mean both both and the cost of diesel fuel is more important but that it all remains to be seen on that but it and it's certainly a significant plus and if you own the kind of business where people really have no choice but it isn't regulated I mean it would be regulating the case of electric utility or something your margins are after-tax margins are likely to widen out and they're likely to widen on you know foreign and domestic
Questionerwhat does this mean for the American economy overall we talked about the stock market and what this means what
[25:12]
Questionerdo you think it means on a broad that's the big question we'll find out and I mean we're essentially changing the mix and to some extent we're adding to the deficit at a time when the Fed actually is going to be selling, oh, well, not in huge quantities, before we were adding to the deficit for years, but the Fed was buying a lot of of the Treasury issuance net, so that that the purchasing from the private sector of debt earlier needed to be less than the Treasury was actually raising because the Fed was there buying it.
WarrenSo they took their balance sheet. So we're effectively taking our own. They were buying their own stuff. So they took, there was three and a half trillion, or thereabouts added, maybe, I think it's about three and a trillion. And basically that was the Fed funding parts of the deficit of the United States government. Now it'll be the other way around a little bit as they, the Fed's going to take it down very gently. But nevertheless, instead of being a buyer, there'll be a seller, and at the same time the Treasury will be raising more money. So you've changed that equation somewhat. How that plays out, I don't know. Net net, I can't imagine that it will hurt the American economy or GDP, at least over the short term. It's hard to tell in economics. That's the one thing I've worked. I do not, we've never tried to make money by predicting the economy. I mean, a tax law change actually changes numbers that you can see. But it's very, macro stuff is very hard to predict. And, you know, you've seen that in the years when people come on and try and predict what the economy is going to do. It is, Charlie and I have never made a marketable security decision or the purchase of an entire business. What we've talked at all about macroeconomics.
QuestionerNo, but I would guess if you were putting money to work in the markets and trying to figure it out, those macro decisions would have a big impact. You just said interest rates act as gravity. The tax bill will add some stimulus and certainly makes it more valuable to own any shares.
WarrenWell, I mean, you've changed the equation there. So, I mean, that you've actually. changed who gets the value or who gets the earnings of American corporations in a fairly major way. So you may not buy a company or a business as a result, but you may decide to allocate more money into stocks. But you never can do one thing in economics, you know, I mean, everything you do, it's the butterfly effect,
[27:41]
Questioneryou know. So you never know exactly what's going to happen from moves that are made. Would you have told the congressmen and the senators voting on that bill to vote for it or vote against it?
WarrenI would have had a different bill. If you didn't have a choice of a different bill and you were looking at leaving things exactly as it was or lowering the corporate rate. If I did it as a representative of Berkshire shareholders, I'd have to vote more. I mean, I've got a million shareholders that are pretty much probably all happy about the fact that happened. But I would have had a different bill myself.
QuestionerLet's talk about interest rates again and just talk about what's happening today. You can look at the 10-year note, touching up, getting 2.56 percent and a little. a little north of that this morning. That kicked off early this morning after the Japanese 10-year bond started climbing as well. And when I say climbing, you have to look at this in relative terms. It was 0.086 percent earlier this morning when I saw it. But it did that because it moved up. The yield moved up because the Japanese central bank was expected to not be buying quite as much as had earlier been anticipated. When you start seeing moves like that, it tells you what.
WarrenIt tells me I don't know any more about interest rates than I did five years ago or 10 years ago. Sidney Homer wrote a book when I was, he was the expert on it. And when you get through, there's nobody whose predictions on interest rates I would pay any attention to, including mine. Even including Charlie. But interest rates are extraordinarily, been extraordinarily low for a long, long time. And that has acted to buoy the stock market very significantly. Because people originally didn't, 2009 and 10, they didn't think they'd still be it. At these kind of levels, now they wonder, is this sort of permanent. It's a very strange situation to have the Federal Reserve say, our goal is 2% inflation, and then have people buying, if they buy the Treasury bills, it's 1.5% and they pay tax on it. So, I mean, they, the government has announced to you that it doesn't pay to save. You know, they say, if we can run things the way we want to, we're going to have 2% inflation. And if you get a nominal return of 2.8 or something, you're going to pay some income tax on that, you're going to have nothing in the way of more purchasing power by deferring consumption today.
[30:05]
WarrenWell, why do you defer consumption? You're hoping to have more consumption later on. That's the reason for saving. And essentially, the Federal Reserve has now said for a few years that we're going to try and make sure you don't have any net gain in consumption. So what could get in the way and mess things up? I mean, that sounds like a sure bet for putting money in equities. And people that have taken it as a queue for years at this point. That's why I've said for a long time that equities were the place to be. I mean, there's been no comparison. To me, it's just been absurd to see pension funds and those people in the early teens of this century saying we ought to have 30 or 40% bonds. There's no comparison. A bond that pays you 2% is selling it 50 times earnings, and the earnings can't go up. And the government has told you. we'd like to take that 2% away from you by decreasing the value of money. That's absurd to own something like that. You may have to own it for legal reasons or something of the sort. But to make that as a voluntary choice in the last 10 years against owning assets has struck me as absolutely foolish. So what changes that equation? What happens? Well, you can have higher interest rates. Higher, but you're not talking about 3% interest rates. You're talking about 7% and north of that. Well, I don't know what it'd be, but 3% is a, 3%. If you pay 20% tax or something on that as an individual, now you're down to 2.4%. The government says they're going to take 2% of that away from you by clipping away the purchasing power of that money. You know, people, when they look at issues that could throw the stock market into a tizzy, they'll point to geopolitical issues most of the time. Maybe it's a trade war. Maybe it's an actual war, something that breaks out with North Korea or something of the sort. What do you think of those sorts of concerns? Well, you've got to have your money someplace. So is that good for bonds? Or, I mean, in the end, you've got to look at the underlying stream of cash you're going to get over time, and that determines what you should pay now. Now, the question is, how sure are you of getting the cash? Nice thing about a bond, as you know exactly what the coupon is. But if you look at American business, if you look at the S&P 500, they're earning well into the mid-teens or higher. Let's say they're earning 15% on assets employed.
[32:24]
Otherand they continue to earn. That's a 15% bond. I mean, the comparison between a 15% bond and 2.6 or 3 doesn't really make very much difference. Right. Even before you talk about the bigger percent of those earnings that you get because of the tax bill and what else comes along with that. And now they increase the potential for the earnings of basically American business, and American business was earning a hell of a lot of money before.
OtherJoe has a question from back in the studio, too. Joe.
QuestionerYou know I always do. Hey, hey, Oracle man. Good to see you. You know, you remember, you know I always ask you the same question. Because insurance is important to Berkshire. I mean, obviously, and we just heard that $100 billion number. And you're very savvy. I love the way you do things because, you know, you get insurance is such a great business because a lot of times you can figure out what's likely to happen and charge more than you really need because the things that people worry about probably aren't going to happen. So it's just like printing money. And I know you know that. you know, you've been like a genius in that field for so long. You remember 2005, we had about 12 hurricanes or something. And I remember right afterwards you were like this, because you knew everyone was going to predict that's going to be every year. And then for 12 years, you charge these exorbitant rates because it was going to happen again, and it never happened. And Berkshire Hathaway, you know, went up five-fold or something because of that. So my question is, we just had the worst year ever for catastrophic losses, both insured and uninsured. Is that going to be the norm from here on out or do you think it's within the range of standard deviations for losses? Do you think it goes back down and you need to raise rates?
Ajit JainAs near as you can tell, you've got pretty good records back to the early 1800s on hurricanes that have hit the mainland United States. It looks awfully random if you look all the way back to, you know, 1830 or 40. And it's true. that we had the longest period here up to last year, most consecutive years without a hurricane hitting the mainland United States. And that came right after Katrina and, you know, in the year when we had Hugo and I forget various ones. So it appears random to us. And incidently, we did not, we went away from insuring what we call supercats. We moved away from it after
[34:51]
Ajit JainKatrina because the race kept just coming down, down, down, down. And we just thought we were not getting paid enough for CAT. So we have not been in the supercat business to any degree at all in recent years. We used to be in a very big time when we thought the rates were more appropriate. But the rates have not been high.
WarrenAnd you argue against every shareholder. Every year you get shareholder proposals that you got to start, you know, taken into account climate change. You got to sell all your fossil fuel holdings. You got to do all that. You don't go for it every year. No, but we, it goes on the ballot. It'll be on the ballot again this year. And since we now webcast our meeting and we get lots of viewers around the world, I'm sure we'll have a lot of people to keep putting. I think we have two proposals on the ballot this year. But I explained our position on it a couple of years ago. The big thing you need to worry about in this world is weapons of mass destruction. Doesn't mean you can't worry about other things. But weapons of mass destruction are the big, that's the big worry. And it's been the worry ever since August of 1945.
OtherI agree. Fukushima. Fukushima and caesium, whatever cesium, whatever number is attached to it that doesn't go away for 500 years might be more of a worry than CO2. I don't know. That's just me. Anyway, Melissa has a, okay. Okay.
Ajit JainBut I would say that there was a little catch-up in September when we had Irma and Harvey and Brea and Brea. No doubt. But we were not insuring supercats. We had a fair amount of exposure just generally, but not supercats.
WarrenWell, I didn't know you're going to go all the way back to 1800 on a 4 billion-year-old planet. I thought all we can look at is the last 15 years. But, you know, you're wacky. I can tell you how many earthquakes of 6.0 or over have been in California in the last 100 years, too. But it doesn't tell me what's going to happen tomorrow.
OtherWell, you were there.
WarrenYeah, that's true. That is true. You know, if you want to know anything about the Civil War or anything like, yeah, I've got to come to it.
QuestionerHey, Warren, I've got a question about Bitcoin. You know, Jamie Diamond called it a fraud back in October. You followed up with comments in December saying that you thought it was a mirage. Jamie Diamond yesterday backed away from those comments saying that Bitcoin is a fraud. Have you rethought your position on Bitcoin?
[37:21]
QuestionerAnd how would you feel if some of your portfolio banks wanted to make a mark? to make a market in Bitcoin, wanted to trade Bitcoin, wanted to make a business out of Bitcoin trading?
WarrenYeah. Well, we don't tell the banks in the portfolio of anything about their operations. But in terms of cryptocurrencies generally, I can say almost with certainty that they will come to a bad ending. Now, when it happens or how or anything else, I don't know. But I know this. If I could buy long-term puts, if I could buy a five-year put, if I could buy a five-year put, on every one of the cryptocurrencies, I'd be glad to do it, but I would never short a dime's worth.
QuestionerHave you thought about trading the futures to take a negative position of Bitcoin?
WarrenNo. You would not do that.
QuestionerNo.
WarrenThere's no reason. I get into enough trouble with things I think I know something about. Why in the world should I take a longer short position in something I don't know anything about? So, you know, we don't have to know what cocoa beans are going to do or any, or cryptocurrencies. We just have to focus on eight or ten stocks. businesses, basically, that we think are decent businesses. But I do think that, I think what's going on definitely will come to a bad ending. I mean, you've got virtually everybody. I have a class, I have 11 schools coming on Friday. The questions will be on Bitcoin. And I won't know the answers.
QuestionerAlthough when we sat down, Warren, you did say, I should have announced that we were getting involved in Bitcoin this morning.
WarrenWell, that is true. I mean, if a, to, that would be much more interesting to the audience that we were going to issue a whole series of cryptocurrencies tomorrow. We aren't, believe me, and we don't own any, we're not short any, we'll never have a position in them.
QuestionerLet me ask you a couple of questions very quickly. We're going to have a call coming in from Charlie Munger in just a few minutes, but before we get to that, I want to run through a couple of stock issues with you, too. You already spoke about IBM, whatever you would or wouldn't tell us on that. When it comes to Apple, that's a huge position. You're one of the top five shareholders in Apple. They had a big, high. holiday season from what we've been seeing, what we've been watching with some of the channel checks and beyond, you still feel like it's a great consumer products business at this point?
WarrenWell, from all the stuff we've published, we've added to our holdings consistently up through all the
[39:39]
Warrenpublished reports, and we'll publish some more on, on, uh, see, the market is not yet saturated for iPhones. I just want to point that out. When Tim Cook sent me a Christmas card again this year saying who's going to sell me an iPhone this year. When I actually buy it, it's all over, folks. You know, the last person is bought. A Samsung flip phone that you still have.
QuestionerYeah. Yeah. So you're still positive on it. You're going to be, when you buy it's jumping the shark, essentially?
WarrenPardon me?
QuestionerWhen you buy a smartphone, it's jumping the shark. That's the end of the run.
WarrenI don't know. Maybe I'll buy one late in the year just so that. He keeps seeing me these reminders every Christmas. Jim Kramer wrote in, too. He has a question for you. He wants to know if there is a point where you think General Electric shares represent value.
QuestionerWell, there has to be. I mean, there always is for almost any company. And then different people have different views on what that price would be. But, I mean, if you came to me and said, we'll sell you the whole General Electric Company at X, and X was the right number, we'd like to buy it. And if we buy little pieces in the market, that's the way we think about it.
QuestionerI think he may have been specifically asking, what is that price target if you have one?
WarrenYeah. Well, that would depend on also on what other stocks we're selling at. I mean, in the end, my job is to have the capital Berkshire invested in businesses that we think we understand pretty well and that are an attractive valuation. Now, we can't move around in big positions that easily, so it takes a pretty big disparity from something we want to sell to move to move to something we want to buy. But General Electric is a big, strong company.
QuestionerHow much cast does Berkshire have on hand right now?
WarrenWell, we have something a little over $100 billion. It's almost all in Treasury bills. I think there's about $1.7 trillion treasury bills in the world, U.S. Treasury bills. And we own 5,000-so percent of them. We actually get the calls from dealers who need a bill for this, if they need $200 million, April 12th or something. They come to us.
QuestionerBecause you have it sitting around in the couch cushions.
WarrenYou have it sitting around in the couch cushions. Yeah, we are usually, on Monday, we're usually buying about $4 billion or so of bills. But they're very short, so they roll. And we have to be a little careful because Solomon Brothers, which I was involved in 25 years ago,
[42:12]
Warrenthere's a rule you can't buy more than 35 percent of the issue. And that's the rule was called the Mosier Rule because the guy there, Solomon loved breaking it, and they, he went to jail for a few months afterwards. So we're very careful about how many we've bid for. But we, we never own, we don't own commercial paper. We don't count on bank lines. We don't do any of that thing. I mean, when a 2008-9 comes along, we want to have short bills. So the only thing we buy are short bills, basically, for liquidity. You've said that you like to have $20 billion in hand. That leaves about $80 billion for acquisitions. Anything you have your sites set on right? now?
WarrenNo, but I'd like to.
QuestionerOkay. Yeah. On that note, let's bring in right now Charlie Munger, the vice chairman of Berkshire Hathaway, who is joining us on the Squawk Newsline from California at the very early hour of 545 a.m. California time. Charlie, I want to thank you for joining us today and calling Ed.
CharlieWell, I'm glad to do it.
QuestionerYou are with us this morning because of the big news at Berkshire Hathaway, the announcement that both Greg Abel and Ajit Jane have been named to vice chairman of Berkshire Hathaway as well. As the first vice chairman of Berkshire, who is, by the way, staying in that position. What do you think about this? What can you tell us about Greg and Ajit and what you think about them being pushed into these positions, promoting to these positions?
CharlieWell, I think this is a very good idea, and although the Berkshire shareholders should be very happy about it. You could hardly find two more qualified people on earth to be promoted to more recognition. and so forth. And Warren is actually going to devolve a little more power in some directions. And these people do some things better than Warren does. A lot better. It's a huge plus for Berkshire to do it and it's a deserved recognition coming to people. Should get more recognition. So of course I like it.
QuestionerYou said that you think it's a great idea. Warren told us just a little bit ago that it was actually your idea when he came to you and mentioned all of this. I mentioned all of this that you were the one who came up with the idea of promoting them. You know, three vice chairman chairman looks peculiar. But Berkscher's always looked peculiar and it's done better than...
CharlieYeah, 94-year-old earlier.
QuestionerCharlie, we've been talking with Warren just about the future, what you see coming, what you see happening,
[44:52]
Questionerand we've pointed out to Warren that for a long time, people have been pushing for a succession plan because he's 87. You just turned 94. I forgot that until a couple of of hours ago, I was still thinking you were 93. You just turned 94, so what do you see in the future? And just talk about your involvement.
WarrenI haven't said to the shareholders, they probably got seven more good years coming out of one.
QuestionerAnd how many more good years coming out of you, Charlie?
CharlieWell, not very many. I have to face this reality, but first is good at reality recognition.
QuestionerCan you talk to us a little bit about the markets? We've just... I'm sorry, go ahead, sir?
OtherWell, on that shareful note, we expires to go on to some different. subject.
QuestionerLet's talk a little bit about the broader markets, too, because you always have some big thoughts about what you see out there. We've been talking about share prices and whether share prices look expensive or not here. What do you think when you look at the stock market and see new records set almost every day and just for the beginning of this year, the strongest start for the S&P since 1987?
WarrenWell, I don't think share prices are crazy. in a world where bonds still yield some 3%.
QuestionerAre there things that concern you when you look at the markets because it's part of what we get all the time, procrastinator saying, well, this could be a big issue down the right. And badly. They're bubbles.
WarrenAre you talking about Bitcoin?
QuestionerNo, I'm talking about, yeah, sure, and venture capital too.
WarrenAnd I'm sorry, venture capital?
QuestionerYeah, there's bubbles there.
WarrenYeah. What do you see in venture capital that concerns you?
QuestionerBubbles. too much money. It has measured how?
WarrenAnd is this just something that you think that the arena itself has gotten too big?
QuestionerExcesses and bubbles. They're just, we have different bubbles at different times. Think of the bubble we had in the capital back in 2000. In that year, they could take $50 billion into a bushelmed basket and burned it in. It would have gotten the same results.
QuestionerWhat in particular started you thinking about venture? capital? Is that something you've just thought in the last year or longer?
WarrenEverything is going on. Mostly we just stay away from what we don't like.
QuestionerSo what do you like right now?
WarrenWell, I actually like this tax reduction that Berkscher's gotten. I'm an unabashed appreciator.
QuestionerWhat do you think about the tax plan overall? This is something you would have voted for?
[47:59]
CharlieWell, I would be more likely to vote for it than Warren. What do you think the broader implications are, what this means for, for corporate America, what this means for the markets, and what it means for the economy? I think there's a chance that it may work quite well. You're talking a long term perspective. No, in India, which is a very poor nation. The capital gains tax is zero, and the income tax on dividends is zero, and a really poor nation. That seems just inconcealed, and the rich in India are very rich. That is really peculiar. It's a lot more peculiar than the United States. United States. And I'm not at all sure that India is wrong in doing what it's doing. Because? Because I think their economy may grow better doing what they're doing, and it would if they were less friendly to the people who invest the money. So what do you think happens to our economic growth? This is the big question in all of this. Do you think GDP here will see big gains because of the tax cut? I don't think we know. I think the people that are sure that it will won't work. I probably shouldn't be quite so sure.
QuestionerWarren, what do you say to that?
WarrenWell, I agree with them on that. I mean, I think it's predicting what the economy will do. When I went to Columbia, I took a course in econometrics and everything. They thought they were getting the answer. Nobody's had any. You have not been able to make money in the stock market or even make great decisions in business by listening to economists.
QuestionerRight. You know, Warren, you in charge. both are allocators who look and take Berkshire's money and try and figure out the best place to be putting those in the market. Charlie, we've spoken with Warren a little bit this morning about what he likes and what he doesn't like. But when you look around at the stock market, are there stocks, are there sectors that you think are really interesting places to be?
CharlieWell, obviously, stocks are valued higher than they were a long time ago, and it's harder to make a lot of money in a stock market that sells at 20 times earnings. times earnings, then one that sells at 15. And so, but that does not mean that you should put all your money in long-term bonds at two or three percent. I agree with Warren totally on this stuff. I think you're... Yes. The right answer for investors is a lot of deferred gratification and being well to suffer a fair amount of agony
[50:55]
Warrenby just writing out, in essence, buying equities and writing out the declines. I think Joe has a question for you as well, Charlie. I'm willing to try. We've got delays from here to you and then delays on the phone and everything else. So just that people can bear with it, that's what we're dealing with. But Charlie, you seem to have a really good grasp, as far as I'm concerned, of tax policy and the role of government and the private sector. And I was just wondering, you know, Warren's quite a bit younger than you. When people are young, they're like that. They're more idealistic. and do you think that eventually, as he grows up, he'll, like, adhere to your tax policy, or you're thinking more, or is he just hopeless? Where do you come down on that?
CharlieHe's got, you know, maybe he can figure it out. We don't have to agree perfectly on everything. It's probably better if we don't. I guess so. But I'm just, usually age, with age, comes sort of the realization that maybe less is more in terms of, Warren, is there any hope? I mean, you've got to, you know, you've got a few years where you, you know, where you have the idea about capital gains and lower tax rates for corporations, or are you hopeless?
WarrenI can't, I campaigned for Wilkie in 1940. Wilkie and McNary, and I was head of the Young Republicans Club at the University of Pennsylvania in 1948. You went to revert. You went backwards. So I've actually gone, yeah, I'm a time reversal machine.
CharlieWell, I am too. I voted for Kennedy. We're coming together. It just takes more time than life is going to give us.
WarrenKennedy was a tax cutter. Yeah. By the way, I really liked that when he did it. Charlie, you mentioned broadly that stocks are the place to be not bonds, but when you look particularly, any stocks that have caught your eye recently or anything that you think would be worth pointing out?
CharlieWell, I don't want to get into talking about specific stocks. Tried.
QuestionerOkay, let's talk about other bubbles then. If you think private equity is a, or I'm sorry, venture capital is potentially a place where you see bubbles. Well, and Bitcoin and the other cryptocurrencies are also bubbles. And what tells you that? I mean, I'm just thinking of the millennials, the young investors who get so excited about something like this, what would you tell them? What would your message be?
CharlieWell, they're excited because things are going up at the moment, and it sounds.
[53:42]
Warrenvaguely modern. And I'm sure the computer science involved is difficult and interesting. So you can understand whether they get excited. But I'm not excited. My attitude is just to hold my nose and go on and go on somewhere else. If you're buying something because it went up yesterday or last week, that is not a good reason for buying anything. It'll get you in trouble over time.
QuestionerYesterday, Bill Miller was on this pro, was on CNBC. And he talked. talked a little bit about what he sees happening. He says there's a potential he thinks for a market meltup. He pointed back to what happened in 2013, where you saw 30% plus gains in the market. And he said that he would think that that is more likely if the tenure gets closer to 3%. I didn't quite understand or follow that. But what do you think about that potentially?
WarrenWell, I don't follow it. I think his point was that people, if they own bonds, their bonds would be going down. Down and if you're losing money. And there is no question that that markets have owned. and that when there is enough momentum, it takes over everything. I mean, and that's how you get bubbles. I mean, Ben Graham used to say you get in more trouble with a good idea than a bad idea. Because the good idea, originally you had the idea that stocks were cheaper than bonds generally. After a while, the very action of the stocks becomes more important than the fundamental reasons. And the fundamental reasons disappear and people are just buying something because it's going up. going up. When people are buying something because it's gone up, there's no telling how far it'll go, but you can be pretty sure there'll be a bad ending.
QuestionerCharlie, anything to you that really jumps out in the markets and the news these days? I mean, you've been watching this a long time, but is there anything that you think may be different this time around?
CharlieWell, the whole situation is quite weird. Whoever would have guessed that you could have 20 years with real interest rates at zero in a lot of different advanced nations. nations. And who would have guessed that we could print as much money as we did and have as low inflation as we did. My attitude toward the economics situation has always been one of skepticism. Thank you. I don't think any of these people know what the hell are doing.
QuestionerMany of these people being who?
CharlieThe economics progression. They've been confident in various formulas.
[56:19]
CharlieBut economics is not physics. The same form. formula that works in one decade doesn't work in the next. Economics is a difficult subject. And a lot of overconfidence has been removed from the economics profession over the last 20 years. They've been really surprised. And Warren, your comment, I'm sorry?
WarrenWell, I'm just going to point out, the national debt now is a thousand times what it was when I was born. Now, if you told my parents or anything, my dad in the waiting room, that the national debt was going to go up a thousand times during his son's lifetime. He would have said, you know, everything is going to turn into pumpkins and mice. And, of course, GDP in real terms, is six times per capital, what it was, that and everything. So it's very hard to get dogmatic in economic matters. The people that, well, I would say that the, just the whole emphasis on the debt going up during my lifetime has been way off. the market and I've been way off the mark. When I was back in my young Republican days, I was going around saying another dollar of national debt was likely to threaten our future or something of the sort. You don't want to get dogmatic in economics.
QuestionerAll right. Well, Warren, I want to thank you very much for joining us today. Charlie, I want to thank you for calling in. It's a pleasure talking to both of you. We truly appreciate your time. And Joe, we'll send it back over to you.
OtherThanks for that. And thank you to Warren and Charlie. That was great. Thank you.