OtherGood morning and welcome to a special edition of Squawk Box. We are live from Omaha, Nebraska. I'm here with Berkshire Hathaway CEO Warren Buffett. He's going to be answering your questions for the next three hours. We will cover his annual letter, Berkshire's big investments, and much, much more. Keep sending us your questions on Twitter and on Facebook with the hashtag Ask Warren. Folks, it is Monday, February 26, 2018, and Squabbox begins right now. The markets are crazy, Becky. was that on 350 on Friday when it was all said and done, and strongly higher again this morning, almost 200. And also, well, we'll take a quick look. Here's a check on the markets. U.S. Equity Futures at this hour are, as you can see, 193 points indicated on the Dow. The NASDAQ up another 25. The NASDAQ had been diverging a little bit last week until Friday, 127 points for the NASDAQ on Friday, which was almost 2%. That's a big move that we saw. and continuing buying going on across the board in this country, and actually in Asia and Europe. Overnight, some strong market action and some interesting moves in the 10-year note as well. But there's, you can see the Niki was up more than a percentage point, which at 22,000, that gives us 260 points. Hangseng, up sharply as well. Check out Europe, green across the board in Europe when I watched or at least looked this morning. Not quite the gains that we're seeing here or in Asia, but we'll see what happens as we move forward. It's only 601. And then Treasury yields moderating on the 10-year, which that is, you know, I guess it's a double-edged sword. As we get closer to 3%, sometimes you see a little pressure on the stock market. I guess if we don't immediately go there, and if we trade below 290, and I don't know if it went below where it is now, let's say it goes down. Maybe that becomes, maybe that lights a fire under the stock market. Just by not going to 3%, we'll see. Anyway, we now know, Becky, that there was quite a bit of margin selling, I guess, going on in that route, which explains how quickly it moved and how far it moved. But we'll get back out to you and you can ask Warren. You're talking about the lead story, or one of the lead stories in the Wall Street Journal today, about the margin selling that was $642.4 billion. I assume he probably doesn't buy, you know, maybe he does. Never, and in fact, he wrote a big chunk about that in the annual letter.
[2:37]
OtherHe wrote a big part about that in his annual letter to shareholders this year is the dangers of margin investing and using leverage, right, Roy?
OtherYeah. Yep.
OtherSo we will talk about that. That would be a yes. Okay, good. Is he going to, what's he going to, is he going to break up?
QuestionerHey, Warren, my man, Creighton. Hi. Did you watch this? I'm great. Did you see that was so awesome that game the other day. I'm not a big Villanova fan, not for nothing, but just because of Xavier, I'm not. I really am not. And their good players absolutely drive me nuts. That even Senzo, he sticks a dagger into Xavier so often. But how great that they, I thought they should have won in regulation. And then you saw how it went to, I don't know if you saw the game, but wow, they really came on strong. initial tip in overtime, right? And then they won. And then they beat Villanova. It was awesome.
WarrenJoe, we're having our baseball bracket contest for Berkshire employees here in a couple of weeks and with the same prizes as last year. But if either Creighton or Nebraska ends up winning the tournament, we're going to double the prize. So instead of being a million dollars, this is breaking news. This is what I was looking for. This is breaking news.
QuestionerYeah, Creighton almost, Creighton just barely lost to Zavis. and then they beat Villanova. So I mean, I wouldn't, how big is that coach? Because he looks big, but then I saw him with his players. He's like 11 feet tall, I think. He's like Hagrid.
WarrenWell, he's got a big, he's got a big son too.
QuestionerHe does too.
QuestionerAll right, we better get, you know, Becky, I'm so.
WarrenWe got three hours, all right? We got three hours.
OtherSo we do. We have plenty of time. And that was breaking news. That was breaking news, doubling. It was. And I'm sure this was going to come at some point, doubling the prize, the bounty. if Creighton or Nebraska wins the tournament.
QuestionerAnd by the way, is Joe allowed to play this year?
WarrenYou know, I will include him. I'll book him personally. The company is going to award the prize for whoever goes the furthest. And if you get through the Sweet 16, you get a million a year for life. Which, if Creighton or Nebraska won, would be $2 million a year for life.
QuestionerI want a finder's fee, Joe, if you win. I want, so he'll do, we can do our own little bet, Warren? Can we do something with, like, here we go again. I'm like a broken record. Can we do something with net jets?
[4:57]
QuestionerI mean, can we do something? Something like private jet travel for life? You want a million for life. You can buy your own net jets. Is it your brick against my net jets? Is that what you're suggesting?
OtherThat's right. My brick. My brick.
QuestionerAll right, we've got, go, go, go. I'll start with it. We'll negotiate. All right. All right, let's get right to the news with our newsmaker of the morning. Berkshire Hathaway's chairman and CEO, Warren Buffett is with us. And Warren, you're here, I should say. We're here, I should say. We're here in Omaha because you just put out your annual letter to shareholders, and you've sat down with us for seven or eight years at this point, and let us. come out and have viewers read your letter, have questions about that, and then get the chance to talk to you about it. This is the 53rd letter to shareholders that you've written?
WarrenI think it's the 53rd, yeah.
QuestionerAll right, so the 53rd annual letter, and this one was a little different. You actually broke with some of the formatting that you've been doing for years now, where you lay out and go through each of the companies and tell us how they're doing. Why did you decide to shake things up after 50 for years?
WarrenI'm 87, maybe I'm in my second childhood, going out a different way. And I just felt we'd sort of worn out that form. sort of worn out that format, and there was quite a bit of information that I would put in the letter that was repeated in the 10K. So we just append the entire 10K. And you're right, it's probably 60 or 65% as long as previous letters.
QuestionerYeah, which is, look, as somebody who doesn't like change on any level, I'm amazed to see you doing this. Yeah, like throwing it right out the window and going with it. But let's talk about some of the big news items that come right at the top of the letter. The first is that there's a $65.3 billion. $25.3 billion increase in net worth for the company in 2017. 29 billion of that comes from the tax changes from the U.S. government making those tax changes. Right. Why don't we dig into that? Explain what that means. How significant is that?
WarrenWell, there were two primary items, but they both reduced a deferred tax liability. We had about a hundred billion of unrealized gain in equities. Now, when they're sold, you pay tax on that. And previously, when the tax, was 35% we would have had a $35 billion reserve for taxes against that as a liability.
[7:02]
OtherThat would drop to about $21 billion, so $14 billion, roughly, was a reduction in the amount of tax that when we sell those securities, we will pay. It wasn't cash now, but it reduced a liability. When you reduce the liability, the net worth goes up. And the other important point related to the same thing, deferred income taxes. When we buy some kind of fixed asset, locomotive or whatever it may be, we're entitled in the previous years to 50% depreciation in the first year. And let's say it's going to last 10 years to may it last longer and not make it easy. Well, you would normally, on a book basis, depreciate it $10, a million a year on a $10 million asset over 10 years. For tax purposes, you've got to have what they call bonus depreciation and take 50% of it the first year, $5. So you're going to get the same amount of depreciation over time, but you're going to get the same amount of depreciation over time, but you got the tax deduction earlier, and that became a deferred tax. And we have a lot of that. We've got it in the railroad. We've got it in multiple places. The amount that was saved with the utility companies goes to the customers. So that was about $6 billion, and we set that up as a liability because that will go to the customers. But the amount that related to the normal, you know, the locomotives or whatever it may be, we got a reduction because that depreciation will take later on, which for book purposes, we've already taken for tax purposes, will come and be taxed to 21% instead of 35%. Those are the two big items.
QuestionerYou were not a proponent of pushing through this tax reform, but you have to talk pretty extensively about what it's going to mean for American business. It is a huge tailwind for American business. It's a huge tailwind, and it's particularly a tailwind if you've got, particularly for companies have had lots of depreciation and taken bonus depreciation. appreciation up front. So it's a big item there. Not as many companies have lots of appreciation in marketable securities, but it's a big item for those that do. What will it mean for American business overall? And as a positive of that, what will it mean for the economy over the next year and over the next several years?
OtherWell, it certainly means corporations will pay quite a bit less in tax than they otherwise would, and because the ongoing rate is 21% instead of 35%. So forget about these changes
[9:26]
Warrenthat apply to the past when we make money in 2018 domestically and subject to a lot of little things here and there. But basically we'll be paying a 21% instead of 35%. So that's a lot of money. And we haven't really gotten cash yet from this, but we will save cash as we go along.
QuestionerJoe? Just thinking about some of your comments in the past, Warren, I don't think you thought of American business was overtaxed. You've made that point many, many times. Or maybe you were saying that if they were taxed less, it wouldn't necessarily make it better for them. They're doing just fine the way they were with the old tax rate. You said that many, many times on the show. And I know I know you think people like you and Bill Gates and others, the wealthy, should pay more. So I think you have a stated sort of objective that the government needs more money to do what it wants to do. In this case, what you just said, is that a positive for the country that Berkshire now is going to have more control about where that capital is allocated rather than the government having control of where that capital is allocated? Is that a net positive for the country or a net negative for the country, in your view?
WarrenWell, it depends whether they'd instead of allocating it to us, they'd allocated it to the people who on very low incomes are If they were going to give a tax cut, the question is who they gave it to. And there are all kinds of provisions in it.
QuestionerNo, I just mean, but we're not talking about Perkins. We're talking about Berkshire Hathaway now gets that money instead of the government. Do you think that's a net positive that it's kept in the private sector or a net net?
WarrenBecause if you think it's a net negative, you're free to write that check and say, I don't like this tax law, take the money from Berkshire and give it to the low-income people or whatever. You could do that.
Questioneror do you think it's better that we we have a million shareholders I think I'd get sued by about 99,000 if I start making voluntary payments if that wasn't the case if that wasn't the case would you do it would you give it if the shareholders would go along with you would I
Warrenjust I just think it's really good for Berkshire and I wonder if you can just agree with with me on that
Questionerno it's really it's really good for Berkshire
Warrenthere's no question about it
Questionerwhat about for society as as a in general don't you think you can do great things with the
[11:58]
Questionerwith the incremental addition that you would wouldn't you rather have it than have the you know maybe people that don't use it as effectively everybody would rather have it the question is whether you're I I've never been able to you're I can't get you on these things I think if I read between the lines I think it's I think it's I think you like this I think it's good and I think that it's not a net negative for society that that the private sector gets to compete globally better whatever you however you want to look at it it's it's a net positive and you know if you don't like it I think you ought to just because I can just sign that check and send it off I it would you say 29 billion I I'd like some people I don't believe in giving away other people's money I think that's probably an area where you two can agree I think there's times where you've recommended giving away other people's money although it would include you anyway okay that's all that I just wanted to I now I'm going back to the brackets.
OtherLet me just see here.
OtherWell, if you win the money, Joe, you're going to pay a big tax on this. I mean, that's not right. You'll wish they'd cut personal rights a lot more, believe me, unless you incorporate your your brackets. We both know about this, don't we bet? I mean, between the agencies and the state and local taxes. The state and local taxes going up is going to hit a lot of people. I think my taxes are similar to your budget. I think I'm paying more than you because you take no income. I do. I think I'm probably paying more than you. I know how you work things.
OtherYeah, I think you're probably paying a higher rate, Joe.
OtherYeah, I don't think you're paying more in dollars. But I don't mind. I'm fine. I'm good. I live in the greatest country in the world. I don't mind either. I'm not particular. I'm not completely. I agree with you on that.
OtherYeah. No, I do not think we're under taxed or overtaxed.
OtherYeah. Excellent. Warren, let's talk about another big change that you mentioned in the letter too. And this is about accounting change that's going to come. And it's going to make your results a little tougher. for individuals to really realize what's happening on an actual basis with the companies, how the companies are performing. What is that accounting change? And it's accounting, it sounds boring, but I think it's important.
WarrenWell, it is important. I mean, we will report, well, we would have reported,
[14:15]
WarrenI don't know how much more, maybe 15 billion or something like that, more income last year than we did under the rules that have just been adopted because they are going, the accounting profession requires that we not that we now run gains or losses, unrealized, just as our stocks go up and down, we run those through the income account. So here we're running a normal business like the railroad, and you're interested in how that does on an operating basis. But we have $170 billion of stocks, and they might go up $10 billion a quarter or down $10 billion. We formerly always reflect that in the balance sheet. Now it has to go through the income account. So you're going to see a bottom line. a bottom line net income figure which really has no relevance to operating results. And people will look at the report and they look at the bottom and say net income. It'll be a totally deceptive figure. And we're warning people about that.
QuestionerRight. You've said that you and Charlie are going to take pains to make sure you explain to people exactly what this means. Have you talked to Ajit and Greg, Ajit and Greg Abel about making sure if they were in charge of things charge of things, that they would continue to do the same?
WarrenOh, they would understand that in one second. But people are used to seeing an item that says net income and have that mean something. The answer is it doesn't mean anything.
QuestionerIs that a Berkshire specific situation, though, because you have $170 billion in stocks?
WarrenYeah, it makes this like securities firms. A Golden Sacks would have to report that way in the past, but they're in the trading business of stocks and bonds going up. But we've got an unusual amount of markets. unusual amount of marketable insurance. But other insurance companies are going to have to do exactly the same thing. So you'll see, you name it, Chub or whatever it is, that they're going to report unrealized gains or losses as net income murder against net income each quarter. Obviously that'll fluctuate with the markets going up or the markets going down. That'll have a huge impact on things.
QuestionerWhat you also said in your letter that's so interesting is that you've got $116 billion. in cash, at least you did at the end of the year, that you'd love to put to work. Right. But when you look around, you have a hard time finding values. You said basically, prices for decent but far from spectacular businesses at an all-time high.
[16:38]
QuestionerThat's true. Does that mean that market overall is overvalued based on what you think is fair?
WarrenNo, not necessarily. I mean, in fact, the market, the stock market relative to the long-term bond market. People have three choices pretty much if they're going to be in marketable securities. They can own reasonably long-term bonds, they can own equities, or they can keep it in short-term cash equivalents. And if you had to choose between buying long-term bonds or equities, I would choose equities in a minute now.
QuestionerYou would choose equities in a minute.
WarrenYeah, that doesn't mean I think a stockmire is going to go up or anything else. But if I were going to own a 30-year government bond or own equities for 30 years, I think equities will considerably outperform that 30-year bond over the 30 years. I don't know what they're going to do in any day or week or month, but I think that I've thought it for a long time and we can talk more about that later, but it...
QuestionerWell, overall, is Berkshire net buyer or a net seller of stocks right now?
WarrenAnd so far this year, we've been a net buyer, although we sold a chunk of Phillips to get below 10%, so that was a three and a fraction billion dollars. I think there's 3.3 billion dollars. So we've bought more than that.
QuestionerReally? So even with that sale, you've still been a net buyer. Is that because of the huge spikes and volatility and the big declines we've seen in the market?
WarrenNo, it's just because we found stocks that we like. If we buy something, we don't have the faintest idea whether it's going to go up next week or next month or the next minute. But if I like it, we buy it. And we've got 170 billion of stocks. I mean, we like, there's plenty of stocks we like. we like. We have not found businesses that, because you have to pay more than the stocks are selling for if you're buying the public market by some margin. And we just haven't seen anything to buy there.
QuestionerAll right. Let's ask a couple of questions from viewers. One is T-60. It comes from Chris Rogers. He says, with $116 billion in growing, how confident are you in the future opportunities to deploy such a large amount of capital that would fit the Berkshire mold? And at what point would you consider a dividend?
WarrenWell, we would, I'm fairly confident that we'll find ways to deploy money. I mean, we are deploying money right now, but we'll get a chance as we go along based on history.
[19:05]
WarrenIt's gone a long period now. We've been in a bull market. And the best chance to deploy is when things are going down, obviously. But if we don't, we'd probably be more likely, it would depend on the price of the stock entirely. entirely, but the inclination might be more toward repurchase than dividends. Because dividends have that implied promise that you keep paying them forever, not decrease them and so on, whereas repurchases, assuming the price of the stock is such that continuing stock holders benefit from the repurchase, we would probably lean toward repurchase.
QuestionerWould you change, I mean, you've been very clear about what price you would buy back shares. Would you change the equation?
WarrenWe might. You might have to change it a little bit. little bit. If you had to change it too much, it wouldn't make any sense. So then we'd have to look at something else.
QuestionerWhat's the equation right now again?
WarrenIt's 120% a book. A book value. That's when you buy back shares automatically. We know that we're doing the continuing shareholders of favor if we buy it at that price. And then that gets increasingly more questionable as you will go up from there. And obviously I leave some margin of safety when I do the 120%. And if we were going to spend a lot of money to buy in stock at some time, in the future and it was 125% or 127% or something like that. We'd probably go that direction. Rather than a dividend, although I'll ask this question from Alan Buckley because, or Bucky, it's number 1023, T23. A lot of people came into this very question, why not come up with a one-time dividend? Would you pay a one-time special dividend? And Alan himself asked, you don't like to invest in companies that pay, or you like to invest in companies that pay dividends and buy back their stock, but Berkshire does not do either. Why is that? Well, we'd rather have a company whose stock was under value spent all their money buying in stock. But the trouble is if you were established a dividend, you're not going to eliminate the dividend to repurchase shares. So a company that's paying a dividend, take Apple or, you name it. I mean, they're not going to cut their dividend to repurchase shares. And they're probably not going to cut their dividend under any circumstances unless their business changed in a dramatic way. So we would do what made this. the most sense for shareholders. But, you know, I have pointed out years ago, you can
[21:25]
Warrensell a little piece of Berkshire every year and still end up owning more of it than you had before. So if you want to create, the people who want to create, turn a little bit of what Berkshire earns each year into the equivalent of a dividend into cash can do it. And they don't, they don't force that policy on the other people. And we had a vote prompted by some shareholders I never heard of a few years ago. Some shareholder put on our ballot, he said, let's pay a dividend. And, you know, let's get this Buffet out of keeping the money from us and pay a dividend. We had the vote and the shareholders, 47 to 1, among the B shareholders, the smaller shareholders, 47 to 1, they said, don't pay us a dividend. So that was a pretty, and we didn't campaign out of anything else. The votes just came in. Because they figure you'd do a better job of it.
QuestionerBy the way, did that include you voting your shares?
WarrenI probably voted my shares, but I'm not counting the A shares.
QuestionerOkay, just the B shares.
WarrenBut Berkshire, in effect, for 53 years, has been a savings account. I mean, Charlie, there's money in, I put my money in. My partners put their money in, all my partners put it in. And it's a way of saving money over time. And the money gets left in and we invested it. And to the extent that it's worth more than 120 cents on the dollar after we save it, after we save it, every dollar we save is worth more than if they got it out in cash, forgetting all about tax factors. We would have had the same dividend policy if we'd been taxed, if the individuals have been taxed free the whole time.
OtherHere's some news just out from GE. The company is adding three new directors, including former Danaher CEO Lawrence Colp, American Airlines, former CEO Thomas Horton. This is the one that, where I said, oh boy, and former financial accounting standards board, board chairman Leslie Seedman might be sideman however it's pronounced. Becky, get back out to Becky, and maybe we have someone who can comment on this.
QuestionerI know you must have had a book of GE questions for Warren Buffett today, Becky. There have been plenty of GE questions for you. Yeah, from viewers and from you and from us, but what do you think of that, Beck?
WarrenSo a former person that ran the accountant, yeah, is that, they need someone maybe to come in. Probably not a bad idea at this point. The FASB, a person that ran the FASB to come in and maybe they can sift through, you know,
[24:02]
Questionerthe power systems and the pension issues that are, you know, who knows how those are finally. And how some of these things were being. Yeah. You know, my question, Warren's, Warren's here. Yeah, Warren loved, love the CEO, gave a, a huge, the former CEO, and remember that big sort of, at a time when GE really needed Buffett or Berkshire in terms of saying, you know, that big investment, that helped GE a lot, Warren. Looking, Becky, you can ask all these questions, but I wonder if looking back on it, Warren, you feel like you were duped to some extent by Jeff M. Out?
WarrenNo, I don't, I don't feel that way. My job is to make up my own mind on things. And we're talking, that investment was made at the very end of September, or the first days of October of 2008, and GE had been funded with extraordinary amounts of commercial paper, and the commercial paper market ended, and they really had a problem, and there was no question in my mind that it would be temporary if the government got its act together, and the economic the engine got back on the tracks, which I was sure it would. And so we did buy a $3 billion worth piece of preferred with some warrants. But it came with a 10%. It came with a 10%. It came with a 10% coupon, callable 110. We made some money on it. We didn't make as much money on that as we made on our Goldman investment. But Warren, looking back, I mean, there was a time where I think Emelt had your full confidence. Looking back on it, do you think that that was misplaced? Have you revised your overall viewpoint? point of how he led GE over his tenure? Have you looked at that and revisited that and think, wow, this wasn't what it appeared to be or no?
WarrenWell, I keep looking at GE. I won't comment. Jack Welch is a very, very good friend of mine, Jeff's a friend of mine, and clearly there were mistakes made, and they made mistakes in long-term care. We made mistakes in long-term care. They weren't to the same degree. But That turned out to be a huge one. And I will read there 10K when it comes out. I'll read it very, very carefully. It'll probably take me all day to do it, but I'll do it. And, no, insurance costs them a lot of money, and it's cost other people a lot of money. You could make big mistakes in insurance. And like I say, we made a... Yeah, sorry. Go ahead. I'm just seeing some more stuff here. I'm just wondering what... Becky, are you... We're trying to get through all this stuff that GE said.
[26:54]
QuestionerAnd I don't know whether to go with this yet from Mark Grant. Did you see this from DRA? I don't know what this means, that maybe there's going to be... I have not gotten that yet. I look back at the past... I think you do, but there's going to be a... Well, look, we already knew this, that this, we already knew this, that GE was going to restate earnings for 2016 and 2017. For both years, that they... We don't know the extent of it, though. We don't know the extent of it, though. We don't know the extent of it yet, but they are going to be restating earnings in large. part because of how they were booking some of the issues at power, how they were booking revenue at power and some of the things that were coming through. What would your comment be not knowing everything that's gone out at this point?
WarrenThere's a lot of flexibility when you're booking that either construction and progress or potential service contracts or anything. I'll be very interested in what they have to say on that. I would say the accounting at GE has not been a model. model at all in recent years. But you can make mistakes in something like insurance reserving big time. And long-term care has probably been the biggest single element of misreserving in insurance throughout the industry. And they were in it big time, but I was staggered by the amount of it. By the amount of this most recent issue. they had to call up the reserves to the tune of billions of dollars.
QuestionerYeah, and the question gets to be, I mean, it was the Kansas Department supervising them, and that doesn't happen overnight, so it would be interesting to see just exactly what the correspondence was between the Kansas Department and the company and all of that sort of thing. Do you remember when you... The GE is a wonderful... Oh, yeah, how wonderful, to the tune of buying how much percentage of the common stock right now? Now, how wonderful are you feeling about it, Warren?
WarrenNo, we haven't bought any, we haven't bought any stock. It's one, what are you going to? In fact, we sold, we sold our stock. We had a small amount of stock that came from the warrants that the company that preferred. And we sold it, I know we sold it at 29, whatever that was, a while back. It was a relatively small investment. It's on sale. It's on sale today.
QuestionerWe did get questions from, yeah, we did. Yeah, we did get, 1458 is the latest tick. We did get questions from viewers, I believe one came from the Rational Walk that asked very specifically.
[29:29]
QuestionerHad the company approached you, would you be interested in buying parts of this? There's another question that came in saying, would you be interested in buying parts of either General Electric or Siemens, particularly if it was something that would help you in your health care initiative? It's a star investor, vacuous star investor, with liquid assets learning less than projected inflation, and why not buy a cash generator industrial like GE or Siemens Healthcare Unit? This could strengthen the health care partnership with JPMorgan and Amazon. As early diagnosis provides long-term savings to fix health care, what do you say to something like that?
WarrenWe wouldn't buy a health care business to try it in with the health care initiative. Would you buy it just simply because of prices on this? If we like the business and the price was right, we could write a check for cash. And that would apply the GE. They've got a few big businesses. I don't think they want to sell them. They have some smaller units that they're interested in selling. But we're always in the market for a big business that we can understand it, that we like, and we think that we've got the management for, and so on. Do you understand GE? I don't understand the whole place. No, but I think I'd be capable of understanding given businesses or managers that we have at Berkshire would be capable of understanding those.
QuestionerHey, Beck. They have not approached us about any big business. They've got some small business. Go ahead, John. Sorry. Warren, and I'm going to let you go, but just for the record, GE is, I don't know, do you see this back here? They're worried about how we're reporting it. So the accounting rules, this is not related, the restatement of earnings is not due to the SEC investigation. It's due to new accounting rules. Every, you know, I guess after the tax, every company is required to do it. So they're worried about that. These are the changes. Let me, let me ask, I've been very confused by this, and maybe we can cash through some of this. Those accounting changes are the accounting changes that we were just talking about with Warren at the top of the program, accounting changes that will affect what you are doing going forward. Is that a reason to restate 2016 and 2017 earnings? Well, just from what you said this morning, I don't know anything about it. Obviously, they miscalculated their insurance reserves in a big, big way.
[31:42]
OtherThat's not related to the restatement of earnings. That is not what we're talking about. That is not restatement of earnings on any. of these issues. These are things that GA has already said on this that we're talking about from that front. If in-process business or amount capitalized as possible earnings in the future and were put on the books for in terms of service contracts or something like that, anytime you get extended pieces of business as you get in aircraft or engines and that sort of thing, there's a lot of flexibility in when you record both costs and revenue. And my guess is the SEC is looking at that. I don't know a thing about it in that respect, but my guess is that they're looking at that. And I've seen companies use much different, and I'm not referring to General Electric at all, I've seen them use much different approaches to contracts that extend over years and how they treat the first few units, which obviously have a higher cost because you're just getting into it. Sure. There's a lot of flexibility. And whether you have a conservative or an aggressive management can determine the earnings for at least a few years. Right, right.
QuestionerAll right. We have much more with Warren that we're going to continue to talk about. We want to talk about Wells Fargo, too. It's an issue that a lot of our viewers wrote in about as well. We'll get to that in just a moment. Welcome back to Squackbox, everybody. We are live in Omaha, Nebraska with Berkshire Hathaway's chairman and CEO Warren Buffett this morning. He's been answering questions that viewers have sent in. And Warren, one that we got lots of questions about was Wells Fargo. It's understandable. Yeah, there was a question that came in from Value Mojo, who says, what are your current thoughts on Wells Fargo? Do you think the market reaction was justified after the Fed's announcements of the assets' growth ban? What's the impact on Wells normalized earnings power? And do you still have confidence in CEO Tim Sloan?
WarrenYeah, I have confidence in Tim Sloan. But Wells did, it goes way back, but they came up with some terrible incentives. incentives work in both directions. If you got the right incentives. And you do the same thing with your family and all kinds of things. And they had some incentives. They had an incentive system which incentivized bad behavior. And the bad behavior became somewhat contagious,
[34:04]
Questionerapparently in some offices more than others where people put in phony accounts and all that sort of thing. I mean, once people saw their superiors doing it, a shirt picked up. But that was a bad problem. But that happens. But what they didn't do. was they didn't correct it when they were getting word that effectively these terrible practices were taking place. So it gets back to the fact that, you know, the same thing that happened in Solomon, you know, 28 years ago, is that management didn't react when they found out that something had gone very much awry. And then it just compounds like crazy. The company took action. That's why the former CEO, John Stump, lost his job. But then chairman, former former F. Federal Reserve Chairman Janet Nielan weighed in just as she was leaving her office and said, we cannot tolerate pervasive and persistent misconduct at any bank. And the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that abuses do not occur again. That is a huge rebuke, one that I can't recall seeing something like this from the Federal Reserve in recent memory. And that brings up questions about current management, too. What do you think the Fed's doing? And I'll bring this up too. Charlie Munger, your partner just recently said he thinks regulators, it's time for them to let up on Wells Fargo. What do you think?
WarrenWell, I don't know all the facts on it. I do know that in 1991, I became a CEO of a company that had similarly insulted the Federal Reserve. And if the Federal Reserve is mad at you because you've flouted them in one way or another, you you're in a big, big, big doghouse and digging your way out of it, it takes time. you find other things. I think I said last time, you know, there's never just one cockroach in the kitchen. I mean, and you find other things. I was always terrified at that at Solomon, because I didn't know what had happened prior to my stepping into the job. So, you know, you obey your government. And if you don't, you can have plenty of consequences. And Wells Fargo is suffering through those. But they will get through it. And they're not the consequences of what Tim Sloan did. He's been working like crazy to try and clean things up. But he's had a lot to clean up. Do you think you've seen the last of the cockroaches? I think so. But that's what you never know. I mean, if you've got 260 or 70,000 employees and there was bad activity someplace, you'd try to find out.
[36:43]
WarrenBut I actually have been in that situation where only, you had 8,000 employees. And what I was, I woke up every morning, terrified while I was in there, that I would pick up the paper and find out that somebody else had done something. And you just, you can't be sure, although I would, my guess is, and it's just a guess, is that they have scrubbed and scrubbed and that they have found out the things that were done wrong and the Fed and any other supervisor is going to make them pay, which they have for past sins. And they don't, they don't just do it in one day and wave at you and say congratulations.
QuestionerBack in 2009 at the annual meeting, you were asked if you had one stock that you put all your money in. You said it would be Wells Fargo at that point. What stock would it be today? If you had one stock, you had to put all your money in?
WarrenWell, I've got all my money in Berkshire, 99% plus. I, yeah, my, 99.8% or something. like that aside from Treasury. So that's the one, that's the one I feel the best about, not that I feel the best about it having the greatest upside potential because it doesn't. But in terms of anything bad happening to it, I feel better about Berkshire.
QuestionerOutside of Berkshire, is there another stock if you had to pick one?
WarrenWell, if you look at our holdings, you would assume that we like them in the order in which they rank by dollar value of holdings. But if you look at them in terms of recent, purchases, you know, over the last year, we've bought more Apple than anything else.
QuestionerCan I take it and run with that as a headline? Apple's your favorite stock?
WarrenI don't think, no, because I haven't told you what I might have been buying in the last week our month. But Apple ranks up there?
QuestionerWell, Apple, you know, it was, but it was selling at 105 or something like that when we first bought it. Okay, great. Warren, we're going to continue to press you on some of these issues in just a moment. I can tell. When we come back, we have more with Mr. Buffett. In the meantime, we'll also give you a rundown of today's top stories. All of this coming up, including big changes to the board of General Electric. Stick around. Squackbox. We'll be right back.
OtherAnd General Electric is making some moves with its board, shrinking the board and adding three new directors. And now there will be 12. The three are former, one of them, former financial accounting's standards board chairman, Leslie Seedman, Seedman. Former American Airlines CEO Thomas Horton
[39:18]
Otherand former Danaher CEO Lawrence Colp. And as previously announced, the overall size of GE's board will be reduced to 12 from 18. So if you're adding three and still going down six, that leaves a who's who list, really, of directors that won't stand for re-election. And look at some of these names, Stephen Mollenkoff, he's pretty well known. Shelly Lazarus, Jim Roar, Mary Shapiro. Marin Decker, Susan Hockfield, Peter Henry, Henry, and Andrea Young, and I think Jack Brennan will be staying as the lead director or the lead director for a while to transition, to facilitate the transition to a new lead director until 2019, but then he won't stand for re-election either. So let's get back to Becky and Warren Buffett in Omaha, and there have been some questions, Becky, and you can talk to Warren about it, about where was the board? And I guess this is sort of an answer to those questions at this point. I mean, that's a pretty big reshuffling of the board. I guess maybe Flannery would want a different board, obviously, but it seems like a pretty big... Flannery has talked about this when he came in about some changes, but I don't think we realized quite how extensive those changes would be. Right. And, you know, Roar from PNC and Malingoff, is he Qualcomm? Or, or where, no, he's not Qualcomm, but I know the, I got to figure this, but, Shelley Lazarus, Mary Shapiro, these are really a who's who list, right? So I'd like to give Warren's thoughts on that, too, yeah. Warren, what do you think?
WarrenI mean, obviously you've watched GE for a long time. You were a shareholder for quite a number of years from 2008 through when you sold those shares that were at $27 at that point. Big changes. They're restating earnings for a couple of years and talking about some different accounting standards that have been put into place, but it does sound like they are changing the way they account for some long-term contracts. It sounds that way. I mean, I haven't read anything. I've just been sitting here, but it sounds like they are changing. When you build a ship or something I've got over five years, not that they're building ships, but you do have ways of accounting for sort of the in-process activity. And companies can be quite aggressive in that. They can be quite conservative in that. And I don't know anything specific about General Electric. You would understand John Flannery coming in and wanting to...
[41:59]
OtherCleanouts. Yeah, and make sure that he's doing things his way, going through the entire process. Sure. Yeah.
WarrenIf I were brought in to run GE, which they never would do and they'd be wise not to, but there'd be a lot to get your mind around. I mean, you know, from the old insurance contracts to the to do these long-term contracts and service contracts, and there's just a lot on your plate. And so the fact that you don't have it all in place the first day, the first week, or the first month, I don't blame anybody for that. There's things to learn with something that complicated and widespread.
QuestionerOkay. One thing that we got a lot of questions that people wrote in about are variations on forms of of corporate social responsibility. I'll start with one of the questions that came in. This is from Tom Inori Ishikawa, who wrote two topical questions. Does Berkshire invest or own gun manufacturers? And then number two, actuarially, does gun ownership have an effect on property and casualty premiums? And these are, there were a lot of questions in this vein that came in, just given the headlines that have been out there about what's been happening with school shootings. But broader than that, just corporate social responsibility overall. And some of the things Larry Fink's talked about.
WarrenYeah, we don't own any gun manufacturers. But I have not issued any edict, for example, to the two managers that run money besides me at Berkshire that they can't own stock in gun manufacturers. They can own stock in gun manufacturers. They can own stock in liquor manufacturers. We do own stock in Diageo and have for a long time, which liquor manufacturer. And so we haven't, but to my knowledge, we don't. I know we don't own. I don't own any money. known any gun manufacturers. And the second point was, does, from an actuarial perspective, does gun ownership have an effect on property and casualty premiums? It's not something that weighs in. There might be some very weird personal policy that you might conceivably, but in terms of standard business, no, I don't know of any, I don't know of any time it's come up in the years I've been in the insurance business. There is a movement from Larry Fink at BlackRock and from others who are kind of stepping into this saying that they would like to have more of an impact on the companies that they are investing in, that they would like to have maybe
[44:24]
Questionera little more say in what's happening. It's an arena that can get pretty fraught with potential missteps, though, because by taking a stand, you're potentially alienating half, up to half of your customers. So where do you come down on this?
WarrenYeah, it's complicated. I mean, did I, but I've been cheering for what was going on on Wells Fargo if I known about it years ago. But Wells Fargo, we do lots of business with them. They made a big mistake and some others that flowed out of the big mistake, but Berkshers made mistakes. And, you know, I got involved in Solomon when they made a mistake. You will not find any large company that doesn't have some problems of one sort or another. I mean, the best defense is a hotline. And we have found out more things that have been wrong at Berkshire through the hotline. different than finding out cases of fraud or wrongdoing or somebody doing things that are wrong. This is a case of investing companies, of banking companies, potentially getting it and saying, we don't agree with a particular group, be it the NRA, be it to take a stand on immigration, something along those lines. You do see more and more CEOs who are kind of wading into the political arena and making their views known. You're somebody who's not shied away from talking about who you vote for and who you support. No, in terms of politics, you know, I have not putting my politics in a blind trust. On the other hand, I don't speak for Berkshire in doing that. Berkshire, to my knowledge, Berkshire at the parent, I never had any contributions to politicians. And I don't believe that imposing my views on 370,000 employees and a million shareholders. I mean, they don't, I'm not their nanny on that. And if I worked for Hillary, but I don't, I don't know what our managers worked for or voted for. And, So I think you have to be pretty careful if you're saying, you know, we're not going to fly on this airline because of that or we're not going to use this railroad because of that in terms of social. Because you'll find something. I mean, I admire enormously Walmart and Costco. They sell cigarettes, do I think cigarettes are good. We actually distribute between the manufacturer through our McLean company to Walmart and 7-Elevens and all kinds of people's cigarettes. I think that I think it's. it's a mistake to get, start getting personal views and trying to pose them on an organization.
[46:52]
QuestionerWe have seen a lot of that just over the last couple of weeks since the last school shooting. Yeah. And there have been some companies.
WarrenWell, I've got views on gun laws, but I don't think they're Berkshire's views. And so you don't think it's something that corporate boards should be talking about? I think you should be pretty careful before the company takes a big political opinion and, and, and, and, and, you should be pretty careful. And something that society has decided that they say, well, we're going to have a different view. Now, I also think people individually should very much express their views. I mean, I think what the kids are doing, they're very admirable, but I don't think that Berkshire should say we're not going to do business. People that own guns, I think it would be ridiculous.
QuestionerOkay. Let's talk about some of the holdings that we mentioned before. At the end of the last block, we were talking about Apple, which is the stock, according to the five, that we've seen that you've been buying most frequently and most heavily. There are a lot of questions that have come in on Apple, and people want to know why you're doubling or tripling down on this stock at this point.
WarrenThey may want to know, but I'm not going to tell them. I mean, they can look at our actions, and we have to report those every three months, but we're not in the investment advisory business. Why do you like... It takes propriety. The views, you know, those are proprietary in effect to Berkshire. They belong to the Berkshire shareholders.
QuestionerJust in terms of one question that came in, there was someone who was asking about, you've long touted the stocks that you've bought into by drinking, drinking Coca-Cola, or eating at Dairy Queen, or doing all of these different things to talk about the stocks and the companies that Berkshire owns, but you still have your flip phone. I wanted to know if you were ever going to get a smartphone, an Apple phone.
WarrenYeah, well, Tim Cooks asked me that. Well, the answer is just I'm out of touch, but I tell Tim, tell Tim that as long as I haven't gotten one, the market's not saturated. I mean, the day I buy one, there's probably nobody left after that.
QuestionerI want to talk through a couple of the other stocks that you all hold, too. One question that came in from Kraft Hines was a question about the announcement that Kraft Hines just put out. This came from Ivan the K.
[49:06]
QuestionerHe says, is this a sign that Mr. Buffett is scaling back his direct participation in the business? He was referring to the headline. Kraft Hines reports, retirement of Warren Buffett. from board.
WarrenThat's, that's, I wasn't on any outside board until the craft, well, until the Heinz deal came along first. And then the three G, our partners, asked if I would go on for a while and I said fine. But it takes, there's five meetings a year, it's about a day and a half for a meeting. I mean, you go in the previous afternoon and you think, so it's really a day and a half. So if you have five meetings, that's seven and a half days a year, we have two other people on the board from Berkshire. And the truth is, I'll talk to the 3G. So it doesn't change anything about it. It just saves me seven and a half days a year. And I don't want to be on any outside boards. I mean, it's just, it's time-consuming and I haven't got that much time. But it doesn't indicate any of a declining interest in the business. We're not going to change the share. We've got, we've got Greg Abel and Tracy Britt Cool on the board. We could have put somebody additional ourselves, but Alexander, Van Damme is going on there. I know him. He's got a huge investment in the company. I love the fact he's a much, going to be a much better director than I'm and he likes to travel. Great.
OtherWe're going to continue this conversation with Warren, but Joe, right now we'll send it back to you in the studio as we had to a break. Warren, always, you know, sometimes I feel like we're drifting and then he pull, he pulls me back in. And that answer on the, on your questions, Warren, was so apt and so appropriate. We all have personal views and we should act on those in every way that we can to try to get what we want in society the way that we think it should be based on our personal views. But isn't that the operative word personal views? I can just play devil's advocate, and I can think of some things that certain individuals would want companies to take a stand on that are diametrically opposed to what other people want. And you can think of them, too, the hot button issues in society, whether it's abortion or or LGBT issues. And, you know, the left always, always feels like they're, they're so sure that they've got all the answers and that they're right that they can't believe anyone would disagree on, on how they feel about
[51:31]
Questionervirtue and things. But if you had the right come in with some of, what they, what the left would feel are insane ideas, and you had, and you were pressuring corporations to take a stand with you, it just doesn't work that way. That's not going to stop the thought police and the media. The media goes crazy and tries to shame corporations. But your answer was so right on and you didn't pull any punches either. I mean, would you tell Larry Fink, if you had a conversation with him, would you say, Larry, what are you thinking? I mean, would you say that to him?
WarrenIt's like, I love your views, Larry. I would tell him what I thought, but it's the extremes on both sides. Whatever people get going on those kind of questions, I always say, let's talk about. I always say, let's talk about. something non-controversial like religion.
QuestionerYeah, exactly. It's just. I mean, salt, you know, red meat, God Almighty, big goal, any of that stuff, if you, there's just, everybody's got a, that's why they're called personal views, you know, so I don't know. Anyway, but I digress. And we'd love hearing from, but Warren, like I said, great answer. Thank you. and Becky, that was good discussion. We'll have much more from Warren and Becky after the break. Becky, you know, when I text people and when I send it and it goes in blue and I get things back in green, it's like I don't even, is that like not an Apple phone or something? I don't, I don't, I like the blue, you know? I don't know. Why do some people really have Galaxy phones or Samsung or do you know what I'm talking?
OtherYou have no idea. I think so.
QuestionerYeah, I do know what you're talking about, but I don't what the answer is. I guess there's a change, whether you're in the iPhone ecosystem or not. I think it's a change. I think less of people. when they're not in the iPhone ecosystem. Because you are all about status and status. I'm just very tech savvy. I'm very tech savvy. But I like blue a lot better. It's like green. I'm like, what, what century are you living in? What is this green thing? Get an app, get a 10, get an X, get a 10, get a 10, Warren. If you were buying a smartphone, which one would you buy?
WarrenOh, I definitely buy an Apple. See? Incidentally. See? Samsung, although they didn't, they made the money. semiconductors, too, a very great, but they, they could be the second highest earning company in the world. I mean, they earned about, I think they earned about, well, you get into one, so 50 trillion or something like that.
[54:00]
QuestionerBut if the one, what is it, what is it, I don't know, 108 or, 1008, but they probably earned somewhere around $45 billion or something. I mean, I haven't looked at it recently, and there aren't too many companies around $45 billion. $35 billion. Right, right. That aren't in commodities business. But they did not make as much, remotely as much money, it doesn't look like in phones. It was a semiconductor business ran wild last year. It just shows you a little bit about how Mr. Buffett is always reading the financial statements of just about every company out there. I like to read it. What you do for your fun time, right?
WarrenYeah, that is my fun time. That is your fun time, right.
QuestionerWarren, I want to talk to you about something you wrote in the annual letter this year, and that's talking about leverage and how dangerous that can be. And I bring it up because it. It happens that one of the stories on the front page of the Wall Street Journal today is all about margins. Margin bets fueling the sell-off. Part of the reason we've seen so much volatility is that $642.42.8 billion had been borrowed by retail and institutional investors against their portfolio. That can lead to all kinds of machinations in the stock markets and some real impact to people when prices finally go down.
WarrenYeah. Well, it's interesting, after the 29 crash when they had 10% margins, they actually gave the Federal Reserve the power to set margin requirements and everything. And then, of course, and I think the Fed still does have that power. But the whole thing has been made moot by derivatives and index futures and that sort of thing. So people can gamble in stocks, and people like to gamble. I mean, a lot of people like to gamble. But you can't, four times in the 53 years I've been at Berkshire, the stock has gone down anywhere from 40, from 40 to 60%. Berkshire shares. Berkshire shares. And sometimes, well, very fast in October of 1987. And people had a perfectly decent investment if they'd borrowed against it, they lose it. It is crazy, in my view, to borrow money on securities. You do not know tomorrow morning. You don't know whether the stock exchange will open tomorrow morning. I mean, we have closed the stock exchange. One time during World War I won, we closed it for months. We closed it after 9-11 for a few days. I put in the annual word, it's insane to risk what you have and need for something you don't really need.
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WarrenAnd, you know, borrowing money is a way of trying to get rich a little faster, but there are plenty of good ways to get rich slowly. And you can have a lot of fun while you're getting rich as well. My partner, Charlie, says that there's only three ways that a smart person can go broke. He says, liquor, ladies, and leverage. Now, the truth is. the first two, he just added, because they started with L, it's leverage. And when somebody tells you how they came back and made a second fortune, I'm not impressed because why the hell did they lose their first fortune? I mean, there's no reason, there's just no reason to borrow money except you're in a hurry to get rich, and you're risking going broke and all the effects that can have on your family. I do not believe in borrowing money on securities.
QuestionerThere was a question that someone had written in. had written in, just asking about how you do that, just in terms of, let's see if I can find it, just in terms of getting yourself to not do it, because you have, at times in the past, have had more ideas than you had money. Always. How did you have the self-discipline? How did you have the self-discipline to not go ahead and get levered up in those situations?
WarrenI wasn't unhappy when I had $10,000 when I got out of school. I was having a lot of fun. I was looking for things to buy. And the fact that after I spent 10,000 I ran out of money meant that I just kept looking for things that were better than the ones already had. But I was, if you think that if you have $100,000 that being, and you're an unhappy person and a million dollars is going to make you happy, it is not going to happen. You know, I mean, then you'll look around and you'll see people with 2 million. It just, it doesn't work that way. You will not be way happier if you double your net worth. You'll get a kind of a euphoric surge or something. like that. But, and to risk, you know, starting all over again, you know, losing everything and you've got children and it's just, it's madness.
QuestionerWarren, we're going to continue this conversation. We'll have a lot of questions from viewers that will go through rapid fire when we come back as well. I don't, did I say anything, should Android users feel like I really, I was just kidding around about, I happen to use the iPhone? I mean, there are people too. I don't want them upset at me. You're getting angry responses on Twitter?
[58:50]
QuestionerYeah, I'm myopic and Android. That's fine. Hey, but I did have a question about Warren for Samsung to give them a plug, but then I thought, I wonder if Warren actually has a flat screen. Do you still have one of those boxy TV? You have a color TV probably, right, Warren, but have you actually, you got a flat screen? I've got an 85-incher. I like to watch sports on television.
WarrenSee, I knew it. Interesting. And I sit very close to it. It's interesting how in a theater you get a bad result if you sit in the front row, but you can sit very close to the screen of mine.
QuestionerCan you? Is it a Samsung Warren? Can you disclose that?
WarrenIt is a Samsung, yeah.
QuestionerMine too. It's a Samsung. I like it. So you watch Creighton. You watch Creighton from like this far away?
WarrenAbsolutely. Absolutely.
QuestionerAll right. And I watch the Super Bowl and I watch the Super Bowl. I watch everything. It's... Olympics? Just think of... Yeah. Yeah. Think of how what that is compared to 40 or 50 years ago. I mean, the experience is just incredible. It's fantastic. All right. And you can tell it to sway, you can verbally tell it to, you know, switch to something else, switch to switch to squawk box, for example, which is apparently one of the most common verbal, or switch from squawk box when I'm... No, I'm kidding. Anyway, go out. All right. I watch you on an 85-edge screen. Oh, my God. I know. We don't pay our makeup people enough. I know. No, we don't. Wow. All right, Warren, we want to take this part of the show and get some questions from some of the viewers who have been writing in and sending things in, too. A lot of these are people who read your annual letter and have additional questions about Berkshire, too. First one comes from Pius Pont, who says, both you and Charlie have the vast majority of your net worth in Berkshire stock, which means that you share which means that you share the pain if things go south. Can you clarify how much of their net worth, Ajit and Greta Gable have in Berkshire and are their plans to increase? Now, they did disclose their holdings as directors in terms of Berkshire, but that doesn't really tell about their net worth.
WarrenYeah, well, I've never asked about their net worth. That's their business, but Ajit obviously has a very substantial investment. He's bought every share of that in the open market. And he came into my office in 1986 on a Saturday. and I don't think he had very much net worth at that time.
[1:01:19]
WarrenAnd he's just bought Berkshires. He's gone along. And Greg has been with Mid-American Energy, now Berkshire Energy, for well over 20 years. And his net worth is virtually 100% in Berkshire. I don't know that it's 100% because I don't know what he has outside. But I'm sure it's a very, very high percentage of his net worth is in Berkshire-Hathaway energy. And it pays no dividend, incidentally. And for sure itself owns 90% of it, so our interests are very aligned. And by the way, you don't hand out stock options like a lot of companies do. These are sums that they've kind of built up themselves over the years. A jeet has bought every share of that, you know, in the open market. They buys it just like anybody else. If it goes down, he suffers. I mean, we do not have one-way things. We don't, and we don't grant the debt. We don't grant the directors restricted shares or anything of the sort. We want our directors to stand in the shoes of the shareholders. We don't have directors and officers' insurance and liability. I think maybe one other company on their stock exchange doesn't. If we do something really dumb and they lose, a company lose a lot of money, they lose money, and it's real money to them. It isn't just something that was given to them.
QuestionerYou didn't know how much either of them owned before, did you? Before they were?
WarrenWell, I knew how much Gray owned. of Berkshire Hathaway Energy. I had no idea what his holdings were of Berkshire. And I didn't know. I mean, I knew Ajid owned it, but I had no idea what the amount was.
QuestionerOkay. Here's another question that comes in. This one's from the Rational Walk. It says, Berkshire has become a large player in the real estate brokerage, a field that's still plagued by high commissions. I recently sold a home using Redfin and saved at least 2% of commissions relative to traditional brokers. Is this a threat to home services?
WarrenYeah. I don't think it's much. but, you know, I could misjudge that. But obviously the Internet is going to try and take away any business that existed in a more traditional form in the past. Buying a home is the biggest deal that most people make in their lives. Sometimes they're moving from another city and they want somebody that explains the schools to them, and then, you know, just how the whole city where they really want a helping hand in coming in. And it's a very personal thing. It's a very personal transaction. It's a scary transaction sometimes to people, a lot of paperwork involved and all that.
[1:03:49]
WarrenThey really want somebody they trust. And I have a feeling that it will be very much a person-to-person operation 10 or 20 years from now, but the people who are backing in internet operation think otherwise. And certainly, Amazon has proved that a lot of businesses that you thought had to be done face-to-face could be done very well from thousands of miles. from thousands of miles away.
QuestionerThis question comes in from Jeff Vaughn. He says, Warren, will you talk about your thought process and discussion that you and the investment team had about taking a large position in BYD? Which segment of the business was most attractive and why? And that comes up because BYD made its way into the top 15 holdings of Berkshire again this time around.
WarrenWell, I've said in the past, it really wasn't me or the investment team. Charlie called me one day and says, we've got a buy BYD, this guy that runs it is better than Thomas Edison. And I said, that isn't good enough. And then he called him a letter and said, he's a combination of Edison and Bill Gates. I said, well, you're warming up, but it still isn't good enough. Anyway, Charlie wanted to do it. Now, it's worked out so well. I'm actually starting to remember that it was my idea. As I'm, it's coming back to me, I think I persuaded Charlie. But unfortunately, I'm on the record that it's his deal. But BYD, Charlie's in love with the company. And it's done very well. And the fellow that runs it, you know, there's autos and batteries. But he's got big, big ideas, and he's very good at executing. So, but I leave it to Charlie.
QuestionerThere's another question that came in from David Rolf. And he's asking about precision cast parts. He says, has, what's the percentage gain in intrinsic value of PCC since the closing of the acquisition? Can you state it if it's even positive? You've described the $37 billion PCC? $37 billion PCC acquisition as a singular bet on Mark Donegan. Are you pleased with his performance so far?
WarrenYeah, I am, but it is not earned as much as within the projections. But that's a very long-term business. And the contracts they get can run out into the mid-2020s. And Mark, I just saw them, what, two days ago, and he is an extraordinary business operator. I mean, he just loves figuring out how to make things. And he hits it off terribly well with our fellow runs his car, because they've got that kind of mind, and they're very, very good at it.
[1:06:21]
WarrenAnd Mark never stops working. And he built a sensational company, and he will continue that with us. And finally, Market Folly writes in about the relationship with Todd and Ted, the investment gurus in house. He says, has Buffett ever disagreed with any of Todd or Ted's investments and why? Well, they make their own decisions 100%. Then they each manage $12 or $13 billion now. It started as, what, about $5 billion each? Pardon me? They started out with each of $5 to 6? Actually, I think when Todd came about a year ahead of TED, and I think maybe it was $2 billion, but it has increased at various points, and then they've earned a lot of money. Fort Berkshire, which builds up for them too. There's certainly they've done things I wouldn't have done. But I've done things they wouldn't do, too. I mean, I want them to figure out their own choices. They are good at managing money. And they've got the advantage of managing smaller sums than I'm running, but they've got the disadvantage running quite a bit larger sums than most people run. I mean, it gets more difficult with size. But they not only have done a good job of managing the money in trusted home, but they've contributed to Berkshire in just dozens of ways. They were sensational hires. hires. Do you talk about the investments with them ahead of time? No, not ahead of time. And there's a number of them I haven't talked with them at all. I couldn't even, I couldn't name three-quarters of their portfolio. I couldn't tell you the amounts. I don't remember that well. But I've gotten ideas from them, but they take on other tasks. I mean, Todd is on the health care situation. He's there on Saturday. On Saturdays, they're all day talking to people around the country in terms of looking for the right CEO and that sort of thing. They are enormous contributors to Berkshire.
QuestionerWe are going to talk more about the health care proposal between Berkshire Hathaway, J.P. Morgan and Amazon coming up in just a little bit. In fact, Warren, this will be the first time that we've gotten to talk to you about it since this announcement came up. But we'll do that just a little bit later this morning. In the meantime, Joe, we'll send it back to you. And you might prepare Warren so, prepare warrants. There's a good answer. Some of the most pressing social issues facing us, Becky. Like, can you, do you know whether he's a Taco Bell or a Chipotle guy?
[1:08:49]
QuestionerHave you ever asked him?
WarrenI'd have a guess. I don't know.
QuestionerHave you been to Taco Bell or Chipotle?
WarrenNeither. Neither? Neither one. No. I go to, I go to Kentucky Friday. I go to McDonald's. I go to Burger King. Occasion we go to Wednesday.
QuestionerYou're skirting the question. There's various local ones. local ones. Scurting the question. Taco Bell, will the Taco Bell guy be good at Chipotle or will he ruin the natural foo-foo, you know, all the, you know, I mean, Taco Bell. Knowing his inclinations for where he's, he just, I don't think he's a taco guy.
WarrenWhen they start serving hamburgers, I'll give you an opinion. Yeah, I don't think he's a taco guy.
QuestionerAll right, all right. I was just, these are the pressing, these are what's all in my mind. As I said, I wanted to prepare you for some of these social societal questions. societal questions.
WarrenI'm for whichever one serves Coca-Cola. That might not be taco about, because it used to be Pepsi, I think.
OtherAnyway, coming up, more Warren Buffett. Let's get back now out to Becky in Omaha.
OtherI wish we could, what if we, what if we just, you know how when NBC, sometimes we go to commercial on the Olympics or golf or something and we stay with the, we show the commercial, but we stay with the programming, what if we did that with you and Warren? Would that be? So you can see what was happening?
WarrenYeah. between the commercial breaks. That would be good. The conversations and stuff. That might be some of the best. What you guys talked about?
OtherI'm actually just looking at this. No, I was just showing him. I was laughing. I've been watching the wires to see what he says makes the wires. And literally, Joe, this honestly just hit the wires. At 744 and 48 seconds a.m., Buffett says, has not gone to Taco Bell, Chipotle, prefers McDonald's, KFC Burger King, Wendy's. I'm not joking. That literally hit the wires. I'm getting quit. So I think he can say anything. 85 inch screen, within, literally within milliseconds, Drudge had Buffett Touts' tax plan. They had that, I thought it was going to be the late there, but that got on Drudge almost immediately, too. So let me check Cuffington Post. But it's not nearly as important as this, as this comment that just made the wire.
WarrenYou too can live to 87. Yeah, that'll come out.
OtherWarren, one thing that you said earlier, you were talking about Samsung. You mentioned you own the Samsung 85-inch television screen, but you know an awful lot about the company.
[1:11:07]
QuestionerYou don't own the shares, do you?
WarrenI don't own them, and Berkshire doesn't own them now, but Berkshire has owned Samsung. It doesn't get reported in our 13F. I think 13Fs just apply to domestic, so it actually hasn't shown up. But I think I'm right on that. I'm 99% sure. And so we bought some, when Samsung was at about a, And about a million won. You got to divide that by something over a thousand. We bought a reasonable amount. We did sell it when it went up, it's higher than it's not. It went up to a million eight or something. I think it's around two million three or four. The wand went in our favor a little bit, too, so we did it a little bit better in dollars. I mean, I don't think of you as, in the past you have bought some South Korean stocks, I think.
QuestionerKorean stocks, I think. It was a while ago. Why were you looking at Samsung at this point?
WarrenIt was very, very cheap. They had a lot of cash. They hadn't done much on buying in their stock, but they had talked about it. But it was just very cheap. It was a big, strong, good company.
QuestionerYeah, I remember you buying a South Korean retailer, was it, years ago?
WarrenYeah. There was a time when I bought a whole bunch of little ones.
QuestionerRight, right about the time when we traveled.
WarrenYeah, exactly. And the Korean market was very cheap. The market was very cheap, I mean, ridiculously cheap, after the 1998 when they had all kinds of troubles. And there were a lot of bargains in Korea.
QuestionerWhen you say a reasonable amount, I mean, for me, that's a different number for my holdings than it would be for you. Are we talking north of a billion dollars?
WarrenWell, we probably made in the hundreds of millions someplace.
QuestionerYou made that much on the transaction?
WarrenYeah. Yeah. That's my memory. Kind of been $500 million or $400,000. I don't remember exactly.
QuestionerLet's talk about some of the other purchases that were revealed, purchases and sales that were revealed in some of these most recent filings of 13Fs. You sold more of your IBM stake and bought more Apple, according to the latest filings that we had seen. And a question came in from Brandon Carroll that said, first of all, why did you?
WarrenWell, I was wrong on, at least I felt I was wrong on IBM. Now, I may have been wrong when I sold it to it, but I certainly was wrong when I bought it. when I bought it. And I felt that Apple has an extraordinary consumer franchise. Apple is a different kind of business than IBM.
[1:13:43]
WarrenThey're both tech, obviously, in a major way, and they even have a joint venture on some things. But I think I understand consumer behavior perhaps better than I do. The tech business wouldn't take much to beat it. And I liked it. I like Tim Cook very much. I like their policies. I see how strong that ecosystem is, is to an extraordinary degree. I mean, I look at my grandchildren, my great-grandchildren, and everybody in the office, I mean, their families. I talked to the people at the furniture mart. When the tent hadn't arrived, nobody goes over to, you know, by it. by an Android. I mean, it's, you were very, very, very, locked in, at least psychologically and mentally, to the product you're using. I mean, you've got your, all kinds of stuff up on there. It is, it's a very sticky product.
QuestionerThat was sort of the same thing you said about IBM when you were first buying it, that corporations that had bought into it, they were kind of stuck with it, that they, that it would be what they were using because it was too hard to get off of a system like that.
WarrenAnd by the way, IBM recently, just finally showed an increase in revenue for the first time in like 27 quarters.
QuestionerWell, but it was, the foreign exchange went with them, and it was the introduction of a new piece of hardware. I mean, actually, they weren't up, except for those two factors.
WarrenBut the cloud came along, and one of the most extraordinary things I've ever seen in business is when an unrelated type company, a retailer you can call Amazon at that type, goes into another big industry. and sees the future in it, gets into it, and then they gave, and Jeff Bezos would say this, that he said it on Charlie Roe Show, he got this amazing runway. I mean, the other players, here are all these 200 IQ people in that business, and they gave him year after year after year, it wasn't a secret of what he was doing, and he was in an important way revolutionizing the industry and the other people sat on their hands, basically.
QuestionerWow. All right, we have more questions that we're going to ask you related to some of these things. But right now we're going to send it back to Joe. Joe.
OtherHold on. I just thought of something, Becky. Hey, Warren, I don't understand why Creighton's in the Big East. I don't know, number one, because it's so far west. But let's just, so it is, why don't, I'm inviting you. I'll get the tickets. You can come with my family.
[1:16:20]
QuestionerWhy don't you come back for the Big East tournament, not the March Manas, but at Madison Square Garden. It's coming up the week of March 7th to 10. of March 7th to 10th. Do you want to come back for that? We'll take in a couple of games.
WarrenThat's tempting because I like watching Creighton basketball. But I am cutting back on the travel, Joe.
QuestionerI'll watch it on my 85-inch and you were talking about Poppo. Now you're cutting back. I invite you somewhere and you're cutting back on your travel. The minute I invite you to what, what?
WarrenWell, I'll get good seats. I'll tell you what I'll do. I'm making you an invitation. If Creighton gets to the finals in March Madden's, I'll take you. I'll take you. How's that?
QuestionerThat's pretty good. That's a firm offer. I'm not convinced they won't this year. And I'm good tickets. I'm not convinced they, I don't know who's good. You know, I mean, there's a lot of, everybody's great. That's the thing. Amazing. All right, okay, so forget it. All right, good tickets, but you got to be for the Blue Jays, though. I mean, if we go, you cheer for the Blue Jays. That's the deal. Not if it's against Xavier. I can't do that. Not if it's a... Well, no, but... All right. Well, we'll see. All right. I just thought, because this is going to be, that's unbelievable. Madison Square Garden, that conference, I mean, if you can win in that conference, you can win anywhere, right? It's like the Southeastern Conference. Who would have thought it, yeah. You're right. All right, Buffett. Forget it. Don't come back. I don't care.
OtherComing up this morning's corporate headlines, plus much more from Warren Buffett. He's not traveling as much. What if you said that, Becky, when he tells you to come out to Omaha? I mean, get on one of your net jets. Warren? Anyway, we'll get his take on health care in a moment. Our newsmaker of the morning is Berkshire Hathaway's chairman and CEO. chairman and CEO, Warren Buffett.
QuestionerAnd Warren, we have not gotten the chance to speak with you since you made an announcement, along with Jamie Diamond and Jeff Bezos, about how the three of you are creating a new company to try and tackle the ever-increasing level of health care costs in America. Tell us a little bit about this plan, how this came together. How did the three of you set this up?
WarrenYeah. It's a good question. I think that certainly Todd and I... Todd and I... In our office, I've discussed it quite a bit.
[1:18:30]
WarrenTodd is on the board of J.P. Morgan, and I think he talked to Jamie about it. And he participated probably more in the discussion than I did, but I love the idea of tackling what I regard as the major problem of our economy. I think that you had health care costs go from 5% of GDP. GDP in 1960. They were $170 per person annually, and now they're over $10,000 and they're closing in on 18% of GDP, which is as much as the federal government raises in a year. So it's, it gives every indication of going up and up and up. Now, you want the best health care, but you find that in other industrial countries that were at about our 5% level in a year ago, they've gone up into the 11% percent. up into the 11% range or thereabout. So we have got a huge competitive disadvantage in American businesses, far more important than any tax change in terms of our health care costs. And 3.3 trillion a year now, that's every dollar has a constituency. So when you try to, and it's a very complicated system. But I do think we have the right three partners, and the job now is to get the right CEO and And that's an enormously important job, and we can't afford to make a mistake. And that is our first and most important order of business, and then we go forth.
QuestionerYou all have not put out a lot of details about how this is going to work, but there's been an awful lot of conjecture. Yeah. And people trying to figure things out. In fact, on the day that you announced this, there was a huge hit to plenty of health care stocks across the board, from insurers to the pharmacy benefit managers. And this is not the first time that... It's not the first time that a group of people has tried to tackle health care costs, but this is the first time that the market has had an instantaneous reaction to something like this, probably in no small amount because of the stature of the three of you combined doing this. What's your goal?
WarrenWell, the goal is to deliver better care in reality and also in terms of how the people feel about the care that they're receiving, because that's important too, and to find ways to take cost out of the system while not impairing the quality of what people receive and that's enormously complicated. There's so many intersecting companies and people. It's not going to be easy, but we're determined we've got the money, we'll stick with it. You mentioned actually forming a company.
[1:21:07]
WarrenWe haven't necessarily, we don't necessarily have to form a company. We may form a company and probably will, but it's just a joint effort now, and we will need somebody to head an organization and there could be a partnership form and different things. And our goal is really, not just for the three companies, our goal is something that other people can pick up on and that when, and to stop this really just constant increase, because there are only 100 cents in the dollar, and if you've got 18 cents which we're approaching, going to health care, you've only got 82 cents left.
QuestionerYou mentioned that it's a very complicated system. I know you're not an expert on it, but you've spent a lot of time digging through it, and so of the other people who are working with this, Todd. Todd, Jamie, and Jeff, and lots of other people involved underneath. What's your early read on some of these things? Because if you look for margins, there are lots of middlemen and lots of margins.
WarrenYeah, no, I think we've been inundated from people that would like to run this or like to help, just inundated, and they should emphasize help. And also, companies that would like to join, you know, and all of that, but we're not remotely there. remotely there. But it would be very easy, I think, to go in and shave off three or four percent just by negotiating power or certain things. We're looking for something much bigger than that. That can be part of it, but we are hoping to figure out a way that the constant increase as a percentage of GDP can be at least halted and hopefully that we could find find a way where perhaps better care could be delivered, even at somewhat lesser cost.
QuestionerYou think the private sector can do it better than the government?
WarrenYeah, I think usually that's the case, and I think that's probably the case in health care. I mean, I realize, again, this is early on, but people look at pharmacy benefits managers. They'll look at Express Scripts and say that their margins are 9% on the $100 billion in drugs that go through their system every year. Is that like an easy way to clip, or are we talking about it? Or are we talking about working even beyond?
QuestionerOh, it'd be beyond that, way beyond that. And I can't tell you what formal day. They interact in ways that it's going to take a terrific CEO, a lot of commitment, probably some important mistakes, lots of time. You know, I'm not interested in lots of time.
[1:23:46]
WarrenI'm going to keep it moving, but this is not easy. It's easier to be done. God, it's very, very difficult. It isn't, like I say, it isn't difficult to shave a little bit off here, but it'll pop up someplace. It has to be looked at by somebody who really has a grasp of it from every angle, hospitals, physicians, patients. I mean, and the question is whether we can come up with something better, and I'm hopeful, but don't expect any miracles out of us soon. We've got the perfect partnership. partnership. And with Jeff and Jamie, I mean, we can make things happen. Our companies are big yet we can still make things happen, but we're not that, you know, we don't have the bureaucratic problems or the constituency problems that some others might have. And we like each other and we trust each other. And so that's going to work very, very well, and it's a lot of muscle. But it takes, it's going to take a terrific CEO, and that's our most important job by far, is finding that person.
Questionerbeen inundated with prospects and we'll we want to come up with the right person and I hope we do it fairly soon but we're we're not going to compromise. Is this a plan we should expect or should would you expect to see this in place a year from now?
WarrenI would expect to see a CEO in place here from now but there will be a lot to do, Becky. I mean, you know, and I mean, you talk about something that has 3.3 trillion of revenues presently going to people. And most people that are on the reception end of the 3.3 trillion are happy with things. I may have said billion, but the 3.3 trillion are happy with things. And although they'll all say things can be done better, but not in their particular segment.
QuestionerYou mean the actors involved in receiving the checks that are coming in from?
WarrenIt's a huge, huge, huge industry. And they're good people. And we've done well with medicine here, although we don't have more doctors per capita or more beds per capita or more nurses per capita than these countries that are spending 11% or so. So, but it, it, we, we should have a top-notch CEO, certainly well within a year. And we will give that person a lot of latitude and a lot of support. And he or she will need it. You know, in the past, when we've talked about ways to try and bend the cost curve as a nation, when we've had this discussion, people always say be careful what you cut back on, because you could hurt the innovation process.
[1:26:25]
QuestionerYou could hurt what we are doing to come up with the best health care procedures and pills and discoveries in the health care front. Do you worry about that?
WarrenYeah, I mean, but I think you've got three organizations, and I think we will have a CEO that's terribly conscious of that. And there's no question, I mean, that our drug companies, companies. I mean, they've worked miracles. I take a few pills, you know, and then they did. They seem to help. So I think I received very good health care. So there's a lot good about our system, but the system, by its very nature, is not cost conscious. I mean, if you are a young medical person, and let's just say you're working on prostate cancer, which I had, the rewards to you psychologically and with your peers, and your peers, and you're working, peers, everything, are going to come if you do something that develop something better for prostate cancer, which they should, but they weren't going to come to you if you reduce the cost of treating it. There just isn't the same motivation as the, the outstanding medical minds are functioning in many cases much more on the results, which they should be, but the cost really doesn't make much difference. It's very seldom that you read about some breakthrough on cost by anybody in this huge profession. So it's got a different set of incentives to some degree. And we've got to figure out a way to keep the good parts, you know, without, but also to get it what I've called, and it really truly is a tapeworm on the economic system. I mean, it is eating up instead of $170 per person in 1960, when we actually think that we actually I thought we were doing pretty well in this arena to over $10,000 per person. Just think of that $10,000 per person, you know, family of four, unbalanced $40,000 of GDP going to just one aspect of their lives.
QuestionerLet me ask a question from Mark Gilbert, who writes in that you've made a lot of money from some very successful profit-making companies. Why is your new health venture with Amazon and J.P. Morgan designed to be free from profit-making incentives and constraints? Is profit seeking not a good incentive?
WarrenYeah. It certainly can be a good incentive. I mean, it's a wonderful incentive, and there may be many places that it happens in this. And we didn't, if you read what we said carefully, I mean, we are free from that as a demand, but that doesn't mean that it can't happen.
[1:29:08]
WarrenSure. What I'd love to see, of course, is costs come down and the employees, in terms of because they're very, you know, significant parts of the cost. You know, I personally at Berkshire, I'd like to see them get the first reduction if we find something better. That doesn't say that Berkshire should get some, too, but it's really a huge, huge cost to the American public, and it gets down to the worker. I mean, the company may write the check, but they often get participation and co-pays and all kinds of things. So this goes beyond just trying to improve the bottom line of the three companies involved. Well, companies like Berkshire Hathaway and JPM and Amazon make up, I think they cover about half of all American households. About half of American households get insurance through companies like this. So it could make it big impact if people are following from that. It's sort of the way it's developed in this country. And partly the tax law leads to that because the companies get a deduction and the employee doesn't recognize income on that particular benefit. I mean, if we could, if the company bought all your food, You know, you would get charged on the implicit value of the food that you were getting. But the tax law has an impact in terms of how the whole system is arranged. Lots of things have an impact. That's why it's going to be so difficult to really make fundamental change, but we're committed to it.
QuestionerOne of the recent additions that Berkshire made to its holdings, to its stock holdings, was the addition of Teva. And there was a question that came in from Marco, a guy named Trader Marko, who says, what are your expectations on return on investment for investment in Do you have any hopes, plans, or strategies to help introduce Teva in the mix of the Amazon JPMorgan Berkshire Group's aspirations for a more efficient and cheaper health care plan for all?
WarrenThat would be the last thing on our mind. But Teva is not a stock I bought, it's one of the other two. And I've never, never talked with him about it.
QuestionerSo you have no idea why you bought it?
WarrenNo. No, no.
QuestionerOkay. And he'll sell it without telling me. I mean.
OtherAll right, Warren, we're going to leave it there right now. right now. Welcome back to Squackbox, where we are live from Omaha, Nebraska with a special edition. Our newsmaker this morning is Warren Buffett, who's Berkshire Hathaway's chairman and CEO. He just put out his annual letter to shareholders this weekend.
[1:31:31]
QuestionerIt's his 53rd annual letter to shareholders, and he's giving you a chance to ask questions, too. We've been asking for questions and Warren. I have a couple I'd like to get to from people who have been watching and reading in. Eric LaFont writes Ann, Warren, at last year's annual meeting, you said you missed out on buying Amazon. The stock was $935 last May. Today it's $1,500. Are you completely surprised by the market's valuation of Amazon?
WarrenNo, I'm not completely surprised. I'm amazed at the managerial talent of Jeff Bezos. But I've been a constant fan, really almost since he started. And the more I see of him, the more impressed, you know, I've been with what he's accomplished. But I've blown it in terms of making any money on it.
QuestionerYeah. So you're not investing right now. We shouldn't?
WarrenNo. But I would never bet against it.
QuestionerYeah. Yeah. All right. Andre writes in a second question. He says, BNSF, the Burlington Northern, was acquired when the railroad industry had consolidated down to four players and was showing signs of pricing power. Has Berkshire looked at acquiring 100% of an airline given similar dynamics of consolidation, high barriers, pricing power, and low valuations relative to book?
WarrenYeah. The airline business is different. People can go in and form ultra-low-cost ones. I mean, frontiers out there waiting to go public perhaps. And so you've got, you're not going to have these huge trunk carriers necessarily more of those. But you can always compete. But you can't build a new railroad from Omaha and Chicago tomorrow or something in the store. But you can add a flight if you're one of the airlines already. there or you can perhaps come in and get a gate and that flight. So it's a way different set of economics between the two industries. On the end I wouldn't rule out owning an entire airline, but it's a different business, a very different business. Right now you have four major airlines. We own, we own somewhere between six and a fraction and nine in a fraction percent of four. We won't, four and we won't go over 10 percent because we just generally don't like to go over 10 percent. But we do own those four, and I wouldn't rule out us even, we haven't done it, but even buying stock and some other one are changing that position at some point. But it's United Delta American and Southwest, right? Those are the four big ones.
QuestionerYeah, the big ones. And you still like the airlines as much as when you first bought it?
[1:34:03]
WarrenIt's a business that's always subject to somebody doing something very dumb competitively. And they've done it a lot in the past. There was more chance of them, doing it when there were seven of them, then the big ones, then four. I mean, the industry was suicidally competitive for decades. I mean, they net lost money while they were growing like crazy in units. And I was on the board of U.S. Air, so I saw how it all happened. And it can turn into fierce competitive battles that wipe out earnings, or it can be a business that's more decent but still subject to lots of competition. And it's really hard to know, you know, for sure, how it will develop. It is not risk-free in terms of competition at all.
WarrenIn the railroad business, all the tracks have been pretty much late and all of that. So that's settled into a business. Now it's regulated. And it means that your earnings can only, you're a common carrier. And many places you compete with another railroad and other places you don't. And there are different rules that apply even in terms. terms of pricing in those cases. But it's a perfectly decent business. It will lose volume in coal over time. And that's an important product, but it will probably gain an intermodal in other areas. So it's two different animals. There's another question. It's T-41 guys. It's Derek Boers, who writes in. And he says, of the equities that Berkshire Hathaway currently holds, which one, one in all caps, do you wish you could purchase more of if the SEC allowed it? I think he's referring to cases like America. like American Express or Wells Fargo where you're not allowed to buy more. Yeah, I can't answer that for it. I'm not going to tell you what we would buy.
QuestionerDerek, congratulations. We managed to get one that he won't answer, so well done on that. Our special guest this morning is the chairman and CEO of Berkshire Hathaway, Warren Buffett. And Warren, we've talked about a lot of things this morning. We've got briefly your thoughts on the markets, but there's been a lot that's happened to the markets since the last time we sat down with you. Volatility is. back in a big way. And that has the average retail investor kind of questioning what to do at this point. It's scared a lot of people. What do you think is happening right now, just in terms of the return of volatility? Is it something to be worried about what's causing it?
WarrenWell, if you own stocks like you own a farm or apartment house, you don't get a quote on those every day
[1:36:32]
Warrenor every week. And I think you look at the business. And the value of American business depends on how much it delivers in cash to its owners over between now and judgment day. And I don't think it changes in 10% in a two-month period if you're looking at it as business. Now you've got anything can happen in markets. I mean, anything can happen in markets. That's why they don't ever borrow money against securities. Markets don't have to open tomorrow. I mean, you can have extraordinary events. So I think to some extent you can get some of the instruments that people don't understand very well that have a lot. a lot of firepower in them. Like the volatility index and things that are tied to that. The idea of people taking a position and they're gambling. They're not investing. Nobody's investing when they buy some supercharged index on how the VIX does or something like that. They don't need it in their life. It's an unnecessary instrument. Now, they will create instruments that the public will buy and you can just count on that. Wall Street's been doing that since they met under the Buttonwood tree in 1792 or whatever. it was on the exchange. So, but if you're investing, if I'm going to buy a half interest in a McDonald's stand and you're going to run it or a McDonald's franchise and you're going to run it, I look to the business to determine whether I made a good investment. And I'm concerned about, you know, whether we have new competition, how we do over the years. But it's the business I look at. When you're just looking at the price of something, you're not investing. I mean, if you buy something, Bitcoin, for example, or some cryptocurrency, you're you're not looking to the asset itself to produce anything. If you buy an apartment house, you're looking at how the apartment house does, you buy a farm, you're looking at a farm does. If you buy a whole business, you're looking at how the business does. If you buy a part of a business, why shouldn't you look at how the business is going to do? But people get charmed by lots of action and the fact that things are liquid and all of that. And it does have repercussions back into the market when you get something like an AETN arrangement on the, you know, supercharged on the VIX, I mean, where you can lose 90% of your money in one day, I mean, that really doesn't belong with the word investment. I mean, it's just, it's a gambling form of activity.
[1:38:51]
QuestionerAlthough you've said yourself, you talked about this in the annual letter over the weekend, and just even at the top of the show, where when you look around for a business that you want to buy, you can't find any at attractive levels. However, when you're looking at equities, you do see that as a good place that Berkshire has been a net purchaser of equities this year in 2018. and that's because you like the deals that you're getting in the market. You can buy small pieces of businesses for less than you can buy whole pieces of businesses. For the premium you'd have to pay if you were buying the whole fat. So you get a bargain as an investor compared to what I can get in terms of buying the whole business. And people, if they just think of stocks as pieces of business, they'd be so much better off than thinking on those little things that move around in price. And I think with Berkshire, we have an opportunity. unusual number of people as shareholders who just look at Berkshire as a business. They look at it as a savings account that puts some money in 20 or 30 or 40 years ago. We retain it and reinvest for them. But we're their savings account. And that's the way I look at my own stock. That's the way Charlie looks at the stock. Part of the reason that you've been so bullish on equities for many years at this point is the interest rate environment. You've looked at interest rates and said interest rates are gravity on stock prices. And when interest rates are so low, stock prices. rates are so low, stock prices inevitably are going to climb. There's been this really weird thing that's been happening in the markets where all of a sudden good news that we got from a good jobs report made people start to worry that interest rates were going to climb and that the Fed was going to raise rates more than anticipated. People got really nervous around that and you can still see it. Every time we get up on the 10-year back towards 3 percent, it gives investors or at least traders, I should say, some concerns. about what's happening. How do you kind of pay a bond? If you buy a 30-year government bond, it has a whole bunch of coupons attached in the old days it does now. It's so electronic. But it has a whole bunch of coupons. The coupon says 3% or whatever it may say. And you know that's what you're going to get between now and 30 years from now and then they're going to give you the money back.
[1:40:57]
WarrenWhat is the stock? A stock is the same sort of thing. It has a bunch of coupons. It's just they haven't printed the numbers on them yet. And it's your job as an investor to print those numbers on. If those numbers say 10%, And most American businesses earn over 10% on tangible equity. If they say 10%, that bond is worth a hell of a lot of money than a bond that says 3% on it. But if that government bond goes to 10%, it changes the value of this equity bond that, in effect, you're buying. You are buying when you buy an interest in General Motors or Berkshire Athamway or anything, you are buying something that over time is going to return cash to you, maybe a long time in terms of Berkshire. but it will be bigger numbers. And those are the coupons, and it's up to your job as an investor to decide what you think those coupons will be, because that's what you're buying, and you're buying the discounted value. And the higher the yardstick goes, and the yardstick goes, and the yardstick is government bonds, the less attractive these other bonds, and that's just fundamental economics. So in 1982 or three, when the long government bond got to 50, 15% a company that was earning 15% on equity was worth no more than book value under those circumstances because you could buy a 30-year strip of bonds and guarantee yourself for 15% a year and a business that earned 12% was a subpar business then. But a business that earns 12% when the government bond is 3%. There's one hell of a business now and that's why they sell for very fancy prices. So 3% is a long way from 15% that you were just talking about. But I watch it go from 3 to 15, though, too.
QuestionerRight. Is there an inflection point on that way? Because people think, oh my gosh, we've gone from 2.4% to 2.9% and that's a big difference. That's not much. Historically speaking, that's still the way we should be measuring these things.
WarrenAbsolutely. Not on the absolute movement or the percentage gain movement over time. 2.4 to 2.9 is nothing if you're comparing it with businesses that earn 12% on equity and reinvest. And the S&P, you can just look at the figures for decades, has earned on tangible equity. more than that. And it translates into higher prices and it should.
QuestionerIs there a tipping point along the way or is it a gradual decline in terms of these things?
WarrenNobody knows, yeah. But it's, it is gravity. I mean, if you told me interest rates were going
[1:43:28]
Warrento be 15% next year on long bonds, you know, there's a lot of equities I wouldn't want to own now and I would, I would buy a lot of governments at 15 and I kind of wish I had in 1982. but I didn't. If I told you that the long bond was going to trade at 4.5% to 5% next year. It makes a difference. But it's been idiotic to own long bonds. You know, I talk about this in the report in terms of it. It's just been idiotic. And big public pension funds and all that, they sat there and they owned bonds. Now they may have bought them on a 4% or 5% basis, but if they go to a 3% basis, they're selling way above part.
QuestionerThe way people think about it is they do some very selling. things. I mean, you lay this out in the annual report, but a lot of investors are told, retail investors are told, that they should have a certain percent of their portfolio in bonds. Maybe they're told 60-40, maybe they're told 70-30 stocks to bonds. That's something that you should do and that's the safe way of doing it. What are they missing?
WarrenSome people should not own stocks at all because they just get too upset with price fluctuations. If you're going to do dumb things because your stock, a stock goes down, you shouldn't own a stock at all. What are dumb things? Selling a stock? stock goes down. I mean, if, you know, if you buy your house at $20,000 and somebody comes along next day and says, I'll pay you 15, you don't sell it because the quote's 15, you look at the house or whatever it may be. But some people are not actually emotionally or psychologically fit to own stocks, but I think more of them would be if you get educated on what you're really buying, which is part of a business. And the longer you hold stocks, the less risky they've become. Whereas the longer the maturity of a bond, the more risky it becomes.
QuestionerDo you feel like that's a message that is getting through to people? It's one that you repeat again and again. And I always feel like I was watching a lot of the Olympics, and I felt like what they do in the Olympics is so easy. These guys sailing through the air and doing massive spins on the ice and turns. And then I read your annual letter and I think, oh, it's really easy to invest. And then I walk away and realize it's not that easy. It's not easy psychologically for many people.
WarrenBut I've been teaching since I was 21. I told my first class on investments. And I had a class last week with 11 schools, 220 students.
[1:45:48]
OtherAnd some of them get it and some of them don't. People would rather gamble. I mean, the idea that you can double your money in six months, that's just going to, it's why people go to the raises, why they go to Vegas, whatever it may be. They even know the odds are against them. And they still do it. I mean, it's a strong instinct to want to get rich fast, and I don't know how to do it. Joe has a question that he'd like to ask too. Joe.
QuestionerYou haven't tweeted since April of 2016, man. Is that true?
WarrenI didn't really tweet that. I've got a friend that's tweeted about seven times for me. You got no follow. You follow nobody. You know, let me, Warren, you were coming on Squawk Box this morning for three hours. It would kill you to say I'm going to be on Squawk Box for three hours and tweet that out as a favor to Becky and me. I mean.
QuestionerMake me an offer.
WarrenI have never actually tweeted myself, and I don't really know how to do it. And I don't know how to look up somebody else's tweets, but I still feel I'm going to look into it maybe. You know what? I'm going to tell you something more. Becky, over the weekend, I was trying to figure out, I mean, I get so irritated that I don't need it, you know? Not from people sending, but now from looking at what other people are tweeting and retweeting. I get irritated. trying to figure out a way to still get the info that somehow, sometimes I get, but just without me being actually part of it? Is it part? If you got a way I can do, but then I'd still be following these annoying people. I don't know. If we go to the final game, if we go to the finals of the NCAA and they're together in these great seats I'm going to deliver for you because Creighton's in it. I will have you tweet for me during during the game.
QuestionerOh, be careful what you offer, Warren. Joe, how would you like the keys to the castle with that? You'll be the designated tweeter. God, there's a lot. I've never read a tweet. You know what? I'm taking Creighton and Xavier right to the... Now I'm really going to be rooting... I love it. I love it. I love it. I unblocked someone today that appealed to me through email, and I've never done... I had to figure out how to do it.
OtherWow.
QuestionerBut it's on a probationary basis at the Board of Discretionary at the board of the... at the discretion of the board. But I've never done that before. Someone got back in. So you get to do things like that if you come on, Warren.
[1:48:21]
QuestionerI'd rather read 10Ks. Right, but you don't realize how dangerous that offer is you just made. Because Joe and I have joked around about getting a hold to somebody's Twitter account or their information when they leave it logged onto a screen that we sit down, the things that you can tweet out or the things that you can say to people. So dangerous. So dangerous.
WarrenWell, people are pretending to... to be me on both Facebook and Twitter. Have you guys gone after the people?
QuestionerWe did it for a while. There's just so many of them. It's kind of hopeless. Every time you stamp went out.
WarrenYeah, exactly. Exactly.
OtherAll right. We will have much more from Warren Buffett still to come this morning. Let's get back to Becky Quick and Warren Buffett in Omaha. Still thinking about that tweet offer. Becky, that's big. That is big. It's big. How many tweets?
WarrenRemember when we almost took over David's? We almost remember you and I walked up and David Faber had been left on and we almost took over his account? We stopped ourselves. I got so scared thinking about the things that I could send out that, and then I'd get fired probably. First, he'd look like he would, you know, and then I got so nervous about it. I logged it out. I didn't want it there. Because it's so dangerous with the... Faber doesn't even know we almost did that. The thought police that are on Twitter are like, you can retweet something inadvertently and if it comes from some like crazy or something. something, then suddenly you're, you know, your, you know, the whole thing is dangerous. The whole thing makes me nervous, Becky. It just does, you know what I mean? It's just better to not do it, you know?
QuestionerAnd you definitely, Warren. Agree. Don't ever TWI. Don't ever tweet while intoxicated. That is immediate grounds.
WarrenOh, he doesn't drink. TWI. You can get a TWI. Don't do that.
QuestionerRight, right. Okay. Well, let's... Make a little bit of a turn here and get into another discussion with Warren Buffett. Let's talk while intoxicated. Right. We get ourselves in enough trouble with this, just with the coffee and the Coke. Coca-Cola, I should say. Warren, let's talk a little bit about trade policies and what's happened in Washington. There's some news out today that Peter Navarro is going to be elevated as a special counselor to President Trump. And people have made a lot of this because Peter Navarro is somebody who has a some pretty strong ideas about free trade and where he thinks the problems are with free trade.
[1:50:48]
QuestionerHe's made the argument that having a trade deficit is a bad thing inherently. Do you agree with that?
WarrenWell, I actually wrote an article about it some years ago, unfortunately. I think having very large trade deficits as a percentage of your GDP means you're transferring wealth abroad to other countries or close. other countries or claims on wealth. And I felt that was excessive a dozen years ago or so. I don't like the idea of running huge trade deficits as a percentage of GDP at all. You can say you're fooling foreigners because you're just handing them little pieces of paper and they're working hard, making underwear and shoes and everything to ship you, and why don't give them little pieces of paper, but you're going to get inflated away at some point. But I don't like large trade. I don't like large trade deficits. On the other hand, trade has benefited us and the world enormously over time. And it doesn't mean that there can't be abuses in it in terms of dumping and things of that sort. But a world that has more trade in it relative to the total world economy, 10 or 20 years from now, will be a better world than one with lesser trade.
QuestionerWhere do you think we stand in terms of how we've approached these trade deals? Because a lot of the things that people thought, thought would happen as soon as President Trump took office, haven't come to fruition. We haven't gotten out of NAFTA yet. We haven't done some of the more restrictive things in terms of labeling the Chinese manipulators or some of the heavy-duty things that were kind of threatened at the start. Do you worry about closing borders? What would it mean for Berkshire?
WarrenWell, I don't think closing borders is a good idea, and I don't think in a... Not that we've talked about doing that, but if we were to get out of NAFTA, let's look at some of the... Yeah. I think over time, we want more trade, and the closer it is to balance trade, the better. I mean, maybe ideal everybody would have a total trade balance, but it's going to work that way, obviously. But we can take small imbalances fine over time, and I think on balance, you want to encourage trade. We will live better off. If we start saying we're going to grow our own bananas in the United States, we've said that with sugar. I mean, with sugar, we've subsidized it like crazy in this country. And the truth is, we aren't the best natural place to grow sugar.
[1:53:15]
WarrenWell, I would say we have not been enormously affected by trade. Obviously, you know, 50 years ago, we didn't own it then, but the company made underwear, you know, it was using more domestic workers percentage-wise than it does now. Berkshire Hathaway, the original.
QuestionerYeah, we did, yeah, through the loom, it used to be called Union underwear.
WarrenI mean, we originally were in textiles, and our competition was partly in the United States, but then it became outside the country as well. In shoes, we got decimated with the company we bought because of the fact that we had the best workers in the world and all of that, but shoes came in cheaper from abroad. The United States used to make a very high percentage of his own shoes. It makes probably none now. So it can have huge effect on industry. But overall, we want to work toward having more trade. And we also want to figure out a good way of taking care of the people that are, that lose their jobs and are 55 and can't really be retrained for other things because of the effects of having free trade. The benefits of free trade gets spread throughout the population, and the roadkill are real in terms of the people in given industries, And we should take care of those people because we're sacrificing their lives for their economic lives for the greater good. And there ought to be policies that take care of them.
QuestionerLast week on Squawk Box, we had a guest host join us for a couple of hours. Chris Hughes, who is one of the founders of Facebook. He was there. He happened to be Mark Zuckerberg's roommate in college. He made a good decision. He did. He spent about three years working for Facebook and in turn made about half a billion dollars when the company went public. He joined us because of a new and he did. initiative that he's been working on to try and deal with the problem that you just described.
[1:55:42]
QuestionerHis thought is to have a program where it's not a universal basic income where everybody gets $1,000 no matter what. It's anybody who is working he thinks should be making about $500 on a monthly basis, just to make sure that they're not falling below the poverty line as long as they are working. What are your thoughts on this? Because you've talked about the earned income tax.
WarrenYeah, I like the earned income tax credit. For one thing, we've got it, so we've got some experience with it. I think we're spending about $60 billion a year on it. So it's, and it's something, incidentally, that seems pretty bipartisan, I think Paul Ryan is in favor of it. And there's some, be some improvements made. I mean, I think now you get it once a year, and, you know, in effect, you take payday loans, seeing it coming. And it'd be better if it was, in my view, done, you know, on a regular basis throughout the year, so you didn't have this loan sum problem. And I think it should be, to the person, a minimum wage, of the person, a minimum wage, of the year. affects market economics and it affects a big time if you really do it extreme enough. What counts to the workers, how much money they put in their pocket, and an earned income tax credit, I think, is the best way of both guaranteeing that people have a reasonable amount in their pocket, even if they're working at jobs where the market doesn't pay that, wouldn't pay that much. And it also keeps the digging day of work there, and it also encourages people to improve their skills because as you move up, you keep more of the money. I much prefer the earning up back credit. And I think the American people generally would endorse it more. I think it has more, it encourages more things the American people kind of value.
OtherWelcome back to Squackbox. Right now, it's time for some parting shots with our newsmaker of the morning. Berkshire Hathaway's chairman and CEO, Warren Buffett. Warren, a couple of quick questions that have come in from viewers as well. Russell Pruner writes in, he was wondering what Mr. Buffett thinks about how residential real estate will perform in 2018, especially the luxury markets in the Northeast impacted by high property taxes and the loss of the salt deductions, the state and local property taxes deductions.
WarrenYeah, I don't really know. We'll find out. And I like the business over time. I like home ownership.
[1:57:51]
WarrenI mean, I bought my house 60 years ago, and, you know, it's been an important part of the family's happiness. So I, but I haven't got the faintest idea.
QuestionerYeah. Harry John writes in, he says, considering that both Warren and Charlie were already both strong-minded and confident in their own abilities when they met, how did they instantly click with each other and what was it that allowed them to trust each other to be lifelong business partners?
WarrenYeah, it's an interesting question because we had dinner together in 1959 and we never knew each other. He grew up less of a block away from where I now live. He worked in my grandfather's grocery store like I did, but we did not know each other until he was 35 and I was 29. And we went to dinner. And in five minutes, Charlie was rolling on the floor laughing at his own jokes, and I do the same thing. So we knew we were sort of made for each other. And we've never had an argument in this whole time. We are strong-minded. We disagree on a few things. We agree on most things. And we have a great time together. You can respect each other. Absolutely, totally.
QuestionerHey, Joe, I think you had a question, too? You know, we don't have time. But working, watch how a war on operates. He never really promises things that are likely. to happen. And Creighton probably won't make the finals. What about that deal works if they make the Elite 8, Buffett? Let's say they make the Elite 8. Can we watch that game? What about? Are you probably?
WarrenWe'll watch that game. What's that game? Okay, Lead 8. You got a deal. Okay, they make the Elite 8. I'll buy the popcorn. I'll buy the popcorn. Excellent. I'll even buy the tickets, but I was going to. Yeah, I'll get the tickets. Don't worry. I just want to, I want to tweet on your account. Anyway, thank you, Warren.
QuestionerThank you, Becky. And then, certainly, Nebraska is a good.
WarrenYeah, Warren, thank you so much for your time today. Okay, thanks. All right, great. Nebraska is a good team. Yeah, excellent. All right, either one then. I'll take that.
QuestionerBecky, thank you.