OtherWell, Warren Buffett is using his annual letter to shareholders to reassure them about the road ahead for Berkshire Hathaway. In that letter, Buffett touches on everything from the company's investment strategy to its lack of a major acquisition in recent years and possible insight into who will succeed him. CNBC's Becky quick joins us now ahead of that big live three-hour sit-down with Warren Buffett himself. And Becky, this is a big deal, especially given all of the macro concerns surrounding not just the markets, but the global health situation as well.
OtherTom, you're right. Warren Buffett has been a calming voice for the markets over decades, particularly when we were going through the financial crisis. There were days that he came on and really calmed things down when things were far down on the markets. We're going to get his thoughts this morning about what he sees happening around the globe with the economy and what his concerns about their coronavirus might be. We're also going to talk a lot about what was in that letter. He did spend some time focusing on succession, focusing on stock buybacks, talking about a lot of different issues. We'll get his thoughts on the markets because he did lay out some interesting things. thoughts in the letter about how we kind of got to this position based on what was written from a a 1924 book. Edgar Lawrence Smith had written that book. It was a book very few people knew about until John Maynard Keynes kind of highlighted it, and it changed people's perspectives of buying stocks. Basically, he came to the conclusion that it's always better to buy stocks than bonds. We're going to talk to Warren Buffett about that this morning, too. By the way, we should point out, Mr. Buffett is very prompt, always on time. He is here already. He's been sitting here made up. ready to go since about 35 minutes after the hour. He's sitting with us right now. I don't know if you could take the shot and see. Yep, here's Warren ready to go on time. Meantime. Meantime, let's check out what's happening back at the NASDAQ Dom right now. I think Joe's standing by ready to go since our show starts in about 12 minutes time. Oh, no, Joe's not there either. Andrew's not there. Joe's not there, but Warren Buffett is here. He's ready to talk about all of these things coming up. Warren, just very quickly, let's talk a little bit about the fact that the market's
[2:01]
WarrenWell, no, that's good for us, actually. We're a net buyer of stocks over time. And just like being a net buyer of food, I expect to buy food the rest of my life. I hope that food goes down in price tomorrow. So when stocks are down, we're going to be buying on balance. And who wouldn't rather buy it, you know, a lower price than a higher price? People are really strange on that. I mean, they, because most people, most your list, listeners are savers. And that means they'll be that buyers. And they should want the stock market to go down. They should want to buy it a lower price. But they got that feeling that they just feel better when stocks are going up.
QuestionerWe're going to talk more with Mr. Buffett about what he sees happening, about what potential concerns he has with the coronavirus, because obviously that's something that the markets are concerned about. The world is concerned about as it looks like this is spreading and developing. But we'll send it back over to you. We've got a lot of that coming up in just a little bit on Squackbox. We appreciate that.
OtherAnd of course, I am a longtime follower of Warren Buffett. And I love the fact that my 401k buys every two weeks. So I, too, hope that stocks do go down every once in a while. Becky, thank you very much. We'll see you just shortly. Becky's going to be talking to the one and only Warren Buffett right now who may have some unique views about all of this. So we want to get to both of them in Omaha.
OtherGood morning to you, Becky.
QuestionerHey, good morning, Andrew. Good morning, Joe. It's good to see both of you. We are here in Omaha, Nebraska this morning with Warren the chairman and CEO of Berkshire Hathaway. He's just released his 55th annual shareholder letter to the shareholders over this weekend. And this is actually the 13th year that we are now in Omaha talking to him after that letter. This is a show that we call Ask Warren so that people can write in their own questions to Mr. Buffett after they've read that shareholder's letter. But obviously this morning, given the news, there are a lot of other questions that people have concerning the stock market. Let's jump right into it with Mr. Buffett, who is here with us right now. And Warren, Thank you for being here today. It's good to see.
WarrenThanks for having me.
QuestionerI want to talk about the letter. Obviously, one of the things that you touch on in the level on the letter is when people should be buying stocks.
[4:10]
QuestionerWe're going to dig into a lot of it. But when you're looking at the futures down about 818 points this morning, I think probably the first thing viewers want to hear from you are your thoughts on what's happening with the coronavirus. If this is a reason to panic and if you are worried about this.
WarrenWell, I don't know. I have any special thoughts beyond the news on the coronavirus. The very first day I bought stocks was March 20. 12th, 1941, 42. And the stocks were down about 2% that day, as it turned out. Unfortunately, I bought in the morning, so when I came home with the evening and my dad told me the execution price, it was down 2%. But if you're buying a business, and that's what stocks are are, businesses. In fact, people will be better off if they say, I bought a business today, not a stock today, because that gives you a different perspective on it. And presumably, you're going to buy a farm. If you buy apartment house, if you buy a business, you're going to own it for 10 or 20 or 30 years. And the real question is, has the 10-year or 20-year outlook for American businesses changed in the last 24 hours or 48 hours? And we're going to, you'll notice many of the businesses we own, partially own, American Express, we've owned it for 20 years, Coca-Cola, we've owned it for 40 years. Those are businesses. And, you know, buy or sell your business based on today's headlines. And if it gives you a chance to buy something that you like and you can buy it even cheaper, then it's your good luck, basically.
QuestionerAlthough there are a lot of people who look at the market and they say, look, I want to buy, but I don't want to buy when the market's sitting at new highs when it's been hitting new records every day. Maybe it's off 800 points this morning, but maybe there's more of a decline to come because the effect of the coronavirus is going to be an impact. on the global economy. IMF said that over the weekend. You are going to see weakness as not only China, but other countries try and address this. You're right. It may not change things over the five or 10-year span of things. But if I think that I can buy something for potentially 10% cheaper, maybe more than that, if I wait a week or a month, maybe that's what I'm sitting around.
WarrenWell, if you think that, then you've got a, you're going to get fabulously rich if you're right. All you have to do is just keep buying a 10-day intervals and keep taking your 10-day prediction.
[6:26]
WarrenI knew what the market was going to do, obviously, but I don't think anybody knows what the market's going to do. I think you do know whether you're making an intelligent purchase at a given price. Everybody, when they buy a stock, if you're going to buy, say, General Motors, that has a billion, 400 million shares out, you should be able to take a yellow pad like you have there. And on one page, let's say it's selling for 30. It isn't selling that low, but that'd be $42 billion. You should say, I am buying the general Motors company for $42 billion because, and you should get it on a piece of paper. And then if you want to have a shepherd piece of paper, since I think I know what the stock market is going to do, so I know whether it'll be higher or lower in it. But you don't, you don't have that. You don't. But if I worry that the economy is going to slow down, not just for the quarter, but for the year, that would impact how many cars I think they might be able to sell or even produce. I'll guarantee them cars are going to slow down someday. In 1932, General Motor Motors had 19,000 dealers. That's more than all the auto dealers in the United States today. They're only 125 million people then, but they had 19,000 dealers. They produced or sold in, there was one month I think when they sold less than a tenth of a car, right at a tenth of a car per dealer. That was a terrific time to buy General Motors. And forget about the market. If you can predict the market, you don't read balance sheets. You don't need to read anything. You certainly can't predict the market by reading the daily newspaper, that is for sure. And you really can't, you certainly can't predict the market by listening to me. But you're buying businesses. And if you had planned to buy a local service station yesterday and it was closing day, I don't think you'd tear your hair out or anything like that. You'd have already looked at where it was located and the contract that they had with the suppliers and made a decision on competition. because they can make decisions every second in stocks, whereas they can't with farms. They think an investment in stocks is different than an investment in a business or an investment in a farm or investment in an apartment house. But it isn't. If you get your money's worth in terms of future earning power over the next 10 or 20 or 30 years, you're going to have made a good investment. And you can't
[8:47]
Warrenpick them from day to day. If you can do that, you can, well, I haven't met anybody yet that knows how to do it. of that in the letter this year where you highlighted a book that was written by Edgar Lawrence Smith back in 1924 and you said until he came along nobody really realized the compound interest effect of buying stocks not just buying businesses but buying stocks themselves. Edgar Lawrence Smith changed the world with that book and the people have forgotten all about it now although in the 1920s it would it became more and more gospel as the boom went on but Edgar Lawrence Smith set out to write a book on bonds versus stocks. And he said if he went in with the idea that bonds would be a better investment in times of deflation and stocks would be a better investment in times of inflation. And the first line of his book was to say that he'd been wrong, but he had enough sense to look at his evidence. I think Darwin said if you found evidence that was contrary to what you already believed, write it down in 30 minutes or your mind will just block it out. I mean, people have a great resistance to new evidence. And he said, if a stock yields 4%, a bond yields 4%, which was what he was talking about then. The stock was going to outperform the bonds because there were retained earnings that were building beyond that yield. And that has been true for a long, long time, but nobody paid any attention to it. We don't get rich on our dividends that we receive all the way happy to receive them. We get rich on the fact that the retained earnings are used to build new earnings. power, repurchase shares, which increases your ownership in the company. And Berkshire has retained earnings ever since we started. That's the only reason Berkshire is worth a lot more as we retain earnings. That led Keynes to actually say that this was an important book. People paid attention to it, but you're right. It added to the frenzy that built up to 1929. Well, that is true because you can get old boss, Ben Graham told me very early on, you get more trouble with a good idea than a bad idea because the good idea works. I mean, it's a good idea to buy a home, for example, and then people go crazy. The good idea works and it works and it works, stocks work out better than bonds most of the time. And after a while, people forget that there were some other limiting conditions. With Edgar Lawrence Smith's book, it was that when bonds yield the same as stocks, which was the
[11:18]
Warrencase then, that stocks are going to outperform because they have this retained earnings. So, stocks started going up in the 20s, and all of a sudden they were selling it five or six times the prices is one he bought the book. And the original correct perception on his part had experienced changing conditions, but people just looked, they got their confirmation through stock prices. And that's what happens in ball markets. People start out thinking stocks are cheap, and then they start thinking stocks are going up. And a stock can be a good buyer or a bad buy. can be a good buyer, bad buy. It depends on price. But that leads us to today. I mean, if his premise was that stocks are always going to be a better a better investment than bonds, that's kind of what you hear today, which we've been hearing for a while is, Tina, there is no alternative, right? You have to buy stocks because bond yields are so low, because interest rates are so low. Well, if you look at the present situation, we've talked about this before, that you get more for your money in stocks than bonds. That doesn't have to be the case. I mean, but it's usually been the case in America, very usually been the case. And if you buy a 30-year bond today with yield 2%, you're paying 50 times earnings for an investment where the earnings can't go up for 30 years. Now, if somebody said, I want to sell you a stockless at 50 times earnings and the earnings can't go up for 30 years, you'd say that doesn't sound very good. Stocks are way better than 30-year bonds. I mean, that's clear. And that's one of the alternatives. People really have three basic alternatives, short-term cash, which is an option of doing something later on. Long-term bonds are long-term stocks, and stocks are cheaper than bonds. Charlie said recently, Charlie Munger, the vice chairman at Berkshire Hathaway, had his daily journal meeting just a couple of weeks ago. And at that meeting, he said that there's a lot of wretched excess out there and that there's a lot of trouble coming as a result. Do you agree with that? There's always trouble coming. There was trouble coming in 1942 when I bought that first stock, all kinds of trouble. Philippines were going to fall pretty soon. There was all kinds of trouble in 1949. There was trouble, certainly trouble in 2008. When I wrote an article for the New York Times, I said trouble is coming, but I said buy stocks.
[13:40]
QuestionerWould you repeat that this time? If trouble's coming, would you still say buy stocks right now?
WarrenI would say buy stocks if you get enough for your money. And, you know, we buy a few stocks. But we don't look at, we're not buying the stock market. We're saying, I am buying, let's say American Express. We own American Express. There's 815 million shares out and sells it this morning's 126 or something like that. So it's selling for roughly $100 billion. Now, the real question is, whether the company's worth more or less than $100 billion. It isn't what the stock is going to do tomorrow or next week or next month.
QuestionerYou said just a few minutes ago when we asked you on World Wide Exchange. Right now, Berkshire Hathaway has a net. buyer of stocks. You are in a net buying position?
WarrenWe've been a net buyer of stocks, or I've actually been a personal net buyer of stocks ever since I was 11 every year. There's been 15 American presidents in my lifetime, more than a third. I've lived under a third of the life. I didn't buy stocks under Hoover. I was only about six months old then, but there have been seven Republicans after that and seven Democrats. I bought stocks under every one of them. Now I haven't bought stocks every day. There have been a few times I thought stocks were really quite high. And I've even written an article once or twice up, but that's very seldom.
QuestionerBut you wrapped up your partnership at one point, too.
WarrenI wrapped up my partnership once because you thought it was too expensive.
QuestionerYeah. Okay. But this is not a time like that?
WarrenWe own $240 billion worth of stocks. Now, we look at that as $240 billion worth of businesses that we own parts of. But I love owning those businesses.
QuestionerYou've also got more than $125 billion in cash sitting around.
WarrenWell, we'd like to buy more businesses.
QuestionerAll right, we're going to talk more about that in just a little bit. When we come back, we have much more from Warren Buffett. Right now, though, I'll send it back to Joe and Andrew. Good morning, everybody, and welcome back to Squackbox here on CNBC. I'm Becky Quick. I'm live in Omaha with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He's just released his 55th annual letter to shareholders over this weekend. We've been taking questions from you. We'll be getting some of those questions in through this morning. We are here, Warren, with you, at Berkshire. Hathaway's headquarters building. This is upstairs in the room that's called the Cloud Room.
[15:56]
OtherAnd this is a room where you often take students to kind of talk to them about questions they have when they come to visit you. You also do some other things up here, too, other presentations.
WarrenYeah, I had students here for dozens of years. And for many years, 40 schools would come in. They'd come in groups of eight. Five days I'd spend a year. And they come from all the world. We have them from Peru. We had them from China and from Israel. And we had a good time always. I've given it up now. But I started teaching when I was 21. And when I got to about 88, I thought, I'll take a rest.
OtherWell, there are a lot of questions that are coming in from viewers that have been hitting here today. They're waking up this morning looking at the stock market indicated down by almost 800 points for the Dow. We're actually off our worst levels of the morning, which is something to say when you're still looking at the Dow down by about 786 points. But people have a lot of questions about the economy. They're wondering what's happening right now, particularly with the coronavirus out there. You have a lot of economic data at your fingertips because not only are the many businesses that Berkshire owns, but the businesses you own pieces in. What are you seeing right now around the globe?
WarrenWell, it affects various businesses. I would say that I received commentary. I get some commentary monthly from almost all of the companies. A good many of them had some comment about how it was affecting them and however it was affecting them at that time, I'm sure it's accentuated. But they've been affected by, they were affected by tariffs, they're affected by taxes, they're affected by the most thing is they're affected by competitors in supply and demand over time. And I don't have the faintest idea what our businesses will be doing six months from now or 12 months from now. I do think that not only our businesses, but American business generally, we're doing fabulously better 30 years from now or 20 years from now. The long term is very, in my view, is very easy to predict in a general way, but an important way. I don't think there's any way to predict what the stock market will do 10 minutes from now, 10 days from now or 10 months from now. So I work on what I think I'm able to do, and as desirable as it might be to know what was going to happen 10 minutes from now, that's just not something I'll ever be able to master.
[18:15]
WarrenSo fortunately, I can come to a pretty firm conclusion that 20 or 30 years from now, America, business. and probably over the world will be far better than it is now.
QuestionerWhat are the momentary implications that you've seen from coronavirus? What's an example of a business?
WarrenWell, an example. For example, we have maybe a thousand dairy queen franchises in China here. And they're just treat only, so they're the older type, not but food. But a great number of them were closed, but the ones that were open weren't doing any business to speak of. Apple is, I mean, our much bigger holding is Apple. We own 5.6% of Apple, and the company came out and said that it's affecting not only its stores, but all kinds of things, supply chain. And I find that certain of our companies have got supply chain arrangements that are being affected by this, that I didn't even know had those.
QuestionerLike what?
WarrenWell, I got one from Johns Manville the other day, for example. You wouldn't normally think of them as having a big supply chain, but Shaw Carpets or you name it. I'll guarantee you that a very same. significant percentage of our business is one layer affected by it. But they're being affected by a lot of other things too. And the real question is, is where are those businesses going to be in five or ten years? They'll have ups and downs. Our candy business is a wonderful business, but it loses money seven months out of the year. But the nice thing is Christmas comes every year.
QuestionerWhen you look at the economy and how things were kind of chugging along, let's say, beginning of this year, when first things first picked up, how would you gauge the U.S. economy at that way?
WarrenWell, it's, it's strong. strong but a little softer than it was six months ago. But that's over a broad range of business. If you look at car loadings, rail car loadings, that's moving goods around. And there again, that was affected by the tariffs too because people, front-ended, purchases, all kinds of things. There's always a lot of variables. But business is down, but it's down from a very good level. So I would say that looking at our 70 businesses and that actually, they've really represent hundreds in addition. They're a little softer. On the other hand, I was out with the fellows from the Nebraska Furniture Mart just Saturday night, and their business was up quite a bit in February, but that's because weather was good. So you have a lot of variables that hit.
[20:39]
QuestionerWhy do you think business was down, let's say, the last six months? Is it a decline in confidence, or is it coming off of levels where there was unusual activity ahead of that?
WarrenWell, it isn't really down. It's just it leveled off and a little softer maybe now. But well, the tariff situation was a big question mark for all kinds of companies and still is to some degree. But that that was front and center for a while. Now coronavirus is front and center. Something else will be front and center six months from now and a year from now and two years from now. Real question is where are these businesses going to be five and ten and twenty years from now? Some of them will do sensationally. Some of them will disappear. And overall, I think America will do very well. You know, it has since 1776. But you still watch things like rail car loading is very close. I watch everything. But I don't do it to make specific investment decisions. But I enjoy, I mean, I want to know what's going on. But I also don't think that I can make money by predicting what's going on next week or next month. I do think I can make money by predicting what's going to happen. happened in 10 years.
QuestionerAll right. Well, tell us more about what's going on, just since you like knowing about those things.
WarrenWell, as I say, you know, the certain businesses depend on weather to quite an extent in retail, for example, in given months. But the big trends you see are going on. I mean, in terms of the movement to online commerce and, I mean, the big stuff keeps moving. But we've got a big investment in the airline business. and I just heard, you know, even more, flights are canceled and all that. But flights are canceled for weather. It's all happens in this case. They're going to be canceled for longer because of coronavirus. But if you own airlines for 10 or 20 years, you're going to have some ups and downs in current business and some will be weather related and they can be all kinds of things. The real question is, is how many passengers they can be carrying 10 years from now and 15 years from now and what will margins be and what will the competitors be? in a position B. But I still look at the figures all the time. I'll admit that.
QuestionerYou mentioned the airlines and you own stakes in all the major airlines, but not as much as as Delta. I think you own north of 11% of Delta at this point?
WarrenWell, our largest position is in Delta. Three of the four positions are mine. One of the positions
[23:11]
Questioneris one of the other fellows of the four positions. But we own a very roughly ten, close to 10% of the four largest airlines. There's been a lot of speculation. In fact, some of the questions that came in over this weekend were questions about those airlines, wondering if you would buy any of them outright? Have you considered buying any of those companies out right?
WarrenIt'd be very unlikely we would do that. I'm not saying it's impossible, but it's complicated. Why? Well, for one thing that regulated, and there's an interplay. I'll just give you an example. not that we'd be doing, but with Delta, we own 18% of American Express, and American Express is a bank holding company, and bank holding companies have limits as to what they can do, and we're a passive holder of a bank holding company with American Express, but if we owned an airline that was tied up with them, they'd have lots of arrangements. There's a lot of complications because it's a regulated industry. Anytime you get in a regulated industry, you have more complications in transactions.
QuestionerSo is it fair to say you like these stocks and you would own more if it if it wasn't complicated?
WarrenWell, we, if to go beyond 15% in any company, we would have to go in on Hart Scott Roddeno. I mean, there's a lot of rules as you increase your ownership. Obviously, almost anything we own, we'd like to own more of.
QuestionerAre you buying more of any of those stakes right now? Apple shares?
WarrenWell, right. I get pretty close mouth when it comes to what we're buying. You thought about that for a second. I feel my jaws lock up. But it's fair to say that anything that we own, we like. You know, and there's very few stocks that we own, and I look at them as part ownership's in businesses. There's very few that are selling at some price where I would sell them a little higher.
QuestionerAll right, well, let me ask a question that came from Tony Dickinson. He said in the fourth quarter, Berkshire sold 55 million shares of Wells Farage. Should shareholders view this as a lack of confidence in the new CEO turnaround planned? And what is Warren's future outlook for Wells Fargo?
WarrenWell, I won't give them any advice specifically on Wells Fargo, but it's absolutely true that we've sold down our position. Some of it was sold down to avoid being over 10% because then you do have some filings with the Fed and so on. But we've sold well more than that. Yeah, we've sold well more than that.
[25:50]
OtherI think 8.4% was the last. Yeah, that sounds right.
QuestionerAnd we've sold Wells Farter in the fourth quarter and we sold earlier. Can I ask why? Only because I did get a number of questions.
WarrenYeah, well, I can understand it. But the, we just don't, we don't want to give any advice on what we're doing because I could change what I'm doing tomorrow. But we talk about everything except we don't give stock advice.
QuestionerOkay. I'll try. I want more from Tony Dickinson just because I think I got 15 or 20 different questions on this. Berkshire owns 32.58 billion of Bank of America and 17.39 billion of Wells Fargo. One position's been increasing while the other's been decreasing. Does Warren like Bank of America twice as much as Wells Fargo? And how should shareholders see the holdings?
WarrenYeah, well, I think they've seen that we've bought, we've bought Bank of America and we've sold some Wells Fargo.
QuestionerAll right, let me ask you a broader question that comes in just on interest rates. and the impact that that might have as well. Varroon Jane writes in on Facebook. Hi, I'm a huge fan and a student of Mr. Buffett. Please ask him what impact does the zero interest rate environment to cross places like Japan and Europe have on their banks, whether the business is still good? And does the prolonged low interest rate regime in the United States hurt the prospects of American banks like J.P. Morgan, etc. And in such circumstances, do Indian banks, which have high return on equity, look attractive to Mr. Buffett?
WarrenI can't comment on that. In another. But generally speaking, with a lot of, but there are a lot of other variables too, but the banks are going to make more money if there's, if there are higher rates with a steeper curve. The curve makes, is more important, in other words, the 10-year versus short-term rates, may make more difference than the absolute level. But American banks have made very good money. very good money with very low interest rates. Around the world, if you look in the UK or Japan, even lower rates have made it pretty tough for banks. The returns on equity are not as high. And they have to use more leverage to even get the same returns, and I don't like that as well. If you are talking about the curve that we're looking at this morning, the five-year, two-year is inverted. Two-year-10 is not right now, but the 10 years below, 1.4.4. percent this morning. And think about the 10-year at 1.4 percent. That means you're paying 70 times earnings for something that can't increase its earnings for 10 years.
[28:27]
WarrenNow, somebody came to do with a stock and said, you know, this is a terrific stock. It sells it 70 times earnings. The earnings can't go up for 10 years. You'd say, well, explain that to me again. Right. But, no, the interest, we've never seen a situation like this in the world, literally. I mean, you can go back and read Keynes and you can read Adam Smith. than you can read, you know, all the great ones. And they don't talk about negative interest rate. It never costs there might have a supply and demand and all these marginal costs. But brilliant economists never really anticipated that you would have negative, and you've got 13 trillion or something like that worldwide at negative interest rates. And we don't know what that means. I mean, we've got a lot of people who can speculate what it means, but 10 years from now or 15 years from now, we'll look back and say, well, it's obvious what would have that and we'll see it. But it is not a normal situation. And it's, it's, well, interest rates are the basis of all value. I mean, you know, if you knew interest rates were going to be zero for a hundred years, you would think 1% was a great rate to return. But you also would know if you bought something with yielding 1%, or that was what it paid, and rates went to 8%, you'd lose practically all your capital. So it's an enormous. factor and we don't know the answer. Central banks don't know the answer. All we know is that it's been useful in stimulating things and particularly asset prices now for 10 years. And what we thought was temporary in 2008 and 9 in the way of monetary policy to stimulate, we've just put our foot on the gas even further. The whole world has.
QuestionerYou made a point in the letter of saying that you don't know how long these interest interest rates were last. You and Charlie never try and figure these things out. But we did have St. Louis Fed President, Jim Bullard, on the program last week. And he said that he expects to see these low interest rates for a long time to come. That does raise a lot of questions if that happens about what this means for the stock market, what that means for banks, what that means for insurance companies, which you touched on in the letter, too. It's bad for insurance companies, but it's good for stocks. Bad for insurance companies. And what happens to the insurance companies as a result. Are they getting more, or some insurance companies kind of push them out of risk?
[30:52]
WarrenThe ones that really get hurt on it are either life or annuity companies that are promised returns. The property casualty business doesn't promise returns. It still holds money, so it hurts them. But if you promise somebody an annuity that's going to pay them three or four percent, and now you find that you're reinvesting your money at 1% or something, you know, you're going to disappear. Are insurance companies being forced to make risk a risk? and riskier bets. Well, they shouldn't. I mean, the answer, if you need to get 3%, and you're only getting 1%, the answer is to quit giving 3%, it's not to try and get the 1 up to 3% and do more dangerous things. You should always adapt your consumption to your income. You shouldn't try and adjust your income to your consumption. That's a basic principle for individuals, businesses, and and everything else. And reaching for yield is really stupid, but it's very human. I mean, and I understand it. And people say, well, I've saved all this money all my life and now I can only get 1% out. What do I do? The answer is you learn to live on 1% unfortunately. And you don't go and listen to some salesman come along and tell you, I've got some magic way to get you 5%. Do you think, though, that that's what should be happening? Do you think that there is more risk taking place in the insurance market? And you see that in what they call leverage loans and weaker covenants and all. No, people are reaching for yield. There's no question about that. And that's stupid. And it has consequences over time. But it's very human. Consequences that could have a big market impact? It depends how far it goes. It's something that, the things that get built in slowly, people going crazy and tech companies in the late 1990s. It can take a lot longer than you think. But eventually you get to midnight and everything turns to pumpkins and mice. You know, that's the downside of low interest rates, pensions, savers, anybody who gets left in a raw position of that. On the alternate side of things, if rates were to rise rapidly or maybe not even so rapidly, what does that mean for the federal debt? Well, it depends on the average maturity of the debt, but our maturities are fairly short. They've gotten lengthened. But if you take $20 trillion and you're borrowing it at 2%, you've got 400, what if you got a $2 trillion, $200 billion, you've got $40 billion of the expense, but if it goes to $5%, you've
[33:39]
Warrengot $100 billion, I mean, at $5%, you've got a trillion of expense, I'm sorry. It's, we are benefiting in normal. in our national budget by the fact that inverse rates are very low. And so interest cost has not gone up as you would have anticipated if you were looking at the scene 20 or 30 years ago with the increase in national debt. Austria issued 100-year bonds, you know, 2% are thereabouts, and then they've gone way, way up. And I think maybe they yield 1.1 or something like that. I don't know where they are now. But it's great if you're a borrower to have cheap money. I mean, everybody should refinance their mortgage. Is that an argument for the Federal Reserve, or I'm sorry, for the Treasury Department here, issuing longer, longer notes? Well, yeah, but I would have said the same thing five or six years ago and been wrong. But if we, under the President's slope, it still would cost more to lengthen it out, but you're lengthening it out at very, very low rates. And it would be what I would be inclined to do if I were Secretary of Treasury, but I'd have missed a lot of bets in the last 10 years, too.
QuestionerAll right, we're going to have much more with Warren Buffett. When we come back, we'll talk a little bit about conglomerates and whether Berkshire Hathaway is being discounted in the market because it's a conglomerate. Warren, again, for people who are just waking up, they're tuning in and they want to know what you think about this sell-off this morning to see the Dow down 700, 800 points in the morning. What's your reaction when you see something like that?
WarrenWell, my reaction is that I like to buy stocks, so I don't wish ill on anybody else, but I like to, if they want to sell them to be cheaper, I prefer it. So if that's a, you know, roughly a 3% decline or thereabouts, I don't know how many 3% declines I've had in my lifetime, but there have been a lot of them. And I can't think of one that you shouldn't have bought on, you know, basically. That doesn't mean stocks are going to go up or down next week or next month or next year. But if there's something, if you like to own American businesses, you're getting a chance to buy it 3% cheaper. I don't consider that a lot cheaper. I mean, but how can it be bad news unless you have to sell stocks? Now, if you have to sell them for some reason, it's worse off. If you don't have to sell them, I mean, somebody can come around and offer you a quote on your house today,
[36:13]
Warrenand it can be 2% less than they offered you yesterday. But if you like the house, it doesn't make any difference to you. Does that mean Berkshire will be buying socks today? Well, we certainly won't be selling. And, yeah, we could easily be buying something, sure.
QuestionerOkay. Let's talk a little bit about a Barron's cover story that was just out last week. The good news on the cover story is they think that Berkshire is worth more than it's selling for right now. The bad news is they said they think that's in part because it's got a big conglomerate discount, and they think if you weren't running it, that it might get broken up. What's your response to that line of logic?
WarrenWell, conglomerates have had a bad name, and for good reason, over the years. I mean, I closed my partnership up at the end of the 1960s, and there was a run, a very abusive run in conglomerates, where they played with numbers, and they had dirty pooling, as they called it, of accounting. They wanted to have their stocks up and put out stories to do it so they could issue more stock. They were kind of chain letter arrangements. There have been a lot of bad conglomerates, and probably disproportionately so, compared to sort of honest to God, single industry businesses over time. We don't think we're that kind of a conglomerate. We've certainly never wanted issue shares. We've never touted shares. It's done for business reasons in our case. The interesting thing is, of course, is the American public has been going wild in their enthusiasm for conglomerates in the last few years, if you think about it. I mean, it's been an incredibly popular area, but they call them index funds. You buy 500 businesses. I'm trying to figure out what you were talking about. Yeah, well, 500 businesses all put together. I mean, that's the ultimate conglomerate, isn't it? I mean, I've recommended index funds to lots of people, and when they do it, they're buying into 500 businesses. And they're going to have 500 businesses a year from now and five years from now, and they think that group of businesses will do very well. And I think our group of businesses will do okay. The difference with an S&P 500 index is it's 500 different companies run by 500 different management. management teams who are all focused on their business, maybe not having a centralized operation that is loosely running all of those businesses. Well, we've got, our businesses are run by separate people. I mean, I, I, I, we just finished Valentine's Day.
[38:34]
WarrenAnd I did not, I did not select what pieces went in the boxes. And it's been, probably been 10 years at least since I've been to a C's candy factory. Now, you know, I get the figures every month. But I don't have, I don't know how to make chalk. I think of the short. I don't pick out the new locations. We have managers for our businesses that are very much like the managers we have for the businesses that we own pieces of like American Express or Coca-Cola. And there's a couple things we can do. We can determine the dividend policy of our subsidiaries. We can control their capital allocation to some extent. But on most capital allocation, whether to buy new equipment or anything like that, they make the decision. The BNSF Railroad is going. to spend $3.5 billion on, I don't approve a single dollar of that in terms of capital expenditures. They know what they need to do, or they need to lay track, how many locomotives they need, whatever it may be. So our managers are, I would say in a sense, they're almost more independent than the managers of the S&P 500 who go around and report to Wall Street week after week. They go to have investor relations meeting and they're always explaining what they're doing and trying to get the approval of the analysts and all all that sort of thing. And we just tell our managers to do what makes sense.
QuestionerOkay, outside of the idea of them not having to report to individual shareholders or the investment community, what's the advantage of having you there? The capital allocation part of it?
WarrenWell, yeah, we can move capital within. If you move capital from one stock to another, and you've got a game particularly, I mean, you pay a tax and may pay a dividend tax or if you sell part. But there's a lot of taxes incurred. in moving from one business to another, either at the corporate level, in some cases, but certainly at the individual level. And we can move capital, well, it just takes C's candy again. We bought that in 1972. We've moved several billion dollars from the candy business to other types of businesses. And we'd love it if we could use it all in the candy business, but it just isn't that sort of business. And in addition to that, uh, uh, uh, we'd, we'd love it if we could use it all in the candy business. We free up our managers from all dealing with Wall Street, dealing with baggers, all kinds of things that are, what I regard as less productive use of their time.
[41:01]
QuestionerHowever, you also have a situation where you have gotten some activists who have been interested in the stock, including Bill Ackman. He's built up a stake, hasn't said too much about it, but I think he has made some comments about how maybe Burlington, northern Santa Fe's margins could be improved. You can look back at Bill Ackman's experience with the Canadian Pacific Railway and kind of wonder if he is building up a position because he would like to see you take a more active role there.
WarrenWell, we notice what other railroads earn and when their margins are better. I mean, and we certainly put way less pressure on than Wall Street might, who would want it next week or, but we, our managers are well aware of what's going on in other industries, and we've made changes where we don't think some businesses are performing as well as they should. But overwhelmingly, we've got managers there that are very, very good. They've got capital available to them for anything that makes sense. And we decide how much they distribute where the capital moves, and sometimes it moves from one industry to another. And in certain industries, a consolidated tax position really is very helpful to us.
QuestionerThere's a viewer question that came in from Ben Comston, and he asks, It was recently pointed out by Bill Ackman that some subsidiaries like GEICO, BNSF, lagged their peers in some areas. Would you agree with that? And how can your successor push improvement in subsidiaries while maintaining a decentralized management structure?
WarrenWell, at GEICO, we bought control in 1995. We had about 2.5% of the market for auto insurance. And we're at about 13.7% of the market. So we've gone from $2.5 billion of premium volume, or their... about the 35 billion premium volume were number two now to State Farm. We were number six or seven at that time. So I would say that not due to Berkshire at all, but due to Tony Nicely during almost all those years, GEICO has been the envy of every other company in the auto insurance business, except for Progressive. But they've done a good job, too. But GEICO is working. worth tens and tens and tens of billions more than when we bought it in addition to all the earnings we've given, just the goodwill value. So that's been extraordinarily well run. And with Burlington, I think we paid a dividend of $5 billion last year and we paid $35 billion for it. So it's gained in market share and its business.
[43:49]
Greg AbelIt's operating margins have improved. But they haven't improved as much as some other railroads. Do you believe in precision scheduling railroading? Well, we'll see. I mean, we've watched it plenty. And for those who don't know what that is, it's something that kind of irritates customers because it makes things a little more rigid, but it does improve. Yeah, it makes the customers adapt to the railroad more than the railroad adapting to the customers. And practically, everybody's done it. And a fellow named Hunter Harrison was enormously successful. Who worked with Bill Ackman at the Canadian Pacific. Yeah, he worked with the BNSFF. if you go back far enough, and there's a book about it. It's very interesting. But he did it at the Illinois Central, the Canadian National, the Canadian Pacific, and then he was going over to the CSX. He developed a method of railroading where the customer does adapt more to the railroad and improved margins dramatically. Our margins are close to what the better railroads. Well, there's only a few, they get from precision railroad. On the end, we've gained share. Because the customers don't like it. Because the railroads apparently, or the railroad customers like us better. And over the long term, we'll see. But it isn't like it's something we can't do.
OtherWe've got more questions to come with Geico and Todd Combs' role there. There were several questions that came in on that, but we do have to slip in a commercial break. Let's get right back to our guest of the morning. Warren Buffett joins Becky in Omaha following the release of his annual letter to shareholders over the weekend. over the weekend.
QuestionerBecky, you took a plane. I mean, it's in the back of our minds. Is it not? It's just in the back. There's no way, and the risks are low. It goes back to 1918. It goes back to 1980. If you look at the numbers of what happened in that pandemic when it came around the globe, up to 50 million people were killed in that. It was a third of the planet's population that was infected. It was 500 million people that were infected at that point. 675,000 Americans died at that point. So inevitably, your mind kind of goes back to what's happened in the past, because as humans, we always look back to history to try and predict the future. It doesn't always work. It's not always prophetic, but it does give you something of what to kind of play out if this were to get worse and worse.
[46:04]
QuestionerNow, Andrew brought up the idea that it's warm weather. We're approaching spring in a lot of parts of the country, or a lot of parts of the planet. That may be good news. We just don't know if this time around if this is one of those viruses that does die off in warmer weather, wait and see and kind of hope.
WarrenYeah. I actually, um, uh, uh, uh, I think this, from what I've heard from people that know a lot more about viruses than I do, that unfortunately this will make it through the summer. And in terms of having a vaccine, it's, you know, a long ways off. So you've got, you know, it is scary stuff. I don't think it should affect what you do in stocks, but in terms of, in terms of the human race, it's scary stuff when you have a pandemic.
QuestionerYeah. I guess this one's particularly. particularly frightening because it's new. So there's no natural immunity that's built up in any of the populations. And you wonder what happens, particularly in areas where there's not the same health care structure that we have in America or in some of the developed nations. I guess that's a big part of the question too.
WarrenYeah. And it's, it's, well, I think about it in terms of our annual meeting. I mean, which is May 2nd, I mean, it could very well affect by that time. It could affect. We've got questions from view. viewers asking just that, will the annual meeting be any different this year? Particularly because you have a large Chinese contingency of shareholders who are here for that.
QuestionerYeah, that certainly will be affected. And incidentally, I mean, flow is particularly tough on old people. You're going to have two guys on the stage as combined ages 185. So we won't be looking for people showing any size of contagion. But that's one of the problems. it does have a long gestation period.
WarrenRight. And it's highly transmissible. And again, you did talk about it earlier. It's something that you see in the results of the businesses, even some of your own, fully owned businesses that you didn't anticipate.
QuestionerWell, and we own airlines, for example.
WarrenNo, it affects businesses. Now, actually, my dad used to tell me a story. He was 14 in 1918. And he told me what went on in Omaha during the big Spanish epidemic. I mean, it was something in those days. something in those days and and pandemics will occur in the future. Now what they hope to get is a universal flu vaccine, but that's a long way off.
[48:34]
WarrenIt isn't impossible. I mean, I asked my own science advisor is Bill Gates, so I talked to him, I call him. I've talked to him the last few days about it and he's bullish on the long-term outlook for a universal prevention. prevention of it, but, but he says it's not going to come, you know, for, not going to be here in 10 years. What are Bill's concerns as somebody who spends a lot of time traveling around the globe, as somebody who is trying to help medicine in some of the less developed parts of the world? Yeah, the Gates Foundation is very active in trying to be helpful on this. And Bill says the CDC is the best in the world. And I mean, we've got terrific resources in this country, but a pandemic is a pandemic. a pandemic and there's just no evaluating. But I have heard that the summer is not likely to cause the end of this. Do you know why? But I don't know. You know, you shouldn't be asked. I shouldn't be offering my opinion on that because I pass along things I hear from people I think are smart, but... I'm actually asking for Bill's opinion, not yours. Yeah, well, I shouldn't really quote it, but I do. But I do, he's the guy I ask, and I didn't talk to it last, just a few days ago. And he loves to talk science, and he can make it so I can understand it, which is quite a trick. You know, at the Gates Foundation, they're taking it very seriously. I'll put it that way. Is money going from the Gates Foundation to try and find a vaccine? I'm sure we're expending human and financial resources. I mean, maybe this is more than you know, but you know if they have put human, resources out, either into China or other places where there's... I don't know that. I don't want to comment on that, but I know that there, that is something they've always spent, they've been very involved in as human health, and even particularly this. Bill knows a lot about vaccines. Let's talk a little bit about Berkshire Hathaway. We were in the middle of a conversation when we had to go to a break before, but there has been this question raised, not only by Barron's in the cover story there, but by other places too, about. whether Berkshire Hathaway would be worth more if it were split up. That's a good question and I will tell you that if you were to say, and let's say the stock market didn't change for two years and interest rates didn't change. So you had a two-year period and you said we'll sell off all the businesses. I don't think, I mean
[51:13]
Warrenyou have the expenses of selling them. Now if you sold them all the people who leveraged them up to their maximum, you might get a little more. the stock is selling for, it would be very tax inefficient, very tax inefficient. Interestingly enough, up till 1986 it wouldn't have been. I mean, there was a general utilities doctrine that governed corporate breakups. So you could dispose of businesses or securities, if you did it right, you could dispose of securities or businesses that are appreciated without a tax at the corporate level. That was done regularly in various ways up till 1986. They revise the tax code big time. They kill general utilities. You can't do that now. Now you can go, you can have spin-offs, this business or that business. You probably have to lie a little in terms of your purpose in order to get the best tax ruling. And it takes time, but you cannot break up, you cannot dispose of the entire business, business by business, without having very substantial tax liability. It would not produce a gain. On the other hand, having them together produces, there's some very valuable synergies in there. Now, we don't use leverage as much as the people who would buy them piece by piece would do. So we could leverage Berkshire up to the sky. I promised people we won't because we have insurance promises to people out 50 or 100 years, and we've got shareholders who are going to own the stock for 50 years, and they do not want us to leverage to the sky. But there would not be a profit if we were simply to another. that over the next 24 months that you could come in and buy any business we had and we'd sell them to the highest bidder.
QuestionerYou made a point of talking about this in the annual letter. You said, key to my only Berkshire-only institutions is my faith in the future judgment and fidelity of Berkshire directors. They will regularly be tested by Wall Streeters bearing fees. And many companies, these super salesmen might win. I do not, however, expect this to happen.
WarrenThat's exactly true. And I think by writing it, it helps it a little too. No, there's no question that Wall Street would love to come along and sell anything that we've got. I mean, there's a fee every time there's a transaction, and they're big fees, and there's fees for financing. So we've had all kinds of people snoop around that. They know they're not getting done with me, but they won't, it won't get done later on either.
[53:45]
WarrenI am leaving every share of Berkshire up goes to charity, and it's 99. 99% of my net worth. So I got, nobody cares more than I do about getting the most money to those philanthropies over the, forward the years following my deaths. And that's going to take place over 15 years, and I say keep it all in Berkshire. But if I thought that it was going to be run in a way responsive to Wall Street, I would instead do something else and have the money distributed to these philanthropies and not have it all tied to Berkshire. But Berkshire has a very unusual shareholder base. I mean, we have individuals that own Berkshire, and a lot of them have owned it 50 years just like. It's, people buy it to own for lifetime, and we're going to run it in a way that they won't be disappointed.
QuestionerDo you think the people who are newer, relatively newer shareholders buying the B shares, have the same mentality as the people who have been in it for 50 years in the acre?
WarrenWell, we try to because that's who we encourage. I mean, in effect. We don't want everybody to buy our stock. I mean, there's only so many seats. There's about a million 600 and some thousand A shares out. All the seats are filled. I love the shareholders we have. I don't want to go to Wall Street and try and get some new shareholders. They're going to replace the people we have. So what we want to have is people in those seats that are in sync with us. You can run a French restaurant or you can run a hamburger sand. And if you serve good hamburgers, you'll do a good business to the hamburgers. and you can, at the French restaurant, you can do the same thing there. But you can't run the French restaurant and then serve hamburgers inside, and you can't run the hamburger stand and serve French food inside. So we advertise in our deeds, in our words, and every way we can, what we're about. And we're looking to have the seats filled at our church by people who are in sync with us. And we do have them there. We get the same people every Sunday. And I see no advantage in going out and telling everybody. And mostly we're going to do wonderful things and having those. seats for place. Because the only way you can get a seat is to throw somebody else out of that seat. There's only so many seats and they're all full. And you want them filled with people who are in the sink with the policies at the company. And therefore you have to explain those policies and you have
[56:04]
Warrento live up to those policies. And for 55 years, we've tried to. So you get the shareholders you deserve? Exactly. All right. Not some mixed metaphors, but can you have a decentralized central office running both the French restaurant and the hamburger place? Well, they aren't trying. We're not trying to have the would management run the utility or anything else? Decentralized, that's what I mean, a decentralized headquarters that's in charge, a conglomerate, in charge of all those different businesses. Well, we could run, well, we have decentralized management as it is. We could have somebody in charge of all the little companies, another one, we could visualize it in all kinds of ways. I think we'd have more overhead. I think we'd have a different sort of manager. Our managers like running their own businesses and they like, they never have to finance their businesses. They never have to go to Wall Street. They probably save 25% of their time and I want them to feel they own their businesses. And that's all they're responsible for if we mess up some other way. They still, they get paid based on how they do and there again, we attract managers who like to operate on that basis. We don't attract managers, particularly, who think they're going to keep moving step by step through various divisions and eventually run the whole place. All right, we can talk more about succession later because you did write an awful lot about of that in the annual letter too.
OtherWelcome back to Squackbox. This is CNBC. We're here with a special show with Warren Buffett in Omaha, Nebraska. But before we continue with that, let's get a quick check on the financials this morning. If you've been watching the futures, you're going to see that overall the Dow futures are indicated down by over 700 points. We've seen level. of worse than 800 points off this morning. But you see, a big part of that comes from the banks themselves. The banks, if you look across the border, are down by about 3%. If you're looking at Goldman Sachs, Bank of America, Citigroup down by 2.9%. JPMorgan Chase off 3%. Wells Fargo down a little less. It's down by about 1.9%. Again, we're with Warren Buffett, the chairman and CEO of Berkshire Hathaway today. And Warren, one of the things that people wrote in, a lot of people had questions about the banks, about what's happening with the banks, what you've changed with some of your
[58:20]
Questionerinvestments over time. Jason Goldberg writes in, he says, please ask Warren about his views on the bank stocks in general and on Wells Fargo in particular. Over the last two quarters, he sold almost a quarter of his longstanding Wells Fargo steak. Also in the fourth quarter, he dumped a third of his Goldman stock, Goldman Sachs shares, although he still owns over $75 billion in bank equities. So what do you think about banks, not necessarily the sell-off today because you don't look at day by day?
WarrenWell, banking is a good business if you don't do dumb things on the asset side, I mean, basically. It's a business that the banks we own earn between the commercial banks earned between 12% and 16% or so on tangent, net tangible assets. That's a good business. It's a fantastic business against the long-term bond, you know, at 2%. If you have a choice between a 2% instrument and 12% instrument, which one's going to win over time. So if you ask me whether I think banks are going to go down where they only earn three or four percent on tangible assets, I don't think that will happen. The question is really whether they do something massively dumb, I mean, which periodically a number of banks have done. And I feel very good about the banks we own. They're very attractive compared to most other securities, I see. And most of them are buying, Bank of America is buying in a lot of stock every year. Our ownership of the Bank of America this year probably will go up 7% or 8% without us spending a dime. I'd like to own any business, any good business where my ownership is up 7% or 8% every year without me spending any money. And on top of it, I get a dividend and so on. They're very attractive, both against interest rates and against bonds and against other stocks, in my view.
QuestionerYou say occasionally they do dumb things. Maybe you're talking about Wells Fargo with the scandal that it had. It just settled on Friday with a number of the regulatory institutions that were kind of looking into it, the investigations that were taking place for $3 billion. Does this mean that they have kind of finally gotten through that and can move forward?
WarrenI don't know the answer to that. I know that they made $3 billion because it was not. I don't know what else is outstanding. But Wells Fargo's classic in terms of one lesson. my partner, Charlie Margaret, he says, whenever we have a problem, you attack it immediately.
[1:00:55]
WarrenHe says an ounce of perversion is, an ounce of prevention is not worth a pound of cure. An ounce of prevention is worth a ton of cure. And we've seen that time after time. And the interesting thing, and I don't know the details at all, but the original thing was a whole bunch of phony accounts. Now, I don't know how if you open up a couple million phony accounts, you make any money on it at all. I mean, I don't, the shareholders didn't make money. People say that, well, the incentive structure was set up so that some of the employees didn't make money. It was the dumbest incentive system, you can think. And as soon as you learn, you can devise dumb incentive systems. We've done ourselves. I mean, you can, you can cause people to do the wrong thing because they will do what their incentive to do. And they had, obviously, a very dumb incentive system. People started playing it in various ways. And the big thing is they ignored it when they found out about it. I mean, you're going to do dumb. things in business. And we do them every day, you know, but you absolutely have to attack a problem as soon as it occurs and you know about it. And if that had happened, Wells Fargo shareholders would be a lot better off. But Wells Fargo shareholders did not profit from opening up accounts that were phony accounts that had nothing in them. I mean, somebody was getting paid so much per account. So, and the practice spread, because bad practices do spread if they're allowed to spread. And they were ignored. which is a total disaster and look at the consequences. So two or three years later, who's paying? The shareholders are paying for something that didn't do them any good whatsoever.
QuestionerIs that why you've sold off some of the shares?
WarrenNo, not specifically. I know you don't want to get specific on why you split this. I'm not recommending. What stocks, people have to make up their own minds on that.
QuestionerOkay. I want to ask you a question about Todd Combs and his new role at guys. in his new role at Geico. I got several questions that came in from that. And let's just use this one from Peter Lampras. During last year's interview on CNBC, after the 2018 letter was released, you were asked about succession at Geico. And you mentioned that at a recent meeting at Geico, you met about 40 of their top executives. And after each introduced themselves, they stated their length of time with the company.
[1:03:10]
QuestionerThe shortest was 19 years. Please explain why none of these 40 top executives were qualified to take over a CEO after the retirement of Bill Roberts. Again, that's Pete Lampras from Chicago. Pete Lampras from Chicago.
WarrenBill Roberts took over not even two years ago. And last, and he's done a terrific job in connection with Tony Nicely. I mean, Geico is my first love. Absolutely. I tell the other companies that day. You can't compete for my second love, but you can't compete for my first love, which is Geico, because it goes back 69 years and it did wonders for me. Anyway, Geico, Bill Roberts took over. took over a little less than two years ago, and then in October or November last year, he said he would, he'd like to retire in a year. He would adjust it in any way that made it the easiest for us. And we did not have the person, in my view, to replace him at that point. And Todd Combs, who's worked with Berkshire now for 10 years, He actually was a product manager, Progressive, and the president. He knows a lot about insurance. Insurance is probably the only business I know something about that we're in all the rest of the total confusion. But I understand the insurance business at some degree. Todd understands it very well at the operating level. And so Todd is there, and I hope very much that he's not there very long, because I'd like to get him back to Omaha. But our intention, always is to promote from within. And we would hope to pick out the right person at Geico. It isn't that there isn't somebody there. It's just you want to have the right one, because when you put somebody in, you're going to keep him there for a long time, or her.
QuestionerDoes that suggest Todd is not going to be there for a long time?
WarrenI don't think he's going to, no, the plan is not for him to be. I mean, he has not made a permanent career shift. And he, he, he, he, you know, I don't know how long it'll be there. We have one important problem, which is, which all insurance companies have, but Progressive has done a better job of managing, of, of, of, of, of correlating, or risk with, with rate. And that is what we're focused on now. Correlating risk with rate, meaning.
QuestionerIn other words, having the proper rate. Right.
Warrencharging the right amount.
QuestionerCharging the right amount.
WarrenIf you were in the life insurance business and you thought that 80-year-olds had the same life expectancy as 20-year-olds, you'd have a big problem.
[1:05:57]
WarrenAnd what would happen is you'd write all the 80-year-olds and somebody would write all the 20-year-olds. So in auto insurance, the same thing. There's a vast difference. In auto insurance, I'm not sure, I might prefer the 80-year-olds over the 20-year-olds.
QuestionerWell, you might, and you certainly would prefer the 80-year-olds to the 16-year-olds.
WarrenI mean, yeah, yeah, and you'd prefer the 16-year-old female to the 16-year-old male. There's a whole bunch of things. So you've got a core, you really got to segment risks, and that's enormously important. And every company is trying to do it better all the time. We do it far better than we did 50 years ago. But we have room for improvement on that. We're focused on that. And in the meantime, we're growing faster, we're gaining market share. Geico is a fantastic asset. Todd's job is the fourth. to focus on that, but it's also to work himself out of a job very quickly, and preferably to work, definitely to work himself out of a job with somebody from GEICO. Eric LaFont writes a follow-up question. He says, Warren, why did you and Ajit decide to appoint Todd Combs as the CEO of GEICO? That part you've answered. But how will he be able to run GEICO, manage a $13 billion investment portfolio, oversee Haven, and be on the board of JP Morgan? Yeah, well, it'll keep him busy. And we've told him me. He's unlimited use of a net jets. Really? Oh, sure. No, I mean, we want them to be efficient. That's what that's just is for. And he'll be working 70 hour weeks. The question about the portfolio is interesting. Most months, neither Ted and or Todd makes a single change in their portfolio. I mean, portfolio management is something that you learn over decades. And when I ran Solomon, I was running Berkshire portfolio. It is not something. that you have to sit there day by day and do. People do it that way. But there are many years where if I just left the portfolio entirely the same and didn't make any changes, we'd be better off. So it's not about, but you're right in terms of JP Mortgage Board. He's going to be a very busy guy. Geico is the top priority, but it isn't going to say the top priority for a long, long time. Let me run to another question that Max, 0205. 0205 wrote in. Have Todd Combs and Ted Westler outperform the S&P 500 since they began working at Berkshire? Why don't you disclose their record? Why don't you disclose their record, they said?
[1:08:30]
WarrenWell, we're not disclosing. I think it would be very unusual for a firm to disclose everybody's sales last year among their sales people or anything like that. I mean, they're entitled to work. and relative anonymity. Our directors know how they do. I know how they do. I know how they do. We made a lot of money with them. I feel very good. I mean, I feel very good about them in all ways. But we're not going to tell you how much each candy store sells it sees candy, or it was the top person that at any place brought in in sales or whatever it may be.
QuestionerAll right. Let's jump to Berkshire's overall record versus the S&P. Berkshire has now underperformed the S&P 500. the S&P 500 on one year, three year, five year, and 10 year marks. Is that because it's too big and will it ever be able to outperform?
WarrenWell, certainly being too big is part of it. And, but I would say this, during that same time, I mean, last year, we achieved, now I don't like it, gap earnings very well, but we achieved the highest gap earnings of any company in the world has ever achieved. That's investor owned. And we have the highest net worth. worth of any company in the world investor owned, any company in the world. So it, I would say, related to safety of principle over time, I feel good about it. And I feel good about the fact that 99% of my money is in it, and that it will be the source of all the philanthropic contributions that are made for 15 or dozen years after I die. So, but I don't think, I do not think, it will be in the top 10% of stocks, of stocks performing over the next 10 years. I don't think it'll be in the top 15% of stocks performing in the next 10 or 15 years. I also don't think it'll be in the bottom 10% or 20% or 30%. So, but our ability to have a huge edge over the market generally with a $550 billion market value. It's just, it'll be minor, but it'll be done in a very, very safe manner. Is an investment in the SEP 500 a better investment? It could be. It could be. On balance, I think we'll do a little better, but it'll be, it'll be minor. It depends on the kind of market we're in a down market, we're going to beat it. I mean, it's that simple. And sometimes we will be the last 10 years we haven't been. But over 55 years it's worked, and it will continue working, but it will not work at all like it did when we were working with $100 million or a billion dollars. There's no question about that.
[1:11:16]
WarrenBut we've got good business. businesses and we won't be in the bottom quartile, I promise you that, over any long period of time. There are people like there were back in 1999 who have said, maybe you've lost your edge. It was a similar thing in 1999 where you saw the technology stocks that were the big high flyers, that people were pouring their money into the dot-com companies and a lot of others associated with that. If you look at the markets again, it's the technology companies that have the big runs. This time you're participating in Apple, which is one of those front. runners. But is this a cyclical thing to you? You think there'll be another market downturn and then? Oh, there'll be a downturn sometime. And then Berkshire outperforms at that point? Oh, we'll outperform in a down market, but that may not be particularly satisfactory to people. But no, we will because we have these businesses that are making money. And I mean, we're not, we're geared somewhat away from a full market participation in either direction. But that's fine. I mean, we own, if you think about it, we're 80-some percent in equities. We may show 230 or 40 billion in equities, and that looks like we're against our market cap. But we own 100% of these other businesses, those are equities, too. I mean, we own a railroad, and we own insurance companies, and those are equities. So we're about 80% in, roughly, in equities, and about 20% in cash, and I'd rather have that 20% in other good businesses. But that is to some extent a curse of size. And it's to some extent the fact that it's very hard. If interest rates stay at this level, we'll wish we'd, for the next 10 or 20 years, we'll wish we'd been 125% in equities. I mean, you know, equities are so much cheaper than bonds, long bonds, that, you know, something will change in a major way. I just don't know what. And I want to be prepared for anything, obviously. So that's why you keep so much cash around. You want to be able to be prepared for a downturn? You want to be prepared for a crisis? We want to be prepared for anything, Becky. We want to be prepared for pandemics. We want to be prepared for anything comes along. That is the chief job I have. I have people's money that gave it to me 50 or 60 years ago, and some of them still have 100% of their money are essentially in it. And the one thing, and I've got the responsibility for,
[1:13:47]
Warrenfor five foundations that presently are going to get $80 billion, and I think we'll get a lot more over time probably. We don't want to permanently lose money. And you don't want to get that so that you go into a shell and don't do anything. But we have obligations to people on workers' compensation claims and auto accidents they've had that go out 50 years. And, you know, we have to run the job. the place so that every check clears under any circumstances. And that's why, incident, we own treasury bills. We don't, we don't own commercial paper, we don't rely on bank lines or anything. When people get terrified and they will occasionally, everything freezes, you know, and you're going to have to stand on your own feet at a time like that. It won't happen very often, but it'll happen occasionally.
QuestionerI know you've developed a thick skin over the years, but does it tick you off when people start questioning whether you've lost it, whether you can still...
WarrenWell, I'm sure I've lost some of it. I'm going to tell you all kinds of things I've lost. No, that happens. But we haven't lost Guy Gaw or the railroads. We don't. Berkshire without me is worth essentially the same as Berkshire with me. I mean, my value added is not high, but I don't think I'm subtracting value. But the big thing is how our businesses do and what we get to add in the way of business. over time and we can add them through marketable securities. I mean, we own five and half or a little over percent of Apple. It's probably the best business I know in the world. And we own five and a half percent of it. And that is a bigger commitment that we have in anything except insurance and the railroad. So it's our third largest business.
QuestionerYeah, they made the point that it was bigger than your biggest acquisition and precision.
WarrenOh, sure. It's our third largest business.
QuestionerAll right, let me test you on your thick skin. Okay. Wow. Here was the kicker of that Barron's cover story. He said there's reasons to think that the company will be a market beter when he's gone. In the meantime, happy 90th.
WarrenYeah, well, I hope it is a market beater when I'm gone. I'm counting on it. I'm telling my estate and then the trustees that succeed my executors in the estate, I'm telling them to keep every share of Berkshire they have until they have this pattern of giving it away. I mean, I want him to look back and say, gee, we should have made this change earlier.
[1:16:18]
Otherthis change earlier because it's going to determine how much we buy in the way of vaccines and all kinds of things, education and all these things. And I feel terrific about Berkshire after I leave.
QuestionerAll right, we're going to continue this conversation with Warren in just a moment. Good morning, everybody, and welcome back to a special edition of Squackbox. We are live in Omaha, Nebraska with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He's just released his shareholder's letter. The shareholder's letter that he writes every year has been writing for the last 55 years now. And Warren, thank you very much for being with us, too.
WarrenOh, thanks for coming.
QuestionerWe've talked about a lot of different issues. For people who are just waking up this morning, I want to once again point out that the Dow futures right now are indicated down by about 767 points. That's not the weakest level that we've seen this morning. We have seen off more than 825 points at different various times. We'll be watching this very closely. Of course, this is because of what's been happening with the coronavirus, with the additional cases that have been picked up in additional countries, and what that may mean for global growth. We'll talk more about that with Mr. Buffett in just a moment. We have been talking about that this morning. But Warren, I want to talk about another issue that we have not touched on yet, and that's politics here in the United States. We just watched the Nevada Caucus. Bernie Sanders walked away with the most delegates after that. He looks to be, as the clear frontrunner for the nomination for the Democrats this time around. You have long been a supporter of the Democratic Party. What do you think?
WarrenWell, I think I'm going to wait. and see who gets the nomination. But I'm a Democrat, but I'm not a card-carrying Democrat. And I've voted for Republicans. I've contributed to Republicans. In fact, I've only run for two offices in my life. One was head of the young Republicans at the University of Pennsylvania, and the other time I was actually on the ballot running for a delegate to the Republican National Convention in 1960. But normally I vote for Democrats, and we will see what happened.
QuestionerWow, that's the first time I've ever heard you say something like that.
WarrenWell, I've kept it a secret for all these years, but now it comes out.
QuestionerYou just said that you're not a card-carrying Democrat.
[1:18:29]
OtherThat's true. You are a card-carrying capitalist. You actually have one of those in your wallet. Yeah. I've seen it.
WarrenI don't know whether I'm a card-carrying capitalist, right? I don't think that's consistent with, inconsistent with what I've said on politics. Yeah, here it is. I don't know whether that shows. Those who can't see, I'll show you on this camera right here. Card-carrying capitalist. This is what you carry in your wallet.
OtherYeah, and I think we will have some of those available of the annual meeting, too, for our shareholders. I think Andrew's got a question that he wanted to jump in with here. Andrew?
QuestionerI was just going to follow up on that question, Warren, which was about a year ago. We had asked you about Michael Bloomberg, and you had said that if he ever entered the race, he was somebody you would support. Would you support him? Is he your candidate?
WarrenWell, I would certainly vote for him. I don't think, I don't think, I don't think. another billionaire supporting him would be the best thing to announce. But sure, I would have no trouble voting for Mike Bloomberg.
QuestionerAnd what do you think his chances are?
WarrenWell, I don't think I want to get into handicapping the race, but I would say this, in terms of Sanders, I actually agree with him in terms of certain things he would like to accomplish. I don't agree with him in many ways. But in terms of the fact that we ought to do better by the people that get left behind by our capitalist system. I don't think we should kill the capital system in the process. I think we should make sure that the Golden Goose keeps laying more eggs and it's worked wonderfully since 1776. But it doesn't work as well for people whose talents aren't really geared to a market economy. And I don't think anybody should be left behind by an economy that has over $60,000 of jobs. $60,000 of GDP per capita. And so I'm a big fan of increasing the earned income tax credit. And I'm, you know, I think there should be some changes made. But if given choice, I would certainly vote for Mike Bloomberg as opposed to Sanders.
QuestionerThere is a plan. Let's talk about some of Sanders plans. You said you agree with some of what his intentions are, but let's talk about some of those actual plans. One of those plans would be to give 20% of company stock to him. a company stock to employees and put workers on the board. What do you think about that? That would be for any company, public company,
[1:20:54]
Warrenthat has more than $100 million in annual revenue or $100 million balance. Well, I don't want to get involved in evaluating his whole plan, but I think that would be a particularly bad idea. Because? Well, I just, I don't think that, I don't think putting 20% of the capitalists out of labor union sports a good idea either. And I think the market system works very, very, very much. very well in terms of developing more goods and services. I mean, when you flew out here to Omaha, if you'd fly out here and you wouldn't have been able to fly in 1776, you wouldn't have seen anything. Everything you see is the product of a system that's worked like nothing's ever worked in the history of the world. So I do not believe in messing up our system of developing output. I do believe that anybody's willing to work 40 hours a week and has a couple kids should not have to have an extra second job. second job. And I believe in having a higher income for people, not necessarily a higher minimum wage, but I do not think it's at all unreasonable that the income tax credit produces at least $15 an hour, maybe higher in certain areas. So I'm very much in sympathy with the fact that that Senator Sanders believes that a lot of people are getting left behind and through no fault of their own. And there's all kinds of of aspects of capitalism that can need in some ways to be regulated. But I don't believe in giving up the capitalistic system.
QuestionerAll right, let me slip in some questions that viewers have written in on this front. Michael Blank writes in, please ask Warren if he thinks the market will sell off if it becomes clear that Bernie Sanders will win the Democratic nomination.
WarrenI think I normally would never make a comment on something like that, but I would say that if you had Sanders and a Democratic House and Senate, or if you had Trump with a Republican House and Senate, there would be a significant difference. But I don't think I would necessarily vote on what, in fact, I know I wouldn't vote, on what I thought necessarily would affect the market the better. I think it's a very poor yardstick. I would not want to cast my vote in a presidential election based on which would be better for the market in the next 30 or 60 or 90 days after the election.
QuestionerBut your reservations with Bernie Sanders, I assume, come with your concerns about what it means for the economy, not over 30, 60, 90 days, over a much broader period of time.
[1:23:29]
OtherCertain aspects of the economy, certain things, you know, I'd like to see done. I would like to see the earned income tax credit change dramatically upward. Alan Bucky writes in a letter. He says, if Michael Bloomberg becomes the Democratic candidate, would you consider buying his company? No. I can give you a category. I'll answer that. Because of the price, because of the... That'd be something to pay more. Okay. With the markets, our primary focus this morning, we're fortunate enough to have one of the greatest investors in the world of all time, really, with us for the entire show. Let's get back out to Omaha where Becky, quick sitting down with Warren Buffett.
QuestionerGood morning again, Becky. Thank you, Joe. Again, we're sitting down with Warren Buffett. And Warren, we've talked this morning about the coronavirus. But there are people who are waking up across the country now, kind of tuning in. at this hour, so maybe we should address this again. With the markets indicated down 750 points, with concerns about coronavirus spreading and now worries about what that will mean for the global economy this year, I know this is not something you look at a day-by-day basis, but how do you kind of wake up and read this and think through it?
WarrenI don't think it. It makes no difference in our investments. There's always going to be some news, good or bad, every day. In fact, if you go back and read all the papers for the last 50 years, probably most of the headlines tend to be bad. But if you look at what happens to the economy, most of the things happen are extremely good. I mean, it's incredible what will happen over time. So if somebody came and told me that the global growth rate was going to be down 1% instead of a 10th of a percent, I'd still buy stocks if I like the business and I like the price at which day. And I like the price is better today than I liked them last Friday. Do you like prices better today? Will Berkshire be buying stock today? Well, we'll certainly be more inclined to buy stock today than on Friday. Yeah, yeah, anything we were buying Friday, we will be buying today and feeling better about buying it. You know, one of the things you talked about in the annual letter was stock buybacks of Berkshire Hathaway. Right. And for the first time, you told people to call Mark Millard in your office outright if they have $20 million worth of Berkshire shares and they're ready to sell.
[1:25:48]
QuestionerRight. That's a really unusual. Why did you do that?
WarrenWell, we did it because it's very hard to buy blocks in the market of Berkshire. We probably never see blocks, except we do see them from estates or occasionally. But if somebody's going to sell $100 million worth of Berkshire and we want to buy it, we'd like them to call us. And if we're buying at that price level, we'll be buying, we'll buy it.
QuestionerDan Mahoney actually wrote in with a very similar question. He just said, is it? hard to buy back the shares?
WarrenIt's harder to buy back Berkshire shares than, say, Bank of America is buying back their shares. Bank of America bought back 8 or 9% of their stock last year. And they can really do it without moving the market. I mean, Apple's been buying back a ton of stock. They were buying stock at the same time. We were buying stock. But it was easier for us to buy Apple stock, even though Apple itself was buying a lot of stock than it is to buy Berkshire. Berkshire is, well, it's held by people that really plan to keep it. I think the amount of spectacular. in Berkshire stock is relatively low compared to most stocks. And so it's, it's, well, we bought $5 billion worth last year, but that's only 1% of the market cap. And I would say with a great many companies you can buy 4 or 5% of the company fairly easily a year without disturbing the market. American Express has been buying it every year.
QuestionerSo with you putting out an ad in the letter to shareholders, does that basically mean you are eager to buy more shares back?
WarrenDepends on the price, but we'll let anybody know if they, and we told them to call us before the opening or after the closed, but, but, and only if, only with blocks and only if they're ready to do business. Now, there'll be a few people probably, they'll probably try and call just to see whether we're buying or not, we will, we will not show a lot of patience with those people.
QuestionerLet's talk about shares of Apple, both from, you just mentioning it with the share buybacks, with it being such a huge holding of yours. You've got more than 5.3% of the company right now?
WarrenNo, I think it's 5.6% of the company. And it goes up every day.
QuestionerLet's talk about what we've seen with the slow down with the coronavirus, because Apple is one of the companies that has said it's going to have an impact, not only with the stores that they've closed there, with the behavior of Chinese customers, but also what happens with
[1:28:09]
Questionerthe supply chain? Well, I change. Sure. How do you read through any of that? What are you hearing? Do you know more than we do on that front?
WarrenNo. No. I don't know one thing more. I see, I may see Tim Cook at the annual meeting. I see them in Sun Valley once a year. No, I don't think, I don't think I've placed a phone call to Tim Cook in two or three years. I mean, no, all kinds of things are going to happen to Apple over the next 10 years. The real question is, you know, what is the degree of pervasiveness and strength of that product five or 10 years from now? And I don't think of Apple as a stock. I think it's our third largest business. It's also a high-flying technology company. It's one that's been at the forefront, but you've said in the past, you didn't buy it because it's a technology company. I think it's a consumer products. In fact, I think I've said this on the program a couple years ago. I mean, obviously it's a consumer product company that uses technology, but we've got a lot of products that use technology at Berkshire. But it's an incredible company, and I should have appreciated it earlier. There's a question that came in from, I guess the handle is GPG. This is a question that came in on Twitter, and the writer asks, you've said that you can do fair value estimates of companies you follow at any time in your head. So please do one now for Apple. What went wrong with your estimate for IBM and how is that a miscalculation different than for Apple? IBM's an entirely different business than Apple. I mean, Apple doesn't resemble IBM anymore. It resembles Seas Candy and way more. I mean, it is an incredibly useful product of people that grows more useful as the number of people are involved. I mean, it's really interesting, you know, we call them smartphones. If you go back and look at the old telephone, that was an incredible useful problem. It changed my mother's life and my dad's. It changed lives in every way. And they took a long time to become pervasive. and it was very expensive initially, but it changed the world. And the smartphone is part of hundreds and hundreds of millions of people's lives in all aspects of their lives. It's used for all kinds of utility. It's a consumer product. Are you a consumer of its products at this point? You've had to flip them for forever. Ah, I'm glad you brought that up. I am now used to use. I am now using, not very often, but I'm using the latest model and I'll give you a little preview of our movie for the annual meeting.
[1:30:57]
QuestionerWe haven't done it yet, but it will probably show me crushing with my foot, my old flip phone while cozying up to the new smartphone. When did you get the smartphone? I've been given several of them, but including by Tim Cook. One finally stuck? What, probably? One finally stuck?
CharlieYeah, absolutely. No, I, my flip phone is permanently gone. The number's been changed to my new phone.
QuestionerWow. That's impressive. I mean, you're looking at an 89-year-old guy that's barely beginning to be with it. What do you like best about the phone? And what are you like the least?
CharlieWell, I don't use all its facilities like most people. I mean, most people are living their lives around it. I use it as a phone. As a phone and nothing else? I use it as a phone. Okay. I don't like to invest from bankers talk about EBIDA, which I re-translate as .
OtherThat was Berkshire Hathaway, Vice Chairman Charlie Munger, about a week and a half ago, when he was speaking at the annual shareholders meeting for his other company, the Daily Journal, answering questions, giving his usual straight answers when things come up as questions. Warren, that was Charlie talking about EBITDA earnings. da earnings, calling them BS earnings, although he said it a little more explicitly.
QuestionerYou in your shareholder letter for Berkshire Hathaway also wrote about how you don't believe in gap earnings. How do you guys come about this? Where do you think? You still have to report these numbers, but you're basically telling shareholders don't listen to them.
WarrenWell, yeah, it's two different principles. I mean, the gap numbers would show us earning 80 billion, which is more than any company's ever earned in history. And we explain why that really isn't the relevant statistic because a lot of that was just the stock market going up, which now gets counted in our earnings. And Charlie was expressing an opinion we both have. Charlie is the shy, reticent one of the pair, but Charlie is the best partner anybody could possibly have. We've been partners now for 60 years, and you could not have a better partner. He, at 96, a woman, since that meeting, actually, in the last couple weeks, a woman said to him, is it to, Mr. Munger, that you have eight children, and Charlie's reply was so far. So Charlie, Charlie is very much an active partner, we'll put it that way. Next time I see him, I'll get an update on that to see. So far, so.
QuestionerYeah. Okay, let us know what happens with you.
[1:33:47]
QuestionerYeah, I will. You know, we watch pretty closely, Charlie's shareholder meeting for The Daily Journal. Sure. We send cameras out, we watch it. I've been out myself. Do you watch that meeting, too, to see what he has?
WarrenI watched it all on YouTube afterwards, but my sister and one of my good friends and my niece were all there. And, no, I end up watching it, and I actually end up reading it usually, too. I wouldn't miss it. But I don't go out for it.
QuestionerWas there anything he said that surprised you this time around? And I'm just looking through some of his sound like to him.
WarrenActually, nothing Charlie says can surprise me.
QuestionerIs there anything that enlightened you or changed your opinion on something?
WarrenMaybe something. But I learned from Charlie every time I talk to him. Charlie has the best 30-second mind in the world. So I can go to him with a new question, a new problem of any kind. And it goes through about eight fillers in his mind in 10 seconds, and he gets to the essence of any problem. There is nobody better to talk to than Charlie at age 96.
QuestionerIs there anything you've talked to them about recently that you might be able to share? I don't know if you want to share the conversations you guys have privately, but or anything where you've bounced something off of them?
WarrenWell, I bounce. We talk about a lot of things. And we talk a lot of, we talk particularly about things we don't know the answer to. And, you know, we find the whole scene so interesting, whether it's politically or economically or the world. I mean, it's incredibly interesting to us. And we're particularly interested in each other's view, although I think I'm more interested in his view than he isn't mine. And that would be a correct decision to make for somebody overhearing us.
QuestionerWhat's something you guys don't understand right now?
WarrenOh, we do not understand at all what the outcome will be in a world where 13 trillion is being borrowed at less than zero. And even Greece went on short-term, I think Greece, the 10-year bond is 1%, for example. And at the same time, in this country, we're having, under very good business and market conditions, we're having a 4.5% federal deficit and nobody is concerned in the least. And we're talking about massive new programs and so on. And everybody talks about how they'll pay for them. but they really, you know, the deficit is going to widen. And so we don't know what world comes out of something where you start with extremely low interest rates
[1:36:22]
Questionerand high rates of growth, and then what you do for stimulus later on. But the whole game, I mean, the game always unfolds differently than you expect. And that's what makes it so interesting. You know, the 10-year, speaking of these low rates, just a little bit ago, hit its lowest yield since July of 2016 this morning. I think it was 1.377%. We're back at 1. 1.396%, but 10-year rates below 1.4%. Would you have anticipated this? It makes no sense to lend money at 1.4% to the U.S. government when it's government policy to change to have 2% a year inflation. I mean, you've got, you've got, the government is telling you, we're going to give you 1.4% and tax you on it. And on the other hand, we're going to presumably devalue that money at 2% a year. Well, these are very unusual conditions. And classical economics, it doesn't appear that, you know, what do people do under such circumstances? Is everybody buy a mattress and stick their money under the mattress or what? And it particularly seems unusual when the world is generally prosperous and, you know. But that's, the game is always changing, but it always looks logical in retrospect, and it always looks puzzling prospectively. But there's always things to do that make. sense too. Like what?
WarrenWell, I hope that's what we're doing. It's buying good businesses at decent prices, whether all of the businesses or parts of the businesses through the stock market.
QuestionerYou know, you told me a year and a half ago, maybe longer, that when you went out to try and buy whole businesses right now, it just looks too expensive, which is why you started buying pieces of companies, more stocks, but in places like Apple. Is that still the case? Is it still a huge premium to try and buy a company outright?
WarrenThere's quite a premium. Part of the premium is because you can borrow so much money so cheap, so cheaply in buying those businesses. Obviously you can pay more for a business if you can borrow a very high percentage of the purchase price and of the future cash flow committed to it, and you can borrow low rates with very little in the way of restrictions, restrictive covenants or anything of the sort. I mean, that's going to bring higher prices and the demand for that is huge and people look at those rates on the 30-year or the 10-year, and they say to themselves, gee, I can't live on that. And so they stretch and buy poorer credits. But that's just part of the human cycle
[1:38:55]
Warrenover time. And that leads to something else, and that leads to something else. In the end, if you own good businesses at the right price, you're going to do fine. You're often quoted as saying that you don't know who's skinny dipping until the tide goes out, who's swimming naked to the tide goes out, or whatever maybe. You get the sense with a high tide right now. that there's a lot of skinny. Well, we're certainly doing, we're allowing people to borrow money on much weaker terms than we were five or 10 years ago. You couldn't borrow money at all or for a period of 10 years ago. I mean, literally, you could, Berkshire couldn't borrow money. I mean, everything stopped. And now we've, the pendulum was swung dramatically and yet we still have, you know, we still have, you know, we have a Very, very, very, very, all right. It's hard to believe that 10 years or 20 years from now we will have a substantial continuation of negative interest rates. But I've already seen things I didn't think could happen. Who knows what could happen? That's what makes it interesting.
OtherRight now, let's get back out to Omaha, where Becky Quick is with Warren Buffett, and there's a lot of important things happening, but don't forget that March Madness is right around the corner, Becky.
QuestionerBecky. And I... You should see what he's doing right now, Joe. He was rubbing his hands as you said that. Now you're talking his language. Well, Creighton, it was 70 to 35 at one point, and I had Creighton yesterday. I don't know if you were paying attention to that. Were you watching that at all, Warren? Nebraska plays tonight.
WarrenWe pay attention... We pay attention to Creighton out here. We talked about it earlier this morning off camera. They're peaking. I think they're peaking. I mean, they're getting better and better and better. The three people. point shooting was, I think that one guy was seven for seven at one point yesterday, which is, I'd be like seven for ten thousand for three-pointers, I think. Anyway, get back to business. I just, I'm looking forward to it, Warren, and I know we always have our own personal bet. If I get them all right, you give me Berkshire Hathaway, which would be cool for me. I'll tell you, if you get it all the way, I'll give you my Berkshire Hathaway shares, all the way to 64.
QuestionerWow. Wow. That's the ultimate giving pledge. That's the ultimate giving pledge. Yeah. That's how sure he is that you won't be able to do it.
[1:41:24]
QuestionerI'm pretty sure. Andrew, I hear you have a question too, Andrew. I actually have a couple and I thought that I read the letter like everybody else over the weekend. It was fascinated by so many of your comments, Warren. Specifically, I wanted to ask you, you talk about diversity on boards in this letter. And one of the things I wanted you to weigh in. I wanted you to weigh in on, if you could, is I don't know if you saw, but David Salomon, the CEO of Goldman Sachs, on our air actually, announced a couple weeks ago that he won't be taking any companies public, Goldman won't, unless they have at least one diverse board member and are likely going to push that to two. You know, in the state of California, they put a law into place saying that you needed to have a female board member. And I'm curious what you think of not just the push towards more diversity on boards, but but the requirement? Because I also note in your letter that you have very specific thoughts about what it means to be a board member, what it means to be an independent board member, how wealth is involved in all of that. What are your thoughts?
WarrenWell, at Berkshire for decades, we've given the three factors in addition to integrity, but for board membership. And we want people who are business savvy. We want them to have have a strong personal interest in Berkshire itself. And we've got directors who really represent shareholders, basically, at Berkshire, and I think they do a great job. Now, that doesn't mean that they don't think that we should delight our customers, that we should treat associates well, that we should behave well in our community, both local and national. But our directors represent the shareholders.
QuestionerSo Warren, just to follow up on it, though, what's your thought about both the requirement that maybe banks and others, investors are going to force companies to have diverse candidates on their board, laws, as I mentioned in California?
WarrenYeah. Actually, there may be, there's been sent to us a proposal, which, unless it's withdrawn, one will be on our proxy. I can't tell you precisely what it says, but the relation to this issue, and we will get our shareholders view on it. I personally, and I want shareholders that, I want directors that represent the shareholders. And, you know, in terms of my estate, you know, with maybe currently $80 billion worth of shares to give to philanthropy, I hope that
[1:44:11]
QuestionerWe have a, and we do have a group of directors that I think will be very conscious of doing the right thing. The reason I ask the question is because the other point you made, which I think is a very smart one, and is often misconstrued in the corporate governance land, is that an independent director these days isn't always independent in large part, and you make the point that those that don't come to the table with some form of wealth often need the job. They need the money, they want the money, and therefore that makes them less independent. And the reason I ask this is one of the things, as we've been trying to get more diverse candidates on boards, more women on boards, as you know, there are fewer CEOs, fewer people who have made enormous amounts of money, and people, therefore, then can question their independence. It becomes a very tricky issue, and that's what I was hoping you might weigh in on.
WarrenYeah, Andrew, I've been on 21 publicly owned, boards of publicly owned companies, and I've seen them in operation. And I would say that people that I have often seen, and that's perfectly understandable, I have often seen people who are classified as independent directors, and they are getting $300,000 a year for a job that takes them a couple of days, maybe six times a year, maybe four times a year. And the company flies into their office, and it's very enjoyable, and the company's good, and the company's good. Who wouldn't want a job like that? I mean, it's an incredible job. And people, I get calls from, I get calls from headhunters, I get calls from CEOs, and they ask, you know, who I think would make a, quote, good, end quote, director. And what they are asking is, you know, who is not going to cause too much trouble and who is going to reflect, who their name is going to reflect credit on the institution. And they are not looking for somebody that, that, that, uh, that I would regard as really independent. And I don't blame them. I mean, if I had spent my life being a, you know, a teacher or whatever it might be, I mean, my IQ is just as high as the average, you're higher than the people on the boards and all that. But on the other hand, I want to get on a board. I mean, $300,000 a year would look terrific and you don't even have to retire probably, in most cases, it's 65 or anything of the sort. So to call them independent is ridiculous. And if you're on one board like that, you want to really go on another one and make $600,000 a year,
[1:46:49]
Warrenand you are not going to do things that irritate your present CEO. So when he or she gets a call and says, would this guy make a good director, that the answer is no. It's just ridiculous to ignore the factor of compensation with board members.
QuestionerOkay. All right. Let me ask a follow-up question that is similar. related. Yeah. Warren, and that's just having to do with sustainability, all these issues that are out there. Guys in the control room, sorry, this is not where I told you I was going, but Abyshec, Baudra, wrote in a question. He said, Larry Fink recently said that our investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted return to investors. What's your view on sustainable investing?
WarrenWell, I don't happen to make that decision when I'm buying stocks in our portfolio. I'm, I, what their individual policies are, I think they're all pro-social. I mean, obviously, you've got to be in tune with your society. But if you think that I look down at a bunch of stocks and decide whether to buy Apple or whether to buy J.P. Morgan or, I am not, I'm not using the factors and that he lays out.
QuestionerOkay. I want to run through a series of questions. that have been in. These are kind of all over the map, so forgive me, we'll bounce around, but these are questions that came in from viewers that I thought were good ones. Lucas writes in, he said, did Justin's son change your mind on cryptocurrencies? For anybody who doesn't know, Justin's son bought the dinner or the lunch that you just had from the last Glide Foundation fundraiser, he is actively involved in Bitcoin. After that meeting, his PR people put out some notes saying that, you know, you kind of listen to cryptocurrency, and maybe you're a little more. in tune with the idea of Bitcoin now.
WarrenWell, I would say this. When Justin and four friends came, they behaved perfectly, and we had a good three-and-a-half-hour dinner, and the whole thing was a very friendly exchange of ideas. But cryptocurrencies basically have no value, and they don't produce anything. So you can look at your little ledger item for the next 20 years, and it says you've got X of this cryptocurrency or that. It doesn't reproduce. It doesn't deliver it. It can't mail you a check. It can't do anything. And what you hope is that somebody else comes along and pays you more money for it later on. But then that person's got the problem.
[1:49:20]
WarrenBut in terms of value, you know, zero. So it sounds like he did not change your position. No, but I didn't change his either. And I had a very pleasant dinner, and those people were, they behaved more than well. And they gave four points, or Justin gave $4.6 million to glide, and that will buy a lot of meals and provide a lot of beds for people in San Francisco. So I thank him.
QuestionerHe gave you some Bitcoin. What's it feel like to be a Bitcoin? I don't have any Bitcoin. You don't?
WarrenNo. Okay. No. You don't own Bitcoin.
QuestionerNo.
WarrenI do not own one. I don't own any cryptocurrency. I never will. And, you know, in the end, I may start a Warren currency. You know, maybe I can create one and I'll say there's only going to be 21 million of them and you can have a little ledger sheet from me and everything that's as you have it. And you can have it after I die. But you can't do anything with it except sell it to somebody else. And the interesting thing, of course, is that Bitcoin's been out there a long time, and people talked about how it would be used in various kinds of exchange. But none of our companies are doing business in Bitcoin or anything. Bitcoin has been used, I think, to move around a fair amount of money illegally. Or maybe in countries where you have a lot of time with... The logical move from the introduction of Bitcoin is to go short suitcases. Because the money that was taken in suitcases from one country to another, suitcases will probably fall off in demand. I mean, so you can look at that as the economic contribution of Bitcoin to the society.
QuestionerAll right, let's talk about a question that comes in from Rusty Thomas. And he's got a question on baseball. He said, given Warren's love of baseball, and the contrast between... between his deft management of the Solomon Brothers scandal and Major League Baseball's inexplicable mismanagement of the Astros' sign-stealing debacle. What advice would Warren provide MLB Commissioner Manfred to restore confidence and integrity in the game?
WarrenYeah, well, it survived the Black Sox scandal back around 1920. And people will continue to love baseball. But, you know, the one thing to steal signs if you were on second base, but it, it's, It's bad. Baseball will get past this.
QuestionerYou're a huge baseball fan. Were you... Pardon? You're a huge baseball fan. Were you surprised to hear about?
WarrenYeah, I was surprised to hear about it, yeah. But then I find out that Bobby Thompson's home run, you know.
[1:51:57]
WarrenSomebody stole the sign, I think, off Ralph Brigg, or somebody, you know. So people are going to, in any games, including the stock market game, you know, certain number of people cheat. And generally, we have people that have... have people that administer things to try and minimize the cheating. And I'm sure that Major League Baseball will address the problem. Should the Astros players get off, Scott Free? Oh, I'm not going to make a judgment on that. But Joe Jackson certainly didn't.
QuestionerYeah. Yeah. Let me ask you about a question that came in from several viewers, actually. And that's about the E.T.Fs. De Mosley Management wrote this version of the question. And news agencies have reported that Berkshire Hathaway. purchase two ETFs. So can you talk about if this purchase happened and if the purchase happened, who purchased the ETF for Berkshire Hathaway and how was the decision made to purchase it?
WarrenYeah, it wasn't me. It wasn't me or it wasn't Todd or it wasn't Ted. And it happened in some pension fund and we have a few pension funds that aren't actually managed by us. But all I can tell you is that nobody at, nobody that manages money at Berkshire is buying ETS, nor do I see any possibility that they will. Another purchase that came up recently, Kroger. And Jason Escamilla writes in, was that one of yours or a lieutenant's pick? It was one of the others. And, you know, I know Kroger's done a good job, but it's in a very tough business. I mean, when you have Amazon and Walmart slugging it out and Costco taking a special part of it and everything, it's a tough business. business, but they've done a good job, and one of our managers decided to buy that. And then Kraft Hines. This comes in from David Hall. He says, Mr. Buffett, while Kraft Hines continues to whittle down their total debt, do you feel that the current dividend payout is appropriate, or should it be reduced further to free up more cash flow to reduce debt more rapidly? I think Kraft Hines should pay down its debt, but I think under present circumstances, it appears that it can pay the dividend and pay down debt at a reasonable. rate and it has too much debt, but it doesn't have some, it doesn't have debt it can't pay down. And the debt holders are going to get the interest and the debt should come down year by year. And I think it will and I think it can with the present dividend, but who knows for sure in the future.
[1:54:31]
QuestionerTheo, Phelos writes in a similar question and says, do you still believe in the company in management at Crabtines?
WarrenIt's still a great business in the sense that it earns, we'll say, $5 billion after depreciation. pre-taxion on $7 billion of tangible assets. It uses about $7 billion of fixed assets. It doesn't know that working out. Well, I mean, it's a very valuable business, but we paid too much for Kraft, and we took on more debt in that, but we paid too much. But we paid too much.
QuestionerAnother question comes in from Beale, again, on Kraft Hines, and this person writes in, private labels have performed very well against brands like Kraft Hines, but they haven't made a dent against other brands like Coca-Cola or C's. Why do you think that is, and how do you think about brands' modes, given your experience with craft?
WarrenBrands are always going to be in a fight with the retailer, and it varies by country enormously. It varies by product category. If people, I worked in a grocery store in 1941, Charlie worked in State 1 in 1940, people would call and they'd ask for a can of peas, and I'd write down a can of peas. They'd call it and they'd ask for a can of peas. for Heinz ketchup, and I'd better give them Hines' ketchup. They didn't care which brand, the peas were. They didn't care that much whether the two quarts of milk we sent them were this brand or that brand, but they cared whether it was it was Hines' ketchup. That was, you know, 1941. Some brands are terribly strong. You can't bring out a private label, cola, and do very well with it. And people have tried for a long, long time on the other. On the other hand, you can bring up private labels and lots of products, and they sell very well, and, you know, you take Costco with their own Kirkland label. I mean, that, that label grows dramatically. It cuts across categories. It, you know, it's done since 1992 or whenever it was introduced. Other people spend 100 years, you know, with huge amounts of advertising and special display, all kinds of things. So the battle goes on. on, I would say that the retailer has gained ground against brands to some degree, but brands are still terribly important. I mean, try and give me a $10 billion budget and ask me to bring out another Coca-Cola that makes a dent in Coca-Cola, and I can't do it.
QuestionerAll right, we're going to continue this conversation. Coming up, we'll have the final moments of our
[1:57:08]
OtherGood morning, everybody, and welcome back to us. Special edition of Squackbox. We are live in Omaha, Nebraska, with Warren Buffett. The chairman and CEO of Berkshire Hathaway. He's just completed and put out his 55th annual shareholder letter to shareholders of Berkshire Hathaway that came out over the weekend and we are with him today answering questions from lots of viewers.
OtherOne of the questions that did come in, it was something that you wrote about in the annual letter, was the role that Greg and Ajit play. Greg Abel, Ajit Jane, the two vice chairman who were recently added as vice chairman, the role that they're going to be playing in the annual meeting with shareholders. You said that they will play a larger role in the shareholder. meeting. How will that work?
WarrenWell, it will mean that any shareholder or any of the journalists there who are presenting questions from shareholders that have been sent to them can direct those questions to either Ajit or to Greg. So if they were insurance questions, they might want to direct them to a jeet, not insurance questions to Greg, but they will be there. And we'll have 60 or so questions. We don't know what they're going to be. And if anybody who says, I would like Greg to answer this or I would like a cheat to answer this, then they're right there adjacent to us.
OtherThey'll be sitting on stage with you and Charlie?
WarrenWell, there's a, yeah, there's, well, he's sitting in front of the crowd. There's two different levels of tears there.
OtherYeah. Again, you said you did this because you'd gotten a lot of questions from directors, shareholders, other people who had kind of advised you that they thought it was good for them to be playing a bigger role.
WarrenYeah, everybody, I heard from quite a few people. Now, we directed questions out to them where they were sitting with the directors out in front, and then the spotlight went down. But this may encourage more questions directly of them, and that'll be terrific.
OtherOkay. Jim Bean writes in a question. He says in the past, both you and Bill Gates have stated that half of the board meetings are spent discussing succession. How has this changed since Ajit and Greg are on the board. Do they leave the room?
WarrenThey leave the room. But if I die tonight, the board tomorrow morning, knows exactly what they're going to do. I hope they're polite about it, let the body cool off.
[1:59:13]
WarrenBut basically, they know what they're going to do. And the interesting thing about it is, we own, you know, the Apple and JP Morgan, all those things. I don't know who's going to succeed the CEOs of any of the companies, I think, that we own stock. But we're well prepared for succession. It's almost going to be embarrassing how well. All right. Let's get to a few more shareholder questions.
QuestionerChip Crook writes in a note and says it was reported that Boeing was like, looking for a large cash loan, where you ever approached about Berkshire loaning the money, kind of like the Goldman Sach deal from years, Sachs deal from years ago.
WarrenI think Boeing's raised about $13 billion, but that's bank type money. In other words, my memory is it's maybe 1% of, you know, they're looking for traditional bank loans and we don't make traditional bank loans.
QuestionerYou also talked in the letter about how Berkshire Hathaway has, Berkshire Hathaway Energy, I should say, has the ability and the talent. to manage big investments, $100 billion and more. I think you wrote, we stand ready and willing and able on such opportunities. California governor, Gavin Newsom, asked you at one point to bid on PG&E. Is that such an opportunity?
WarrenPG&E, obviously, I mean, we've worked with them for decades and been familiar with them. But that doesn't fit Berkshire. But if there were a hundred billion of transmission lines or whatever it might be, Berkshire could do it, I mean, and we would love it. That happens to be a very tough thing to do because you cross all these states and everybody says, not in my backyard and all that. But there can be huge, intelligent investment made in the utility energy area, and no one is better equipped to do it than Berkshire in both talent and resources.
QuestionerWhy does PG&E not fit that bill?
WarrenIt's too tough. I don't know the answer to it. I mean, that... arranging that utility. I know Governor Newsom, I think he's a very, very, very smart guy. And in terms of solving this problem, it's just not easy. You've got so many constituencies and they're at each other's strokes and there's lots of money involved and I don't want to be the guy to try. I don't know how to solve all that. Okay. Let's go on to a question that is posed by Ken Ducey. He says, you sold 31 newspapers after buying them over 40 years of as a self-described newspaper addict. You said recently that most newspapers were toast.
[2:01:47]
QuestionerI know that's not exactly what you said. Yeah, that's not true. But this isn't his question. You can answer that too. Do you believe the problem with local newspapers is a lack of demand or a lack of innovation and a new business model?
WarrenWell, the problem is that, well, getting back to the toast comment, Andy Sherwer actually, as a fellow who said toast, he was interviewing me and I repeated it. But the problem is even every day, the circulation of the papers, in every, every print. print circulation goes down. And the interesting thing about it, of course, is that the three survivors so far that look promising online are the New York Times and the Wall Street Journal and the Washington Post. All three of those papers sold their smaller papers. The New York Times sold, I think, 11 papers about seven or eight years ago. The Dow Jones, which owned the Wall Street Journal, and now is owned by News Corp. They sold the Ottawa newspapers, eight papers. Washington Post sold the Everettarol. So they all saw the handwriting on the wall before I did. And they all sold their papers. That was their reaction. They did not try and figure out the online solutions. They got out of them. And unfortunately, I bought some. And we're still, I mean, we are financing Lee, and we think Lee has by far the best opportunity to continue print as long as anybody and to find an online solution for these papers. So we put new money into the newspaper industry here. industry here, or we've committed to do it, it will close in a month or two.
QuestionerAnd then finally, very quickly, we are in the Berkshire Hathaway's headquarters building here in Omaha. Strom writes in a question, it says, why did you decide to rent your offices for all these years instead of buying the building or building your own office building?
WarrenWell, we only use one floor of the 15 floors here, but we have signed a lease for the next 20 years on one more floor. So it shows just how flexible our thinking is about the future. How much growth you're anticipated?
QuestionerYeah, we don't want a big headquarters office. If we had a big headquarters office, office, we'd fill it. Believe me. I mean, if we had 15 floors of our own, we'd have 15 floors worth of people.
QuestionerWarren, before we let's just go back to the futures again this morning, because right now the Dow is indicated to open down about 800 or 830 points. Weakness, again, on concerns about coronavirus and what that means. What's your mentality today as you kind of go out and look at the stock market and decide what you're going to do?
WarrenWe're buying businesses to own for 20 or 30 years. We buy them in whole. We buy them in part. They're called stocks when we buy them in point. And we think the 20 and 30 year outlook has not changed by coronavirus.
QuestionerI want to thank you for your time today. We really appreciate it. Your generosity with your time, and we hope to see you again soon. Come every year. Thank you.