Notes To The Charlie Rose 3 episode interview of Warren Buffett

Warren Buffett, Co-Chairman of Berkshire Hathaway, was interviewed by PBS commentator Charlie Rose. The 3 separate episodes were presented on PBS on July 10 – 12, 2006. You can purchase these videos at http://www.charlierose.com. The following are some notes I took during the viewings of these episodes. Part 3 includes interviews with Bill Gates as well. As many of our clients know, our two largest holdings are Berkshire Hathaway and Microsoft Corp. We keep a web page on Warren Buffett Link . Please understand these notes are informal and not all encompassing. I only took notes of items that were of interest to me.

During these notes you will see the word “WEB.” WEB is the initials of Warren E. Buffett.

Part 1 – Warren’s Personal Life

1. I listened as WEB discussed his reading of 5 newspapers a day. I was happy to hear that as I do the same… He clicks in the AM, as do I , Oh yeah…..Yet, he discussed his love of freedom from date books…He makes his own schedule. I try so hard to do that, but I at times fail, not because of clients demands, as I rarely speak with clients. I just got back from a 2 week vacation, not one message in voice-mail. I fail, because I feel I need to be in my office. I work with others who are not affiliated with my section, and I feel as though I need to be there. After seeing WEB, I am inspired to live my own life, not feel guilt, and go through the day without emotion caused disruption (guilt). The life change for me, is going to be the loss of guilt over making my own schedule. Realizing that like WEB I am up crazy hours reading all kinds of stuff that will hopefully ultimately benefit my research, deployments, fatherhood, business, business partners, etc.

2. I enjoyed the Buffett kids (all 3 are mature adults now) talking. All seemed to admire WEB a great deal. Understanding that he is what he is. He was typically always there physically for them, and for Susan (his recently departed wife), but emotionally he was often tied up in a reading or interpretation of some type. I will often read in my kids rooms, and once again, feel guilt of not sharing at the moment, but still, I dig being in their presence. I think the life changing event of hearing WEB fro me was seeing that he is what he is, and that cant be changed.

3. I didn’t realize how powerful, influential, understanding, pretty and generous Susan was. What a wonderful relationship. I liked how the kids described Astrid, and how that relationship would be so difficult to figure out from the outside. Astrid was the woman whom Susan asked to look after Warren after Susan physically moved to California, without Warren.

I am very touched at WEB’s emotions with Susan. It was emotional to see Howard talk of his mom. It was very emotional when Charlie said, “lets talk about Susan.” WEB responded, ” I can’t, I’m sorry, I‘m not ready to talk about her.”, Charlie responded, “you must, she spoke about you, so you have to speak about her.” WEB responded with kindness, “Charlie, I’m sorry, I wish I could, but I cant, I’m not ready, I will talk about anything else.”

4. I didn’t realize how sports minded WEB is. He seems to admire the greats in sports, Ted Williams, Tiger and Ty Cobb. I didn’t realize that Carol Loomis had dated Ty Cobb several times.

5. I enjoyed his explanation of why he likes talking to students. One, he loves to teach, and two, he loves to make a difference. The students are typically young and energetic, and he can talk to them in a way that is important to them. He mentioned that when he talks to groups of 40 to 50 year olds, it is more as entertainment value, as they are set in their ways. I don’t know, I am shortly pushing 47, and his influence on me is material.

6. I didn’t realize that he read Ben Graham’s Intelligent Investor, and then proceeded with life, not realizing that Ben Graham was a professor at Columbia. He was skimming through some Columbia material, noticed Graham. He kidded with Rose, saying that if he was going to be a deciphal, he might as well learn from the Messiah.

7. I loved the part about WEB not being seen much by neighbors in 1960, but all the kids knew WEB. My wife sometimes thinks I am unsocial with neighbors and friends, but I’m just quiet…yet, get me with the kids on the ball fields, bikes, coaching or so forth, i just shine.

Donald Keough discussed WEB going across the street in 1960, WEB telling Donald how much he loves Donald’s kids. WEB mentioning that if Donald gave WEB $10K , “he might be able to turn it into something substantial.” Donald told his wife, “What am I going to do, borrow $10K and give it to a guy who doesn’t go to work every day?” Keough chose not to invest. Rose starts to ask Keough, “how much would….”, Keough says, ” Don’t ask.”….Scene changes to another discussion with WEB, where he says, “oh, about $400 million today, but we are still friends.”

8. WEB said his greatest attribute was focus. He has a great ability to focus on a situation and block everything else. I admire that, and strive for it. I guess it is just implanted in us, either we have it or we don’t…. time will tell, I said selfishly.

9. I admire how the kids would prefer fundings of their foundations as opposed to personal wealth.

10. I like how he mentioned he pays $95 annually to play internet bridge, whereas he claimed he would easily cough up $5M for that. he said he would take that over a vacation home any day.

11. He loves home fries.

Part 2 – Warren’s Business Life

I enjoyed part 2 of the Charlie Rose interview of Warren Buffett. It hardly hit home with new information as part 1 did, but seeing and hearing Warren on a not so great day, sure beats a lot of other things in life. My wife at dinner last night mentioned, “I might as well watch Warren on the Tivo tonight, since he has become such a common person in our household.” I sense she might be referring to the guest that Ben Franklin refers to 😉 Nevertheless, she is happy that I have chosen a role model like Warren, as opposed to perhaps a lesser healthy model, maybe such as John Belushi (oh, how I dug him.)

Incidentally, Berkshire is typically (but not always, and hardly exact) a 15% portfolio position of ours. All purchases have been from 11/23/05 till now.

1. Warren talks about the textile business he bought after Berkshire. Rose asks, “Why did you do that?”, Warren answers, “Only my psychiatrist knows.” Interesting, I wonder if Warren has seen or sees a psychiatrist during his life. I know a fantastic physiologist named, Dr. John Sarno ( www.healingbackpain.com ). Sarno believes that all people in power (and those not in power as well), should spend time with psychologists. I was introduced to Sarno in 1992 by a good friend and very smart person, as I was about to undergo an operation for herniated discs. He cured my back, he assured me that within a month I would be playing softball again. I told Sarno, ” I don’t think so.” He said, “Ron, I am sure of it.” I explained to him, how my pursuit would be golf and not softball. Sure enough, i was playing within a month. I have since given up golf, for a sport that occupies even more time, more pain, crazy hours, but a blast for me and my health…long distance running.

2. Still looks at Coke as a wonderful company. If he was running a partnership in 1999, like the old days, he might have sold Coke. He doesn’t regret holding. He said wonderful companies don’t come around every day. (Later in this paper you will see how at a later date, Warren wished he had sold his Coke shares.)

3. Not envious of any deals that were made in the last year by others. He looks at GM, and mentions that entire GM is selling for $15B. He looks at GM as too tuff to figure out. Claims GM has 1/7 of all world vehicle sales. Says that GM has a lot of world wide obligations. Talks of contracts with UAW based on contracts when GM dominated the market. He doesn’t blame UAW, just the way it is. He has looked closely at GM. He discussed legacy costs, which competitors don’t have. He calls it a huge annuity and health insurance company, with an auto company attached. Warren can not come to a conclusion as to valuation of GM.

4. He claims that odds are good that they will find intelligent things to do with their money. When buying, looks for enduring competitive advantage, reasonably attractive price (least important, but still important), great management that he trusts. Warren says there is not a single purchase candidate for all their funds. He claims it has happened before, “it happens from time to time, I can’t do something smart every day, much less every year, but he can do something smart every 3 or 4 years. (As you go further in these notes, I think this discussion was from prior to 2005 annual meeting).

5. He talked about his competition. He certainly hinted at the hedge funds, as they take an over-ride and use other peoples money, he mentions that their calculus is different than his calculus. They get % of upside and no downside. As I type this, I think of my own business of managing money. I have been quite interested in Berkshires recent discussion of “frictional costs.” Many money managers consider that a “dig” on the business. It’s interesting, I am in full agreement with Warren. He has a stake in his philosophy, he eats his own cooking. I am real happy to say that I do the same. I have learned to put my money, side by side with my clients. It really feels good for me. Yet, I say that in times when our portfolios long term performance has been what I consider to be much greater than acceptable. I wonder how it will feel if the tide turns. I was speaking with a friend earlier today. I mentioned how in year 2001, I traded some optics, and really blew a lot of my own money. I was happy the money I incinerated was my own and not my clients. I knew that Ben Graham did the same, but I certainly was concerned that unlike Graham, I would never recover. I did, and some time back, I put my money in the same fashions as everyone else. The paragraph above is in no way any type of solicitation or assurance that my future investments will be profitable as my past has been.

Now the Interview goes to June 2006, whereas a few investments were made since the prior discussion with Rose and Buffett above. He discussed Pacificorp and Iscar. He said he is looking for elephants. He mentioned that he spent $10b so far this year. Warren said he has never made a move based on economic situations. He will invest in both easy and tough years. As he mentions this, I am reminded on the virtue of patience. Warren reaffirms that he is looking at criteria such as very simple business, management in place and seller who knows the price of the business. Warren says the decision to buy or not is very quick.

They discuss the value of Coke. Warren now says, looking back, he should have sold Coke. Incidentally, when Coke was at 50+ earnings, we were short. It was always difficult to short a company that Berkshire was long. Nevertheless, I always referred to the fundamentals, and I felt that Warren did not want to own Coke then. I suspected taxes was the reason he continued to own it.

Finally in June 2006, Warren admits he wish he sold Coke in 1999. That is so different than a few paragraphs above. I don’t find Warren to be contradictory, just an ever evolving process of learning and understanding a situation.

6. Warren reaffirms that he will over reach on the safe side in having money around for Berkshire. He wants Berkshire to be seen as the Rock of Gibraltar. Warren says that insurance still fits him well. Charlie asked if terrorism and increased hurricanes make insurance less of a business than it used to be. Warren mentioned that the recent events just makes the predictions more difficult. Warren claims he still enjoys insurance, and hopes that he will continue to be a good predictor of odds. Warren claims that he expects Berkshire will continue to focus on insurance, and that insurance will be the most important aspect for Berkshire, for a long time after he is gone.

7. Charlie asks about the economy today. Warren claims it is “pretty good, with plenty of problems, but the problems have not manifested themselves in business today.” He mentions how people have extracted appreciation and equity out of their appreciated real estate. I gather that he considers that to be one of the “problems.”

8. Warren thinks that over time, US Dollar will go down. He primarily believes US policies will cause that. He mentions that consuming more than we produce, we need to trade the rest of the world for that. He feels we are trading away assets in order to over consume. Trades a little piece of the big farm. “It adds up and has consequences.” Warren claims that national debt to GDP is not dangerously high.

9. He hints of a hedge fund catastrophe. At least that is my interpretation, as he discussed constant trading, with huge imbalances, leading to a potentially catastrophic day.

10. Warren mentions that we have to change some previous promises. He doesn’t expect a change in Social Security, maybe Medicare. I interpreted Warren’s discussion as one of concern over promises that were based on situations similar to his current view of GM. There might be legacy issues that were not designed for elderly luxury, and if that is the case, perhaps a change is in order.

Part 3 – Warren, Bill and Melinda Gates are Interviewed

Part 3 of the episode was a lot of fun. I learned a lot, observed a lot and just had fun watching it. Once again, here are my notes, they are hardly concise, but these are notes that are important for me. There is no substitute for watching these interviews for yourselves, and you will be able to feel your own important data points.

1. WEB discussed how the idea of giving to the foundations was in place, yet he had to look out for the beneficiaries and the Berkshire shareholders as well.

2. WEB mentioned that the goals of the Gates Foundation were similar to his own. He felt the time to do this was now. Later in the interview, Rose asked WEB if he regretted not making the gift sooner. WEB was emphatic in saying, “absolutely not.” He investigated the possibilities, researched the foundation, was able to see how Gates co-operators worked in the foundation, and realized that the diligence process was over and at the same time, WEB could make meaningful contributions to the foundations, while at the same time keeping an eye out for Berkshire shareholders.

3. Gates discussed meeting WEB. He remembers their second meeting and how WEB got a bunch of people together. The objective of the meeting was to look at great companies of the 50’s, 60’s, 70’s, 80’s and 90’s, and to see how some lost their greatness, others became great. The goal was to determine if people could have foreseen such paradigm shifts. I do not know what their conclusions were. I will have to research to see if there are any known conclusions.

4. Gates discussed a fun practical joke he played on WEB. Basically he planted a few actors in a position of having dinner with WEB, Susan and the Gates’. The actors proceeded to get drunk and taunt and insult WEB. Rose laughed, and asked WEB if he ever paid back the prank. The answer by WEB is what I loved. He did not want to disclose the future payback. Like everything else, WEB is in stealth mode, and indicated that one day there will be a payback. Reminds me of the old adage, “expect it when you least expect it.”

5. Another real interesting comment for me was WEB discussing bridge. He loves the game, got Gates addicted. He mentioned that bridge does not take an hour or two to learn. It requires about a 30 hour commitment, and then the pieces start to fit together. I am glad I heard that, as I hope to one day take up Bridge. Now I know a quick rule of thumb of time allowed for the initial steps of learning to play the game. I have seen this in life in my hobby of running. I always disliked running. I would try on occasion for my first 43 years. Finally at 43 ½ I decided to stick with running at all costs. As I built up my mileage, I read a book given to me by my sister (an Utlra marathon runner). The book was called “Jeff Galloway’s Complete Book of Running.” http://www.jeffgalloway.com Galloway described that in the first 3 to 6 weeks of running, you will not necessarily see or feel positive results. In fact, he explained that the brain will try and feed you excuses for not running. Excuses like, “I do not have a runners body,” or “this is so boring,” or “I think I am getting sick because of running.” I was feeling those noises from my brain, ignored them, remembered that I gave up in week 3 or 4 of all previous attempts, and now it is 3 ½ years later. I am training for my 3rd marathon, have lost a ton of weight, and just love the relaxation and thinking during those long runs. Incidentally, I am a firm believer that if you want to lose weight, just run or run/walk 45 minutes every other day. I lost 32 lbs doing that.

6. Gates most admired WEB for his use of the calendar. Or lack of use. I mentioned in part 1, that I have admired WEB for that, I strive to not be a slave to a calendar, and to hear Gates say the same, sure does a lot of good for me. Value your free time.

7. Rose asked Buffett about never investing in Microsoft. WEB acknowledges and Gates agrees, “it does not fit my model.” With that said, WEB mentioned “if there is any company that I would have bet on, Microsoft would be the one. I just can’t see 10 years out. I am 65% sure that Microsoft will be successful in the future, but I typically like to be 90% sure.” Gates agreed with WEB. He indicated that there are just different strategies. Gates explained in technology the “possibility of phenomenal returns are possible.”

8. WEB was asked about other smart people, and why success doesn’t follow them in a similar manner. WEB said something like a lot of people have high IQ’s, they are similar to a 500 pound motor and getting 100 horse power out of it. He describes they get a lot of sand in their gears. “It’s amazing that people get tied up in self destructive elements of nature.” It seems to me that if a smart person can recognize the sand in the machine, they can focus on correcting that inefficiency and move towards greatness. I have a close friend, who I hope can understand this and become exponentially greater than he already is, by curing this simple flaw.

9. Very funny section on Gates buying Melinda an engagement ring. Gates asked WEB for advice (as they were going to Borsheims Fine Jewelers http://shop.borsheims.com/Borsheims/Default.aspx (owned by Berkshire). WEB kidded Gates, saying when he proposed to Susan in the late 50’s, he used the rule of thumb of spending 6% of your net worth on an engagement ring. WEB was hoping that Gates would spend $5 billion on a ring.

10. Rose asked Gates if he felt USA had an optimistic future. Gates responded that he did feel that USA has an optimistic future, as he also feels the world has an optimistic future. WEB stepped in and said, “Gates is a citizen of the USA as well as a citizen of the world.”

11. Buffett talked of “dynastic wealth.” I searched “dynastic” at Wikipedia, and found this explanation. “Dynastic union refers to the union of two titles or rulerships in one ruler or titleholder. That is, the titles have not merged, the realms have not merged, but the same person holds each.” Buffett was cool with the leaving of a small business or farm to a family member, and they could cultivate that business or farm. Yet, he talks of distaste for the “lucky sperm club” or “winning of the ovarian lottery”, and how that lucky draw should not be the wealth of future generations just because they were born into a specific family.

12. WEB was asked what Munger thought of the charitable act. WEB claims that Munger said, “ You finally had a good idea.” I would like to know what Munger feels about the Gates Foundation.

13. WEB feels that Gates Foundation can be a better allocater of funds than WEB for the sake of mankind. WEB explains that people will invest with a specific money manager because they think that manager will be a better accumulator of money than they would be.

14. WEB would like the foundations to continue to hold Berkshire. He won’t direct them to do so, but does think that Berkshire is the best investment for the future. WEB said something very interesting and new for me. He said, “ I think Berkshire shares will be worth more every year. I want the shares to be worth more every year.” The greater Berkshire grows, the greater funds to charity. Many students of Berkshire and Buffett realize that this is the first time that WEB has mentioned his views of future value of Berkshire.

15. WEB mentioned that over the next 50 years, the world is going to change a great deal, “and it might not be good changes either.”

16. The Theme of the Gates Foundation is “Global Health and Poverty” first, and 2nd is education.

17. Gates mentioned Andrew Carnegie’s “Gospel of Wealth.” I recently read this short book, and will look to read it again. I didn’t realize at the time of reading that both Gates and Buffett admired the book, and perhaps I will read it in a different light this time.

I am so thankful that I have two wonderful role models in life, one being Warren Buffett, the other being “The Boss,” Bruce Springsteen. I have studied both for so long, and I am convinced they share the same moral compass. Thank you for reading this, if you have any comments feel free to email me at [email protected]

Respectfully Submitted,

Ronald R. Redfield CPA, PFS