THIS IS A TRANSCRIPT OF WARREN BUFFETT’S SERIES OF LIVE APPEARANCES MONDAY, MARCH 3 ON CNBC’S SQUAWK BOX.
JOE KERNEN, co-anchor: Good morning. Wealth in America. An exclusive CNBC survey on the state of the US consumer and a forecast for the country’s economy. Under pressure, the world taking its cue from Wall Street this morning. After Friday’s sell-off, Asian equities dropping overnight, European stocks opening in the red. Plus, Becky reporting live from the heartland. Beck.
BECKY QUICK, co-anchor: You know, Joe, with times as tenuous as these, we are turning to the world’s most watched investor for a little bit of guidance this morning. The “Oracle of Omaha” joins us live this morning as SQUAWK BOX begins right now.
ANNOUNCER: This is a special presentation of SQUAWK BOX with Joe Kernen and Carl Quintanilla at CNBC’s global headquarters, and Becky Quick live from Omaha with billionaire investor Warren Buffett.
CARL QUINTANILLA, co-anchor: Good morning for a Monday, March 3rd. Welcome to SQUAWK BOX here on CNBC, I’m Carl Quintanilla along with Joe Kernen and Becky Quick. And Beck, what a way to start the week. We have an amazing show on tap today.
QUICK: Yeah, guys, it sounds like we have a lot to talk about, and especially with the markets, everything that we’ve seen happening both on Friday and then overnight in Japan. A lot of questions about exactly how stable things are going to be this morning, so we’re very lucky to have Warren Buffett standing right by to guide us through everything that’s happening this morning, guys.
KERNEN: Indeed. Yeah, it’s going to be interesting, Becky. I want to–you know, especially from the guy who coined the term “weapons of mass destruction” and “financial weapons of mass estruction.”
QUINTANILLA: And following the letter on Friday.
KERNEN: Yeah, yeah.
QUICK: For derivatives.
KERNEN: And don’t we know it. And he doesn’t, you know, he doesn’t make calls overall on the economy too much, what the Fed should do. He likes to buy businesses that are going to be worth more in the future. But we still are going to have to ask him today, what about–is this different? How much pain do we need to get out from under all these weapons of mass destruction? Look what it’s done so far. What kind of slowdown will it be? It’s going to be great.
QUINTANILLA: Yeah. And given…
QUICK: All right.
QUINTANILLA: …sort of the data we had last week, is this a matter of reality setting in, or is the situation actually getting worse than we thought it was going to be?
KERNEN: You don’t like hearing a huge owner of insurance companies that the party’s over, either…
QUINTANILLA: The party’s over.
KERNEN: …from someone who would know, I think. Right, Beck?
QUICK: Right. Right. That all came from the annual letter that Mr. Buffett put out to shareholders on Friday afternoon. And, guys, now that we’ve given a little bit of a hint of what we might be starting off talking about, why don’t we bring him in right now.
Warren, I want to thank you very much for joining us today. Again, Warren Buffett, Berkshire Hathaway, joining us, guys. I should point out, we are live at the Nebraska Furniture Mart. Behind us and all around us, this is the brand-new electronics store that they just opened up last year. And so they’ve opened up early for us and given us a little bit of time to be sitting here. But, Mr. Buffett, thank you very much for joining us this morning.
WARREN BUFFETT (Berkshire Hathaway Chairman and CEO): Even if it’s early, you can buy something if you’d like, Becky.
QUICK: Yeah, they’ll open up the cash registers right away.
BUFFETT: Your credit’s good.
QUICK: Well, as you know, we have a lot to talk about today.
QUICK: We want to get through the annual letter, we want to talk about what’s been happening with Berkshire’s earnings. But we also want to start off talking about what’s happening in the global markets right now, and what’s happening with the economy. Where do you think things stand right now in terms of the global strength of the markets?
BUFFETT: Well, you’re getting sort of waves of deleveraging going on in different areas, and last week we had some deleveraging of the municipal bond market, which is not a market you would normally expect to get hit by that sort of thing. But we’ve had it–they really haven’t deleveraged as much as they wanted, things like leveraged loans at the banks. They’ve been trying to sell them, and they haven’t found the levels yet at which they’ll move. But that’s–you got a very leveraged world, and it’s getting somewhat deleveraged.
And unfortunately for the people that are deleveraging, it was leveraged at crazy valuations in many cases. So people that are out–have been out on a limb financially are having the limb sawed off.
QUICK: Well, in the past we’ve–you’ve spoken with us, and Joe’s asked you about this, the number of calls that you’re getting on deals. What have you been hearing the last couple of weeks, and how would you judge exactly how chaotic things are based on the number of calls you’re getting?
BUFFETT: Well, late last week it was pretty chaotic. I mean, we were getting calls on large portfolios of various fixed income type instruments, and even on municipals where multibillion dollar portfolios had been leveraged. And people set that position up because municipals look cheap relative to governments, and then they got a whole lot cheaper, and that happened day after day after day. And it–really, in 1998, the Treasury was sort of the other side of every trade on convergence trades. People shorted the Treasury and were long on other kinds of other things. Same thing’s happened this time, only it’s extended to something like municipals.
QUICK: OK. It’s extended to something like municipals, and you’re getting calls on all of these deals. And I take it they’re not calling you and offering to sell them at 95 cents or 99 cents on the dollar?
BUFFETT: Well, it depends on the instrument. Some they’re calling at 75 cents on the dollar. But–and we’ll buy some, at some point. But there’s a–there’s a lot of merchandise out there that people are getting margin calls on, and they’re not the small guy getting a margin call on stocks. These are big guys getting calls on billions and billions of dollars of fixed income positions.
QUICK: You know, there are suddenly a lot of people wondering what’s going to happen with this economy and trying to pin it back to a time that we’ve seen in the recent past or maybe not so recent past. Some people say this is like 2001, some people say this is like 1989. Other people say this is like 1973 to 1974. What do you think?
BUFFETT: Well, it’s nothing like ’73, ’74 yet. I mean, that doesn’t mean it couldn’t be. But in ’73, ’74 we had this stagflation situation, and we really had a meltdown in equity prices as really good companies got down to three and four times earnings and they weren’t phony earnings. So nothing like that’s happened in this situation. But of course in ’73, ’74, at some point during that, it didn’t look like it had happened either. So every day is a new day, and we are seeing more fixed income type forced liquidations.
We’re seeing more indigestion at banks with a lot of loans we don’t want to have. So you’re seeing a time of easy money in terms of price, but not so easy money in terms of availability.
QUICK: We also have talked an awful lot about what’s been happening with the bond insurers. You made a deal that you brought up on our air a couple of weeks ago, where you said you would take over the municipal bond portfolios for Ambac, for MBIA, for FGIC if they came to you. Did you hear from any of them? Did any of them take you up on that deal?
BUFFETT: Well, we heard from them, but we tossed our hat in the ring, and they tossed the hat back. But fortunately–it’s been fortunate for us, because we’ve been writing business that they insured, and we’re getting a far better rate than we offered to take it over from them. So here–we’ve written 206 transactions in the last three weeks, and we have been paid an average of 3 1/2 percent to take on business that they wrote at 1 percent. But we don’t pay until they go broke. So in effect, the municipality has to quit paying, and over here I’ve got the bond insurers. And it’s just–it’s the three you named plus a few others. And they have to go broke, and then we pay. So we’re getting paid 3 1/2 percent to be in a secondary position when we offered to do it for 1 1/2 percent in a primary position.
QUICK: And we’re still talking about municipalities.
QUICK: We’re not talking about CDO business or any of the other portfolios.
BUFFETT: Oh, no. We’re not–no. These are all A-rated or better municipals insured–202 of the 206 are insured. And we’ve received $69 million of premiums for two billion of a par amount. The original insurer received about 20 million. And they’re still primarily on the hook. So our price was all wrong.
QUICK: Why would this happen? I mean, why don’t they come back to you at this point and say, `We’ll take that 1 1/2 percent deal’?
BUFFETT: Well, it–they don’t have much motivation to do it from the directors’ level or the shareholders’ level, and what they’re hoping for is new money, you know, and I hope for new money too. I mean, who doesn’t? And they may get it. In fact, MBIA has gotten a fair amount of money. But they–in the end, they–they’re not really–they really haven’t, in a sense, totally faced up to the mistakes that they’ve made.
QUICK: You say that they hope–you hope they get new money, as well, put in?
BUFFETT: Well, if they get new money, as long as they stay solvent we can’t pay a claim on this. We get $69 million, there’s no way we pay a claim because they are primarily liable if the municipalities go broke. Now, municipalities do go broke, or tax exempt issuing entities. People say it’s risk free. Vallejo, California, town of 120,000, last Thursday the city council was scheduled to vote on going into Chapter 9 and going broke. And the thing about municipalities, if they decide it’s the easier way to go, it could be contagious. Now, I don’t think that necessarily will happen. It’s unlikely to happen, but it’s not impossible it would happen.
QUICK: OK. Warren, I know the guys have some questions from back in the studio as well. Joe, Carl, you guys want to jump in?
KERNEN: Yeah, I got a–we both want to jump in at some point. Can you hear me, Mr. Buffett?
BUFFETT: I can hear you fine, Joe.
KERNEN: Good, great. So last week, one of the things that threw the market for a loop was this new figure for the size of these weapons of mass destruction, $600 billion. And I’m just wondering–you know, you go back a ways, we both do–S and L crises, LDC debt. You remember all the times in the past when we’ve, you know, when we saw numbers like this. How does 600 billion compare? And is it the kind of thing that can throw our economy for a loop for an extended period of time, worse than our, you know, shallow recessions that we’ve become accustomed to?
BUFFETT: Well, it sure could. I don’t know the answer on it, but it–nobody knows what the economy’s going to look like a year from now or two years from now. But you have certain things in motion that could possibly lead to that, or it may not. But I–you can’t rule it out. There’s no way you can–you can say that the trouble we’ve experienced and the trouble we’re likely to experience can’t lead to something pretty severe. And maybe we’ll be lucky and it won’t happen. I’ve never made any money out of economic forecasting.
BUFFETT: I’ve made money by staying out of trouble.
KERNEN: But yet you were early with the weapon–you know, you knew that these–all these structured products, that sooner or later there would be a day of reckoning. The other thing I was thinking when you were talking about where we haven’t gotten to those levels in–that we saw in the ’70s, but as a person that epitomizes Graham and Dodd type investing, what–we’ve had a long, secular bull since the early ’80s. We have not gotten to the extended part of, you know, where you get dividend yields at 4 percent, you get a priced earnings multiple that it–drops well below 10. When now that we see inflation in commodities like they are, is this the beginning of that cycle where we do get to a really stretched valuation on, I guess you’d call it a secular bear?
BUFFETT: Yeah, Joe, I don’t know the answer. It’s always a possibility. And–but, you know, I’ve never really been able to predict the stock market. I–when things get very cheap, I know it. When they get very high, I know it. And in between, I really don’t know much about what’s going to happen.
KERNEN: And–we’re in between, I guess.
BUFFETT: I will–I will recognize it…
QUICK: Does that mean we’re in between right now?
BUFFETT: Well, yeah. Thirteen hundred-plus on the S&P, you know. Stocks are not cheap. As it–as a group they’re not in some bubble price. But they go to extremes every now and then, and when they do go to extremes you have to be prepared to act.
QUINTANILLA: Warren, it’s Carl. You talk about munis. The…
BUFFETT: Hi, Carl.
QUINTANILLA: Good morning. The Journal this morning tries to interview a few muni bond fund managers, saying this is the kind of market they’ve been waiting for, where something goes from paying 5 percent to nearly 6 in a couple of weeks. You just said you will buy some. Are you champing at the bit, or are you going to wait for everything to come to you?
BUFFETT: I never try to–I try to avoid getting excited, you know. But there’s no question that I salivate a bit more as the rates get higher. We made a bid on a $3 1/2 billion portfolio on Friday; we didn’t get it. I don’t think it sold either. So–and, you know, I may go to the office this morning, and if there’s a large portfolio–and it can be five billion, it could be one billion, could be 10 billion–we would make a bid on it. But we try to have it reflect what’s really going on in the market. And it’s been pretty chaotic.
QUICK: Warren, at times like this, when you get an offer, how easy is it to come up–when somebody calls you, how easy is it to come up with that offer price, and how long does that last?
BUFFETT: Well, it–if it isn’t easy to come up with the offer price, I don’t make an offer. I mean, I have to–I have to decide myself where I’m willing to buy it. And–but, in this kind of a market, if somebody calls us and they say, `We have this list of 200 munis, and it’s three billion’ or something like that, we give them an offer that’s, you know, it’s basically–like the used car salesmen used to say on their warranties, 20-20. It was 20 seconds or 20 feet. Well, we’re more or less that way in the municipal bond business. We–we’ll give an offer good for a minute or something. We–there’s no–we are not offering puts to the rest of the world for nothing. And a bid is a put as long as it’s outstanding, and puts you’re supposed to get paid for in this world. So we put them out for, you know, basically a minute or two. We want the fellow on the other end to be able and prepared to act, and we do not want him to use our price to out and shop with somebody else.
QUICK: Well, speaking of that offer you made on our air to the municipal bond insurers–or to the bond insurers to take over their municipal portfolios, is that deal still on the table?
BUFFETT: No, it’s not on the table because you pay for puts in this world. And what we did offer to do at that time–people got this kind of mixed up, although it was–it was right on the program. We said they could take our offer and have 30 days to shop it, and then have–pay us a 1 1/2 percent kill fee if they found a better deal. So they could have used our offer for 30 days to go out all over the world and see if anybody’d make them a better deal. What they did was they said it was a terrible offer, but they didn’t go out and try to get a better deal on it. So we–no, we don’t leave offers on the table for–we don’t leave them on the table for an hour in a market like this. You don’t want to go down on the New York Stock Exchange floor and say–if General Motors is at 24, and say, `For the next hour I’ll pay 24 if anybody wants to sell it to me.’ I mean, you’ll get it if it goes to 23, and you won’t if it goes to 25.
QUICK: Right. Guys?
KERNEN: Go ahead.
QUINTANILLA: Now–and–well, we got so many–where to start is the question.
KERNEN: I’ve got it, I’ve got it. I’ve got a lot of other ones that they’re just asking. You know, we had this–we had Charlie Gasparino say a week ago Friday say the Ambac deal was close, and then this past Friday part of the reason we saw the big sell-off was because there were significant stumbling blocks I guess. I haven’t heard what Charlie’s going to say today. Knowing, as you do, that there’s no free lunches and things–you know, people don’t enter into transactions out of–well, not usually out of stupidity, but how’s this–is it going to be possible to structure something for Ambac that’s going to, you know, cause someone putting the equity in to feel comfortable with the situation, given the looming CDO exposure that the company still has?
BUFFETT: Yeah, it may be possible. There may be people that feel that they understand the risk that’s already in the portfolio and see enough opportunity in the future that they’re willing to take on that risk. It’s not possible for me to do that. But who knows? You know, there’s money all over the world, and I would not be surprised if they were able to raise money. I would not be surprised if they weren’t able to do it. If they raise money, like I say, we’ve made an easy $69 million in the last three weeks, because if any of those bonds go bad, and some will, they pay–they pay first. So, in a sense, I should be out trying to help them raise money.
QUICK: Warren, in your annual letter to shareholders on Friday, one of the big attacks that you took was on companies and how they are expecting their pension plans to grow over the next several decades and beyond that. What caught your attention on that? Why are you focused on that?
BUFFETT: Well, I–actually, I’ve written about it before, too.
BUFFETT: The pension fund assumption–you can take your earnings up or down by changing your pension fund assumptions. And within a fairly wide range, the professionals, the auditors will let you pick different numbers. So you have companies–if you look at the S&P 500, you have companies picking lots of different numbers. And the higher the number you pick for an investment return, the lower the charge that’s made against your earnings. And if you go back far enough, 30 or 40 years ago in accounting, they didn’t make you make any charge. And they soon found out that was folly. And General Motors has been living with that, you know, in terms of particularly in the health plans, since. I say that most companies and a great many municipalities or public bodies are using rates that are really a little crazy. And a year like this may dramatize that. Now, you’re not supposed to look at one year returns in setting these rates, but we set–we have some public utilities, and they have pension plans, and in those cases, the states tell us what rates we have to use. We argue for lower rates, but they won’t let us go as low as I’d like. With our own pension plans, we use a 6 1/2 percent return, and the world is generally using 8. And that doesn’t sound like much of a difference, but it’s a huge difference.
QUICK: It’s a huge difference when you roll it out and annualize the compound interest over a number of years.
QUICK: You asked our viewers last week on cnbc.com…
QUICK: …where they expected the Dow to close at the end of the century, December 31st, 2099. For those of you who haven’t seen this yet, we’ll show you the poll results. It came back that somewhere close to 34 percent were looking for that level of 100,000, another 33 percent were looking for over a million, and about 23 percent were looking at a level of quite a bit more than that.
QUICK: Ten million, or the third question that you had was 10 million.
QUICK: So where should people be looking? Here’s the number that you see right now.
BUFFETT: Well, I’m not sure where they should look, but the–but if it turns out to be 100,000, that means that people in this century, from the start of the century, will have had a return, including dividends, of about 4.2, 4.3 percent. That’s before expenses. Now, commissions, investment adviser services, all of that comes out of that 4.3 percent.
BUFFETT: So that’s a gross return. And I would say that most people think that if the Dow went to 100,000 by the end of the century that they’d have had maybe double-digit returns or something like that. If the Dow is at 10 million at the end of the period, you still haven’t had double-digit returns, believe it or not. So people can get kind of careless with numbers. Most people aren’t too numeric.
QUICK: But this is a word of warning to investors out there, and, Warren, you’ve been gracious enough to offer to stay with us throughout the entire show this morning. Throughout the morning, we’re going to be getting to some of those answers from the questions that you all have been sending in, our viewers. We’ve gotten thousands of questions. And in the next half-hour we’ll be getting to a lot of the answers of those questions. But right now, Joe, I’ll throw it back over to you.
KERNEN: All right, Beck, thank you. Let’s hope that furniture store in the middle of the day doesn’t look like that. I don’t know. You know, we’ve been…
QUINTANILLA: It’s going to get busy.
BUFFETT: This store did 400 million last year, Joe.
KERNEN: All right. All right. I’m not worried about you. I’m not worried about you. Your businesses, but…
QUINTANILLA: He’s going to be behind the counter.
KERNEN: Yeah, exactly.
ANNOUNCER: Live from Omaha, Nebraska, here again, Becky Quick with special guest Warren Buffett.
QUICK: Welcome back, everyone, to this very special edition of SQUAWK BOX. We’re live in Omaha, Nebraska, and we’re standing by at the Nebraska Furniture Mart. This store is the largest home furnishing store in the entire country. We’re standing by right now in the electronics store which just opened up last year. Nebraska Furniture Mart, if you don’t know, folks, is one of the 76 holding companies–or operational companies of Berkshire Hathaway. And we are very fortunate to be joined this morning by Warren Buffett, the “Oracle of Omaha,” who has been gracious enough to offer–to take questions from our viewers this morning. And, Warren, I have to tell you, the demand was overwhelming, thousands of e-mails coming in, and we’ve tried to narrow them down a little bit. Why don’t we jump straight to it.
BUFFETT: Just give me the easy ones.
QUICK: Yeah, just give you the easy ones. I have to tell you, there were some very, very thoughtful questions that came in.
EMAIL TEXT: In your annual letters you make it very clear you are not a fan of hedge funds and think they destroy wealth. Do you think hedge funds have an edge which justifies their huge fees? Brad Alford, Atlanta, GA
QUICK: I want to start off with a question from Brad in Atlanta, Georgia, and he asks, `In your annual letters you make it very clear that you are not a fan of the hedge funds and you think they destroy wealth. Do you think hedge funds have an edge which justifies their huge fees?’
BUFFETT: Well, the answer is an aggregate no. When there were very few of them and a lot of talent, but not a lot of competition with each other, it’s very likely that they did. But in Wall Street you have this progression from the innovators to the imitators to the swarming incompetents. And what happens is that the results achieved by the innovators enable the product to be sold by a lot of people simply because the record of a few people was good. So the idea that billions–well, trillions of dollars can be managed to get above average results while charging fees that are way higher than normal just defies the–just defies the logic. So, in aggregate, people are going to be disappointed with the results you get from hedge funds. But there will be ones that do terrifically, but it’s–I would not want to buy them across the board.
QUICK: OK. Jake Kamm from Cleveland, Ohio, writes in and he says, `Among the CEOs within the universe of publicly traded companies in which Berkshire doesn’t have an ownership position, which CEO do you believe is doing the best job on behalf of shareholders?’ Tricky.
BUFFETT: Well, there’s a number of them. The fellow at Fastenal has done a very good job.
QUICK: I’m sorry. Which company?
BUFFETT: Fastenal. I mean he, all you have to do is look at the record on it. Jim Senegal has done a terrific job of running Costco. We own a tiny bit of it, but I don’t think that’s warped my view. There are a lot of good CEOs in the country that–I’m thinking right now a few where we own them, but I think Jeff Immelt at GE. We have some in a pension fund, we don’t have anything at Berkshire, has done a first class job. Some of these people got handed the baton at the wrong time.
BUFFETT: Jeff got handed the baton at kind of a bad time. There are–there are a lot of outstanding–there are a lot of outstanding CEOs. I may think of some more that I want to name as we go along.
QUICK: OK. If you think of more, you can jump in with them.
BUFFETT: Yeah. I’ve got to think of who I’m playing golf with next week.
QUICK: Let’s move on to David from Defiance, Ohio. He asks, `How would you define a recession?’ This is something we talk an awful lot about on the show, but he says, `I’ve been listening to a lot of discussions on CNBC, some of which can be very annoying because they tend to be so outrageously vocal and the experts believe two quarters of negative growth qualifies as a recession.’ Is that the surest definition of it? Or do you think it’s broader than just that?
BUFFETT: Well, it’s the standard definition, but if you think about it, population grows 1 percent of year. So you could have growth of GDP of a 1/2 a percent, but GDP per capita would be going down. So the very definition, you might say, is a little bit flawed if it–if it doesn’t allow for the fact that GDP per capita can go down while growth GDP’s going up. Beyond that, I would say by any common sense definition, we are in a recession. And…
QUICK: You would?
BUFFETT: Yeah, we wouldn’t–we haven’t had two consecutive quarters of GDP growth, but I will tell you that, on balance, most people’s situation, certainly their net worth has been heading south now for a considerable period of time. And if you owned a house, and you had an 80 percent mortgage on it, and so you had 20 percent equity a year ago, you might not have any equity now. And millions of people are in positions somewhat similar to that, and people would–people that own municipal bonds feel poorer today than they did a few months ago.
BUFFETT: So business is slowing down. We have–we have retail stores in candy and home furnishings and jewelry; across the board I’m seeing a significant slowdown and, of course…
QUICK: That’s the first time I’ve heard you say you think we’re actually in a recession right now.
BUFFETT: Yeah, well, I think, when we talked earlier, I said we might be.
BUFFETT: But it–no, I would–I would say that–but when I say we’re in a recession, it doesn’t meet the technical definition. We aren’t in the second quarter of–we can’t be because we don’t know what the fourth quarter of last year was. But I think that, from a commonsense standpoint, we’re in a recession now.
QUICK: OK. Let’s get to one from Don in Atlanta, Georgia. `If Ben Bernanke’s a company, would you be interested in owning it?’
EMAIL TEXT: If Ben Bernanke is a company, would you be interested in owning it? Don Sitec, Atlanta, GA
BUFFETT: Well, I think that Bernanke’s very able, and I’m not sure I’d want to be in any–own any company that an economist was running, though, so he gets disqualified by profession, but not personally at all.
QUICK: OK. Roy writes in from Maple Glen, Pennsylvania. He says, `Would you please characterize, in general terms, the breakdown of shareholders in Berkshire class A. Are there a lot of single share owners, and what would be the average number of shares owned per shareholder? And by the way, does Bill Gates own your shares?’
EMAIL TEXT: Would you please characterize, in general terms, the breakdown of shareholders in BRK-A. Are there a lot of single share owners? What would be the average number of shares owned per shareholder? Does Bill Gates own your shares? Roy Stephenson, Maple Glen, PA
BUFFETT: Oh yeah, Bill Gates owns a lot of shares. As a matter of fact, when he joined–I didn’t know how many shares he owned when he joined the board, so I had to put him on the board to find out. So he had to make a filing so I could find out how many shares he owned. And he owned about, as I remember, about $300 million worth, and then he bought another pretty good size chunk of stock. And somebody asked him why he bought it, and he said, well, everybody else on the board had a higher percentage of their net worth in the stock than he did, so he felt like kind of a picker, and he had to do something about it. We have about 400,000 shareholders. We have–I believe we have the lowest turnover of our stock relative to the shares outstanding of any company on the Big Board, which means we have more real investors. We don’t want anybody to buy our stock to sell it in a month or six months or something. We really want it to be a holding like buying a farm or buying an apartment house. We want it to be a real investment. So we try, by our policies and by our communications, to attract those people.
BUFFETT: Because, you know, it’s like running a restaurant. If you put hamburgers on the outside, and you’ll get a crowd that wants hamburgers. If you put French food, you’ll get a crowd that wants French food. We try to be very clear we have investors out there. We don’t want anybody–we don’t want all shareholders. We don’t go out and make presentations to analysts’ societies or anything like that because the idea that every shareholder we could add would be a plus is ridiculous. I mean, it would be like measuring a church, you know, with high turnover and every week you had a different congregation sitting in the thousand seats. Well, we’ve got a 1,500,000 seats out there, and we really like the idea of talking to the same congregation every week. So we have a lot of one share class A shareholders, we have a lot of one share class B shareholders. What we do have is a lot of individual shareholders. I used to have something like 100 shareholders in my zip code here. So when I would take the kids out trick or treating on, you know, on Halloween, I mean, we scored big time.
QUICK: You know exactly where to show up for all the candy.
BUFFETT: I knew where to go.
QUICK: Warren, we have a lot of e-mailers that came in from the viewers. We also solicited a couple from some of your well-known friends, and we get one that I want to bring up, too. LeBron James of the Cleveland Cavaliers writes in.
QUICK: And he asks, `If you were ever to buy a professional sports franchise, what would it be?’
BUFFETT: It would, well, if I lived in a big city that had a–that had a top team, I’d want to buy it there. I mean…
QUICK: You would?
BUFFETT: Yeah. Well, I own a quarter of the Omaha Royals, which is just a minor league team, but if–but it–I grew up in Washington, DC. My dream might have been to buy the Washington Redskins, although they were playing baseball then, the Washington Senators. I’m not sure you would want to–they used to say, you know, `First in war, first in peace and last in the American League’ about the Washington. But the–I would–sure, if I lived in Dallas, I’d want to own the Cowboys or something like that. So that would be the team I would buy. But…
QUICK: I guess the question would be is are you planning on moving anytime soon?
BUFFETT: No, no. I went to Cleveland for a game to watch LeBron, and, when I was a kid, I thought for sure if I ever got rich that I would be buying a sports team, but I’d rather play on one now. So if there’s anybody out there who would like to sign me up, I’m ready.
QUICK: OK. We have a lot more questions to get to this morning, but we also have to get in a quick break, and so, Carl, I’ll send it back over to you and figure out where we stand right now.
QUINTANILLA: I can imagine Warren playing a power forward. Joe, can’t you? Maybe some elbows in the paint?
KERNEN: Will he put on…
QUICK: There you go. Sharp elbows, Warren?
BUFFETT: Yeah. You bet. KERNEN: Will you put on one of those Will Ferrell wigs, Warren? “Semi-Pro” wigs? I don’t know if you’ve seen that.
QUICK: Darren Rovell ran around dressed up like this new Will Ferrell character last week.
QUICK: And he had the big wig, he had everything going on. Shorty shorts, remember that?
BUFFETT: I took on LeBron last year, one on one, and I noticed he hasn’t asked for a rematch.
QUINTANILLA: He’s not going to take that mistake twice. We’re going to take a quick break. We’ve got a lot more with Becky and Warren Buffett when we return live. We’re back in just a second.
ERIC JONES (question on tape): My name is Eric Jones from Los Angeles, California. Mr. Buffett, with spring football right around the corner, what’s your prediction with Nebraska football?
QUICK: OK, there’s the question for you, Warren.
BUFFETT: That’s an easy one. We’ve got Tom Osborne back as athletic director, Bo Pelini, we’ve got a lot of talent. We should win at least eight games. If–it was getting kind of desperate around here a year or two ago. The coach was asking for a fullback prospect that was 6’4″ and weighed 120 pounds. And people said, `Well, that’s kind of a strange definition for a fullback.’ And it is the only kind of guy that can get through the holes when the line opens up. Well, we have a little stronger team this year. We’ll do all right.
QUICK: OK. Another question from a viewer. This comes from Tony in Springfield, New Jersey. He says, `I’m getting a tax rebate and I would like to invest it. Which of these do you think is the better bet? Number one, bet it all on the hard eight,’ straight at Atlantic City, I guess. `Number two, buy a lottery ticket. Or number three, invest in Ambac.
BUFFETT: Well, OK, I’ll give him the answer. The answer’s number four. Buy a no-load neutral fund with very low costs.
QUICK: OK. That’s the question for him. And finally, Cara Bruder from Oklahoma City, Oklahoma, says, `My favorite charity is my children, and yours is the Gates Foundation. When I give over $12,000 to my children, I am taxed at about a 50 percent rate, yet you were taxed at nothing for giving to Gates. Why shouldn’t you be taxed the same rate? Or why shouldn’t I be taxed at your 0 percent rate?’
BUFFETT: Well, he’s only taxed at all if he’s used up his lifetime exemption. And the lifetime exemption, I think, next year goes to $3 1/2 million, and that’s man and wife. So you can actually give your children, next year, over a lifetime, you can give them $7 million, and there is no tax whatsoever. So if anybody’s told them that, unless he’s already given $7 million, he can give a lot of money to his children. Or to his dog, like Leona Helmsley did, you would out–without paying tax. But the idea is that in one case you’re doing it essentially for personal benefit, and the other you’re doing it for the benefit of society.
QUICK: OK, we’re going to get to a lot more questions like these. There are people who had questions about the estate tax and other issues. Plus, we have Mr. Buffett here on a very fortunate day. There’s been some chaos in the markets. He’s going to tell us what he’s seeing right now, both in terms of the markets and the economy, from the perspective of his businesses. We have much more live from Omaha, Nebraska, with Warren Buffett right after this.
STEVE LIESMAN: And one bright spot: While Wall Street, they’re panicked over the credit crunch, three quarters of Americans say, `Credit crunch? What credit crunch?’ They’re reporting no trouble getting a loan, and that is unchanged from our survey in October. And just 16 percent of Americans say they have a lot of debt. So while the economic pundits may worry about American debt levels, Americans themselves aren’t too concerned. Who better to ask about this than Warren Buffett? Good morning, Mr. Buffett. Steve Liesman here.
BUFFETT: Hi, Steve.
LIESMAN: So let me ask you what this means from a stock market perspective when we find such tremendously widespread negative attitudes. Does that signal a buying opportunity to you?
BUFFETT: Well, at some point it will. I–but I don’t buy based on what I really think the market will do in the next, you know, month, six months or a year. If things–if I buy something at an attractive price, I don’t care what the stock does. You know, if I buy a farm, I don’t get a quote on it every day. If I buy an apartment house, I don’t get a quote on it every day. And if I buy a stock, I want it to be a stock that I’m happy owning. If they close the stock market for a couple of years–they–back in 1914 they did close the stock market for many months and, you know, it’s what the business does over time that’s going to determine how I do. So I don’t really–I don’t try and time stock prices, I try to price stock prices. And it is true–and there’s a lot of negative sentiment around–I’m more likely to find good things to buy than if everybody’s in a very bullish mood.
LIESMAN: Is that one of the…
QUICK: So, Warren, that actually…
LIESMAN: Go ahead, Becky.
QUICK: Go ahead, Steve, I’m sorry.
LIESMAN: No, I was going to say, is that one of those times right now? Are you finding more things to buy in the stock market, and are those negative attitudes helping depress prices and creating buying opportunities for you?
BUFFETT: I’m–certainly I find more things to look at now than I did six months or a year ago. But I would say that it’s changed more dramatically in the fixed income market than it has in the equity market, so that I may–that may be where I find the opportunities.
LIESMAN: Warren, one…
BUFFETT: You just–you go to work every–you go to work every day and you just look at–the nice thing about securities is that they change in price every day, and you don’t have to pay any attention to it except if you–if you have borrowed money, it can–somebody pays a lot of attention to it. Or if you have fresh money to invest you–you know, when you get–when you find something you like at the right price, you buy it, and you don’t think about whether it’s going to go up or down next week or next month.
LIESMAN: One of the most striking things in this poll is for the first time–we’ve done this for four quarters now–Americans now look for a decline in their home values. What’s the significance of that from an economic point of view, Mr. Buffett?
BUFFETT: Well, it has a huge effect because, you know, with 60 percent-plus of the American people being homeowners, as being a huge asset–and in many cases it’s a leverage asset–it obviously is going to be on their mind big time. And I get the figures every month. We have a number of real estate brokerage operations around the country, and I get the–I get the figures from many markets on listings and sales, and I’ve seen something like Dade and Broward County go from 6,000 listings and 3600 sales a month to where they’re now, I think, 82,000 listings and about 1500 sales a month. So unless there’s some major intervention by the government in some way, or something of the sort, home prices have not stopped going down. Now, they will at some point.
QUICK: Any of the intervention plans we’ve seen from the government strike you as being a good idea?
BUFFETT: Well, that–I haven’t seen the details on many of them, but I think it’s very hard to start interfering with markets without having a whole lot of unintended consequences.
KERNEN: Hey, Warren, always there’s a backdrop to the things you say. You always end with, `I know that in the future things are’–you know, `the United States is going to do great and US businesses are going to do great.’ That’s always sort of the backdrop, you don’t know when it’s going to happen. I just wonder, you know, with your view on the dollar and knowing what we still have to work through in terms of all the–what you referred to as financial weapons of mass destruction–and there was a time where you actually said that–we believed you when you said the dollar was going to be worthless. You actually said worth less. You actually said worth less, but I mean, you are saying five years from now it probably is going to continue to go down. I mean, is–are you more negative now than you have been in recent years, would you say? Or tell me we’re going to be OK down the road.
BUFFETT: No, no. No, I–you know, we’ll be–we’ll be fine. I mean, the factories don’t go away, the people and their talents don’t go away, the houses don’t go away, the population grows. No, over time, you know, my children are going to live better than I do, although they don’t seem to think so. They’d like to hasten it a little bit. My–and my grandchildren will live better than they do. And the same with you. This–in the–in the 20th century, the real standard of living in the United States went up seven for one, and a great many of the–of the factors that went into producing that really unprecedented gain in how people–improvement in how people live, those factors are still present. I mean, we have a market system, we have a meritocracy, we have the rule of law. None of them perfect, but they have combined in the past to move one generation after another ahead of the one that preceded them. That will continue to be the case. But it will also be the case that markets will do very wild, unpredictable things and you will see things you haven’t seen before in markets. That’s the way–people make markets, and they’re not rational much of the time.
KERNEN: Hm. All right. Thanks, Beck. And we’ll be back with you, Mr. Buffett, in just a second. If you’re just tuning in, yeah, this is a very special morning. Becky Quick is live in Omaha with–in Nebraska with Warren Buffett, and he’s fielding whatever we can throw at him, whatever you can throw at him, whatever Liesman, Carl, Becky, all of us and all of our viewers. He’s answering your questions on cnbc.com. We like it.
QUICK: Welcome back, everyone. As you know, we are taking your viewer e-mail questions. They’ve been coming in, and we haven’t shown Mr. Buffett any of these questions. We’ve been catching him by surprise, asking him on the fly. So I’d like to go back to one of the questions from earlier because Warren said he’s been thinking about it and has another answer for him. This is from Jake again from Cleveland, Ohio. And again, if you missed this earlier he’d asked him, `Among the CEOs within the universe of publicly traded companies in which Berkshire doesn’t have an ownership position, which CEO do you believe is doing the best job on behalf of shareholders?’ Now Warren, you mentioned some CEOs, but you told me you just thought of another.
BUFFETT: Yeah, I think Bob Iger at Disney has done an absolutely terrific job since coming in a couple of years ago, and he–it’s a–it’s not an easy company to manage and he is–he’s done a first class job. He’s shareholder oriented. He works well–extraordinarily well with the people that are involved. He understands his business. He’s moved them into new areas, so I give Bob high marks. And actually, Jim Kilts, who was at Gillette when we were there, he’s not running the company now, but if I find out he’s going to run a company, I’m going to buy stock in it.
QUICK: Well, let me ask you that. You mentioned both Disney, and you mentioned Jeff Immelt of General Electric. Why don’t you own those stocks if you think they’re doing such a great job?
BUFFETT: Well, unfortunately, the market recognizes the fact they’re doing that job, to some degree, although neither one of them think that, incidentally. They both think their stocks way underpriced, and it may well be, but I have to–I have a universe of $20 trillion worth of stocks and bonds and everything to decide where to put the money, and every day I look at what’s going to make the most sense for us. And they’re close.
QUICK: They’re close. OK. Stephen Battaglia writes in from Alexandria, Virginia. He asks, `Why do you think that you are afforded the exemption from the SEC to avoid revealing certain positions when others in your same position have to reveal theirs?’ He also points out that he’s a professional investor.
BUFFETT: Yeah, well, I think there are actually certainly many, many dozens, if not hundreds–you’re entitled to get an exemption if you’re in the–if you have a purchasing or a selling program going on. That’s not a special rule for us at all. So if we–if we’re buying X, Y, Z at the end of the quarter, we or any other institution that reports to the SEC is entitled to ask for an exemption for that, and they grant it. So it’s not a special exemption at all for Berkshire.
QUICK: OK. We also got a lot of e-mails that came in from international places. This one came in from Switzerland and D.L. Frischnecht writes in, he says in regards to the subprime loan and banking crisis, he says, `In physics we know the fundamental principle of conservation of energy, so where did all these billions go? Was it burned in heaps at the Pall Mall, or is economics maybe not really a science?’
BUFFETT: Well, he’s a little beyond me there, but the mistake was in lending, you know, unwisely, as Shakespeare would say. There were a lot of dumb lending practices that were dumb lending practices in private equity financing, and that’s why the banks are hung up with the loans. It isn’t that the companies are terrible, but if you loan too much money on anything, you’re going to lose money. And if a house has doubled in price, and somebody lends 95 percent of the price that’s doubled in a couple of years, there’s a good chance they’re going to lose money. If they–if they lend money to people where their income isn’t going to make the payments–allow them to make the payments, they’re going to lose money. So there’s of ways to lose money, and for a while people thought houses could do nothing but go up, so they paid no attention to any other factor. They didn’t pay attention to borrowers’ income, they didn’t, you know, and you know…
QUICK: But somebody’s making that money, right? Somebody’s on the other side of the train.
BUFFETT: Well, the person who–the person who buys the house–well, the person who sold the house got a bubble-type price. The person who buys the house now buys it cheaper than other ways. I mean, every time anybody tells about somebody losing a lot of money by selling a house, there’s somebody else that’s buying it at a more attractive price than they would’ve paid a year or two ago.
QUICK: OK. Here’s an easier one for you.
QUICK: Gordon writes in from Meadville, Pennsylvania and he asks, `What do you put on your hamburgers?’
EMAIL TEXT: What do you put on your hamburgers? Gordon Barrett, Meadville, PA
BUFFETT: I put a lot of salt.
BUFFETT: Oh, yeah, well, I salt everything a lot, and I–sometimes I put tomato and mayonnaise, sometimes I put pickles and, you know, and then I top it all off with a little See’s Candy, wash it down with Cherry Coke.
QUICK: Well, happy breakfast everyone for anybody who’s looking at home. Sam from Tarnation, Texas, writes in, `In December on CNBC, you said that if unemployment rose to 5+ percent, some quote “very large dominoes” would start to fall. So what are those dominoes and have they started to fall?’
BUFFETT: Well, I think–I don’t think 5, I said it was at 4.7 then, but if it started moving up significantly.
BUFFETT: Five is still not a really high level at all, but it’s going the wrong direction, and some factors are in play that I think will keep it going that way, but when people aren’t employed, then a lot of bad things happen.
BUFFETT: And we’re closer to seeing that now than we were when we talked in December.
QUICK: OK. Tory from Bellevue, Nebraska, writes in and said, `You support Barack Obama and Hillary Clinton to be President and Chief Executive of the United States. Would you support either one of them to your successor as President and Chief Executive of Berkshire Hathaway?’
EMAIL TEXT: You support Barack Obama and Hillary Clinton to be the President and Chief Executive of the United States. Would you support either one to be your successor as President and Chief Executive of Berkshire Hathaway? Tory L. Lucas, Bellevue, NE
BUFFETT: Well, I would certainly employ them to run a business, but running a business is a little bit different form my job. I couldn’t run the Furniture Mart very well, but I’ve got the best people in the world in the Blumkin boys running this place. So I would them–I would put either one of them in charge of a business. I don’t think I’d give them my specific job, which is strictly allocation of capital. I’ve got a little different job. But if they’re looking, one of them will probably be looking for a job here in a few weeks. I would be glad to hire either one of them. !
QUICK: OK. Douglas from Alexandria, Virginia writes in and says, `You stated that people, including you, aren’t paying enough taxes. OK. So why don’t you send some of your billions to the government?’
EMAIL TEXT: You have stated that people, including you, aren’t paying enough taxes. OK. So why don’t you send some of your billions to the government? Douglas Smith, Alexandria, VA
BUFFETT: Well, I don’t–I don’t say generally people. I think the lower class, the middle class, even the upper middle class are paying more than they should be paying. I think that the super rich, like myself, you know, my tax rate was 17 and a fraction percent in 2006, and everybody else in the office was paying way more. I’m not advocating tax increases across the board at all. I’m advocating a redistribution to the super rich. In the last 20 years, the total wealth of the Forbes 400 has gone from 220,000,000,000 to a 1,540,000,000, seven for one. The average wage has gone no place in real terms, it’s up about 80, 85 percent and that’s exactly what inflation is. So the world has gotten tilted to the super rich, and I think that the middle class and even the upper middle class, I think they’ve been getting a very raw deal. So I would change their taxes and move them over to people like me.
QUICK: Back to the point, we’ve got a lot of questions like this from viewers saying…
QUICK: …why don’t you send your billions in? Here’s the address.
BUFFETT: Well, my billions will go to society. Every share of stock I’ve got. And, on balance, I think that the five foundations I’m giving to will probably get a better result than sending to the government, but I wouldn’t have any objection to sending to the government. This society has showered everything on me. I’ve gotten everything in life I’ve wanted, and I will spend less than 1 percent of my net worth, I and my family, during my lifetime. If the only choice were to give it to the government or to give it to create a dynasty of Buffetts, I would give it to the government.
QUICK: OK. Fair enough. We have a lot more questions that have come in from you, the viewers, and we’ll have many more of them when we come right back after this.
JIM CRAMER (ON TAPE): Asking the icon. Sir, isn’t it true that we have an energy policy backing ethanol that is creating so much inflation that perhaps it would be better to stop the emphasis on ethanol, allowing inflation to come down and the Federal Reserve to cut more? Am I wrong that mankind is being crucified upon a cross of ethanol right now, and it’s killing the poorer nations and the people in our country who can’t afford anymore to eat chicken or beef?
QUICK: Warren, what do you think?
BUFFETT: I wouldn’t put it exactly in those terms, but I would say that ethanol is a relatively inefficient way of creating gasoline–gasoline equivalent, and it uses a lot of energy in the process of raising the corn that does it. And, as correctly pointed out, it has a by-product of raising agricultural products elsewhere. In economics you can never do one thing. Anytime anybody tells you they’re doing something in economics, then you have to say, `And then what?’ And the `and then what’ in the case of ethanol is A, if you use it to plant more corn, you’re going to use–in terms of fertilizer and everything, you’re going to use a lot of energy. And secondly, you’re going to raise the prices, on balance, you’ll raise the prices of other agricultural products. So there’s no question that that–that’s a fairly correct statement of the problem.
QUICK: Those are very brave words when you realize we’re standing in the “Cornhusker State.”
QUICK: Do you get pushback from that?
BUFFETT: My son was head of the Nebraska Ethanol Commission. He is a farmer. He lives $5 1/2 corn, he loves $12 soy beans, I don’t blame him. But I’m not running for anything, fortunately, and, you know, I can call them as I see them.
QUICK: OK. Let’s get back to some of our viewer e-mail questions.
QUICK: This one comes in from George Greene in Wilmington, North Carolina. He says, `Do you believe the media sensationalizing news events has caused the turmoil in the market as well as driven up the price of oil due to constantly talking about $100 a barrel?’ He’s talking about the `fog in Houston for two days, it shouldn’t cause an increase due to a possible supply disruption.’ Is this our fault?
BUFFETT: Yeah. In other words, if you just keep people ignorant, will markets work better?
BUFFETT: You know, the nature of it, you are reporting spot news all the time, but you’re going to get spot news one way or another, and the problem is the way people react. And–but they’re going to react–they reacted too much to short term news, and if it doesn’t come from you, it’ll come from somebody else. So just do the most reliable job you can of reporting.
QUICK: Whoo! We got a pass. We got a pass from you on that one.
QUICK: We’ll take it.
BUFFETT: Yeah. People have themselves to blame for crazy markets. You know, we’re talking–if you talk about apartment houses, you talk about farms, normally or something like that. Prices move very gently and people don’t get quotes on them every day. You don’t have to look at the price of the stock market. I don’t even look at–I don’t look at the price of Berkshire’s…
QUICK: You don’t look at Berkshire share every day?
BUFFETT: No. What difference does it make? I haven’t bought or sold a share in, you know, 25 or 30 years. I mean, it’s the business that counts.
QUICK: Wait a second, come on. You have to have a rough idea for where you stock is trading.
BUFFETT: Oh sure, I’ve got a rough idea and some days I look at it, but I don’t feel like it’s a necessity to look at it. It doesn’t tell me anything. The market is there to serve you and not to instruct you. That’s the most important lesson in investing. And when it gives you the chance to do something because it’s doing something silly, you do it and otherwise you ignore it.
QUICK: Can you remember the last day you didn’t know exactly where Berkshire share was. Was this in the last week, maybe?
QUICK: Wow. OK.
QUICK: Jerry in Chicago, Illinois, writes in. He says, `In recent letters, you mentioned investment management “Helpers” and hedge fund “Hyper-Helpers.” You say fee arrangements and costs work to the detriment of the investor. So what type of investment management fee structure do you think is fair? And if you were still running the Buffett Partnership, how would you determine fees?’
BUFFETT: Yeah. I–overall in terms of that–I think everybody should read Jack Bogle’s book. Low–what you really want to do is you want to own an American industry which is going to do fine over time, but you want to make sure you don’t put all your money in at once because you might pick just the wrong point.
BUFFETT: But if you buy in over time into a wonderful business, which is American industry, and you make sure you don’t go in at just the wrong times, when people get excited, and you get to keep your costs low, you’re going–you’re going to beat 90 percent of the people because they’re going to run up unnecessary costs. And if you have the whole world running hedge funds, and they’re all charging you 2 and 20 or something of the sort, believe me, it doesn’t make the cars, you know, Toyotas sell for any more money. It doesn’t make the Furniture Mart make any more money. It just–it just transfers the profits of those enterprises to a bunch of people who are essentially telling you to buy and sell.
QUICK: OK. There’s a question that came in from Kim Johnson in Spring, Texas. He said–this is a good question, I really like this one. `Would you be the same man you are today if you’d been accepted into Harvard Business School?’
BUFFETT: Well, no, because I wouldn’t have gotten hired by Ben Graham later on, and I’d probably wouldn’t have married my wife, because events would’ve been different. It was a two-year school there, and I got out in one year, therefore I had some time to put on a full court press on the romantic side. And–so, no, it was very fortunate for me. I didn’t feel that way at the time. It was very fortunate for me they turned me down. So maybe they should be soliciting me for their alumni fund based on the fact they turned me down.
QUICK: OK. Melvin writes in from Manila. He says that `You mentioned in your annual letter to shareholders that Berkshire would be experiencing slower growth in the future and definitely would not be able to match the high growth rates of the past. So do you think the present price of Berkshire Hathaway stock reflects that outlook as well?’
EMAIL TEXT: You mentioned in your annual letter to shareholders that Berkshire would be experiencing slower growth in the future and will definitely not be able to match the high growth rates of the past years. Do you think the present price of Berkshire Hathaway stock reflects this outlook at well? Melvin Olivan, Manila, Philippines
BUFFETT: Well, we certainly try and explain the facts to everybody, so the price should reflect all of the facts that we give them, including my views about the fact that the past is not replicable. Well, if we knew we were going to compound at 21 percent a year for the next 40-some years…
BUFFETT: …you know, a much higher price would be justified, but that is a total–that would be a totally crazy assumption.
QUICK: OK, guys, I’m going to throw you off in the control room here because I’m going to go out of order. I want to go to the Reed in Canton, Michigan. He wrote a question that says `You seem like the guy next door. Do you sit down and pay your own bills? Things like electric, heat, phone, credit cards, etc. It would be great to know that one of the richest men on the planet sits down and writes out his own checks every month or goes to the Quickie Mart and picks up a gallon of milk.’ Do you do those things?
BUFFETT: Well, I like to go to supermarkets. I like to buy things there and roam the aisles and see what there is. Actually, my assistant writes out the checks, you know. So I do sign checks, but I don’t–I do not make them out anymore.
QUICK: OK. All right. We have a lot more viewer e-mail that we will get through throughout the show. Also, Carl, when we return, when we come back on this, we’re going to be talking about some of the news of the day and Mr. Buffett’s particular thoughts on derivatives. He’s got some new ideas he’d like to share, and we’ll get to all of that when we come back.
QUINTANILLA: All right, Beck. As she said, a lot more with Warren Buffett coming up in the next hour of SQUAWK. We’re also going to find out how politics and the economy are playing out in the CNBC Wealth in America report, and Charlie Gasparino going to join us. Also–did we mention?–more e-mails for Warren Buffett as this special edition of SQUAWK BOX continues.
KERNEN: Welcome back to SQUAWK BOX here on CNBC, first in business worldwide. I’m Joe Kernen, along with Carl Quintanilla and Becky Quick, who’s in Omaha this morning with the man himself, Warren Buffett. It’s a perfect day to have him on with everything going on in the markets and the economy. Becky, I don’t know if you’ve gotten access to the wire services, but they truly…
QUICK: I don’t.
KERNEN: Well, they truly are hanging on every word. I mean, I’ll see a flash, you know, the ones you would think of: Buffett, common sense, we’re in a recession. But also, Buffett says he has not–a woman is not on the list for CIO. They have another one that says Buffett would not put Obama or Clinton in charge of Berkshire. So they’re putting everything on there. Nothing about me being the main guy for CIO, though. Nothing about Joe being in the–in the…
QUINTANILLA: One of the four candidates.
KERNEN: And I challenge Reuters and Dow Jones to, if he said it–they’re putting everything else on. J-O-E, right?
KERNEN: Even just my first name is OK. I’m mad.
QUICK: And Joe, did they pick up–did they pick up what he puts on his hamburgers? The mayo and ketchup?
QUINTANILLA: That also has not been on the wires.
KERNEN: That has not been picked up, either. It’s like, you know, they’re trying to judge what’s important and what isn’t and, you know, someone–they’re like 22 years old, they’re misspelling everything. But–no, they’re not. They’re…
BUFFETT: I’m doing my best to make news, but…
KERNEN: You are–you are making a lot of news.
QUINTANILLA: Yes, you are.
KERNEN: And I got so many follow-ups, Beck, but let’s get to–there–you know, earlier it was quiet. There are so many e-mails at this point that have come in, I’m sure they’re very similar to the ones that you already have ready to go. So you want to take it away, Beck, and do some more?
QUICK: Sure. And guys, jump in as you want. You know, you tell us when you want in on these things, and…
KERNEN: We want in at–we want in whenever you can let us.
QUICK: …it’s hard when we’re far apart, but you guys jump right in.
KERNEN: Yeah, we want in whenever…
QUICK: All right, you guys jump in. You guys are listening. You hear any points you want to jump in on, go right ahead because…
QUICK: …we’re OK with this. We’re working. We can hear everything.
QUICK: But we’re going to start off with a question about derivatives, because Joe, you brought this up earlier. You were talking about those comments that Mr. Buffett’s made in the past about these being weapons of financial mass destruction. And Warren, you said you had a couple other thoughts on derivatives.
BUFFETT: Well, you know, the ways you get into trouble in markets is doing things you don’t understand, and then doing them with a lot of borrowed money. And derivatives combine those things. And–but the really important illustration that has never gotten picked up on much was that a couple of years ago Freddie and Fannie got into big trouble, billions and billions and billions of dollars of–that they had to restate. Now, Freddie and Fannie had auditors like everybody else, but they also had a government agency called OFHEO that had 200 people in it whose sole job was to oversee Freddie and Fannie. Two hundred people going to work every day, and those people did not pick up at all on all of these problems that Freddie and Fannie had. I mean, they were looking at complex financial instruments, you know, all kinds of swaptions and all that sort of thing. The auditors didn’t pick up on it, but more important, 200 full-time–they didn’t have to think about General Motors, they didn’t have to think about AT&T. They had two companies to think about. And they issued a report later on telling about the failing of all–everybody else.
BUFFETT: But it shows you–when things get that complex, you’re going to have a lot of problems. And CDO squared–I figured out, on a CDO squared you had to read 750,000 pages to understand the instruments that were underneath it.
QUICK: Oh, my gosh.
BUFFETT: Yeah. Well, you start with the RMB, that’s the residential mortgage-backed securities, and that would have 30 tranches. And then you’d take–and that would be a 300-page document–you’d take a tranche from each one of that and create a CDO, 50 of those times three–300, you know, it becomes 15,000. Then you take a CDO squared with 50 more, and now you’re up to 750,000 pages. QUICK: You have to read through it.
BUFFETT: And the mind can’t comprehend that. What people did comprehend was that the fees were terrific in selling them to the people.
QUICK: Yeah. It raises some questions, too, when you talk about people who are looking at oversight for these very particular things, about what’s been happening with the rating agencies as well, and there’s been some viewer e-mail. I’d like to bring in another one right here. In fact, Brad Osterloo from Mitchell, South Dakota, writes in and says, `I was surprised to see no mention of the municipal bond rating crisis nor a mention of Berkshire entering that market in the annual report–how come?’
BUFFETT: Well, we entered it very late. I write–I write the report in November, December, we didn’t even enter in the–and we’re still very small in it. We’ll undoubtedly have something to say about it at the annual meeting and in the report next year. But, you know, as I mentioned, we only have had 69 million of premiums. We’ve written 206 contracts so far. So it’s something we’ve just started in. We were admitted in New York about a month ago, we’ve been admitted in five more states. The states have been terrific about responding very quickly. But we got into Maryland the other day, so it’s moving, but it isn’t yet a big item.
QUICK: OK. Joe:
KERNEN: You know, Warren, I was–your comments about insurance, the party being over, I don’t think you were talking about monoline. And typically property casualty, P and C companies, there’s these big macrocycles that have to do with–I don’t know whether there were a lot of disasters in one year, and being able to raise premiums. What are your thoughts on what makes it such a difficult time right now for the entire insurance industry? Why did you say that, that the party’s over? Because of the credit crisis?
BUFFETT: Well, it’s been a–it’s been a–it’s been a–no. It’s been a wonderful time up to now. Now, if they happen to own the wrong assets, they could lose some money on that. But on their peer insurance underwriting, we’ve had two very, very good years, partly because rates were very good and partly because natural disasters in the United States were almost absent on a big scale. So we’re now going into a year where rates will be somewhat lower. Exposures grow every year, and some years we’ll be lucky on natural disasters and some years we won’t. But I would bet a lot of money that the–that the underwriting profit margin–or loss, perhaps–but underwriting profit margin of the US property casualty industry decreases in 2008, but it’s decreasing from a very good level. So it–but it’s going to be worse.
QUINTANILLA: Warren, we’ve talked a lot about growth concerns this morning, inflation concerns. Page two of the Journal, Greg Ip, big Fed watcher, has a story about how for the Fed it is recession, not inflation, that poses the greater threat. If you were in the chair, and Chairman Buffett was giving Humphrey-Hawkins on the Hill, would you be framing it the same way?
BUFFETT: I’d probably arrange to get an emergency call so I had to leave the place. Hey, it’s a very tough position. I never–I don’t like to second guess Fed chairmen, because they have a very, very tough problem. They don’t–and they don’t have all the answers. They know they don’t all have the answers. And, of course, people like to think they do. And the problem with inflation is that it’s very easy to ignite it and it’s very hard to put it out. And you needed a Paul Volcker to do it 25 years ago. So I think Bernanke’s got a very tough balancing act and I think there’s a pretty fair chance that the country will react in such a way as to ignite inflation in a serious way.
QUINTANILLA: I don’t want to put words in your mouth, but one could take that and say, `Well, Buffett’s suggesting they’re on the wrong side of the trade.’
BUFFETT: No. The trouble is they have–they’ve got a problem on the other side. You know, it’s like Woody Allen in that movie many years ago, where he said, you know, `We face a fork in the road. One leads to death and pestilence and the other leads to total destruction. May God grant us the wisdom to make the right choice.’ I mean, it is not an–it’s not an easy game.
KERNEN: I was thinking of Yogi. `If you get to a fork in the road, you should take it’ is what–that was much–that was much easier one to…
BUFFETT: Yeah, absolutely take it. Yeah.
KERNEN: Warren, real quickly on–I wanted to follow up, a long time ago, on your comments about hedge funds. I don’t know the exact numbers, but let’s say 10, 12 years ago there were X hedge funds, now let’s say that there’s 50 X, or whatever it is. And you’re not a big fan, obviously. How do you foresee the scenario where we go back to something between X and 50 X? Does the market–does a bad market take us there? Does bad performance across the board take us there? How do we see the end of this–of this explosion in hedge fund mania?
BUFFETT: Over time there will be a disillusionment when the–and incidentally, it won’t be disastrous or anything of the sort. There’ll be–there’ll be the occasional blowups here and there. But over time, when people find out that it’s not the holy grail, you know, the money will flow elsewhere. You know, people will–people always go through the rearview mirror, what’s been popular and has worked recently, and this will be like all the rest.
QUICK: You know, Warren, in your annual letter you laid out an argument not only against companies and how they’re not really thinking correctly about their pension right now, the pension plans and how they’re funding them, but you also said that the public sector faces a much bigger problem; that municipalities are even in a worse situation, because they’re promising people they can retire in their 40s and different things, making promises that they’re never going to be able to keep.
QUICK: Floyd Norris over the weekend, of The New York Times, pointed out yes, but at the same time you’re very willing to underwrite a lot of those same municipalities for the promises they’re making right now. Why is that?
BUFFETT: Well, that could be a tough problem. I mean, they won’t walk–they won’t walk away from the pension problems. It’s going to be easier to walk away from their bonds than it would be their pension problems. But it’s a–it’s an incremental problem. And it’s so easy, if you come up for election next year, to increase pension promises. You know it’ll get you votes and you don’t–you’re never have to–going to have to pay if you’re on the city council or if you’re a governor or a state legislator. So those promises–you know, when I was in New York, I knew some guys that retired in their early 40s and they worked a lot of extra hours in the last year and all of that. And they were going to be getting pensions for 40 or 50 years. So they worked for 20 years and they’re going to get paid 40 or 50 years for not working. And that creates a lot of problems on their own. And it’s much more so in the–in the public sector than it is with corporations.
QUICK: OK. Another viewer e-mail here, a gentleman named Bo Mann writes in. He says, `You usually advise the younger crowd. But what would an ideal portfolio consist of for a 55-year-old man with two kids entering college and $1 million to invest? Should it be 100 percent Berkshire?’ That’s what he asks, not me.
BUFFETT: I’m only 99 percent Berkshire myself, so I never go 100 percent. Well, I think if you buy equities across the board, which means an index fund, and if you do it over time so that you don’t put all your money at the wrong time, and it’s a low cost index fund, that’s probably the best investment that most people could make. Mm-hmm.
QUICK: OK. Now, Carl and Joe, we will get back to you guys in the studio. Again, we’ll be here–and I should point out, we are at the Nebraska Furniture Mart right now in Omaha. You wonder why we’re sitting in the middle of a store. This is one of Berkshire Hathaway’s many companies and this store that we’re sitting in right now is one that they just redid this year and opened up this brand-new store. So if you wonder why we’re sitting in the middle of a store, that’s why. And we’ll get to a lot more questions with the Oracle coming up.
QUINTANILLA: That’s a great shot, Beck. We’ll see you in a couple of minutes.
QUINTANILLA: We do have–thank you, Charlie. We do have Becky and Warren, of course, in Omaha, listening to all of this.
QUINTANILLA: And there’s a lot–a lot of cross currents here, Becky. Any thoughts from that part of the country?
QUICK: Mm-hmm. Yeah. Actually, Charlie, Warren was just listening in to what you were talking about, and we started talking about Moody’s because Berkshire owns about one sixth of Moody’s. And that was a question that came in from a lot of–from viewers, as well, Warren, is what do you think about the value of Moody’s? Was this a mistake to jump in and buy this stake?
BUFFETT: Well, it wasn’t a mistake at the price we bought it. But in terms of the–the intrinsic business value of Moody’s decreased last year. I mean, Wells Fargo stock was down last year. I don’t think the intrinsic business value shrunk. In fact, I said I thought it probably increased a touch. And there’s a lot of companies whose stock went down where the intrinsic business value did not go down, or maybe went up. But I–our holding a Moody’s, which is a significant holding, they’re–I don’t think there’s any question that the intrinsic business value of a Moody’s shrunk last year, just as McGraw-Hill owns S&P and the S&P component of McGraw-Hill, it–they have less of a moat around them and they’re going to be affected for a long time by the experience of the last couple years.
QUICK: OK. And, you know, that’s something interesting, though. Does that mean you would sell this stock and try and get out of it, or do you hold onto it through this time?
BUFFETT: Well, we own 48 million shares, so we have not seen a lot of bids for 48 million share blocks. We have a much more difficult problem either buying or selling stocks than the average investor. I mean, moving big blocks of stocks around, it’s very difficult for us to sell, except on the way up, and it’s difficult for us to buy except on the way down just because of the quantities involved.
QUICK: OK. Charlie, that’s Warren weighing in on what he’d just heard you reporting about.
QUICK: And, guys, we’ll toss it back to you.
KERNEN: All right. Warren, I may lighten up on that a little bit if I–if I do come in and start running–I mean, maybe a million here, a million there. You’re not going to–I mean, you’re not going to come in and tell me what to do, right, once I become CIO, right?
BUFFETT: Well, I don’t know how many million shares you’ve got, Joe, but we’ll let you go first.
KERNEN: Well, no, I got–I’m going to sell some of yours when I’m running the place. Forty-eight…
BUFFETT: Oh, I see. Well, you…
KERNEN: If we got–if we got 48 million, I’m going to start lightening up. I just–I don’t want you looking over my shoulder every…
KERNEN: …you know, every time I do something.
QUINTANILLA: Joe, have you started looking at homes? Have you started looking at homes in Omaha?
KERNEN: Oh, yeah, I forgot about that. That–I won’t be able to buy a sports team, either. Charlie, you want to get back in here?
GASPARINO: Yeah. I mean, you know, listen, we’ve been writing–I’ve been covering the bond rating issues for a long time, and every now and then you have this huge flare up where everybody says they haven’t done their job and, you know, there should be more competition. And basically nothing has really changed much. This–if we–we were talking about bond insurance as a license to steal. Well, let me tell you something: The rating agencies is–you know, multiply that by 10. I mean, these guys have an entrenched–it’s not a monopoly, because it’s three of them. What is that, a triopoly? Those generally aren’t bad businesses to invest in, unless, of course, you think there’s going to be regulation out there. And this SEC does not seem to want to regulate the rating agencies. It’s not really–it’s not really–it keeps saying that it wants to open up the competition, but the types of competition it’s opening up to doesn’t seem to–these are not–these are not companies that could really compete against big companies like Moody’s, S&P and Fitch, which is a growing company. So, you know, we’ve sang their–you know, we’ve said in the past that they’re not great investments. Whenever we hit these sort of bump in the road, like now, they’ve obviously missed the subprime market. But, you know, they’re there for a reason, and three of them, and it’s hard to break in. And I guess Warren Buffett would agree with everything I say.
KERNEN: Yeah, and I would…
BUFFETT: Yeah, I–can I?
QUICK: Yeah, go ahead.
BUFFETT: I do agree with that. But they have–certainly structured finance rating has been a–quite a profitable–everything’s profitable at the rating agencies.
BUFFETT: But structured finance has been very profitable, and certainly that stream of revenue probably has diminished dramatically for quite a while.
QUICK: OK. I…
KERNEN: All right, thanks…(unintelligible).
QUICK: Warren–thanks, Charlie. Guys, I’d like to bring in a few more viewer e-mails that have been coming in, as well. This one comes from Shan Ausaf in Katy, Texas, who writes in: `How do you know when you’re dealing with an honest and capable person?’
BUFFETT: Well, it’s a great question, and I would say this: If you–if we get 100 possible sellers to us of businesses, I don’t think I can make a correct judgment all–on all of the 100. But I only have to be right on the ones I make an affirmative judgment on. So I think I can be right a high percentage of the time on the six or eight that I might pick out from there, and I think I can sort of pick out the obvious thieves, you know, of the six and eight. But in between, I think, I can’t grade everybody in that 100. And–but we have had–I mean, when we bought the Furniture Mart from the Blumkin family, I’d seen them operate for 20 or 30 years. I knew them personally. There wasn’t any doubt in my mind whatsoever that they would work harder and more–you know, for me than they had when they owned it all themselves. And we’ve had good luck in that. But we’ve not batted 100 percent. Every now and then I make a mistake.
QUICK: In terms of the management that you’re betting on?
BUFFETT: Yeah, yeah. It–human beings sometimes change. Sometimes they change with age. I hope not, but I kind of feel it myself some days, the–but you can be right most of the time. We love buying businesses from people who are second and third generation. You’ve really got to–you’ve got a scorecard on them then. Buying them from a financial operator, we’ve never done it.
QUICK: OK. Steve Cady from Charlottesville, Virginia, writes in: `With the obvious understanding that you have of economics and of business, how in the world can you be a Democrat?’
BUFFETT: Well, I think–I first became a–I was president of the Young Republicans Club at the University of Pennsylvania. My dad was a Republican congressman. We used to sit around the dinner table thinking that if Roosevelt won again that the country would disappear and all that sort of thing. But civil rights in the early ’60s probably changed my view. I just felt–it wasn’t exclusively a Democrat vs. Republican issue, but I felt the Democrats cared more about it. I feel the Democrats–I feel people like me can take care of ourselves. The Democrats, I think, have some more concern on average, but it’s not universal. I vote for Republicans. But I think they worry a little bit about–more about the people that get the short stick in life.
QUICK: OK, we had a viewer write in from Zimbabwe–I believe the name’s Mfaro Hove–who writes: `What approach would you use to invest in a country where inflation is at more than 100,000 percent a year?’
BUFFETT: The only–the only defense you have in–when money is turning into confetti is basically your own talents and earning power. If you’re the best brain surgeon, if you’re the best meat cutter in town, if you’re, you know, the best professional football player, whatever it may be, if you have your own talent, whether the currency becomes, you know, totally devalued or they go–they go to sharks’ teeth or seashells for currency, you’ll command your share if you have personal talent. So the best investment you can make is always in yourself. I tell students that all the time. If they learn how to communicate better, all the–all the things they–they develop their own talents, they don’t have to worry–they don’t have to worry as much about the currency. It’s when you’re trying to store wealth that you have to worry enormously about what a currency does.
QUICK: OK. Warren, I have stacks of more e-mails that we’re going to try and get to throughout the morning. And what I haven’t told you yet is we also have another celebrity e-mail that’s coming up, too…
BUFFETT: Oh. QUICK: …from one of your famous friends. And, guys, we’re going to get to all of that when we return.
QUICK: Welcome back to SQUAWK BOX here on CNBC, first in business worldwide. Folks, we are just one hour away from the opening bell and we have a very special SQUAWK BOX today. We are live in Omaha, Nebraska, at the Nebraska Furniture Mart. Our special guest this morning is Warren Buffett. He has been answering all kinds of questions we’ve been throwing at him. He’s got a lot of e-mail questions from you he’s going to be getting to. But first, Joe, I think you have a question for Mr. Buffett, as well.
KERNEN: Want to just try to get some insight into how he decides to do certain things. Warren, you recently bought some Glaxo, some Sanofi. I don’t know whether the–whether you make that decision, but I’m trying to–OK, you got Merck or you’ve got Schering or Lilly, you got some domestic company. You bought Sanofi and Glaxo. Is it the pipeline? Do you–do you look into what the pipeline of upcoming drugs is? How do you make that decision? Or is it you that makes the decision to go with the Glaxo, Sanofi vs. somebody else?
BUFFETT: Yeah, it’s me that makes the decision. And I would say this: with drug companies, I feel I know less specifically about a given company’s future than I might if I were buying a candy company or whatever it might be, because it’s very difficult to say who will have the winners five or six years from now. I think–I think if you buy drug companies that you probably want to buy those with–that–you probably want to buy them somewhat across the board. You know, it would be hard for me to make a bet on any specific company based on something that was in the pipeline that might come out in two or three years. You know the ones that are coming off protection, so you’ll see–in a Sanofi, you’ll see certain things that are going to cause the earnings to go down, and what’s going–what will cause the earnings to go up is in the pipeline, you’re sort of guessing at. If you have a group of them, I think you’ll probably do OK if you buy in at sort of a multiple for the group. And actually, the drug companies have gotten in some cases quite a bit cheaper in recent years.
KERNEN: So we shouldn’t be surprised to see you–then it wasn’t that you were picking nondomestic drug companies, you might end up with a stake in one of the domestics at some point.
BUFFETT: Yeah, very easily. And, of course, the domestics have a lot of earnings coming from abroad, too. I do like earnings coming from abroad better than earnings coming from the United States. So if they’re doing business–but most of them are doing business all over the world, so there’s not a huge difference in that. We own some Johnson & Johnson and, you know, half the earnings, roughly, will come from abroad. And we think we probably have some currency play. We’ve already had some, but it hasn’t been reflected that much in the stock. But there will be a J&J, a Sanofi, you name it, they will earn a lot of money abroad and they’ll come up with some drugs that surprise you and they’ll have plenty of them that are earning a lot of money now that’ll–won’t be earning any money for them or anything to speak of 10 years from now.
KERNEN: Let me–you want to go back? Or I had a real…
QUICK: No, go ahead.
KERNEN: I had a theoretical question. Alternative energy, Warren; I mean, you seem to buy things you know. Utilities. Obviously, utilities are going to deliver energy to communities all around the globe. It seems like there’s a huge potential in alternative energy. Is that just too out there, or maybe the fundamentals get ahead–or the stock price gets ahead of the fundamentals? It seems–are there any earth-changing areas that you’re considering right now or do the stocks just get ahead of themselves?
BUFFETT: Well, I don’t–I don’t try to–I usually don’t try to make money by guessing that something will be doing enormously well 10 years from now, that is sort of a dream…
BUFFETT: …at the present time. I look for things I can understand. I mean, here’s our own See’s candy, I might add. And See’s candy will be–will be popular 10 years from now or 20 years from now. People will keep eating it. They’ll keep chewing gum, they’ll keep doing all kinds of things that are obvious.
BUFFETT: They’ll shave with Gillette razors and, you know, they’ll use Tide in the washing machines and so on. And I can’t pick–I can’t pick the winners. There were 2,000 auto companies started in the United States and you’ve got three of them hanging on by their fingernails now. So it was a tremendous industry, it changed the world, but 2,000 of them disappeared.
QUICK: Hey, Warren, you mentioned earlier–and you wrote about this in the annual letter to shareholders, too–the sovereign wealth funds. So these guys have come out of nowhere. When you made these comments earlier, we were talking about the strength or the weakness of the dollar. But are sovereign wealth funds a bad thing, necessarily?
BUFFETT: Well, they’re inevitable. I mean, we are creating the sovereign wealth funds in the United States. We have–when we ship $2 billion today to the rest of the world, it has to go into stocks or bonds or direct investment in the US or something. But we are forcing investment in the United States by our consumption pattern. So when we–if we run a negative trade balance with China of 250 billion this year or something of the sort, they’re going to have 250 billion of US somethings. And they’re picking equities now, and in the end–you know, it’s kind of interesting. They produce the 250 billion net of goods. People work hard over there, they work extra hours to send us shoes and send us a lot of the things you see in the store, and we send them little pieces of paper, you know. And they’re not as excited about getting those pieces of paper, but we ought to expect them to do with those pieces of paper whatever’s the most intelligent. That’s what we would do. And so sovereign wealth funds are simply a result of a large trade deficit here, large current account deficit, and they’re going to get larger and larger and larger. And, you know, we may hope that they buy government bonds instead of buying equities, but they should have the right to make that choice.
QUICK: You know, very quickly, you mentioned that they are less excited about getting those little pieces of paper.
QUICK: Our dollars. Right now, everything trades in dollars, from gold to oil, anything else out there. You think that that will change in the next five to 10 years?
BUFFETT: I don’t think so. I think–I think people will keep using it. The dollar will become somewhat less important over time, but it’s a very, very, very important currency so people will think in dollars for a long time.
QUICK: OK. We have a lot more of your questions that you’ve been sending in to us through the e-mail, and folks, we’re going to get to a lot more of those when SQUAWK BOX comes right back.
ANNOUNCER: Live from Omaha, Nebraska, here again, Becky Quick with special guest Warren Buffett.
QUICK: Welcome back, everyone. We are live in Omaha, Nebraska, at the Nebraska Furniture Mart, which is one of the many companies that Berkshire Hathaway owns. We’ve been asking Mr. Buffett questions all morning long, and at this point we’re turning the show over, once again, to you. Warren, we have a lot of questions that are coming in, and one of them comes from Larry Beckler from New York. He asks that, `Given the board of directors are normally quite chummy with their CEOs, how can shareholders get some kind of accountability for CEO pay, particularly when the company’s stock has not appreciated or decreased in value?’
BUFFETT: The only real way, in my view, is to have a few of the very largest shareholders–I mean, you would need–you would need the CalPERS, the Vanguards, the Fidelities. If a half a dozen of those, when they saw something really that they felt was outrageous, would simply withhold their votes and explain why, that would get through. You know, the–you’ve got a bunch of big shots on the board, and they don’t–they don’t like criticism. And they particularly–they don’t like criticism when it would come from a group that would not look like a bunch of hot heads or anything of the sort.
BUFFETT: So I would–I would say that if four or five of the largest institutional investors–and they don’t have to give an opinion on every one or anything like that. If they saw something really egregious, they just simply said, `We’re withholding our votes,’ and…
QUICK: They do that from time to time, right?
BUFFETT: They–but they don’t–they don’t speak out. It just would take four or five of them, practice would change, then, in some cases. I’m a big fan of pay for performance. We pay people a lot of money at Berkshire when they perform. But we don’t–we don’t let them–we don’t let them shoot the arrow and then paint the bull’s-eye after it lands.
QUICK: OK, Allan from Manchester writes in with a question–Manchester, New Hampshire, I should say–writes in with a question that we heard in a lot of different forms. He says, `I’m a shareholder of Berkshire. How can you assure me that Berkshire Hathaway will not change the way it is now after you’re gone? In other words, will corporate culture change or will the company be split into different entities when you’re no longer in charge?’
BUFFETT: Yeah. I think it’s–I think there’s more chance of our corporate culture being maintained intact for many decades than any company I can think of. I mean, we have a board that’s bought into it entirely. They’re big owners themselves in almost every case. They’ve seen it work. We’ve got 70 managers at 76 businesses out of–out there. They’ve come to us because of that culture, in many cases. They’ve seen it work, too. So you’ve had this–you’ve had it communicated through annual reports, at annual meetings. I mean, it is–I think it’s as strong a culture as you could possibly have. And I think that anybody that tried to fool with it would not be around here very long.
QUICK: Because of the board and everyone else involved.
BUFFETT: Because of the board, and the fact that I would come back and haunt them, too.
QUICK: Peter Knoll writes in from Minneapolis, and this is another question that we got a lot of similar questions. He says, `As shown in your appearance on CNBC, you’ve been taking a much more public role in the past few years. Why, and what’s the benefit to shareholders?’
BUFFETT: Yeah. Well, I think, you know, today is a good chance to explain things that I may not have communicated perfectly in the annual report. And people can ask questions about it, and I like talking about Berkshire. I like–at the annual meeting, you know, they have to use a hook to pull me off. I mean, it–so I’ve always been very open about talking about Berkshire. I haven’t gone out to sell it to anybody, I never will, but I like–I think you should be able to defend your policies. I think you can do it through various kinds of communications. And if you–if you can’t defend them, you know, you better–you better re-examine them. So I kind of enjoy it in that respect.
I am not saying that Berkshire stock is a buy. I never–you know, I don’t know whether it is or not. And I–and I never will get into that. But if anybody wants to understand the philosophy, we have a section in the back of our annual report, the economic principles of Berkshire Hathaway. We’ve run that now for over 25 years and they don’t change, because they’re principles. And I want people to know what Berkshire’s all about, and I–frankly,, I want people that might sell us their business to know what Berkshire’s all about, because for some people we are the right choice.
QUICK: OK. Another question that came in came from Brent in Fountain Valley, California. He’s got an offbeat question. He says, “Why Coke and not Pepsi?”
BUFFETT: Well, the–I bought the Coke in 1988 and we bought what’s become 8 percent of the company. And I thought–it’s a business I like very well. I like Pepsi, incidentally, as a business, too. I mean, Frito-Lay is a terrific business. It’s better than the–it’s probably better than their soft drink business. But Pepsi’s been a wonderful investment to own. But Coke’s been a wonderful investment to own. So just put me down as having made a mistake for not having bought both.
QUICK: Although I see you’re drinking Cherry Coke today.
BUFFETT: We drink–this stuff’ll do wonders for you, folks.
QUICK: Joe’s got a question for you, too. Hey, Joe.
KERNEN: Hey, Beck. You know, Mr. Buffett made some news earlier about the common sense recession, and from some of the–some of the businesses in the Berkshire portfolio, how about your rail holdings, Mr. Buffett? Slowdown reflected in rail volume?
BUFFETT: Yeah. You can get rail volume–you can–you can go to the Internet and every week get car loadings as to each railroad. And so I click on there every week and look at–look at car loadings. Car loadings were down last year, but we’re particularly seeing it in things like our brick business, the carpet business. Haven’t seen it so much in paint and insulation, although we’ve seen it. But I can tell you that those businesses, on balance, are getting worse. The–you know, it–we have not hit bottom at all in construction-related businesses. But that’s OK. I mean, we knew that when we bought them, that they would be cyclical business. So that doesn’t bother me in the least. I would buy another business like that tomorrow if I had the right management and the right competitive position and the right price on the business.
QUICK: But we haven’t hit bottom? You just said we are not near the bottom.
BUFFETT: Yeah, but I wouldn’t try and–but I wouldn’t worry about hitting bottom in terms of when I’d buy them. I think if you knew exactly the bottom for the business, you would not know the bottom for the stock.
QUICK: OK. Carl?
QUINTANILLA: Warren, with that in mind–and we talk about, you know, Berkshire’s exposure to housing here in the states–we’ve seen you buy Iscar in Israel, we’ve seen you now get into the real in Brazil. You’ve gone to China with Becky. Would you guess that your next big purchase would be overseas or domestic?
BUFFETT: Well, it’ll be whatever I get the call on. I hope I get it from overseas, but, you know, I just go down to the office in the morning and wait for the phone to ring and hope it isn’t a wrong number, you know. So…
QUINTANILLA: Why would you hope for an overseas offer?
QUINTANILLA: Because of–because of the currency?
BUFFETT: Well, yeah. I would–that would be a factor in some–in some situations. And frankly, we’re way more on the radar screen in the United States than we are around the world. So the more I can feel that an owner that cares enormously about their business thinks of us in the UK or Germany or wherever it might be, you know, that would be encouraging if I started getting more calls from abroad. But the one I’m really waiting from–for is from Sophia Loren in Italy, but I haven’t gotten that one yet, either.
QUINTANILLA: Well, you–she’s been trying to reach you.
KERNEN: Yeah, she has. Warren, you…
BUFFETT: Yeah, well…
KERNEN: Yeah. You–for some reason we think of all that big cash horde you had. I don’t know, what is it now, 40, $50 billion? We think that you’d like to do something with it, but you just really haven’t felt that comfortable over the past five, 10 years with what you’ve had to choose from. Is that a fair assessment?
KERNEN: I mean, do you expect to be down–could you be ever down to having $10 billion in cash?
BUFFETT: I think so. We probably wouldn’t go much below that. But we did–we’ve contracted to buy eventually 100 percent of Marmon, which would cost us at least 7 1/2 billion. We’re going to write a check for 4 1/2 billion some time–at least 4 1/2 billion sometime this month for 60 percent of it. We’ve bought a lot of businesses in the last–in the last five years, but the money’s come in even faster. Basically, we’ll have a couple hundred million dollars a week coming in to Berkshire, and some weeks I spend it and some weeks I don’t. But I like to spend it.
QUICK: Hey, Warren, we haven’t heard from Sophia Loren yet, but we have heard from another one of your famous friends, Alex Rodriguez of the New York Yankees.
QUICK: He wrote in an e-mail, as well, and here’s his questions, guys. He said, “If you were starting in the business world today, what sector do you believe has the most potential?”
BUFFETT: Well, I still think money management would have the most potential for me. I mean, if I were starting today, I would–I would–exactly what I did, you know, whatever it was, 50-odd years ago. And I would–I think–I think I’m better at that than I’m at other things. I mean, I don’t think I can sell television sets or–you know, or vacuum cleaners as well as some of the people here–right here, you know, in the store. So–and I’m not going to be a research scientist. I’m just–I’m a little bit better at money management than anything else. And it’s a big, profitable field. I mean, there will always be lots of opportunities in it. So I would–I would go right back doing that, unless I could hit a baseball like A-Rod, in which case I would talk to the Yankees.
QUICK: We also got an e-mail from a viewer who wrote in, K.A.–don’t know any more than that–but this person wrote in, “Would you consider creating a Class C share for Berkshire Hathaway?” Probably what they mean is a lower…
BUFFETT: Yeah, we have a Class A and a Class B…
QUICK: And a Class B.
BUFFETT: …and it’s not impossible. I mean, it would…
QUICK: It’s not?
BUFFETT: Well, anything a little goofy like that kind of appeals to me in some extent. We created the Class B because we kind of got forced into it. But–and the Class A and Class B served us well. I mean, I’m very happy with that. I wasn’t happy that I was forced into doing it, but I’m happy with it. But it’s not inconceivable.
QUICK: All right, Class A right now is $140,000. The Class B, like we’re looking at on the screen, is closer to $4600. Class C, what would you set that up, maybe $1,000 or less? How would–how would you do that?
BUFFETT: Well, we probably wouldn’t get much below that, but…
BUFFETT: …we don’t want anybody to buy Berkshire stock based on what they think some corporate event will be, or whether we’ll split the stock or do this sort of thing.
BUFFETT: So I don’t–I want to have something that makes people really think they’re investing in a business. And when you–when you buy a $3 stock or something like that, I think most people think they’re buying a $3 stock that might go to 5. We want–we want to discourage those people from buying our stock and we want to encourage the people that are buying it because they think it’s a good investment to hold for 10 or 20 years.
QUICK: OK. An Vo writes in from Edmonton in Alberta, Canada: `What do you think is the most complicated out of the three? Is it A, love; B, science or C, business?
BUFFETT: The most complicated?
BUFFETT: Well, I think anything involving human emotions is the most complicated. But it’s the most rewarding, too. So I would–I would pick love as being the most rewarding and the most complicated.
QUICK: OK. We have a lot more questions to get to, and we will do just that when we come right back from a very quick break. Stay right here. SQUAWK BOX live in Omaha, Nebraska, with Warren Buffett.
STEVE (on tape): I’m Steve, and I’m wondering why Warren Buffett isn’t running for president.
QUICK: Well, Warren, go ahead.
BUFFETT: Bill Buckley, who just died a few days ago, ran for New York mayor many, many years ago. And they said, `If elected, what’s the first thing you’ll do?’ He says, `I’ll demand a recount.’ And that’s sort of the way I would feel about running for president. It requires a whole different set of talents than I’ve got. I wouldn’t like the job, so, you know, and I love what I do. I mean, I would do this if I had to pay to do it. But don’t tell the shareholders that. But the job of being president, the compromises you’d have to make, it just wouldn’t appeal to me at all.
QUICK: OK. Joe, I know you have another question from back in the studio.
KERNEN: I have to. And it just has to do–Warren, over the years you see commodity cycles and supercycles. I’m just wondering, this time around–and not worried about the dollar. The dollar notwithstanding, because that’s the excuse everyone uses. But have we now passed the point of no return in terms of what we have on this planet and what we’re using as–is the Malthusian nightmare finally here, or will we go back to where wheat doesn’t cost, you know, $50 a bushel?
BUFFETT: Well, ag commodities are a little tough. You know, if I had to on–where ag commodities would be three years from now, up or down, I wouldn’t know which way to bet. But they look like they’ve had quite a run. But if you take something like oil, I mean, we have been sticking straws in the ground now since, what, Titusville in 1850-something with Colonel Drake. And we have–we have–we have found a lot of the oil that’s to be found. And if we’re going to produce–or use 85 million barrels a day now and the rest of the world probably is going to increase its demand in the–in the–in the next five or 10 years, we’re going to have–we’re going to have a tough time maintaining production that satisfies those at this price, even. So I think something like oil, six and a half million humans–or six and a half billion humans are going to use a lot more oil than a lot fewer used 20 years ago or 30 years ago.
KERNEN: So that goes for metals, too? You’re saying things that we can grow, we can grow more of. But things that are in the ground are…
BUFFETT: Well, we–yeah, we’re using–my son is turning out considerably more bushels of corn or soybeans per acre than 20 or 30 or 40 years ago. So land can get more productive. But oil is finite. There’s actually some school that says it isn’t, but I think it’s pretty finite. And, you know, we have 500,000 producing oil wells in the United States. The average production is 11 barrels a day. Five hundred thousand times we’ve actually hit. But if you look at our production vs. 30 years ago, it’s way down. And most, you know, most fields are depleting at a pretty good rate. And with demand–if demand grows a million or a million and a half barrels a day from year to year and the present fields deplete and we don’t find the elephants in the future…
BUFFETT: …you know, who knows what the equilibrium price will be.
QUINTANILLA: Well, with that in mind, some of the biggest bets, Warren, that get talked about on this show are from the likes of Boone Pickens, who says that he likes wind. Or it’s the tar sands or it’s a play on water here at GE. When it comes to energy, is there a next generation play, an alternative play that at least has caught your eye?
BUFFETT: Well, we’re using more and more wind. We have a big energy company and–for example, in Iowa, we have a lot of wind farms and we’re going to have more. So sure, the world is going to attempt to do that, but that is–that is not a big answer to the kind of energy demand that–that’s coming along. So I think we’ve got to do everything we can in alternative areas, but I don’t–I do not see that as a cure-all at all.
QUICK: OK. Warren, I’ll try and get through several quick e-mails from viewers. And guys, jump–follow with me in the control room. This is from Ivan in Voorhees, New Jersey. He says, `We know there’s a succession plan for Berkshire, but will there be a succession plan for writing your annual letters?’
BUFFETT: Well, my guess is my successor will have studied how much pain I go through in writing it and decide he’s not going to quite do the same amount of work. But I hope that his goals are the same, which are to tell his fellow owners as much as possible and as accurately as possible, really, the things he worries about, the upside, the downside and accurately report, you know, where he’s flopped in the past and all that. I think we’ve set a tone for that, I’m sure he’ll do it somewhat differently.
QUICK: OK. Phil Nielsen from Durham, Connecticut, writes in, `Have you ever bought and sold a stock on the same day?’
BUFFETT: Maybe sometime. In 50–I bought my first stock when I was 11, so that’s 66 years ago. I got a late start, but, you know, I’ve been making up for it since. I probably–maybe I’ve done it once or twice. I don’t remember.
QUICK: You don’t remember ever doing it? Celeste from Bridgeport, Connecticut, writes in and says, `Aside from you, who’s one of the smartest minds in finance today and someone you would listen to?’
EMAIL TEXT: Aside from you, who’s one of the smartest minds in finance today, and someone you would listen to? Celeste Pagano, Bridgeport, CT
BUFFETT: Well, there’s some very smart people out there. Bill Gross is a very smart person. Charlie Munger is about as smart as they get. I listen to him even when I don’t want to, sometimes. The–obviously these four candidates that I’ve–I think are very smart.
QUICK: For the CIO job at Berkshire.
BUFFETT: For the CIO job. I don’t know the 30 and 40 and 50-year-olds like I did when I was that age myself, so I–I’ve got–I do not have the same fix on the universe of investment managers I might’ve had in the past. I will guarantee you there’s some plenty smart ones out there. We have a number of them that show up at our annual meeting, actually.
QUICK: Mm-hmm. And Warren, just thoughts for anyone who’s watching the market today, the futures have been under pressure. What would you tell somebody? Do we need to worry about this?
BUFFETT: I would tell people if they worry what the market does on any given day, they shouldn’t be buying stocks.
QUICK: OK. Warren, I want to thank you very, very much for joining us for these three hours on SQUAWK BOX. We’ve been getting e-mails, guys, coming in, including from Jack Welch, writing in saying this is the greatest SQUAWK BOX ever.
KERNEN: Yeah, great.
QUICK: So Warren, thank you so much for joining us today. We all appreciate you being here.
QUINTANILLA: Although I think–I think next time he’s on, he’s going to want to read headlines, he’s going to want to do stocks to watch, right?
KERNEN: I just thought–Warren, your stock was City Service, that right?
BUFFETT: That’s right. City Service–City Service Preferred.
KERNEN: Oil company. Yeah.
BUFFETT: It was a $6 preferred with a lot of–a lot of arrearages,$100 worth of arrearages.
KERNEN: I remember hearing that story before. This is–this is awesome. Great. Thank you, Becky. Thank you, Warren Buffett…
QUICK: Thanks, guys.
KERNEN: …for so much of your time. It was great.
QUINTANILLA: Amazing, amazing.
BUFFETT: Thank you.
Transcript prepared by BurrellesLuce