CNBC Transcript: Warren Buffett and Bill Gates on Squawk Box
BECKY: Good morning, again, everybody and welcome back. We have been speaking all morning long with Warren Buffett. Joining us right now— joining the conversation is NetJets chairman and CEO, Jordan Hansell. Jordan, thank you, very much, for hosting us here today. We appreciate it.
HANSELL: Thank you for letting me do it. It's been fun.
BECKY: You know, we were just talking inside— inside the Global 6000, I might add— about— just the idea of how many people are coming back and what the numbers are like. When— when I talked to Bill Gates this weekend, he said just by looking around casually at the number of private jets on the runway when he came in, he expected that it was something like 25% more in terms of people who are coming to the annual meeting on private jets. Was he right?
HANSELL: I think he's in the ballpark. We had a record number of flights for us coming in and out of— Omaha this year for the meeting.
BECKY: What— what— what do you attribute that to?
HANSELL: I think it's a fact of the economy coming back and people starting to feel better about things and more optimistic and— and they want to be here to hear what Warren and Charlie have to say and they want to do it efficiently.
BECKY: Is this the biggest weekend for you just in terms of— I mean, I— I've heard that in the past, and I— I— I kind of make that number up and throw it around. But in terms of both the Berkshire Hathaway meeting, and the Kentucky Derby— when you add them up?
HANSELL: It's a big weekend— our biggest weekend and day is the Sunday after Thanksgiving. But this one— this one comes — ranks right up there.
BECKY: This one ranks right up there, too. So Kentucky Derby— did you have a similar gain there?
HANSELL: We did. We had a great trip down to there— great set of trips down to the Kentucky Derby, too.
BECKY: Okay, so— Warren, you see what's going on. You see what's happened. Is it— is it a situation where people who hadn't been buying before are buying in? Is this— people who are just now feeling like they can do something like this? Or is this— a resurgence of all the customers who were there who have come back and maybe are using it more frequently?
HANSELL: It's both from our perspective. We've got people who've been in the program flying more, and we're up— year over year, 55% in terms of new owners— people who've just come to the program for the first time.
BECKY: Fifty percent in terms of that?
HANSELL: Uh-huh (AFFIRM). Uh-huh (AFFIRM).
BECKY: Can you give us numbers on that?
HANSELL: In terms of new owners. Well, I like to keep a secret unless Warren tells me I'm supposed to tell be telling people (LAUGHTER), so I can speak generally —
BUFFETT: Don't let her work on me. (LAUGHTER)
BECKY: So, 50% in terms of new customers. That's interesting.
BUFFETT: Well, we keep looking for Joe's name, too. But—
BECKY: Yeah, has Joe—
JOE: I— we haven't— we haven't shown the jet from the other side, and— and Andrew says that's where the n— my name is. But I— I'm g— yeah, you know, the more you talk about—
ANDREW: There's a whole red ribbon. They're going pan around at the end of the show.
JOE: The more you talk about it without doing it, I— I think that I'm getting my hopes up and it's not real. Hey— hey, Warren, I— I had— I was thinking about— the business of NetJets. And you remember the— the— the— the bumpy period you had w— can you explain— it— it was based on the dropping value of— of the jets themselves, that thing, and— how does that work? It's all— it's all accounting, but there're a couple of really tough years. Why are you in a business that— that you— that you can't necessarily insulate against the next big break? Or— or have you done something differently this time to make sure that that doesn't happen again?
BUFFETT: Oh— we're not— we're not insulated against the major downturns in the economy. But— but that's part of— that's part of the business. Incidentally, the— you know, the— the— Burlington Northern peak was 219,000 carloads and it got down to 152,000 carloads. So all of our businesses— maybe with the exception of insurance— but all of our businesses— showed declines of one sort or another, and some quite significantly— during the— recession. And you would expect— aircraft— to be— in that group. But—
ANDREW: H— hey—
BUFFETT: —that doesn't mean it isn't good business over time. See's Candy doesn't make any money in eight months of the year, but— but Christmas always comes around and— and the— metaphorical equivalent of Christmas (LAUGH) comes around in the— in— in— in the— in the jet business.
ANDREW: Warren— you know— (Legg Mason Capital Management Chairman) Bill Miller had made the argument or at least in the question, Becky asked it during the meeting about airlines and— and given all the consolidation whether you'd be interested in those. Do you think about NetJets in that context at all in terms of— an c— a competitor— trying to come in? You— you know, we had talked to— one of the reasons I think you said during the meeting that you wouldn't want to buy an airline is that there's always a new competitor. Is— is there— is there a moat in your mind around jet— NetJets?
BUFFETT: Yeah, the— there— I— I think there have been dozens of companies that have gone into fractional ownership— arena, and— and I believe and Jordan confirmed it— I think we have over 60% of the market— in the United States. So— people do come in one way or another, but— they really can't match, you know, the— the breadth of our operation, the service— the safety— precautions that we— we follow. So, it's not a field— it's not like the airline business. There will be nobody come in, in my view, that— that— goes into fractional ownership business and— and— has any kind of success. In fact— people have— people (LAUGH) have been going out of it for— for some time, and— and— and like I say, our market shares held steady the l— it— it's in the low 60s, I believe.
HANSELL: That's right. Yeah, we've had steady market share for— for some time. And— and— unlike the airline industry, we've been differentiating quite a bit and you see the two aircraft behind us. Those are signature series aircraft. They're completely different than anything you can get anywhere else. It's not like flying for Delta or for United and you're either on a 737— doesn't matter where you are.
BECKY: And— and you're kind of taking deliveries—
JOE: You— you're not— oh— oh, sorry, Beck— you—
BECKY: I think— go ahead— go ahead, Joe.
JOE: No, you go ahead and then I'll— and then I'll ask. I have a totally separate question.
BECKY: Okay, let me ask real quickly. Let's talk about the signature series behind us, Jordan. You started taking delivery of these in December of last year. How many do you have now?
HANSELL: Right now we got eight on the fleet, two of which are leased to provide us with core, but six that we're flying fractionally.
BECKY: And how about— how many more deliveries you'll be taking?
HANSELL: We'll be taking about another eight this year, and of course we have— up to 120 that we can take over time.
BECKY: And this is part of that initial deal that you got to go in and help design some of these.
HANSELL: That's exactly right. Both of these aircraft, the Phenom and the Global 6000 were completed with the heavy input from the folks at NetJets.
BECKY: Yeah, we should point out the— they have the big one behind them. That's the Global 6000. Behind me is the Phenom, and I think that one holds seven passengers?
HANSELL: That holds, seven. Uh-huh (AFFIRM).
BECKY: This one holds 13.
HANSELL: That's correct.
BECKY: And the distances between the two for—
HANSELL: 2200 miles, 2300 miles depending on your flight pattern— nautical miles in the Phenom, and 6,000 nautical miles for the Global.
BECKY: Is there a big demand for this? Do people get to request this as part of their package? Or is it just luck of the draw?
HANSELL: No, they get to request it. If they're an owner, they obviously are going get it faster. I've been trying to talk Warren into it here for a little while, but we— and we'll see when he— if he ever decides to take that plunge he'll get it even more. But— (LAUGHTER)
BUFFETT: He's checking my credit. (LAUGHTER)
HANSELL: That's right. That's right.
BECKY: Hey Joe, what was your question?
JOE: Mine was about kind of the air taxi business, and I wonder whether that's viable and whether— I don't— maybe NetJets wouldn't even play there in the low end. You know, there's— I don't know how you do it. You buy a HondaJet that doesn't even have a bathroom, but— but there are people that want to— want to operate between cities that are 80, 100, 200 miles away. And— and— you know, there's— there's capacity, but there's a way of booking these flights. I guess NetJets doesn't play there, does it Jordan? Is— is it a viable business? Will that be a business some day?
(Editor's Note: Honda Aircraft company says its $4.5 million HondaJet comes standard with an aft lavatory.)
HANSELL: NetJets had not played in that arena, and a lot of— people have tried. It's a very difficult place to operate, and so— we've not looked at it— in some time.
JOE: Yeah, and I— I don't know if that even possible to— to eventually do that. But is that your s— what's your smallest jet? Was that the one that we just saw that— that— that holds seven? Or do you— do you have Citations?
HANSELL: That's right.
JOE: Oh, that's the smallest one? Okay.
HANSELL: Well— the Phenom will be the new small cabin aircraft for us. It will replace everything we had in that category before. It— it will be the smallest jet we offer in the fleet.
BECKY: Jordan, when you look around, the— the biggest difficult thing you face right now is what?
HANSELL: Oh, I think— waiting for the economy to gain full stream. We're seeing it pick up in the United States and Europe remains anemic. As it continues to pick up, we'll do better. We've been working very hard. The team's done a terrific job getting ourselves in a strong position to compete forcefully when the time comes, and I think we're starting to see that in the United States already.
BECKY: You are getting record numbers? I mean, we talked about before about how these are record numbers for some of these things. I mean, does that mean you're 100% back from any of the downturn?
HANSELL: No, we're still working our way back, and I think we will be for a while. But we're starting to see those early turns. And— and as you suggested, some of our performance is at record levels. So we couldn't be happier.
BECKY: Well, w— one of the things we talked about— is— with housing, we talk about how maybe it's up ten percent with Case-Shiller, but it's still 30% below the peak. Where are you versus the peak?
HANSELL: We're still roughly 20% down versus the peak. And the industry is over that— beyond that— 30% down or so. So we're in better shape on a comparative basis, but we have to remain vigilant.
BUFFETT: The contracts are generally for five years, and so we had— a huge amount sold in 2007 and they matured in 2012. And there were— quite a few in 2008 before the crash. So, you had people who'd made a lot of money, you know, financial types particularly and— and— they might not be in the same frame of mind now that they were in 2007. (LAUGH)
BECKY: Got it. Jordan, thank you, very much, for joining us this morning. We really appreciate your time.
HANSELL: Thank you for having me.
BECKY: Again, Jordan Hansell. We are approaching the top of the hour right now. That means it's time for us to take a very quick break. When we come back, we will have more from Warren Buffett. Still ahead, we're going be talking about the discussions this week in shareholder meetings. We'll also be talking about the business of Berkshire and some questions about the session. And then in the 8:00 a.m. eastern hour, we have another Squawk newsmaker. Berkshire and Microsoft chairman, Bill Gates, will be joining us live. Stay tuned. Squawk will be right back.
ANDREW: Let's get back to Becky in Omaha who's got our special guest in the morning.
BECKY: Andrew, thank you. We've been speaking all morning long with Warren Buffett. He is fresh off of this weekend's annual shareholder meeting here in Omaha. And, Warren, we haven't spent much time talking about— Berkshire in particular. You did report your earnings after the bell on Friday.
One of the things that was very strong were the insurance operations. And that's because— you were able to get strong premiums and you didn't have to pay out a whole lot in terms of catastrophe dollars. People might be surprised when they realize that Sandy— Hurricane Sandy happened this weekend but— or this— within this past year. What— what— what's really happening in terms of catastrophe?
BUFFETT: Well, the first quarter of the year usually is a very low period. The third quarter is most— the one most prone to catastrophes. Sometimes you get some in the first quarter, and— and we had a few hailstorms and things like that. But— but it was generally a benign quarter for— the insurance world, and— and we shared in that. But our insurance business is really doing very well. (LAUGH)
BECKY: How— all the insurance businesses just in general?
BUFFETT: Yeah, they really are. I mean, it— it's led by Geico. I mean, Geico is— is— is having a phenomenal year in terms of new business and— and the profit is fine, too. But— I just hope it keeps up. (LAUGH)
BECKY: You— also nominated— or elected, I should say, a new board member.
BECKY: Meryl Witmer. She is— a 51-year-old who's coming in. She is a general partner at Eagle Capital, which is an investment partnership. You've changed the board pretty significantly over the last several years.
BUFFETT: Yeah, we're moving. We have now— we have six directors over 80. We have six under 60, and those six under 60 are the ones for the future. And— and we've been adding in that category. We've now had (NBCUniversal CEO) Steve Burke and now we have Meryl joining us. And we've really got a terrific group— of— of younger directors that— fit— just perfectly.
We— we want directors with business savvy that are shareholder oriented, and that have a particular interest in Berkshire. That's not the criteria that most companies set out. But that's— that's what we care about at Berkshire. They're— they're the ones that will care about addressing the issues of succession and that— that— are— are— they're wonderful in terms of— understanding the allocation of capital. And—so we've got a great board.
BECKY: Is— is that why you wanted Meryl with her background— as an investor— really kind of overseeing potentially what (Berkshire portfolio managers) Todd (Weschler) and Ted (Combs) are doing?
BUFFETT: Well, not so much overseeing it, but just understanding how to pick the Todds and Teds of the world— when the time comes up, maybe down the line. Meryl— understands businesses. She's— she's gone along— with Todd— on various— trips to various companies. She understands management. She understands capital allocation.
And a lot of people with very big names really don't understand that part of the business. They understand, you know, medicine or a whole bunch of other subjects very well. But, we're in the business of capital allocation and we're in the business of— of getting great managers and then keeping them happy. And it's a different place than most.
BECKY: You didn't give away any secrets this weekend when it comes to succession. But you've told us the— this weekend and in the past that the board knows that there are three people right now who could step in and take over your job as CEO. And you've said in the past that these are three people who are currently at the company. You've said that they are men.
And I couldn't help but notice when I was looking around the floor this weekend— normally the way it's set up is that the directors sit on the floor directly in front of the stage. The managers sit up to the left in sort of the bleacher seating. I— I noticed that there were three managers who were sitting on the floor with the directors, and that was (Reinsurance executive) Ajit Jain, (BNSF CEO) Matt Rose and (MidAmerican Chairman & CEO) Greg Abel. It that a coincidence that those three were on the floor and you happened to have three names that are out there?
BUFFETT: Certainly could be. (LAUGHTER) But— they were there particularly— because I thought there might be some questions— relating to the railroad or— or— relating to our utility business— that were technical in nature. And I— I really wanted 'em where I could spot 'em easily and get a spotlight on 'em and get a microphone to 'em. That— so I— I asked— I asked those managers to— to be there. And— as you noticed, we did get— one question that— Greg— answered one question and Matt answered— but I would have— not have known— the answer, as well.
BECKY: Okay. In terms of other things that came up this weekend— Andrew touched before on the question that Bill Miller asked— of Legg Mason. His question was again related to the airlines. He's been on Squawk and talked about his investment thesis. He has bought into a lot of these airlines. And he points out that after the merger— the latest merger with USAir to go through with American, the top four carriers are going to be carrying 90% of the traffic. And he sees that as a great reason to be buying into these stocks right now. You were not as convinced. Your reasoning behind that?
BUFFETT: Well— to have the airline industry be a wonderful industry— you'd want one air— airline that was carrying 90%. As it consolidates, that helps to some degree. As they go through bankruptcy and they modify the labor contracts, it helps to some degree.
But for 100 years, airline tr— (LAUGH) tra— transport has not been a good business. If you've got it down to few enough competitors— it— it— it could happen, and maybe— maybe four with 90% will get the job done. But the problem is with— a seat on— on an airliner as a commodity to a great extent.
And the incremental cost of the last seat to the airline is virtually zero. Got these huge fix costs, so there's this temptation always to tr— try to sell that last seat. And unfortunately, when you sell the last seat cheap you may sell the first seat pretty cheap, (LAUGH) too. Bill's a very smart guy, and— the airline industry may have finally got to the point of concentration that enables it to become a decent return on capital. But I've seen enough times where that's been said before that— I'm skeptical myself and I'm— you know, I hope Bill's right for his sake, and also for the airline's sake. I don't have the conviction.
BECKY: Another question that came up on stage was just (Pimco co-founder) Bill Gross and his outlook for where things are headed. There's an article in today's Wall Street Journal that talks about Bill Gross and other people who have been bear— very bearish on bonds— and says to this point, it hasn't been an accurate reflection. But— your take on what Bill Gross has been pointing out on this is what?
BUFFETT: Well— I don't know the exact specific comments. In terms of— terms of bonds, some day they will sell the yield a whole lot more than they're yielding now. I— I don't know when— when it'll happen.
BECKY: So you agree with him on that— on that point?
BUFFETT: Oh, it has to— it— it's going to happen. And question is— is— well, all— the question is always when. I'm no good on that. The question is to what degree it happens. But you could have interest rates very significantly different than what they are now— in some reasonable period in the future.
It's not a game that I can play. I mean, I— I don't have any special insight into that sort of thing— I was in— that it will happen. In terms of stocks, you know, stocks are reasonably priced. They were very cheap a few years ago. They're reasonably priced now. But stocks grow in value over time because they retain earnings and they expand o— basically the companies (UNINTEL). You know, I like owning stocks. I do not like owning bonds now. There could be conditions under which we would li— we would own bonds. But— they're conditions far different than what exist now.
BECKY: Well— it's always been— standard investment advice that you have some sort of a blend of stocks and bonds so that you keep things— just for— for— the man on the street, I should say, for the average investor who is kind of looking at this, getting a little bit of advice. Joe went in not long ago and talked to a retirement specialist who told him he should be 40% in bonds. I just wonder if this is a very different time.
BUFFETT: No, I— you shouldn't be 40% in bonds. The— you know, my family— any— anybody that— I've advi— and they are a lot of typical people. I mean, they're not— they're not— super-wealthy or anything of the sort. You know, I— and bear in mind they have the proper attitude and if the stocks go down 20% in the next month, they're not going be bothered.
But I c— I would have them having enough cash on hand so they feel comfortable, and then the rest in equities. Or if they— you know, if they're farmers or something, I mean, they could apartment houses or other things. But I would— I— I would have productive assets. I would favor those enormously over fixed dollars investments now, and I think it's silly— to have some ratio like 30 or 40 or 50% in bonds. They're terrible investments now.
BECKY: They— so now. This is not just your— your lifelong look on it. This is particularly to—
BUFFETT: Oh, it's now. No—
BUFFETT: I— I bought bonds back in— in the— in the early '80s. We— we— we bought— we made a lot of money and we bought zero coupon bonds that— I bought 'em personally. And— no, it— it— the price of everything determines its attractiveness.
And— the price of stocks was way down a few years ago. The news was terrible, but the stocks were cheap, you know. News is better now. Stocks are higher. They're still not— they're not ridiculously high at all, and bonds are priced artificially. You've got some guy buying $85 billion a month. (LAUGH) And— that will change at some point. And when it changes, people could lose a lot of money if they're in long-term bonds.
BECKY: And— leak— Luke— Lee Cooperman's point when he talked to us about it was that this is kind of like bending down to pick up a quarter in front of a steamroller.
BUFFETT: Yeah, well, it— I'm not sure it's even a quarter.
BECKY: Yeah. (LAUGHTER) So, it is a concern for you. If you look at the pension funds, though, a lot of them— are being forced out into other places to try and seek the yield. Because they've promised or they're expected to return around eight percent a year or something just to meet their obligations. It's a much more difficult game.
BUFFETT: Yeah, chasing yield— is— is crazy. You know, just because you'd like to earn eight percent, (LAUGH) or— or— or you'd like to earn ten percent or you'd like to earn six percent. The world isn't going to adapt to that. You— you have to think about what is the most intelligent thing to do and if— if that produces five p— percent or six percent, that's the best you're going to do.
But to— to get enticed into some investment that— is riskier that you don't understand because somebody promises you a higher yield— I mean, I can— you know, I can take it down to the waterfront or something like that and they'll promise you 15 percent or something. (LAUGH) And it just doesn't make any sense at all. And— but, pension funds— you know, they— they haven't been that well managed over time.
BECKY: We spoke with the CEO of Lloyd's of London last week and talked to him about some of the insurance businesses, and he said he's a little worried about hot money getting into the insurance arena because he thinks it could— very likely create a bubble there.
He's not saying that it's happened yet, but he says as you see hedge fund managers and others who are looking for yields, they look at insurance stocks and it seems like potentially a good place to put that. But he's worried about that being fast money that is in the market and back out. And it's not good, he thinks.
BUFFETT: Well, money is capacity in terms of insurance. I mean you— you need to have money to get people to trust you to write insurance policies that you'll pay off. So when you bring more money in, it's just like bringing in more capacity. It's just like bringing in more steel capacity or autoc capacity.
You know— it's likely to affect the supply side of the equation. And if the demand side doesn't change, prices come down. So it— he's correct in that and, of course, a number of money managers, they talk about— you know— some things uncorrelated and other things. They'll— they'll sell what they can sell.
And— and— they get special tax treatment if they— put these things together in— in some offshore locations. They can keep their— their manager's money for managing the money. They can keep that from hitting their U.S. tax returns. And so it's very attractive for the money manager to create it. And then the question is whether it's attractive for the investor when the game is all done.
BECKY: Right. Warren, do you mind if— we slip in a quick break here?
BUFFETT: Oh, I think you should have a commercial, yeah.
BECKY: You're in favor of capitalism and—
BECKY: Anyway, when we come back, we will have much more from Warren Buffett right after this break, including his thoughts on— the railroads and J.C. Penney. And later, Microsoft chairman and CEO— Microsoft chairman, I should make that— Bill Gates is going be joining our conversation. Everything from the third anniversary of the flash crash to the future of Microsoft. We'll cover it all when Squawk Box returns.
BECKY: Good morning again, everyone. We're joined this morning with— by Warren Buffett, who's the chairman and CEO of Berkshire Hathaway. And, Warren, we've been talking about some of the Berkshire businesses and some of the things that happened over the weekend. We have not talked much about the railroads to this point. When— you look at what's happening with Burlington Northern, where are you just in terms of carloads coming back?
BUFFETT: We're running about 185,000 cars— a week. We'll— in the— the peak comes in the fall. My guess is we'll peak at maybe 205 or a touch higher. That will not be quite as high—
BECKY: A bit below.
BUFFETT: —it's below—
BUFFETT: Yeah. Yeah. And we're gaining share this year, so far, which I like. And— and— it looks to me like we will— have record earnings at the— at the railroad— this year. It— it— it's been a terrific acquisition for Berkshire.
BECKY: Is it still not back to the peak just because of the housing situation? Is that the biggest—
BUFFETT: That— that's part of it. But it's— it's— a general business activity, and— coal is down— significantly from— 2006. Oil is up quite a bit— a lot. So it's a mixture of things, but and (UNINTEL) the rails as well. Business has come back. It's come back year by year, but it's not where— where it was in— in two— in 2000— actually 2006.
BECKY: The oil situation— that's because— Burlington is the largest player in the Bakken shale formation area.
BUFFETT: Fortunately they found oil where our railroad tracks happen (LAUGHTER) to be.
BECKY: How— how big of— of— of a game changer is that?
BUFFETT: Well, oil is now— petroleum tr— petroleum products throughout the country will be about five percent of our car loadings, and that was about two— two and a half percent. But— and that's a lot. I mean, it— it— it— nothing like coal or anything. But— we are now carrying about 650,000 barrels a day of— of oil.
And— the country not too long ago was producing about five million. So it— it's a very significant part— of— of— of the oil production in the country. And I've talked to a number of producers, and they're very happy with it. We spent a lot of money to have the— just some of these to— to carry this— quantity. And we expect the quantity to— grow quite a bit.
BECKY: There are people who have suggested that— pipelines will eventually siphon away some of that. How long of— how long away of a change is that from happening?
BUFFETT: Well, pipelines are carrying a lot of oil now, and— and there'll be more pipelines created. Surprisingly, oil moves through pipelines a lot slower than it does by rail. So, if you want to get oil to a given refinery and that happens to be the best— where the best price is, A) the pipeline may not fit that perfectly, but even if it does, you can get it there considerably faster if— with rail. On the other hand, it costs more per barrel— barrel to get it. So it's a tradeoff, but it gives— it gives the producer— a lot more flexibility in terms of— in— in terms of refineries— than— than a pipeline system.
BECKY: There was a suggestion over the weekend from President Obama that— he'd be in favor of exporting liquefied natural gas. I think he said something by 2020 he does expect United States will be an exporter— a significant player in that. Are you in favor of exporting liquefied natural gas?
BUFFETT: Well, it would be good for the short term, but— but— but in the end, I regard this huge finding we've had of both oil and gas— in terms of fracking— well, I mean, it— it's a huge natural resource. And— my— my general feeling is that— that— that we oughta save that for— grandchildren.
So I've often said that you can't rob your grandchildren. But— but in terms of a natural resource which is— although we found much more of it— but it's still— it's a finite asset. And if you're thinking about the country for hundreds of years to come, I— I d— I don't think I'd be in favor of it.
BECKY: I mean, Charlie's said in the past— the idea of American independence is crazy. American energy independence is crazy because he thinks you should use up everybody's resources before you use your own.
BUFFETT: I think that was pretty smart, actually. But it— it's not good for the economy, (LAUGH) in the short term. But when you've been using Saudi oil all through the 1930s and 'course during the war years, that's one of the arguments for having it developed in this country. But as— in— in terms of having an energy source in c— in times of trouble. But in the '50s and '60s, we shoulda been using the other guy's oil more and we'd have more of it now. And we've got— we've got a whole lot more than we thought we had now. It's finite.
BECKY: Andrew has a question, too.
ANDREW: I— I have a question, actually— Warren, we have newspapers sitting all around the set. It reminded me to follow up with you. We had a number of people also e-mail in— after we had talked during the meeting— about newspapers. And— and— and the suggestion that I think you made and Charlie made was that your— your acquisitions and investments was— in newspapers you consider to be an exception or an exception to the rule in terms of businesses. A number of people— e-mailed in and said, "Would you ever buy additional newspapers— personally?" Meaning— meaning would— would you use your personal account to go and— and buy newspapers in the future?
BUFFETT: Yeah, it'd be— it would be pretty awkward if I got offered a newspaper now having bought 'em for Berkshire. It'd be very awkward if I go on and buy it for myself. If it happened to do better than the ones we bought for Berkshire. (LAUGH) I'm sure I'd be criticized. So any newspapers we buy in the future— I— I could have started out and just bought newspapers personally, perhaps, and— and said this is a sideline.
But I c— I can't do anything that looks like I'm in competition with Berkshire. And the paper I bought would either do better or worse than the group we've already bought. And if it did better, I'd be in trouble. If it did worse, I wouldn't be that happy about it. (LAUGH) The— the newspapers do not meet our size criteria— on— on an individual basis, although they do meet the earnings criteria now on a group basis, now that we've bought a group of 'em. Newspapers will decline in earnings over time.
JOE: We— we got— Andrew's got to give it up. Give it up. Sell your— sell that dog crap stock and buy some Comcast. Sell your New York Times and buy something that keeps moving (LAUGHTER) into the— into the future. Just give it up. It's not going happen for you. It's— Warren c— that's— you know, Warren—
He's doing it 'cause he likes local newspapers. He has fun with 'em. He's not doing it to make money. Your— your options are never going back. They're never going be worth anything, and the stock that you own is just going to zero. Give it up. And, Warren—
ANDREW: Thank you, Joe. Thank you. I got to try, Warren, right?
JOE: Hey— I can't even believe you'll ask about newspa— let me see. What else can we— no, but, hey— you know, that one buggy whip company that's still left, Warren? Do you have an opinion on— (LAUGHTER) No, no, I'm not going ask you about that.
BUFFETT: I— I'm trying to buy it. I'm trying to buy it.
JOE: Are you? Just— just for— a vanity buy. I'll tell you what I was thinking of, and—
BUFFETT: National— National Buggy Whip. You'll— you'll see it in our portfolio. (LAUGHTER)
JOE: I— I really want to know the answer to this and what— what you think. Larry Summers— zero interest rates. Let's do all of our infrastructure improvements that— that we need right now. I mean, it— it had such— just on s— on the surface, sounds like a slam dunk. But we would be borrowing money, probably more money from China.
We— we'd— we'd still be— you know, it wouldn't be deficit neutral. Is there a payoff? You got a brand new bridge. Does suddenly the— does GDP grow faster? Does something happen because you— you do all those improvements? Is that something that— that we should do right now while we can?
BUFFETT: Well, certainly the country should have— have— a first class infrastructure. Incidentally, we have that in the railroads. I mean, the— the railroads have never been in better shape— physically— than they are now. They're in dramatically better shape than they were.
JOE: Yeah, but the private sector—
JOE: —did that, didn't it, Warren? Didn't the private s— I mean, I— I—
JOE: Well, yeah, that's great.
JOE: Well, that's great. But what about— is— is it a good investment for taxpayers? I know you would like to bring percentage of GDP that we spend on government or still I figure if you think we're still too high— should we— take it from somewhere else to do this? Should we not do it right now? And I'm— I'm talking about, you know, airports— all— all the big heavy things that only the government can really do, maybe in a public/private— partnership. But really government spending— should we do that?
BUFFETT: Well, it depends what you do. (LAUGH) You know, you have a congress that might appropriate the money— have bridges to nowhere. But you also might have, you know, them do something like the interstate highway system which was a stroke of genius back in the Eisenhower years. It depends on the projects.
But— but certainly, you want a great highway system in this country, and— and— and you want— you want a very s— a very sensible— well controlled— airport system. And then the question is, I mean, do you raise— gasoline taxes, for example, and devote it to highways? There— there're a lot of ways to go. It doesn't have to be done by bonds. It can be done by— by in effect what are user fees. I mean, that's done when you build toll roads, for example.
JOE: Yeah. Yeah, I— so I'm— I'm trying to figure out whether you're giving me— an unequivocal yes, or— I don't— I don't— you know, 'cause that— that's something you would hear about a lot. It would create jobs. At least we wouldn't be d— you know, digging a hole and then filling it back up like so many, you know— like— like so many government p— I mean, at least we'd have something to show for it when it was all said and done.
BUFFETT: And— and actually, in— you know, in the '30s, I mean, you know, that's— Boulder Dam, TVA - I mean— there could be a lot of useful projects, and— and the question is whether you finance 'em by bonds or user fees is another question. But I think you have to really look at the specifics of the program. There was no— there was no better investment than the interstate highway system.
ANDREW: We got to take a break now, I guess, to pay for our infrastructure. Anyway— thanks, Warren. Still to come, we're going— get Warren's take on health care and why he backs Jamie Dimon, which we already know that.
JOE: Okay, thanks— Andrew. We are speaking to Warren Buffett, Chairman and CEO of Berkshire Hathaway, fresh off— this weekend's big— shareholder meeting. Can— can I ask him a question be— Becky? Or— or you want to—
BECKY: Yeah, yeah, yeah. That's—
BECKY: —that's what we thought. No, no, jump in, Joe.
JOE: I got a shopping list here— of some— some— some companies—
JOE: —because I don't understand you sometimes. I— I'm bored with ketchup, okay? I'm bored with some of the— they're great businesses, the things you buy. I— I understand that. But I'm just trying to get you to expand your— your universe here a little. And I still don't understand, and I'm not talking newspapers, even though it's media. But big media, big media.
And I got a list of companies here that I want to tell you why you've never really gotten that interested about— okay. Do you like Disney? Do you like that model? You got theme parks, you got movies, you got— you got cable. You got Comcast, the parent (company of CNBC) here. You got News Corp, Viacom, CBS, Time Warner, even Google or Facebook or something. This is the future, Warren.
I know you— sometimes you don't think you understand technology. But what makes you hesitant to— to do something that's so ubiquitous and that— and as we get more advanced as a culture, you know media gets more and more— gets bigger and bigger as a percentage of what we spend our— our— our leisure time doing? Why can't you— you make an—
BUFFETT: No. There's no question. And— and— it's going get bigger. I just don't know if I look out ten years, I don't know which— which of those company's you named— will be doing— the best in. It— it's— it's an industry that's subject to a lot of change. And it's much easier for me to predict that ketchup will be do well or Coca-Cola will be doing well in ten years. And some of the companies you name will undoubtedly outperform the ones we own. It's just I don't know which ones.
JOE: Well, if you don't know it—
JOE: —well, how am I—
BUFFETT: Those are dyna—
JOE: —how am I supposed to—
BUFFETT: Those are—
JOE: How is anybody else supposed to know then if you don't know? And do you think—
JOE: —do you think that you are, like, an old dog with— with new tricks, or something? Does someone know how this is going work itself out? Is there anyone on the— on the planet that knows—
JOE: —how it's going— really?
BUFFETT: Sure. There— there are people— a lot of— all kinds of— a lot smarter about some of those companies than I am. And that doesn't bother me. I— as long as— as long as I can make money with— with ketchup and Coca-Cola and I— and I don't really think I know which one of that— list that you ran off, there'll be— (COUGH) there'll be a couple big winners in that list and there'll be a couple little— really surprise you on the downside. And, you know, you know enough about the history of the stock market to look at the tech companies that have fallen by the wayside, for example. But you— you will have a bigger winner in that group—
BECKY: But who knows?
BECKY: Who does know? I mean, if somebody knows it, do you— do you know if there's anybody that you would listen to when it comes to those things—
BUFFETT: Oh, there isn't anybody I'd listen to. But there are people in our office, for example, that would buy some of those companies. Yeah, I can tell you that—
BECKY: —DirectTV is one that both Todd and Ted have put some money on.
ANDREW: Warren— Warren—
ANDREW: —do you feel any better—
BUFFETT: I'm not— I'm not— I don't—
ANDREW: Do you feel any different about IBM—
ANDREW: —since you've bought— since you've bought IBM, it's had— a couple tough— tough quarters.
BUFFETT: Yeah, they— I think— I— I— I think we'll be right about IBM. But I said at the meeting, in terms of the certainty of conviction, I feel more certainty of conviction in terms of where Coca-Cola will be in ten years— or Heinz for that matter— than I do about IBM. But I feel enough conviction about IBM to put a lot of money in it and I like very much their financial policies. I— and I— I like their position in— in the world. But I don't think it's as bulletproof as something like Coca-Cola.
JOE: And content—
BECKY: You— you said the other day that you—
JOE: Oh, sorry.
BECKY: —you have bought more IBM shares though, right?
BUFFETT: Pardon me?
BECKY: You said the other day when we asked you, you have bought some more IBM shares this— this year, before the earnings—
BUFFETT: Yeah, we bought a few.
BUFFETT: Yeah, we bought a few, yeah.
BECKY: Joe, I'm sorry, go ahead—
JOE: I was just getting back to this media, 'cause I'm trying to understand, I don't know what the landscape looks like. And Warren probably— doesn't necessarily. Do you— does— does it look like the pipes, Warren, eventually become more commoditized— and— and— we've— you know, people have been saying content is king for— forever.
And then it's hard to— content is so— it's a creative area and it's so hard and it— it's so— specific to the people running it or the— the people that you bring in that— that— that are creative. I guess that makes it difficult too, if you're going invest just in content, that's hard—
JOE: And— and then you don't even know whether to keep the distribution because of— you— technology is— Andrew always brings up the disintermediation of all these different technologies. So it really is difficult to do, but there's just such a potential, it seems like, to me.
BUFFETT: Yeah, the— well, distribution was incredibly valuable, for example, when there were three electronic highways, you know, the three big networks. And you could run a test pattern on one of 'em and— and get— and get a reasonable audience practically. So— when it was limited— when distribution was limited, that distribution was really valuable. And there were a couple of big VHS stations in the big markets.
And— and— and the profit margins were fantastic. But as distribution became more ubiquitous in all kinds of forms, then as you say, content, you know, content is where the money is. And— and— and content will always be where the money is. That's why sports players, you know— they'll make, you know, millions of dollars a year when— when you can remember when— you know, DiMaggio was playing for $25,000 a year, something of this sort.
But content— distribution magnifies the value of content. And— you want to be— unfortunately I don't— I don't— (LAUGH) you know, I don't have any talent, so I can't cash in on that. And talent usually gets its share of— of the revenues. If you own distribution and there's very little in the way of competition for your distribution, you can make a lot of money. And that's what's shown by what the networks and the TV stations did— in the past.
JOE: All right.
BECKY: You know, this was— a big weekend at Berkshire, and there were a number of events that took place. And— Joe, you know Andrew was out here. He was here for all of this. The new issue this year was the 5K race that— Brooks Running Shoes put on on Sunday. Warren, you showed up for it. Andrew—
BUFFETT: Oh, I participated in a big way, I shot off the gun.
BECKY: Yeah, you shot off the gun. (LAUGH) But you showed up. Andrew told us that he was going to show up, so we were there, waiting to shoot him. There's Warren shooting off the gun. They were looking and looking and looking, and I was not there, I wasn't— but I never claimed I would be. In fact, (LAUGH) I said there was no way I was getting (LAUGH) up that early on Sunday—
JOE: Is that Burke?
BECKY: —which is the only day in the last three weeks I've slept in.
BECKY: That's Steve Burke—
JOE: Oh my God.
BECKY: —he did show up for the race and Andrew didn't.
JOE: So that looked like—
ANDREW: Steve— Steve Burke—
BUFFETT: Steve does very, very well—
BECKY: Steve Burke is a board member—
ANDREW: And he did it— he— he—
BECKY: Yeah, Steve Burke is a Berkshire board member.
ANDREW: He beat every board member. I think he might've even beat most Berkshire employees. I think he did it in under—
BUFFETT: That was a fast pace.
ANDREW: —20 minutes and—
JOE: That was a fast—
ANDREW: —frankly, you know, he's the boss, so I didn't want to have to, you know—
JOE: Oh, you were hungover, probably—
BECKY: You would've lost so badly—
JOE: You didn't even show?
ANDREW: I would've lost so badly—
BECKY: You would've lost so badly.
ANDREW: —I didn't even— I couldn't— couldn't bring myself.
JOE: Did you say you were going be there and then didn't—
ANDREW: I did— I didn't say— I said I co— was contemplating.
BECKY: He did say he was going be there. He did say he was going be there because they were looking for him with the cameras to shoot him.
BUFFETT: I— I waited to shoot the gun, I kept, "Where is Andrew? Where is Andrew at?" But Steve Burke ran a 2:39 marathon one time. (LAUGH) I mean, we— we—
JOE: He was amazing.
BUFFETT: —have some real talent on the board.
BUFFETT: Yeah, 2:39. Yeah—
JOE: That's scary.
ANDREW: Yeah, thank you, Becky, for raising that issue, I— I— I appreciate—
BECKY: You're welcome—
ANDREW: A great— a good excuse to talk about—
BECKY: —sort of cocktail sister over here.
ANDREW: Yeah, thank you.
BECKY: Yeah. (LAUGH) It gives you that excuse to talk about what?
ANDREW: Oh, I said it was a g— it was a good excuse to talk about the wonders of— of Steve Burke's running performance, which wa— was outstanding. We should say.
JOE: I mean— do we know that— was it really under tw— under 20 minutes? I mean, I don't even know if I've ever run—
ANDREW: That's what I heard.
JOE: It was under 20 minutes—
ANDREW: That's what I heard. Yeah, no, he's fast—
BECKY: I want to say 18 something, but I don't know if I'm making that up—
ANDREW: I think 18— 18 minute something— around 18 minutes, yeah—
BECKY: Oh, under 21. Under 21 I'm told. I'm told under 21—
JOE: Under 21.
BECKY: Anyway, it was a lot faster than Andrew or I did. So—
JOE: Yeah, I know.
BECKY: —way to go. Hey, very quickly, before we go to a break Warren, I wanted to ask you about J.C. Penney. We've been watching this story very closely. There was a story recently about how I think Goldman Sachs had been potentially lining up— a line of credit for them. It's got to be a company that you've been following too, because Fruit of the Loom is a supplier—
BUFFETT: Well, they're a supplier, but I thought— I worked for J.C. Penney— as you fir— for a considerable period. I— I— I've got a rooting interest for them, I don't have a financial interest. But— and I— I would like to see .J.C Penney— succeed.
BECKY: You would like to see them succeed. Do you think they're going to?
BUFFETT: I think it's very tough. I mean, they— they obviously alienated a significant part of their customer base— in the last 18 months or whatever it's been. And— retailing is— it's a tough game. And you've got very, very smart competitors who are out there doing smart things every day.
So when you lose momentum and when you turn off a significant part of your— no— percentage of your customers, it is a big job to get back. I— I really hope that (new CEO Myron) Ullman pulls it off. I mean, I— I— I'm for him and— and— I think, you know, that they've got a good man in there to do it. But— but I'll just have to wait and see the figures.
BECKY: They've been burning through cash pretty quickly.
BECKY: Has it ever gotten to the point where as a supplier you've gotten nervous about it?
BUFFETT: No. But— but you worry about that if you're a retailer getting to that point. When your— when your suppliers get worried, you've got troubles. But that is not the case with Penney.
BECKY: So you've never actually worried about it?
BUFFETT: No, no.
BECKY: All right, Warren, thank you again— if you'll let us, we're going jump in for another quick break.
BECKY: Welcome back everybody. We are speaking with Warren Buffett this morning. I've been talking about a lot of things. Warren, the annual meeting is— a place where you see a lot of— people that— it's just an amazing place to people watch. You see some huge— successful people from the worlds of business and beyond. This weekend, some of the people who I ran into here were Bill Ackman— Bill Miller, who we talked about, Lee Cooperman was here, Mario Gabelli was here, and people like Kathy Ireland were here too.
BUFFETT: She beat me. (LAUGH)
BECKY: She beat you in the golf— it was—
BUFFETT: In the putting.
BECKY: —the mini putt. Right, it was mini-golf putting scene. One of the people who was here though— that really caught my attention who I haven't seen here in the past was erk— Erskine Bowles. He came in this weekend as well. We— we spoke with him very recently about his new plan.
This was kind of— Simpson-Bowles 2.0, where he's coming back at the Congress again and saying that we still have a lot that needs to be done, that the sequester is stupid. When he was on with us the other day, he said it was three times stupid because it had dumb cuts the way you use it, and it's not attacking what we should be attacking, which is really the entitlements. Where do you come down on this argument?
BUFFETT: Well, Congress— (LAUGH) Congress originally set it up and said, "We're going to propose something so dumb that we can't possibly do it." And then they did it. (LAUGH) And so it— it— you know, it— it is a stupid way— to enact— a cut in the budget. And— and like I say, it was designed to be stupid. And Congress at some point will face up to the fact that their job is to design— a responsible, long-term budget plan.
And some things immediately that— make sense in terms of where the economy is now and where expenditures should be made, where taxes should be raised, and whatever the case— this business of getting it, you know, to provide— the middle of the night— some crazy compromise. And then letting things like the sequester kick in, you know, it's just— we deser— we deserve a Congress better than that.
BECKY: The biggest issue that you've talked about for a long time is health care costs, it's something that—
BECKY: —Erskine has spoken an awful lot about as well. And we've done just about nothing to try and get those costs under control—
BUFFETT: That's right, that's right. We— we are a very rich country. So we can get away with— with the— the sort of deferring things like that. I mean, we— we can get— we— we can— we can— mismanage in significant ways. But because we're so rich, you know, it doesn't— we— we don't go under. We're not a Greece or something like that because of it.
But— but health care costs are the biggest factor that make us noncompetitive, certain industries, noncompetitive in the world. We have— anywhere from this 6¢ on the dollar to my 8¢ on the dollar disadvantage in costs from that one item— against the rest of the world. Imagine if we faced a 6¢— 6% sp— six percentage point disadvantage in terms of our cost of our steel or something like that? I mean, it would be a national emergency. But health care marches on.
BECKY: The Affordable Healthcare Act— is, you know, now being— brought in more into play all the time. Does that help or hurt the situation?
BUFFETT: Well, I— I don't know the answer to that. But I know that we are not addressing the costs overall. And— and it isn't— it isn't government the problem, it's the whole system. And— and we need some very, very good minds— to tell us how we can get to something like 15% perhaps in G.D.P. going to health care.
If the rest of the world is anywhere from, you know, 8% to 11% or something to the sort, we oughta be able to figure out how— how to have a very, very good system for all Americans with 15% of G.D.P. And it— I would love to get, you know, to have the Cleveland Clinic and the Mayos and Kaiser just ta— give them that task— to design a system.
BECKY: Toby Cosgrove was here this weekend, too—
BUFFETT: Yeah, he's a terrific guy.
BECKY: —head of the Cleveland Clinic too—
BUFFETT: He's a terrific guy.
BECKY: But he was talking about how they are rolling this program out into the— looking for a lot of other ways to try and get that there. But— the idea of getting down to 15%, how do you do that without crushing innovation and without hurting the quality of care the people receive?
BUFFETT: We operated— we operated at five and a fraction percent— what, 45 years ago and— and we thought we had a reasonably good healthcare then. The GDP has grown like crazy. So it isn't like the— the— the base from which we're working. I don't know enough about health care to design a system. But there are very smart people— that I really think— if you gave them— the responsibility for actually just looking at the whole system.
And— and why do we have this runaway situation? We have terrific health care, but we do not have more doctors per capita, we do not have more hospital business per capita, we do not have more nurses per capita than country after country. And that, you know, we've got this huge cost and now the problem, of course, is that we're spending $2.6 trillion or $2.7 trillion a year on health care.
It's as big as the governmental receipts total. And those dollars all have a constituency. And so it— it— it is— it is a tough problem. We'll— we'll attack it and— and solve it. But there is no— there's no real incentive— to bring down the costs. In terms of the research we're doing, nobody's doing research that will focus— or at least I don't know of it, that's focused on bringing down costs of health care.
They're— they're— they're looking for ways, and they'd be very expensive ways, to deliver even better ca— care. And I— you know, I applaud that. But when you've got these kind of expenditures going on, you have to have somebody focused on bringing down cost.
BECKY: The way Washington has gone about this, so there are a lot of people who have pointed out we have brought down— the rate of increase for spending, I should say. They're not cutting spending, they're bringing down the rate of increase for spending over the future years.
As part of what the sequester's doing too is trying to take out and strip out some of those costs. People say, "Hey, we've done a much better job and maybe we'll be okay even if there's not a grand bargain that gets reached on either sen— either end. Maybe we've already cut enough." What do you think of that?
BUFFETT: Well, we've— we are so rich. We can afford a lot of slop. (LAUGH) But that's no reason to have it. And— and we aren't so rich that we can afford all kinds of slop. And— and you know, what— there— there are choices that are going have to be made. And— and— and so far, I've— you know, I admire Erskine and— and Alan Simpson enormously.
I mean, they were given the task of working in a bipartisan manner to come with made— something that made sense over the longer term. Nobody likes it 100%. But they got Tom Coburn and Dick Durbin to vote for it, they got 11 votes out of 18. That's a monumental achievement. And you know, they've basically been ignored.
BECKY: When it comes to Social Security, everybody we talked to says, "Oh, this is a pretty easy fix." If it's such an easy fix, how come we haven't done it?
BUFFETT: Because it's the third rail of politics. (LAUGHTER) You know, in the end, nobody wants the vote recorded that affects any voter of their district negatively. And particularly if it's a large group of voters. And they worry about losing in primaries. They don't worry so much about the general election and— and the fact that primaries have become the important election in this country, for most people in Congress, I think drives them into more and more intractable and more and more— fringe-type positions.
BECKY: Andrew, you have a question too?
ANDREW: Yeah, Warren— where do you stand on— on repatriating money from abroad and— and what type of either a tax holiday we should have or— or— or maybe— a longer-term corporate tax plan that— that works globally?
BUFFETT: Yeah, well, if we have a tax holiday, I can guarantee you (LAUGH) we'll have a ton of money will come back. They may have already borrowed money to repurchase shares or— pay dividends, so now they would use it to replenish, take care of the money they've borrowed. If you give people a tax holiday, there will just be more money invested abroad, because obviously they're going invest it abroad and get taxed at 5% or something like that.
And you think you can get it back into this country, it will push investment abroad. And come— companies now that have tons of cash are borrowing money, you know, in the United States, and they are going use it to repurchase shares. So the idea that if that money came back, it would— it would come back to pay back the debt — it's— it's somewhat disingenuous, the argument that's made, that— that— this is a terrible thing, because it forces companies to keep their money abroad. It doesn't force us to keep money abroad. We just have to pay a normal tax of 35%. The— the tax that was paid originally to the foreign country plus the supplemental tax to bring it up to the U.S. rate. And— people can bring it back, they just don't want to bring it back. And they're hoping, like, that they can get a tax (LAUGH) holiday and then they'll bring it all back that time and then they'll start accumulating it again.
BUFFETT: That's what happened after the last one.
BECKY: If they would were to overhaul the corporate tax code though, I mean, would it be something that you would think would be okay if they lowered tax rates to 28%, like Simpson-Bowles suggested the first time around?
BECKY: I mean, the problem is, a lot of companies don't pay 35%—
BUFFETT: Of course. And— and what'll happen is that they have something to bring the rate down to 28%. Ev— every single company will figure out what— when they like at all the— if it's revenue neutral, there will be some companies who will pay more and some that will pay less. And everybody that will pay more will go straight to K Street and get every lobbyist that they can lined up and the lobbyists will kind of like the proposal because it drums up business for them.
And— it will be very hard to get data. That doesn't mean I'm against it. It just— I'm just get— laying out the difficulties. If you talk about a revenue-neutral bill, you're going to have a lot of people that are opposed to it being enacted.
BECKY: Okay, we can continue this conversation in just a moment, but we are up against— the end of the hour. So right now, we're going to take a quick break. When we come back, Microsoft Chairman Bill Gates will be joining Warren in a very special interview. We'll get his thoughts on everything from philanthropy to the global economy to the future of Microsoft.