CNBC Transcript: Warren Buffett and Bill Gates on Squawk Box
BECKY: This is the— the site of the Berkshire Hathaway Annual Shareholder Meeting, and that's where— the Berkshire Chairman and CEO Warren Buffett— spent all weekend on the stage and different venues, talking to all types of people. There were about 40,000 shareholders who were here this weekend.
But Warren, we get the chance now to sit down with you and— and— talk about the perspective of where things are headed in this stock market right now. People look at you. You're called the "Oracle of Omaha" because they think that you are one of— if not the greatest investor of all time.
We've been watching where the markets head. We've been watching the new numbers that they run through, the Dow above 15,000 and the S&P above 1,600. That's the type of thing that makes people sit up and take notice, even when they are not people who pay attention to the stock market every day, right? It's got people worried, it's got people eager, it's got people anticipating about what comes next. What do you say to those people who are just looking for any sort of advice on what they should be doing right now when it comes to the stock market?
BUFFETT: Well, I— I never know what comes next. No one knows what comes next. And— and— but what you do know is that over— a long period time, American business is going to do fine. And— they not only get dividends, but they retain earnings and— values will build over time. You know, Berkshire's value will build over time.
But you can go down— up and down the list, and they will, and— you never know what they're going do next week, you never know what they're going do next month. Anybody that tries to buy and sell stocks actively and my— view is making a terrible mistake, anybody that owns a cross section of American business at these prices, I think will do very well over a ten or 20-year period. And I have no idea of, you know, how they'll do in the next ten days, and I don't think they should think about it.
BECKY: You said earlier this morning that you remember when the Dow went above 100?
BECKY: When was that?
BUFFETT: Well, it was in 1942. I— it hit a low of 92 on the Dow and I bought some stock and I watched it go down and then I watched it go up finally. And the Dow crossed 100. And it was before I got out of— college that— or right when I got out of college that it crossed 200. And— I've watched it cross 300, 400, (LAUGHTER) right? And it'll— it'll go far higher over time. Just because businesses will become more valuable over time.
I mean, it— it's going to happen. But if you think you can buy and sell stocks based on current news or something of this sort, I— I think they're give— they're giving away an enormous advantage which you have. I— I bought a farm in 1985, I haven't had— had a quote on it since.
But I know what it's produced every year. And I know it's worth more money now. You know, it— if I'd gotten a quote on it every day and somebody's said, "You know, maybe you oughta sell because there's, you know, there's clouds in the West," or something. (LAUGH) It'sj— it's crazy.
BECKY: You know, over the weekend— or on Friday, we should say, we spoke with Charlie Munger who's the Vice Chairman of Berkshire. And— he talked about how he thinks bankers are like heroin addicts because— they get addicted to things like leverage and different things.
And yet, the biggest investment that Berkshire has— in a stock is in Wells Fargo. So not all bankers are created equal, I guess we read into that?
BUFFETT: No, that's true. And— and a lot of leverage has been taken out of the system. You— you hit right on it when you said because of leverage. Leverage is like heroin, people— in— in— in investments. I mean, everybody starts saying, "I could make a little more money if I leveraged up." And of course, that's the way they felt about housing. And— and that's why we got into all this trouble.
People wanted to borrow every dime they could against their house. So when they went down a little bit, they— they had negative equity. So leverage is— is catnip to people in— in— in— in finance. And it's particularly troublesome— in banking because you can issue a government-guaranteed piece of paper. So there is no market system that puts the limit on the leverage that you— you can obtain.
They can— in fact, people give you— all the money they— that they have. And they— you've got leverage of a hundred for one, if the deposit is guaranteed— by the— FDIC. So they have the ability, they had the ability to leverage up. And they had s— they had special purpose vehicles and— and through derivatives they could leverage more.
And it— it's just tempting because it's the way to increase earnings. That's how Freddie and Fannie got in trouble. Freddie and Fannie had a perfectly decent mission. But then they just build— huge portfolios and they had the ability to leverage, 'cause the government was behind 'em. So anything the government is behind, particularly, you need someone that can put their foot on the amount of leverage that they have.
BECKY: Last time we spoke with you, I think you said that you were still buying Wells Fargo in the market, that you were still adding—
BUFFETT: That's right.
BECKY: —to your— to your— to your— are you continuing to do that?
BUFFETT: We— we've bought Wells Fargo probably every month this year. Yeah. Uh-huh (AFFIRM).
BECKY: Moody's, you're not buying. You've been selling that, at least that's what we—
BUFFETT: We've— we sold— we sold some last week, yeah.
BECKY: You sold some last week on Monday through Wednesday, there was a filing on that. The obvious question becomes, are you going keep selling that? You going—
BECKY: Drop down?
BUFFETT: I guess the obvious answer is I don't tell. (LAUGHTER) If we sell, we have to announce it as long as we have more than 10%. And then if we get to 10%, we don't have to announce it after that.
BECKY: But are you—
BUFFETT: We don't have to announce it very quickly—
BUFFETT: —after we do it. Yeah, yeah, we have to announce it.
BECKY: So there would be an advantage to owning less than 10%, because—
BUFFETT: Well, we—
BECKY: —then you're—
BUFFETT: Yeah. But you know, if— we've done— I mean, we're selling Moody's at six times what we paid for it.
BECKY: Okay. Joe, I know you have a question too?
JOE: It's more of a comment. I was listening to Charlie and thinking about, you know, Andrew has written— a book on this. And— and w— Warren, Charlie was saying, you know, and they— they're— they're going do it and then they're— they're going— leverage to the point where they blow up and— and that'll be fine. And— and in any business, if you mess it up and you blow up, then you quickly learn you don't do it next time.
But it's that— it's the— either the government backing or being systemic so that you take down a country like Cyprus, that's what makes the difference. So we're back to two big d— if you're too big— and— and you're systemic and you take everyone down then you can't fail, so you can do these things. But in a perfect world, is it better to regulate these guys or just make it so that they can fail? I mean, it— it seems like it would be self— correcting, that bankers would not be able to—
JOE: —they wouldn't be able to act like that, bankers. If they were going l— if they were going go out of business, somebody else, who was more prudent, would— would obviously take the place of those guys. But as long as they can't fail, then we need regulation.
BUFFETT: And one of the problems is, Joe, that when they fail, the people at the top often went away rich. So it isn't— it— it isn't like their calculus, when they leveraged up, was that if they would lose everything if it went bad and they needed society to bail 'em out. So it— it was the shareholders that— that lost 90% or more in— in— in— in— certain of the banking institutions.
But the managements, I don't know a CEO of one of the really big institutions, whether it's Freddie or Fannie or— or— or— or— AIG or— or— or a number of the banks, where the CEO went away— in— in any kind of financial distress at all. They went away rich. So they had a different calculus. And they— and— and in the case of the banks, they were off— able to offer government guaranteed deposits.
And in a case of Freddie and Fannie, they had the implicit guarantee of the federal government. And that enabled them to leverage to the sky. And I think it's perfectly appropriate that they be regulated in terms of the amount of leverage they— they could have.
ANDREW: Warren, would you put Berkshire and specifically I guess the insurance business has, given the size, in this systemically-important category that— that— that sometimes we put some of the big banks in?
BUFFETT: No — we can't— we can't issue government-guaranteed paper and— if you look at our resources, our earning power and everything, it— it's— it's an incredible percentage— you know, of anything bad that can— can happen to us.
BECKY: Well, for you specifically, the AIG got us in a lot of trouble. Should they—
BUFFETT: AIG has lo—
BECKY: Should the regulators be looking at the insurance companies as potentially the ones that could really get us in a mess next time around too?
BUFFETT: Well, regulators are looking at insurance companies all the time. I mean, we are regulated. And—
BECKY: But the insurance industry is saying, "No, you shouldn't look at us." Or— who's right?
BUFFETT: Now, I— no, the— the insurance companies are all regulated, but they're regulated by the states primarily—
BECKY: No, but they— by the states instead of the federal regulators who look after the banks.
BUFFETT: Yeah. I— AIG got in trouble basically 'cause— in terms of the deriv— derivative position they had. And I think they're changing the rules on derivatives. If the rules in terms of— of— of collateral and so on had been what they're going to be— it would've been a somewhat different struggle. It was— it was a very recklessly-managed institution.
BECKY: I— I guess my question gets back to the idea though that how safe should Americans feel if an insurance company can get us into that position, derivatives, if that's taken away, you think that can't repeat itself in other insurance—
BUFFETT: I— I think it—
BUFFETT: I don't think— I don't think— an AIG would be the type of problem. It— Berkshire itself, I mean, we have $200 billion in net worth, we always have $20 billion of— of equity, you have 200 derivative contracts. Lehman had hundreds of thousands, Bear Stearns had hundreds of thousands.
BECKY: Right. And—
BECKY: —the— the big— the big weapon is going to be something we haven't thought of, probably—
BUFFETT: That— that— (LAUGH) the next— we will have another bubble w—and it will burst, it won't be the same as the last one. That's been the history. We don't— we don't have one internet after another. You have housing after the internet. That— that—
BECKY: Andrew, I'm sorry—
BUFFETT: But capitalism will continue to have excesses, you can count of that.
ANDREW: Hey, Warren, I—
BECKY: Andrew, I'm sorry, you had a quick question—
ANDREW: Yeah, I just— I just wanted to ask, you know, a lot's been made of the fact that— you had a bear, a short seller, Doug Kass there— asking questions and I— I wanted to just get a postmortem. How— how do you think it went and w— what was the hardest question you think you got?
BUFFETT: Well, I don't think we really got any particularly hard questions. But— but (LAUGH) I think if— I think if—
ANDREW: We tried to throw in some zingers.
BUFFETT: (LAUGH) Well, you know, we'll— we'll give the best answer we can. I mean, that doesn't mean we have— I don't have an answer, if you ask me what the stock market's going do next week, I have no answer at all. But— so there's plenty of questions I can't answer. But— but I— I thought the questions were good that we got generally, and— I think we—
JOE: Warren, Warren, Warren. You— you invited—
JOE : —you invited a guy who short your stock to come out after you— after you knew you were going report a 51% jump in net income. (LAUGHTER)
BUFFETT: That's the danger of being short. (LAUGH)
JOE: I mean, I— I can't— bring 'em on. You know, hey, that— I mean, and you knew you were going get 50% increase in net income and you got a guy who's short your stock. I mean, I— he shoulda known. He shoulda stayed home.
BUFFETT: He wants to come back next year, I have to say—
JOE: Oh, I'm sure he does. (LAUGH) I'm sure he does. God, it was the greatest thing in the world. But— you're not going give him a hu— you're not going give him $100 million, I guess, Charlie said no?
BUFFETT: (LAUGH) No, I don't— I don't think we can give him $1 million. (LAUGHTER) Maybe even a dollar. (LAUGH)
ANDREW: You can— you can double— what he manages if you gave him a million. No, I'm kidding. (LAUGHTER) I'm just joking.
BECKY: All right, guys. We're going take a quick break. (MUSIC) When we come back, Warren Buffett and I will be joined by a legend in the world of business and technology. Microsoft Chairman Bill Gates of the Bill and Melinda Gates Foundation, he's going be joining us for the rest of the show. This is just a few minutes away. Stay right here.
JOE: Welcome back to Squawk Box. Let's get back to Becky Quick in Omaha— with two special guests, I see them on, I don't recognize this other guy. Actually, I do recognize him. (LAUGH) He's pretty well known. All right, right back to you, Beck.
BECKY: Joe, thank you. You know, we've been spending the morning with Berkshire Hathaway Chairman and CEO Warren Buffett. Now we are joined by another very special guest, Microsoft Chairman Bill Gates of the Bill & Melinda Gates Foundation, and Bill, thank you very much for being here this morning.
GATES: Great to get up. (LAUGH)
BECKY: Well, we are thrilled to have the two of you sitting here with us together. People are going be watching this, realizing that you are two of the richest men in the world, and that's because you are two of the brightest businessmen. We've been watching the markets. We've been watching what's happening.
And I know that this is not something that either of you spend a lot of time wondering about. But our viewers are going to have a question, just what you think about where we've seen the markets headed. And we've talked with Warren about this, this morning. Bill, your thoughts. And again, I realize you don't look at these numbers every day. But people want to know what you think about this.
GATES: Well, I know less than Warren does. (LAUGH)
BUFFETT: You're in trouble.
GATES: You know, there's always the question of what's going happen with interest rates. It has this fundamental effect on things. You know, certainly you could say equities are a good deal relative to bonds at this point. But, you know, if interest rates are going go shooting up, you'd like to, you know, sort of stay short, (LAUGH) stay liquid. And so, it is definitely a overreaching figure that people have to think about as they're investing right now.
BECKY: In— in terms of what it could mean, what we haven't talked about this morning with either one of you is the currency markets. There are a lot of people trying to figure that out. Because it seems what central banks are doing right now is chaotic, particularly when you look at what the Bank of Japan's doing with the yen and what that means around the globe. Have either of you spent much time— thinking about that or going through any of those maneuvers? Any big thoughts from either of you on it?
BUFFETT: We talk about currencies. (LAUGH)
GATES: Yeah, they've been times in the past in between, like, World War I and World War II, where it was an effort for people to pr— depreciate currencies. I think this, in terms of simultaneously people trying to stimulate their economies by having very low interest rates and— weak— weakening their currencies, it's pretty unique.
And it's unfortunate for somebody who's trying to reboot their economy that they don't— they can't relatively get their currency much below. In the EU, they've given up that tool altogether. Everybody else, you know, you're— you're fighting— everybody with— almost everybody, with weakening currencies.
BUFFETT: It's easier to predict that interest rates will go up at some point, and probably substantially, than it is to predict which currency will— will gain versus another currency when that happens.
BECKY: I guess the big question is when, on all of those issues.
BECKY: Like, when these things will run. Today happens to be the three-year anniversary of the flash crash. Since that time, there have been a lot of things that have shaken investors' confidence. You look at Libor and the rigging scandals that were there. You can just look through some of the issues at the CBOE, some of the things that they've been talking about at the CME, too.
On Friday, I sat down with Charlie Munger. And he talked a little bit about the high-frequency traders. Listen to what he said in terms of who he was comparing these traders to. Oh, we don't have the sound bite. But at the time, Charlie said this is basically legalized front running. What do you—
BUFFETT: I agree.
BECKY: —guys think about that?
BUFFETT: I agree. I mean, it— that— that's why these fellows exist and why they— they spend all— enormous sums on trying to get the speed of transmission, you know, that's— a millionth of a second or a thousandth of a second faster than the other guy. I mean— you know, it— it is not contributing anything to capitalism. And whoever gets the information, you know, can front-run just that slightest bit faster than somebody else. And they have algorithms that obviously— they're working with. They make money. But that is not money. Berkshire Hathaway, General Motors, IBM, does not make more money because somebody is front-running by a nanosecond— under orders.
BECKY: You know, it raises the question though, whether average investors can get a fair shake on Wall Street. And that's probably always been a question that's been out there. I don't know if this time it's a whole lot different than others. I mean, my dad has always looked at the market as kind of a Vegas in terms of being able to get in. Bill, you're looking at me—
GATES: —if you buy a stock and hold it for many years, the percentage effect of all these things we're talking about, you know, assume you didn't sell during the flash crash— or I guess some of those got reversed. You— you're— you still have— a bet that's fundamentally based on— on that business. I don't think trading in and out of the market with high frequency— makes sense for most— most people. And these frictional costs just add to— the fact of how crazy it is. I mean, you might as well go to Las Vegas.
BECKY: Okay. So—
BECKY: —buy and hold is the solution to a lot of these problems, in other words—
GATES: Yeah. And that's really the— the primary function of the market is to have people provide capital to businesses— (UNINTEL) devaluation of those business— and that works just fine without— this high frequency or even— day-type trading.
BUFFETT: The flash crash didn't hurt any investor. I mean, you know— you're sitting there with— with a stock. And, you know, and the next day it— it— it's gone past. The— the frictional cosst in— in investing for somebody that does it in a real investing manner are really peanuts. I mean, they're far less than the cost in real estate or farms or all kinds of things. So it's— unless you turn it to your disadvantage by trying to do a lot of trading or something of the sort, it's a very, very inexpensive market to operate in. And— and all that noise should not bother you at all. Forget it.
BECKY: Hey, Bill. The— we talked with Warren earlier this morning about how once a year, he leaves the room for the Berkshire board meetings. And the directors sit around and talk about things that maybe they wouldn't feel as comfortable talking about in front of him. He doesn't know what they're talking about. You do. Can you give us any— any insights as to what type of things they brought up? (LAUGH)
GATES: Well, I agree with Warren. This is— one of the great improvements in— boards, is you get that person who's so wise, knows the company better, you know, has— a relation with everybody, get him out of the room and say, "Gosh." Part of the function of the board is to say, "Is our CEO— doing the best job possible? Is our CEO the right person? Are there things we're seeing where we could support the CEO in— in a different way?"
You know, in Warren's case, we've talked about security or— you know, health or— you know, make sure that we're performing our fiduciary duty. I think that's— a great thing. And it gets the board to think, "Boy, we are supposed to be, in certain cases, an independent voice." And we sit and talk about it. And— then we welcome— welcome Warren back into the room. (LAUGH)
BUFFETT: I wonder what they said. (LAUGH)
BECKY: So I know Joe Kernen has a question from back at Studio Two. Joe?
JOE: I— I want to ask— Bill if— some questions about his— philanthropy. And— and it would— based on something Warren said earlier. But— but first, I— I— I think we got to just ask you— about— you know, these— all these— tablets and, you know, PCs. Everybody's writing off the PC. You still do— Microsoft still does $80 billion a year doing— I don't know what the hell it does. But obviously there's something going on in the PC world to still do that— revenues like that. But what's the world— going look like? And— and— how does the cloud factor into what Microsoft will do in the future?
GATES: Well, the cloud is a gigantic opportunity. Because right now, there's so many things that you can in computing that just wouldn't have been possible before. So you've got a lot of the top companies going to seize that opportunity. In terms of the devices themselves, now Windows 8 really is revolutionary in that it takes the benefits of the tablet and benefits of the PC and it— it's able to support both of those. So, you know, if you have Surface, Surface Pro, you've got that portability of the— of the tablet but the richness in terms of the keyboard, Microsoft Office of the PC.
But as you say, PCs are a big market. The— it's going be harder and harder to distinguish products whether they're tablets or PCs— with Windows 8, Microsoft is trying to gain share in what has been dominated by the iPad-type device. But a lot of those users are frustrated. They can't type. They can't create documents. They don't have Office there. So we're providing them something with the benefits they've seen that have made that— a big category, but without giving up what— they expect in a PC.
JOE: Bill, what— what do you make of— of— of what's happened to— to both Apple stock price— and have you frankly— people have compared Apple to— to Microsoft over the— what may be the next decade, suggesting that they may grow more slowly.
GATES: Well, with tech companies, whoever's the leader is always questioned, you know. They say, "Is this the end of them?" And— there's more— more times people think that's the case than it really is the case. Eventually, they're right. And— they remember, "Okay, we said these people would— you know, have challenges."
You— we've got some amazingly strong companies— Apple, Google, Microsoft— companies coming up like Amazon, Facebook— Samsung, to some degree— Wong's in that mix. If you do deep software both on the client and deep services— if you have things that are unique for businesses which is a particular strength of Microsoft, the software business is an amazing business to be in, both in terms of growth and the profitability dynamics.
BECKY: How— how big of a problem is China when it comes to that?
GATES: Well, China has been— a disaster if you say per unit of your product that gets used, how much do you get paid? It's been over ten to one— versus— the United States. And even, like, four to one versus India. And so it is a uniquely high piracy market. Now, the trend line, that number's been coming down somewhat.
The place we have piracy in China that we don't in most of the world has been government institutions— state-owned enterprises, and large businesses. All over the world, you have— the challenge is you get down to the consumer, even to some degree, small business. But here, we have— a challenge with these large entities. It is improving but fairly slowly. So there's a constant dialogue with the companies, the government, about how to get compliance rates up— up to be higher.
BECKY: Okay. We're going continue this conversation with Warren Buffett and Bill Gates. Squawk will be right back.
BECKY: Again, Warren Buffett and Bill Gates are here with us. And— Bill, I wanted to ask you a little bit about something you wrote in your annual letter this year. Just in terms of measuring innovations. You were talking about this specifically for delivery systems, things like for the next seed that's out there or for an immunization, getting those to the people who need them. And you talked very specif— specifically about how you need to measure how that is working. And I had never thought about it from that perspective before. Can you explain what you mean by that? Because there were some big terms . I had to read through it about three times before I kind of got the concept.
GATES: Well, capitalism works best when things can be measured. And helping the poorest are the same. You know, you may have government donors or philanthropic donors. And so picking, say, which seed to improve, and then you improve it, does the farmer really use it? Does it give them productivity? Do they— have you educated them in the best practices?
Or have you created something that requires fertilizer which they can't get— or tools that they— they don't have available? So there's all this well-meaning— thinking going on. But the actual benefit always ends up being so much less than, you know, people with new tools might think. And the only way to get around that and to see where it's hard and to see what you need to do more of, is to be able to measure, measure the health improvements and measure the agricultural productivity.
And you'd be amazed at how weak these numbers are. Most of them are just huge interpolations where they measure— less than 1%. And they sort of assume that the rest is the same. And even population numbers, GDP numbers— as you get to these poor countries— it makes the normal statistics that you look at, which sometimes have flaws, they are so much worse.
And so our foundation's had to invest in, okay, how could we do satellite maps to look at these crops— and see what's going on with them? How can we use more surveys, more regular surveys, to ask people about health-type things? And that's been— a big way of seeing that some interventions just aren't working, and some are miraculous.
BECKY: You pointed out that this is something that's really nec— necessarily, particularly in times of tight budgets. And we have seen tight budgets all the way around the globe. We've gone through a very difficult point where I know charitable giving suffered in a big way, too. Have you seen, you two with your globetrotting efforts to try and— raise awareness of philanthropy and get people to give more money, has it improved, like we've seen the wealth effect with jets and other issues?
GATES: Well, you have this trend of there being more rich people— billionaires or whatever level you take. And so that will lead to philanthropy going up over time. Then you have the— the idea is that— is it something people consider that lots of people are doing? And I'm optimistic that's going up over time. So you had the blip of— the financial crisis that— that hurt a lot of things. The government budgets are very tough because when you talk about aid to the poorest, overwhelmingly, that comes from government budgets.
I mean, philanthropy is fantastic. But in terms of buying AIDS drugs— the vast majority of that is the generosity of the U.S. government. When you look at buying bed nets, when you look at all the different aid activities, and— most countries, as they've squeezed their budgets, have cut back on those things. A few like the United Kingdom have gone up— even despite big budget cuts. So it's harder to raise money— now than— than it's ever been.
BECKY: Joe, I know you have a question too?
JOE: Based on something Warren said earlier— when he's— addressed it to— to Mr. Gates, and Warren pointed out that a lot of— of basic science and a lot of money that goes into science is— is directed towards extending— longevity rather than figuring out a way to pay for it. And it's very expensive.
A lot of these things that we come up with, whether it's drugs that cost $200,000 or $300,000 a year or— or techniques or organ transplants or whatever it is, not everyone— we can't afford for everyone to live forever. Are— are we not funding some of this properly in terms of what we're doing? And— and— if this is a throwaway, Ray Kurzweil, thinks that by 2045, we're— we may be able to do something in terms of living much longer than— than we live right now. How are we going do this?
GATES: Well, they— there's two key factors from this. The first two is the ratio of your working life to your retirement life. And so if that ratio's staying the same, then you know, it's all okay because your contribution to retirement health care is scaling up with the extra length of that retirement period. So, you've got to look at that variable. The other variable that's interesting and— the foundation funded a thing called "The Global Burden of Disease," is the— chronic diseases— where you're sick but staying alive— like a Parkinson's or— diabetes, or versus acute disease— like a lung cancer where you don't live very long.
The rise in chronic disease is a big challenge. And we need to get our innovation, our risk-takers, we need big incentives for them to go after these chronic diseases. Because only by having lots of solutions there— do you avoid the— the reduction in acute, which gives you longevity throwing things completely out of whack. So overall, I'm optimistic, not like— I'm not optimistic like Ray Kurzweil. He— (LAUGH) he—
GATES: —his longevity—
JOE: Imm— immortality by 2045, a transplanted or— I don't know what we do with the brain. That— that makes it a little bit more difficult. But— we might make it. I'm optimistic. I don't know. We might make it to— (LAUGH) we might make it to for— but it's going be expensive if no one dies.
BUFFETT: Well, Bill and I talked a lot— over the— last couple of years about the incentives in medical research are not to bring down cost. They are— they are actually— whether, not— perhaps by accident, but they are actually going to produce more and more increased cost. Because— they— somebody goes to work on a given solution to a given problem, the cost of that solution is not really part of the calculation— or any significant part. It's just getting the answer, and no matter what the cost is.
BECKY: But— I guess we want that, but we can't pay for it.
BUFFETT: The problem.
BECKY: That's the problem with it. Andrew, you had a question too?
ANDREW: Yeah. I would be— going just follow up with Bill. You know, on the last hour, Bill, we talked to Warren a little bit about tax policy. And I— you know, there's now a conversation about capping charitable ded— charitable deductions. And I just wanted to get your thoughts on, you know, what you think the impact of that will be, and— and if something like that existed, how it might've changed or would it have changed the way you approached your philanthropy, and— and the same for Warren?
GATES: Well, the answer is— is no, it wouldn't have changed what I do in terms of charity. You know, if you give away 90% of your money, the deduction doesn't— is not— not beneficial to you— in any— any meaningful way. I do think that the— having an estate tax where giving to a foundation— is exempt from that, and having charitable deduction, is a very good thing.
You know, limiting it to a 28% rate, I— I don't think will have a dramatic impact. It— it probably would have a slight negative impact. But I don't think that would be super dramatic. If they were going get rid of that deduction altogether, I think that— that could change behavior and— and would be unfortunate.
BUFFETT: Well, yeah. In the case— in the case of Bill and myself— I got to use less than 1% of what I— (CLEAR THROAT) gave away in terms of a charitable deduction. Less than 1% of that showed up on the income tax return. The last 99% I got no deduction for at all. And I'm sure— you know, Bill and I might have carry-forwards that, you know, mine's $11 billion and his is probably— (LAUGH)
GATES: Yeah, I— I had— I gave $20 billion in 2000 and that— that expired; 98% of it expired unused.
BUFFETT: Yeah, well my— 99%. Mine expires— but anyway— it's not a factor. I would say this. Of the people at the high end in our giving pledge, I don't think it would make a lot of difference. I think sort of in the intermediate area of— of wealth and income, I— it could make a fair amount of difference.
BECKY: Okay. Where— we're going take a quick break. When we come back, we will have much more from Warren Buffett and Bill Gates.
BECKY: Welcome back to Squawk Box everyone, I'm Becky Quick. And we are live in Omaha, Nebraska this morning. We are joined by Berkshire Hathaway Chairman and CEO Warren Buffett, and Microsoft Chairman Bill Gates, who is on the board of directors for Berkshire Hathaway. And— guys, one of the things that we haven't touched on today is what's happening with immigration.
Bill, I know this is something you've talked about in the past where you do believe that immigration laws need to be altered. It looks like we are closer than ever to getting something done. How important is it in terms of what it will mean for technology workers, though?
GATES: Well, I think there's two issues here. One is the high-skilled worker part— where this group of eight has come up with something that's— that looks pretty good on that and it's— bi— bipartisan. And then there's the overall issue where you have this great injustice of a kid who— is undocumented, not being able to get scholarships, not being able to participate in a lot of things. So I think it'd be fantastic— to get this issue resolved. And as you say, it looks more hopeful now than— in the past.
BECKY: And the one question people had is whether the situation would— in Boston would make it much more difficult to get through the House in particular. The Boston bombing.
BUFFETT: It shouldn't. It shouldn't. No. I mean— take one case and then extrapolate it, and— and— and say that that should affect all of immigration policy does not make sense. And look, we— we ought to be attracting the kind of people we want to attract. And we certainly— do not want to kick out of this country, you know, all— billions of people— that— that are here. And I think it's in both parties' interests (LAUGH) now, which it's more important, to— to pass an immigration bill— and— so I think you'll see it. I mean, it— it's in their self-interest.
BECKY: You mean because of the voting pattern—
BECKY: —that what happened in the last election?
BUFFETT: —the Republicans that are scared silly that we got— losing more and more of a minority vote— in the future and— and the Democrats are for it based on principle. So— (LAUGH)
BECKY: Another issue in Washington is— the online sales tax,— being collected by online retailers. That again is something I think the Senate's expected to vote on today. Is it fair? Is it right? And should online retailers be protected— in a way that they hadn't been before, either one of you?
GATES: Well, the bill that asks them to collect these taxes make a lot of sense. It— it's very unfair to the person who's got a physical store that not only do they have those expenses— but that the other person isn't collecting the sales tax. So this— this is— it's a good thing for state budgets. It's a good thing for fairness in terms of the— the competitive framework.
BUFFETT: Yeah, I think the fairness argument is compelling. You've got thousands of merchants here in— in Omaha. And to have people walk into those stores, look at the item and then order it from somebody out of state and then not pay a sales tax have it be a differential cost, I think— just— it's just unfair.
BECKY: Yeah. Joe, you have a question as well?
JOE: (LAUGH) Yeah. I— I mean, as long as— as— Gates is CI— there are big issues that I'm thinking about. And I— this is something that was in the news last week. I'm just— I'm going to ask it a certain way, Bill. Bioethics. Is it keeping up wi— with technology? And I'm talking about the Chinese scientists have put a bird flu together with the swine flu. Do you think about technology and— and things like this and— and I mean, you— you talk about a brave new world that we're in. Are— are we safe? Can we trust all these different countries though, to abide by— you know, prudent science when we've got this stuff— at— at our disposal? I mean— a very contagious bird flu virus would not help anyone.
GATES: Well certainly, the whole area of genetics, though, give us a lot of ethical challenges. And if you want to think about a nightmare scenario that's even worse than— a nuclear bomb going off— bio-terrorism is the area that you— you've got to be concerned. Because, you know, the right sort of construct— either intentionally created or unintentionally created, could do so much damage.
The— in the scientific community, there's been this debate about, should— should scientists figure out which mutations would cause, say, a flu to get worse? And then they can see if that's starting to happen and— be more alert. Or should they not try out those things because that information might be— get into the hands of somebody who would misuse the information?
And that is a very tough discussion. Lots of reasonable scientists have disagreed— about the— the right approach there. But— it— it is an area, you know, we're lucky that we haven't had a bad flu pandemic— and the fact we had a scare and it wasn't that ba— that bad, made us get a little more prepared. But we're— we— we would still— it— it would still be a huge problem.
BECKY: Warren, you've spent a lot of money trying to prevent nuclear— bombs from getting into the wrong hands.
BUFFETT: Yeah, and nuclear, chemical and biological. I mean, there are per— people in the world that wish ill on— on— theie neighbors and— and— and— would like to— kill as many people as possible. And— the choke point— is not so much knowledge anymore, with knowledge spreading so much, but— but materials. And— and— I think we've been very fortunate and probably quite vigilant, you know, since 1945 when we unleashed the atom— in avoiding it. But the biological, you know, as Bill says, is probably more of a danger than— than the nuclear.
BECKY: We're going to— go to a quick break right now. And— Joe, I think when we come back, we'll have some final thoughts from Warren Buffett and Bill Gates.
BECKY: (LAUGH) Welcome back, everybody. Right now we have more from Berkshire Hathaway Chairman and CEO Warren Buffett, and Microsoft Chairman Bill Gates who is a board member at Berkshire Hathaway. Gentlemen— I was thinking about how much Berkshire has changed. And Warren, you've written about this in the annual letter. But— when you look back to just— about eight years ago, you can look at the biggest bu— businesses for Berkshire outside the insurance companies. It's MidAmerican, Lubrizol, ISCAR, Marman, and BNSF. And four of those companies were not part of— of— of Berkshire just from when Bill joined the board back in 2004.
BUFFETT: Yeah, we had one of those then, yeah.
BECKY: How has your investing strategy changed, and why?
BUFFETT: Well, we've always liked buying businesses. But we've had much— a fair amount more success in the last eight years. So well, you named five companies. We had one of those earning a little less than $400 million pre-tax then. Now we got the five making a little more than $10 billion. So it— it's— we're transforming Berkshire as we go along. It's a work in progress.
BECKY: You know Bill, from the perspective of being in the board— has your job changed over that period of time? Is it different as you've been— adding more businesses and the business just looks so different?
GATES: Well, the key role of the board is— supporting Warren, talking about the succession plan. And so that's pretty much the same. It's m— it is more about wholly-owned businesses and less about trading stocks. And in that sense— the— the value's very enduring. Because those business franchises are— you know, just— amazing assets. So it's— I think it's a really great maturation process— that bodes well for the— the future of the company.
BECKY: The future of the company. How will the board's role change with the next CEO who comes in? My guess is, things are going be run a little differently.
GATES: Well, you'll certainly have a period of supporting the new CEO where— you know, we'll have some institutional memory and— want to make sure he— he gets into the job very well. So I think things will be more intense then— than they have been. You know, there'll be a lot of questions about the company that— all of us on the board will, you know, lend our time and our reputation to talk about what an enduring— incredible company Berkshire is, and make sure that's— that's really what's— what's happening.
BECKY: You— you've talked about how succession is the number one topic that the board talks about. You have a board meeting that starts in about half— or I guess an hour and a half from now. Is that going be the top— topic of discussion today as well?
GATES: It's always the— the main topic. Warren's good about letting us bring up anything we want. But we all know that— that's— that's what— the main thing we're there for, and— we go through it— even when there isn't that much of a change. We make sure that nobody in the room— has new information or new thinking— because it's such a critical decision.
BECKY: All right. Andrew and Joe, I'll give you the last 30 seconds each if you have a quick question that you want to ask.
ANDREW: Hey Bill, you have a very special friendship— with Warren. And I— I never even like to think about this. But in— in a post-Warren world, ten years out, do you imagine you'd still be a board member of Berkshire Hathaway?
GATES: Absolutely. Absolutely. That's one of the things— that I can do as a favor to Warren.
JOE: You g— we got no time, Warren. You going give me the jet — I mean, I— is there some kind of ceremony or something that you've got planned, (LAUGH) it's— it's— we— you got like, 40 seconds now. You're not going to, are you?
BUFFETT: No, I was planning— no, no. I was planning to do it until he said "ten years out," and you said 25 years out.
JOE: I— I know. I heard— I heard that. What— that— that was— that was cold, man.
ANDREW: That was—
JOE: That was cold.
JOE: —past 92?
ANDREW: No, no, no, no, no. I meant ten years— no, look. Warren's going live till— till at least over 100, 100— (LAUGH) and I'm thinking ten years— no, it's ten years after.
JOE: You know what? Warren, I— I heard that question. That was cold, Warren.
ANDREW: No, no. Warren, I— I—
JOE: I heard that, too.
ANDREW: That wasn't the intention at all.
JOE: You know Sorkin, he's going live forever 'cause he's in his 30s.
ANDREW: No, Warren's going live forever.
JOE: Yeah, he is. (LAUGH)
ANDREW: We're all going— to be very happy about that. So— it's been great to—
BECKY: Guys, I will let you in on a secret real quickly. Just that even if you think I never do anything for you, I just want to tell you about the hazards of working here. We're in a big hangar, there are a lot of birds. One pooped on my head ten seconds before we came back to air. Look. (LAUGH)
JOE: Oh my god.
BECKY: It's there. (LAUGH)
BUFFETT: Only in Omaha.
JOE: Only in Omaha. Indoors, holy smokes. All right. That was great, thank you, thank you.
BECKY: Warren and Bill, thank you both very much.