This is the news conference held by Warren Buffett and Charlie Munger at the Berkshire Hathaway Annual Meeting in Omaha, Nebraska on Sunday, May 4, 2008, as live-blogged on CNBC.com's Warren Buffett Watch.
All times are Central.
2:22 pm: Buffett and Munger are sitting at a table in a hotel meeting room. No pictures, video or recording is permitted. The news conference is primarily for print journalists.
2:23 pm: Buffett says Korea stock market one of the most attractive in the world right now, but he's not looking at stocks in China due to price rises in that country. (Buffett made similar statements about Korea and China during last fall's trip to Asia.) He says, however, that it will remain on his radar. PetroChina is also on his radar screen. If the price becomes right, he could go back in after selling last year.
2:25 pm: Asked if the political situation in Italy affects his view of the market situation there, Buffett says, "No. We don't even let the political situation in the U.S. affect us."
2:27 pm: Asked how they react emotionally when economic times are tough, Charlie and Warren say as part of their investment philosophy, they stay calm when others get excited. It's all just business. Buffett says he specifically doesn't get excited about stock splits. Important to have a bedrock investment pilosophy. He got his from Ben Graham. It's important to have the right, "calm" temperament and the ability to think for yourself. "It doesn't make any difference what anyone else thinks about a stock."
2:30 pm: "Temperamental detachment from crowd opinion works. And when it works it becomes reinforcing in your behavior." Buffett says he and Charlie have a natural ability to remain calm.
2:32 pm: Munger says don't get seduced by crazy ideas of professors and pundits. Academics don't appreciate what he and Buffett do because their strategy is so simple. No complicated models. No formulas. "It's very simple what Berkshire does but it's kind of boring to many professors." "Not to me," jokes Buffett.
2:34 pm: Buffett says he's happy when stocks he's bought fall in the short term because then he can buy more at a "sale" price. Most people get unhappy when stocks fall. He doesn't.
2:35 pm: Buffett - "There's going to be more pain" in the banking sector involving write-downs, but "no one knows" exactly how much. Some of the investment banks still have losses to be taken but a lot of it has already been taken. Depends on what happens with the economy in the future. But, Buffett says, the fear of a major financial panic has been squelched by the Fed's move to prevent Bear Stearns from collapsing.
2:38 pm: Buffett says Wells Fargo (in which he has a stake) will have larger than usual losses, but that won't be the end of the world and he'll keep owning it over the next 5-10 years. "I would predict that Wells will be earning a lot more money ten years from now than it is now." It wouldn't matter to him if Wells Fargo was delisted for three years and he could just watch the business. He doesn't feel that way about every bank, of course.
2:40 pm: Munger says, "What your seeing now is justice." Banks that were stupid and overreached deserve to suffer. Buffett notes that justice is coming from the shareholders, but also affecting shareholders who didn't really know what was going on.
2:42 pm: Asked about free trade agreement between the U.S. and Korea by a Korean reporter, Buffett says he hasn't read details on any specific agreement. But in general he thinks the more trade the better. He notes, however, that while U.S. exports have grown, imports have grown even more. He thinks "the imbalance is a problem." He thinks a big imbalance will lead to economic and political problems down the road. But, in general, you should have as much trade as possible without favoring any specific countries, products or industries. Protectionism doesn't work toward the greater good over time. A Buffett trade policy would be "wide open."
2:46 pm: Buffett does note that trade is a tough issue politically, as people perceive a threat from foreign goods. Especially difficult during a political campaign. "When someone talks the way I'm talking about benefits of free trade" it doesn't mean much to someone in a small town that's lost a factory. He says there should be a safety net in a wealthy nation.
2:48 pm: Buffett says Berkshire uses a conservative, standard formula to value some derivatives holdings. While he thinks it's wrong, he doesn't want to use a formula that would give Berkshire "a better number." When you buy a financial institution, including Berkshire, you should be comfortable with the risk tolerance of the people in charge, and for a lot of banks, Buffett just doesn't know what they're doing. Will invest in a bank "only when I have a real fix on the people" running the bank. "We just can't figure out what they're doing most of the time," he says about most financial institutions.
2:52 pm: Buffett says you can't design a regulatory system that can deal with a very large financial institution using complex strategies. You're better off knowing the people running it. Munger says when a financial institution accepts the backing of a government, it should be required to be very conservative in its dealings.
2:54 pm: Buffett - Fannie Mae and Freddie Mac were pre-announced to be "too big to fail." 200 people were assigned to a regulatory agency (OFHEO) whose sole job was to watch Freddie and Fannie. Even so, there were all kinds of accounting problems. People will behave badly when given the wrong incentives. Management had to "paint pretty pictures" for Wall Street and that led to bad accounting.
2:58 pm: Munger - "The people selling the weird products are always going to be venal." Buffett - "Well, not always." Buffett notes that when the profit margin gets squeezed out of the "plain vanilla" transactions, people start getting creative. "Toxic waste" more attractive to Wall Street than "plain vanilla."
3:00 pm: Asked about the partnership, Buffett says the two hit it off from the start, "rolling on the floor, laughing at their own jokes" and have "had a lot of fun ever since." They disagree sometimes, but they have never had an argument since 1959. Buffett says Charlie has taught him a lot about how to value a business and about human nature. Charlie has pushed him to buy into strong, solid businesses rather than be tempted by cheap "cigar butts."
3:02 pm: Munger says Buffett has influenced his life far more than he has influenced Buffett, especially since Buffett convinced him to give up his law practice. "We both like learning." Berkshire is an example of an "ever-learning machine." "The best thing a human being can do is to help another human being know more." They say they are blessed to know each other and to be able to work with such talented managers throughout Berkshire.
3:06 pm: Asked if there may be opportunities among financial stocks, Buffett says he just doesn't know enough about most banks and any bank Berkshire would invest in would have to be very big. "I'm not going to rattle around the country talking to one manager after another." Buffett says just talking to a manager isn't all that useful. Sometimes when they're lying they believe it themselves. From Berkshire standpoint, wouldn't gain much trying to find some medium-sized bank it would feel strongly about. It may be out there but too much effort to find it. Still, every now and then "one hits me between the eyes." Munger says "that prospecting territory might have some promise" for others, but not for Berkshire. Buffett - probably easier to find values in Korean stocks rather than U.S. financial stocks. Munger agrees. "More obvious opportunities there than in American banks."
3:10 pm: On helping investors hurt in the mortgage mess,Buffett says those who bought mortgages they didn't understand shouldn't get any more help than he did when he bought Dexter, which he didn't understand. As for helping home buyers, there are a certain percentage of people who got into mortgages with payments that get bigger. A "small proportion" may have been misled, and they deserve some help to keep their homes. There should be a big, red, warning on mortgages with payments that increase during the term of the loan. "I see no reason for someone who borrowed on a 6 percent mortgage" to get help if they can't make the payments. If they can make the payments, they should stay in the house. We can't guarantee to everyone that the value of their house will never go down. For a time, everyone thought house prices could never fall.
3:14 pm: Munger - "We never should have created the situation" where the holders of the first mortgages on a home have a conflict of interest on foreclosures. It was a stupid system. "There's a certain amount of tragedy in this that may be unfixable in a capitalist system." Buffett - When you get into any kind of bubble where you think tomorrow's price will bail out any decision now, there's going to be trouble. He says Berkshire bought some sub-primes, and even though it could reset the rates higher, it won't.
3:19 pm: Problems came from allowing "over-reaching and complexity" by financial institutions that wanted to increase their earnings. "Problem came from giving human nature more discretion than it can handle." Buffett says in some cases, people could pick their own payments, even payments so low that it didn't cover the interest and the principal went up. Banks shouldn't have made those kinds of loans and people shouldn't have taken them out. Munger - People sacrificed common sense and decency to increase earnings.
3:23 pm: Asked why he bought stock in Munich Re when directors of the company don't own a lot of shares, Buffett says that happens a lot. "There's no rule that you can't have a wonderful business when directors don't own a lot of the stock." He prefers it when directors do own the company's stock and even better when they buy it with their own money. "It's not a requirement." In response to a question, Buffett says it was his decision to buy Munich Re stock, not Geico investment chief Lou Simpson's.
3:25 pm: Asked by a British reporter why he's not including the U.K. in his upcoming European tour, Buffett says Berkshire is already fairly well known in Britian. He has no aversion to investing in the U.K. and may be close to buying a "medium-sized" British company. He also said he'd take a look at Royal Bank of Scotland's possible divestiture of its insurance unit.
3:26 pm: A Brazilian reporter asks whether Buffett is still invested in that country's currency. Buffett says the real is the only currency position he does have, and it's relatively small. He learned a lot about Brazil from a friend who lives there. After hearing about the country from his friend, he looked at the country, and bought some reals. He says he had an "outdated" opinion about the Brazilian economy. He was lagging on "what has really taken place in Brazil" recently. He still thought of it as a place with a history of failed currencies. Buffett reveals that his friend is Jorge Paulo Lehman. (He's a self-made "beer baron" who is number 172 on the Forbes list of the world's richest billionaires.)
3:32 pm: Asked if the U.S. is still in recession, Buffett says, yes, by his definition, although most people pay attention to the "official definition." "If we're in a non-recession," he doesn't think people would like things to stay the way they are.
3:34 pm: Q - What should Japan do to attract Buffett's attention? Buffett says he does look at Japanese companies, but so far hasn't found anything he likes at a price he likes. He points out that he doesn't buy all that many stocks at any given time. "Very few names get added or subtracted at Berkshire every year." Buffett says we like the companies fine, we just don't like the prices. If prices come down, he could be buying there. There's nothing Japan itself needs to do. He'd love to buy something big in Japan, and he could come across such an opportunity at any time. Munger - "We're not prejudiced against Japanese stocks, it's just that your reputation is so good that your stocks sell higher."
3:38 pm: Buffett says if he had to guess, he'd say the Canadian dollar will be stronger than the U.S. dollar ten years from now. (He made a similar prediction last fall during a Toronto appearance.) Munger points out that semi-socialist nations like Brazil and Canada have stronger currencies, and he finds that "amusing." Buffett - "It's much easier to be wrong on currencies than it is on stocks." Canada and U.S. are following policies under which the Canadian dollar will overperform the U.S. dollar over a period of years.
3:39 pm: Q - Thoughts about being the world's richest man on the Forbes 400 list? Buffett says it hasn't changed the way Charlie treats him. "It doesn't mean anything." He points out its unlikely that its 100 percent accurate anyway. "It changed nothing in my life. It didn't even change the mail much." He says he's happy when Berkshire is doing well, not when he's high on the Forbes 400 list. "It's vastly overrated to be rated number one on Forbes." Charles jokes he has no new respect for Buffett.
3:45 pm: Q - How widespread are real estate problems around the country? Buffett says data from the Berkshire businesses connected with homes shows particular weakness in some areas, including Nevada, Arizona and California. Las Vegas furniture stores have been hit harder than stores in other places. "What you read in the papers is accurate." There is a mild contagion effect. "The land rush thing wouldn't happen now" in real estate. Munger points out that even if real estate in your area is not hit hard, it still causes problems for financial institutions around the country.
3:52 pm: Buffett sometimes has difficulty hearing the questions, especially when the reporter has an accent. Charlie has been repeating some of them for him.
3:53 pm: Buffett says he think its kind of crazy when companies have their constantly updated stock price on display in the lobby or something like that.
3:56 pm: Buffett says he doesn't think the recession will have a long-term effect on the value of his home-related businesses. He accepts there are going to be ups and downs.
3:59 pm: Buffett says he's surprised Asian currencies, including the Taiwan dollar, haven't appreciated more. Munger points out that some Asian countries don't want their currencies to appreciate. Buffett says Taiwan is a "perfectly sensible place to buy a company" but most of them aren't big enough. He's not worried about buying a company in Taiwan from a currency perspective.
4:05 pm: Buffett says a lot of the mispricing of risk has been corrected, although "they'll make the same mistakes again" in the future. Banks are "Cleaning up their act because they're being forced to." Munger says he's rather have all his money in Berkshire than in any bank. He thinks banks take too many risks. "We try to behave as if Berkshire stock was all help by crippled relatives of whom we are the guardians." Says some big bank executives take on big risks due to ego. "Testosterone is the most dangerous substance in the world." Munger criticizes "swashbuckling" practices. Buffett points out that bank executives are encouraged to take risks by their compensation.
4:10 pm: Buffett recalls when he and Munger were running Salomon in the early 1990s and the number of times he was told that he was out of touch for insisting on conservative practices. "Everyone else is doing it is the code of Wall Street" and it's hard to go against it because employees will simply go somewhere else where they are able to take great risks and make more money.
4:15 pm: Buffett says just because China gets richer it doesn't mean the U.S. will get poorer. China may grow faster than the U.S. but no reason to get paranoid. But he notes that some will find it convenient to blame China for problems in the U.S. "There's likely to be a lot of scapegoating of China. It's easy to do" especially in bad economic times. Buffett says there's a lot of potential for an increase in tensions between U.S. and China. He thinks it shouldn't happen but fears it will. "Very dumb" to scapegoat a country will nuclear capability.
4:21 pm: Munger praises China for reforming itself. "Hats off to China." Crazy to criticize it for not changing fast enough.
4:22 pm: Q - Why do so many people come to the annual meeting? Buffett says because they have a lot fun and they feel like they're part of the act. We treat them like partners and they feel like partners. "It's a real company to them." We're proud of the companies we've bought and the products they make and we want our partners to feel proud, too. Munger: We're sufficiently peculiar so people don't have a lot of other options." Buffett says most shareholders don't come to make an exposition or advance a cause. Good shareholders drive out bad shareholders.
4:27 pm: Q - How much of your wisdom comes from being in Omaha? A - I spend most of my time in Omaha. I like being here. There's a good community aspect to Omaha. Anything that adds to an "ease of life" will make you more effective. Munger, who lives in Los Angeles, says, "I'm an Omaha boy. They got the boy out of Omaha. They didn't get the Omaha out of the boy."
4:30 pm: Buffett - When you send $250 billion a year to China you shouldn't be surprised when they use that money. Hypocritical for the U.S. to get upset about sovereign wealth funds.
4:33pm: The news conference has ended.
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