This is part four of the preliminary transcript and video clips of Warren Buffett's appearances on CNBC's Squawk Box on Monday, March 9, 2009.
BECKY: We do have thousands of e-mails that have been coming in, Warren, so we're going to ask you some of these e-mails just right off the bat. There have been a lot of concerns about what's happened with the stock market. We've also heard about some major scams, and that has shaken people's confidence. One investor wrote in--his name is Bruce, he's from Cincinnati, Ohio--and he says, "How do we know that you are not another Bernie Madoff?"
BUFFETT: Well, that's a good question. I would say this. I--it is a problem with investment advisers. I mean, it--there are going to be a certain number of crooks in the world. And sometimes they're smooth-talking, and the best ones are the ones that kind of don't look like crooks. So I would say I'm saving up for my big score, if I'm doing it, because I've been doing this for a long, long time. I haven't run off yet, you know, to South America. But it is a problem who you put your trust in.
BECKY: Yeah. And on a serious note, there are people who look at the stock market and wonder how do they know the whole thing's not a Ponzi scheme?
BUFFETT: Well, the whole thing's not a Ponzi scheme.
BECKY: What--how do they know who to trust?
BUFFETT: We're talking about, you know--we're talking about American businesses that employ, just the ones on the stock market, tens and tens and tens of millions of people. They're real companies. Nebraska Furniture Mart will do 400 million in business this year. Owning--you've got a choice in this world. You can own some real estate directly, you can own a farm directly, you can own apartment house, you can have your money in a savings account, you can have your money in government bonds, you can have it in American business. American business has been a very, very good place overall. People have made mistakes on individual stocks. But in the 20th century, the Dow went from 66 to 11,000, you know, 400. And we had all kinds of problems during that period. Business works overall. It doesn't work every day or every week or every month, and sometimes it really gets gummed up. And then you need government invention sometimes to get the machines back working smoothly. But the machine works.
BUFFETT: And equities, over time, are the way to do it.
JOE: Warren, do you think that--you made a couple of points just now, and one, I think, is that you can't catch--regulations can't necessarily catch every one of these guys. And I just thought it was funny, because you said that the guy would be very smooth-talking and he won't look like a crook. And I was looking at you, thinking, `Wow, you're very smooth and you don't look like'--and I was thinking, `Wow, he said'--but no, you see what I'm saying? You can't use--you can't use regulations...
JOE: ...necessarily. And do you worry that in this environment that, once again, we're going to overshoot?
BUFFETT: Well, I think that's--we're going to overshoot in some ways. But we need--we need to shoot anyway.
BUFFETT: And, you know, and my partner Charlie Munger says we will get conned some day by a guy that goes to work on the bus and carries a little lunch sack. We'll never--the guy with the suede shoes and all that will not take us. But crooks do come in different--in different forms and, you know, you're protected with CPIC if you've got your securities with a brokerage firm, up to an extent. I think that for the duration you ought to be--I think you ought to be protected for all deposits at all banks. I mean, I just think that's a move to take, just like we needed to do it for $2500 in 1934. We can't have people worried basically about banks. And we--and--but, you know, overwhelmingly people are honest, but you should guard against the one that's--that isn't. I mean, you should--you should--you should have your own possession of your own security. I mean, that's one good way to do it.
BUFFETT: I still--I still have a safety deposit box with my securities in it. There's only one or two securities, just a few securities in it. But we'll always have crooks.
BECKY: You know, Warren, right now the Dow is sitting just above 6600, 6626. Five months ago you wrote an opinion piece for The New York Times where you told people--or least the headline said, "Buy American. I Am."
BECKY: People now look at that and think, OK, market's come down significantly since then. Do you wish that you'd held off on writing that op-ed?
(Graphic on screen)
The New York Times: The financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary. So... I've been buying American stocks.
BUFFETT: Well, I wish I could pick the bottom, but I didn't write the headline.
BUFFETT: I'm responsible for everything but the headlines. And within the body of that article I said things are--I started off saying things are a mess and they're going to get worse in the economy and all of that. But I did say--and I said I can't predict the stock market. I don't know the bottom. I mean, if I knew the bottom, you know, I wouldn't have to look up 10-Ks and do all that stuff, I'd just buy the S&P 500 at the bottoms . So I have no idea what the stock market's going to do tomorrow or next week or next month or next year. And I actually said it twice in the article, and the editor said, `You're not supposed to say things twice.' I said, `I want to say this twice.' But what I did say, and I'd say it absolutely today, is that you will--over a 10-year period you will do considerably better owning a group of equities and don't--not just one stock, but a group of equities than you will either owning short-term Treasuries and rolling them, in which case you get virtually nothing, or owning a 10-year Treasury that gets a few percent.
(Graphic on screen)
The New York Times: A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. Let me be clear on one point: I can't predict the short-term movements of the stock market. I haven't the faintest idea as to whether stocks will be higher or lower a month--or a year--from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over. -- Warren Buffett Op-Ed Oct. 17, 2008
BUFFETT: I mean, equities will do better than that. I don't know whether they'll do better than that over a year. And I didn't know then, and that's been proven. But that's not my game. And, overall, equities are going to do far better than US government bonds at these prices. The US government bond is guaranteed to lose purchasing power. I mean, it--there's no way we follow the policies we're following without money becoming worth less over time. That's been true of governments every place, you know, forever. So I stand by the article; I just wish I'd run it a few months later.
BECKY: Well, they're--a very smart person asked me, they said you knew that the economy was going to get worse.
BUFFETT: Well, both--in those cases, I got 10 percent preferred that I don't think I could get now. So, I mean, actually--I don't think Goldman would issue me a 10 percent preferred now. Although they--if they did and there were warrants attached, the warrants would be cheaper. But that was a time when both of those companies wanted money immediately and we could structure a preferred that was attractive. But the fact that business is going to get worse does not mean you should wait to buy stocks. I mean, if...
JOE: But, Warren, I...
BUFFETT: It doesn't--it doesn't--go ahead, Joe. I'm sorry.
JOE: I was thinking about, you know, you did and that was the attractiveness, I guess, the 10 percent yield. But I think a lot of your long-term--your long-term holdings--for example, American Express you can now pick up almost for single digits.
JOE: Wells Fargo, one of your favorites, is single digits, 8.60. Goldman Sachs, you liked it, you said it's going to be around; GE, you like it, you say it's going to be--I can't remember, maybe 100 years or it's going to be a great company. That's at $7. It would seem to me that maybe by the end of this quarter we're going to hear that you were buying a lot of these things.
BUFFETT: Well, I'm glad you know, Joe, because...
JOE: But if you liked them--if you like these things and you've held American Express for $50 or whatever for a long time, that would give us a lot of confidence if you saw it at 10 and decided I'm going to--I'm going to buy a lot more here and just lower my average price.
BUFFETT: Yeah. American Express is a special case, Joe, because it's a--it has become a bank holding company. And if you own over--we own over 10 percent of American Express. If you own over 10 percent of it--if you own over 9.9 something percent of a bank holding company, you need the permission, I believe, of the Federal Reserve to buy another share. So they--they're becoming a bank holding company I believe. As I understand the law, it precludes us buying another share of that because we are at that percentage already.
(Graphic on screen)
Berkshire Hathaway Investment
As of 12/31/08
Am. Express 151,610,700 shares
Coca-Cola Co. 200,000,000 shares
ConocoPhillips 84,896,273 shares
Kraft Foods 130,272,500 shares
Source: Berkshire Hathaway Annual Report
BUFFETT: But I would--American Express, for example, you know, it's very clear that American Express' losses in 2009 on their receivables will be, you know, considerably higher than last year. And their earnings will suffer to some degree accordingly. But that doesn't mean that American Express isn't a hell of a buy at $10. American Express is going to be around forever. They've got the cream of cardholders. Unfortunately, they have some cardholders that aren't the cream, too.
JOE: But you're not--you're not a 10 percent in GE, I don't think, yet.
BUFFETT: No. No, I--and--no. And we--but we bought the preferred of GE. You know, we--there are things I like to buy, but I also want to be absolutely sure--I mean, my job is to be sure that Berkshire does not need the help of anybody in getting through the toughest of times. So we keep a lot of cash. But I don't like to keep more cash than's necessary, but I regard necessary as always way more than other people regard as necessary because I always think in terms of worst cases.
BECKY: In the past, you've said $10 billion you like to keep around. Is that still there?
BUFFETT: Well, $10 billion is an absolute minimum. So if I'm going--I'm going to say $10 billion is a minimum, I always have to have quite a bit more than that to be sure that I don't go below that. Because we could have a hurricane tomorrow or something of the sort in our insurance business or, you know, who knows? So I leave--I leave a cushion above that.
BECKY: Is the cushion bigger than it used to be, or is...
BECKY: ...this the same as always?
BUFFETT: The cushion--what is--what has changed is that we will do less cat insure--catastrophe insurance business this year than we would have done in a year when we had way--even way more cash. I look in--you know, I look, I say to myself if there's a 9.0 earthquake in Los Angeles or San Francisco or the Pacific Northwest or something, I want to be prepared to have a lot of money afterwards. And, you know, it--I have to err on the side of caution. But that doesn't mean I go into a cave either. And when we got the chance to buy, we did the Wrigley deal, we did GE, we did--we did--we did Goldman, a lot of money went out then. In fact, when we did the GE deal I actually simultaneously made a deal with a base price on selling a couple billion dollars' worth of J&J. I didn't want to sell J&J. I mean, I like J&J. But I just, you know, I didn't--I didn't want to--I didn't want to commit that much money without having a couple billion coming in at the same time. And that's my job, though, is to be--I don't want--we can't depend on anybody.
BECKY: There's a question that came in from Kevin in Tifton, Georgia. He says, "I keep hearing people like Doug Kass say that your style of buy and hold investing is dead. Do you think that's true?"
BUFFETT: Well, it depends what you buy and hold. It's--if you buy the right businesses at the right price--you know, we own 70 businesses. We own See's Candy.
BUFFETT: So we have bought and hold See's Candy since 1972. It's a very good business. Now, does that mean that if it's stock was quoted every day I couldn't have danced in and out with 100 shares or 500 shares? But if you're in the right business--Coca-Cola, 1886 or something like that, you know. Per capita's probably gone up of their products virtually every year. So, if we own a good business--if some another guy can buy one stock today, sell another--sell it tomorrow, buy another stock--if you--he may be able to make more money doing that than I can do with buy and hold. All I know is if I buy the right businesses, I'll do very well.
BECKY: OK, let's get to some more questions right now. Joe's right, we have had thousands that have been coming in, Warren, so we'd like to get you back to one from Adam in Springfield, Virginia. He writes and he wants to know, "If you could take back one investment you've made in the last year, what would it be and why?"
: Well, there'd be quite a few in terms--well, I mentioned in the annual report that, you know, I bought ConocoPhillips when oil was selling well above 100, and I was wrong about oil and therefore that made me wrong about that stock big time. I bought a couple of--smaller, but I bought a couple stocks in the--stocks in a couple banks in Ireland. I did not do my homework sufficiently on that, and I was just dead wrong. So I make plenty of mistakes. The interesting thing is--and I'll make plenty more mistakes, too. That's part of the game. You just got to make sure that the right things overcome the wrong ones.
BECKY: We're trying to focus this hour on your investment strategy.
And Doug Kass of Seabreeze Partners has written in in the past, he's been critical of your investment style recently, and he had a question for you as well. He says, "Mr. Buffett, your long-held investment philosophy has been importantly based on one, successfully identifying companies whose business franchises were protected by moats, and two, holding--a holding period of forever. So do you think the moats of your financial holdings have been flooded, and in light of a business world that's now changing more rapidly than the past, do you plan to alter your holding period of forever to a lesser period of time?"
BUFFETT: Yeah, well, I--in terms of our businesses, the ones we buy, like See's Candy or those, we really do plan to hold them forever. I mean, our stocks we plan to hold a very long time. Washington Post stock we've held since 1973, I believe, and Coke's been long time. But overall I like to buy them with the idea of owning forever. And the quotes don't make much difference. I own three things outside stocks. I own--I own--I own a quarter of the baseball team here in town. I don't get a quote on it every day. I've had it 15 years. I own a farm near here, bought it 20 years--I don't get a quote on it every day. I look to the performance of the asset.
Now, if I looked at the performance of Wells Fargo, we'll say, I see that, you know, in a couple years--and management doesn't have anything to do with what I'm saying here. I--these are not from them. But I would expect $40 billion a year pre-provision income. And under normal conditions I would expect maybe 10 to $12 billion a year of losses. I mean, you lose money in banking, you just try not to lose too much. So, you know, you get to very interesting figures. I mean, the spreads are enormous on what they're doing. They're getting the money at bargain rates. So I--if there were no quote on Wells Fargo and I just owned it like I own my farm, I would look at the way the business is developing, and I would say, you know, it's--`These are a couple of tough years for losses in the banking business, but you expect a couple tough years every now and then.' And that the earning power is never--is going to be greater by far than it's ever been when you get all through with it. The only worry in that is the government will force you to sell shares at some terribly low price. And I hope they're wise enough not to do that. That would--that's what--that's what's spooking the banking market to a big extent.
BECKY: You worry about that, too.
BUFFETT: Yeah, sure.
BECKY: That's why you'd like some clarity out of Washington on what they're planning to do...
BUFFETT: I--that's one of the reasons. I particular--I think clarity is a good thing for the whole country on a--on a lot of--any issue to do with people's money, clarity's important. People want to be clear about their money. But I would say that if--if we own US Bancorp, which we do, or Wells Fargo, their prospects three years out have been better than ever.
BUFFETT: And if they weren't quoted, you know, people would feel fine owning the business and I think they would say that, you know, they're going to lose more--way more money than usual that--maybe this year and the next year, but they've built the provisions and all that sort of thing. They're going to come out fine unless they have to issue a ton more shares.
BECKY: But the back and forth in the administration right now has been which plan to follow. There's been a lot of confusion. There was this idea that the TARP money was going to be used to take the toxic assets off of their hands.
BECKY: There was the idea that maybe they should just be buying shares outright. There's the idea of nationalization out there. What's the right answer?
BUFFETT: The right answer--the right answer for me is the president to clarify things as only he can, because you have heard so many different things. And, you know, they're doing their best to communicate, but the person that the people of the United States gave their trust to not that long ago was Barack Obama. He speaks very well. He has--he is the commander in chief on this, and it has to be clarified. Like I say, the head of the New York Fed gave a talk, explained a lot of it, but nobody's going to pay that much attention to what he says. You need the president of the United States to make it very clear. Because if people aren't clear, they're going to be confused. And if they're going to be confused, they are going to be scared stiff. And that has to end.
BECKY: Does that--you make it sound almost like it doesn't matter what he says, as long as he picks one of those.
BUFFETT: Well, it matters...
BECKY: That's--you've got to--you've got to be leaning one direction.
BUFFETT: It matters somewhat. But we know that the Battle of Midway was the, you know, the important battle, you know, or that, you know, in terms of when the Philippines fell, all the--I mean, you've got to--you've got to assume that you need a commander in chief. They'll be intelligent, they've got the interests of the country at heart. And then you can't expect to agree with them on every point. And if you don't, you still get behind the effort.
JOE: Hey, Warren, you're talking about some of the investments maybe you regret. This wasn't made last year, but your what was it, a sale of puts, a long-term bet on the S&P that I think you have to mark at least a little bit to market once in a while, and it's up in the billions now. Do you regret that? Is that going to work out in the future? How long do you have now, where does the S&P have to end up?
BUFFETT: Well, the S&P has to end up 15 or 20 years from the time we did the deals at the price at which we did them. Although, if the S&P actually ends up, you know, 15 percent below or so, we still break even and we've had the use of the money for 15 or 20 years. So we're holding about $4.8 billion. The first one comes due in the latter part of 2019. And obviously I would rather put those positions on now than having put them on a few years ago. But if you--if you gave me the choice of not having the positions at all, and not being able to put them on or sticking with the positions we have, I would stick with the positions we have. I think--I think we will--the odds are good we will make money. And the thing I know for sure is we'll hold almost $5 billion for between 15 and 20 years in conjunction with it.
BUFFETT: So I like...
JOE: Those are derivatives. You don't like derivatives, but you used them in that case, right?
BUFFETT: I--well, we've used derivatives for many, many years. I don't think derivatives are evil, per se, I think they are dangerous. I've always said they're dangerous. I said they were financial weapons of mass destruction. But uranium is dangerous, and I just went through a nuclear electric plant about two weeks ago. Cars are dangerous.
BUFFETT: But I mean, every American wants to have one. You know, the--a lot of things can be dangerous, but generally we regulate how they're used. I mean, there was a--there was some guard up there with a machine gun on me, you know, when I was at the nuclear plant the other day. So we use lots of things daily that are dangerous, but we generally pay some attention to how they're used.
BUFFETT: We tell the cars how fast they can go.
JOE: Yeah, yeah. Good. Well...
BECKY: David--go ahead, Joe.
JOE: Well, hopefully, Beck, we'll have a chance to talk about, you know, AIG and what we need to do...
JOE: ...because to be able to, you know, to write that many insurance contracts, Warren, and not put up any collateral, that's got to be something that regulators at this point, right? I mean, that is--that's why we're in this mess right now.
BUFFETT: I wrote--I wrote Congressman Dingell in 1981 about it, when they--you know, these are--they are dangerous.
BECKY: About AIG, or about derivatives in general?
BUFFETT: Oh, they were--it was--well, it was actually about trading the S&P 500 and what--the dangers you get into when you allow people to leverage up like crazy, which derivatives allow you to do. We put margin requirements in in the United States after 1929. We said that '29 was a terrible crash, it was partly brought on by the stock market and that was partly brought on by the fact that people were buying stocks with very little down payments. So the United States Congress said to the Fed, `You regulate this thing.' That's been 75 years ago. They still regulate it, but derivatives enable people entirely to get around margin regulations. They made them meaningless. And so we leveraged up the system and we are now feeling the pain and the spread out of the pain to people who had nothing to do with it from the deleveraging the system. And it's massive. So we do need--we need something new.
BECKY: Part of the reason AIG was able to do that was because its high credit rating at that point.
BUFFETT: Absolutely. Yeah.
BECKY: You're not suggesting necessarily they change the rules on how much people have to put down based on their credit ratings, right? Because you benefit from your AAA credit rating.
BUFFETT: Yeah. Although we benefit less these days than before. But AIG had this AIG financial products. I--when I bought Gen Re, they had something called GenRe financial products.
BUFFETT: They had 23,800 contracts. Hell, I, you know, I couldn't understand 22,000 of them, probably. I spent--and I know I couldn't get my mind around it. You--that--and people recorded profit every--you know, that section made a profit every year, supposedly, and the guy that ran it made a lot of money and everything. You know, it probably would have busted the company if they--if they'd kept it around. Anything where you use the credit of a great institution to go out and start doing all kinds of things that--enormous leverage gets you in trouble. Citigroup could do SIVs because everybody trusted Citigroup, you know, and nobody knew that, you know, all this stuff was off balance sheet. It was a way of getting around capital requirements. You have to watch people that had all big sums of money.
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