RSS FEED

» Help

Subscribe to this RSS feed
Stay up to date with the Warren Buffett Watch blog.

LATEST FROM OUR BLOGS

» More

- US Stocks Avoid Closing Down Over 1%, Again

TOP HEADLINES

» Markets | Economy | Companies

- Greek Debt Saga Back on Center Stage for Markets

Warren Buffett Watch

Text Size

Mar.09

9:43 AM ET

Monday, 9 Mar 2009

TRANSCRIPT & VIDEO: Ask Warren Buffett on CNBC's Squawk Box - Part 4

Posted By:Alex Crippen

Topics:Warren Buffett

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?"

BUFFETT: Well, there'd be quite a few in terms--well, I mentioned in the annual report that, you know, I bought ConocoPhillips [COP Loading... () ] 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.
Doug Kass
Doug Kass of Seabreeze Partners
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.

BECKY: Mm-hmm.

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.

BUFFETT: Sure.

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.

BECKY: Joe.

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.

JOE: Hm.

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.

JOE: Yeah.

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.

JOE: Hm.

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...

BECKY: Mm-hmm.

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.

BECKY: Right.

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.

TRANSCRIPT AND VIDEOS CONTINUE WITH PART FIVE

Current Berkshire stock prices:

Class A: [US;BRK.A Loading... () ]