CNBC Buffett Transcript Part 7: What Should Happen to CEOs of Failed Companies
BECKY: There were a lot of questions that came in regarding Berkshire, people who still had questions after they read the letter. This came in from Steve in Dallas, Texas. He writes, "After a year of full ownership of BNSF," the Burlington Northern, "is there anything you know now about the company that you didn't know from reading the annual reports, 10-Ks and other public information? In other words, does full ownership confer additional information advantages that you did not have when you were a minority shareholder?"
BUFFETT: Well, it would if I dug into it. And, you know, I will learn something occasionally about— I probably know a little bit more about the Rail Labor Act than I did earlier. You know, but nothing material. I mean, it— I've only been to the company once since we bought it, and I get— I look at a few more figures than I might otherwise. But I— but if I didn't know enough before I wrote the check for 34 billion, I mean, you know, I was making a mistake. You know, I really have not— I've learned nothing of significance specific to the railroad. Now, I would say that over the last year my appreciation of the competitive position of the rail industry vis-a-vis trucking has improved somewhat. There's— just the other day the truckers announced they're going to have to spend— or they're going to have to raise prices significantly this year. And so I think if anything, my appreciation for the competitive advantages of railroad both for the owner and for society have increased significantly.
BECKY: OK. Let's bring in a question from Richard in Tucson, Arizona, who says, "How do you evaluate the effectiveness of the $900 million spent on advertising last year at GEICO?"
BUFFETT: That's a good question. Yeah, people have been asking that question ever since they started advertising. I think it was John Dorrance at Campbell's Soup 75 years ago or so when it was a big advertiser, and they said, you know, `Isn't half your money wasted in— on advertising?' He says, `Yeah,' he says, `I just don't know which half.' Well, we can measure certain types of advertising. I mean, when we do direct mail advertising, you know, we get a response which gets measured. And we do cold phone numbers and that sort of thing. But now with three-quarters almost of our quotes coming from people who come to the Internet, you know, what drives them to geico.com, who knows? I mean, certainly our television advertising does it. All I know is it's working. In February we had the greatest gain in policyholders of any month in our history. And it blows me away.
BUFFETT: I mean, we had a gain of about 130,000 policyholders in one month. If you think of 130,000 households, that's like a town of 300,000 just getting added in one month. And why they come, you know, what— that little gecko does wonders and, you know, we get in people's minds that they're going— they might save money by checking with us. And it's a big, expensive item for most people, auto insurance, and if they can save a few hundred dollars, it's meaningful. So— but exactly why we get more inquiries in February than we were getting last October, you know, I don't know the answer. All I know is if I thought spending another billion dollars this year would work in an appreciable way, I would write a check so fast. I mean, I love advertising.
BECKY: You think the gecko works better than that catchy name, Government Employees Insurance Company?
BUFFETT: It— who knows what does it. It— one way or another— I mean, we were spending about 20 million a year when I took over in 1995, and now we're spending 900 million. And all I know is every month I urge them to spend more. I mean, it— we want every American to at least give us a try. And what we have seen is that of the people that call us, you know, if they phone us, we're going to get— over 40 percent of those people are going to become our customers. And when you get that kind of a response, you know, you better be out there talking to people.
BECKY: OK, let's bring in another question. Robert from Potomac, Maryland, writes in— and this is something that a lot of people are confused on, so hopefully you can clear this up. But, "Why did you allow, I assume, the new manager to liquidate many of Lou Simpson's stocks? If they met your `forever' holding period criteria with Simpson, why sell? Simpson's record is long-term proven. The new manager has no record long enough to show a similar competency or that his results are just luck. These stock sales are inconsistent with your forever holding period advice." So maybe you could clarify what's really happening there.
BUFFETT: Yeah. Well, we buy— when I say I, I buy stocks with the idea I'd be happy holding them forever. We don't end up owning them forever, obviously, in many cases, because you find something else that's more attractive and— or sometimes managements change and who knows what. But Lou Simpson was managing his own portfolio. He managed it for 21 years, did a sensational job. But when he said he was going to leave in June, he and I both decided he was going to liquidate his portfolio between then and the end of the year. In other words, I never inherit any investment decision from somebody else. If Charlie Munger made me a gift of 100 shares of some stock, I would sell it then— and then— I would then decide whether I wanted to buy it again myself. But I do not believe in default-type decisions on investments. So when Lou left, his portfolio left. When a new man comes in, his portfolio comes in.
BECKY: And the two aren't related.
BUFFETT: They're not related at all. Lou had maybe 15 or so stocks, generally in the 3- to $400 million range, and he just sold them proportionally throughout the rest of the year. He wasn't going to be managing them anymore, and I knew they were probably good companies, but I didn't want to buy them myself. And there's no reason, if I don't want to buy them myself, I should tell the next manager at Berkshire— of GEICO to manage them. Todd is going to be responsible for his decisions, and— just as Lou was when he was there. And I want it to be Todd's portfolio.
BECKY: OK. Carl, you have a question, too?
CARL: I was just wondering, Warren, earlier you talked about searching— hunting for elephants or even any business, and occasionally some businesses do not want to sell to you for a variety of reasons. Does that ever take you by surprise? Do you ever say, `Excuse me, I'm Warren Buffett. I'm kind of a big deal, and the opportunity to be owned by Berkshire doesn't— is kind of a golden ring that may not come around too much'?
BUFFETT: That isn't exactly the way I present it to people. No, it's very— a really good business, like I say, if it's owned privately, they shouldn't sell. I mean, I— I've been called in by lots of families, and I— and they're usually good businesses. And I— the first thing I tell them is that you should keep this business unless there's some compelling reason other than the dollars you'll get from it. Because you'll get a lot of dollars from me, but those dollars are not going to buy a better business than the one you've got already. I mean, I— you know, that's why I'm buying it. So I don't think— the question usually— the question is now is finding big businesses. I mean, there aren't that many big businesses in the world, and then I want big good businesses, and that narrows it down further. And then you have to have people who for some reason or another want to sell on the other side. And that happens from time to time in America.
I've— I had a fellow come to see me a few years ago, and he loves his business, it's a wonderful business, and he said, `Warren, I want to sell you this business.' And he said, `I want to sell you this business because I'm 61 years old and I'm in good health and I love running it, but I don't know, you know, what would happen if something happened to me tonight.' He said, `I've seen'— he'd bought another business where the family had fallen apart when the— when the owner had died, and he said, `I don't want to leave my wife with that kind of a problem, and my children, and they wouldn't know what to do with it. So as long as I get to keep running the business, I've got all the money in the world, and so I want to have the joy of running the business and I do not want to have the worry of what happens if I'm not around tomorrow.' And he said, `You're the only guy that can solve that.' So that's the only way I win beauty contests is when I'm the only guy in them.
CARL: All right, we're going to...
BECKY: All right, I think— go ahead.
CARL: Beck, we'll continue the conversation after we reset at the top of the hour. A lot more coming up with Warren Buffett and your e-mail questions, plus the countdown to jobs Friday is ongoing. It includes the ADP number in about 17 minutes' time. We'll get that number and the instant reaction when Squawk Box comes right back.
JOE: Ho, oh, hey, I thought we would be in...(unintelligible). Welcome back to Squawk Box here on CNBC, first in business worldwide. I'm Joe Kernen. I'm with Carl Quintanilla at CNBC headquarters. And Becky, who looks really beautiful.
JOE: What'd you do, bring a— who'd you bring— who's out there with you?
BECKY: I have great people out there.
JOE: And Warren looks— yeah— Warren looks good, too. That is Warren Buffett.
JOE: Yeah, ravishing. A legendary investor, Warren Buffett, with his— he's wearing an underwear tie. If you missed it, you should have been tuned in. He's been answering— he's been answering...
CARL: I think the term was asses to the masses.
JOE: Yeah, asses to the masses. He said that, yeah.
BECKY: Cover the asses of the masses.
JOE: Right. All right, answering viewer e-mails for the past two hours. We have many more questions or e-mails to go. I've got more, Carl has more, Becky has more. Plenty to discuss with him over the next 60 minutes. First, though, Carl is going to bring us up to speed, as only he can do, on the morning's top headlines. Carl..
CARL: Joe, thanks.
JOE: You're welcome.
CARL: Equity futures meanwhile holding onto some moderate gains, although Europe continues to be in the red. And, Beck, the market also responding, reacting to some of the calls that Warren has made in our first couple of hours. Some of them, I think, relatively bold, right, looking for unemployment in the low sevens by Election Day and other things like that.
BECKY: Yeah, that's right. You know, Carl, we've gotten through a lot of ground this morning. In case you missed some of the earlier points, why don't we talk very quickly about the economy and unemployment. As Joe and Carl mentioned, we do have ADP report. That report coming up at 8:15. And, Warren, we watch the ADP every month because we figure it'll give us some indication about what's happening with the big jobs report on Friday. It hasn't been great in tracking that lately, but do you watch the ADP?
BUFFETT: Well, I don't really. I watch our own businesses. And we've got so many of them, I get a lot of data coming in all the time, and, you know I don't know how accurate those surveys are. I do know how many people we've got on the Union Pacific working every day, or how many people's at Geico. And I was surprised incidentally last year that our employment only went up 1 percent, whereas our businesses really did a lot more volume overall. And I don't think we're going to be able to continue that. And there was— I think as our businesses increase this year our employment will go up much more in tandem with the rate of increase.
BECKY: What businesses do you expect to see more hiring within the Berkshire family?
BUFFETT: Well, I think most of— I think most of our businesses will hire more people. And I mean I think our railroad, you know, our railroad during January hired more people. But I know Geico will hire more people this year. But I think you'll see it. At Marmon, for example, one of our main businesses there is leasing— building and leasing rail tank cars. Now, when you see those trains going down the tracks, you think those cars all belong to the railroads. They don't. The tank cars all belong to shippers or to people like us who lease them to shippers. We are— and we make those cars down in Alexandria, Virginia. We are seeing more people interested in buying tank cars for various things, whether it's— I mean, it could be for ethanol, it could be— could be for all kinds of things that get carried in tank cars. We're seeing more interest in that in just the last month or two. We will add people at Alexandria, Virginia, to our tank car line. I don't know whether it'll be this month or three months from now or two months from now, but the orders are coming in. And you see that in one area after another in our businesses. So I think we will— I would be surprised if we don't add more— quite a bit more than 3,000 people this year to our overall employment.
BECKY: You know, you talked in the annual letter about optimism for this country.
BECKY: You've talked about how the economy is improving and how the investing outlook, you've said, is getting back to a normal situation, that things look very good in terms of the dividends you expect to be getting paid back from a lot of your major investments. You also, though, wrote in the annual letter about GE and Goldman . Those are two companies that you made major investments in preferred shares, and you did mention that by the end of this year you expect both of those companies to call you on those.
BUFFETT: Yeah, I made a mistake on those. I should have— I should have snuck in one sentence that said, "You have to find me if you're going to pay me off." And then, you know, I would have gone in the witness protection program and Immelt and Blankfein would have had these people out looking for me. But they know where to find me, and as soon as Goldman can pay me off, which is determined by the Federal Reserve, my guess is that they will. GE, by contract, can't pay me off till sometime in October and I think they will— they've said they will pay us off as quickly as possible. So that— you know, I— Goldman, I think, I mentioned we get $15 a second as a dividend. So tick, tick, tick, that's 15 bucks every time. And I love to hear those ticks, but they don't like to hear those ticks. And as soon as— when the Fed gives them the green light, I have a feeling that Lloyd will charter a NetJets plane and fly that check out to me.
BECKY: OK. Joe, you have a question, too?
JOE: Yeah, I do. And a— I should say I probably have a follow-up, too, because I'm going to get to where I'm going, but it always takes a while. I know that. Warren, we think about jobs in the country and how to get jobs. And then we also think about how to run businesses. And that huge— or that jet acquisition you made from Bombardier, you could have bought Gulfstream. Do you— do you ever think about social responsibility in terms of where the jobs will be— will be generated? That could have gone to Gulfstream, but it didn't, it went to Bombardier, right?
BUFFETT: Yeah, we think about what will be the best deal for our customers in terms of what they're going to want in terms of a wide cabin, long-range plane. And in the end the customer drives every decision we make on something of that sort.
JOE: That's a global— are you're buying— is that plane you're talking about?
BUFFETT: It's a series of four planes over the next decade or so. Eventually they'll bring in a 7,000 and an 8,000, so there's— and incidentally Gulfstream will be bringing in new planes over the next decade, too. But we evaluated the options just as we did in the small cabin planes, tried to decide what, in terms of the demands of our owners, what they want in terms of range, in terms of cabin width, in terms of all kinds of things, cost, and made that decision, because in the end we can buy planes, but we also have to sell planes, and the customer's going to make that decision.
JOE: We— I guess this indicates that both business travel, which I figure use the big cabin ones, and also— you bought— you bought in Marquis jet, right? That goes more to, what?
JOE: Pleasure? How's that acquisition going, and are we seeing then, you're saying, a bounce in both business travel and individuals?
BUFFETT: Yeah. And we bought Marquis late last year, and Kenny Dichter, who runs that operation, is doing a terrific job for us. Our sales of Marquis cards in the month since we bought it are appreciably ahead of the same months a year ago, and it made sense for us to buy Marquis and I'm glad we own it. We're seeing— we're seeing increases in both personal use and in business use. And sometimes it's hard to tell. Sometimes in small businesses an owner will have $100 or something, and we don't really know whether he's using it for personal or business use.
But we have seen— we have not seen a surge in demand at all. We have seen our present customers using more hours per month by a considerable margin than they were two years ago. They're usage right after Lehman fell off dramatically. They were still paying us the monthly management fee and all of it. They had the right to the same number of hours, but they weren't using them. It was amazing to me, because you had these very wealthy people and they had homes and, you know, that they went to at Christmas or Thanksgiving. But maybe they started going to them by bus. But our usage really fell off there significantly in the six months following Lehman. It's come back quite a ways. Our sales have picked up, but they're not remotely like they were four or five years ago when everybody was feeling flush. JOE: Well, you're making a huge bet on the future of this. And, you know, you— sometimes you lessen investments like Washington Post or something, that it looks like even though NetJets has never— has it been a big moneymaker for you? You're going in, you know, full bore at this point.
BUFFETT: Yeah. Well, Net, since we bought it, we made a couple hundred million dollars last year and that brought it— brought us back to where for the full 11 years we more or less broke even.
BUFFETT: So it has not been a satisfactory investment financially. It's been— it's been a significant winner in the marketplace. We have five times the market share of our leading competitor. Nobody's gained market share on us, nobody gets the customer satisfaction reports that we get. But we have not— we have not made money. We were spending more money than we were taking in, which catches up with you eventually. Under Dave Sokol, it's now doing very well. But it is now— we have not gone back to a period like 2005 and '06 and '07 when the hedge fund operators and everybody were signing up hand over fist. We're selling more than we were a year ago and are using more than a year ago, but it's not dramatic.
JOE: Well, it looks like you're expecting it to be.
BECKY: Hey, Warren, real quickly.
JOE: I'm sorry, Beck, but...
BUFFETT: Well, I...
BECKY: Oh, that's OK. Go ahead, Joe.
BUFFETT: Joe, I just feel if we could get you in the fold that millions would follow you. I mean, you're a trendsetter. So...
JOE: I have asked you many times for one of the— I don't know how we can swing it, Warren, but a Squawk jet has been on our list of things to have. You want one, too? A Liesman jet or a Squawk?
STEVE LIESMAN: Squawk...(unintelligible).
BUFFETT: If you'll just— if you'll just let me garnish your wages I could promise you you'll be in the— you'll be in the pilot's seat.
JOE: You— can you garnish into the hereafter? Because that's what it would take, I think.
CARL: How about we just put it on a credit card.
JOE: Yeah. Put it on a credit card, that's right.
BECKY: Put it on our AmEx.
BUFFETT: Maybe you and Carl ought to go in together.
CARL: He did send us a brick, and we will never forget that.
BECKY: Warren, let...
JOE: No, you sent— you sent— you sent me a brick and put my name on it.
BUFFETT: Yeah, and I do not remember a thank you note, but maybe I...
BECKY: Warren, I want to ask real quickly, we just put up the picture of Dave Sokol. He's one of the managers who is repeatedly mentioned as a potential successor. You said in your annual letter that there's a manager you talk to every single day. Is that Dave Sokol? Is that a Ajit?
BUFFETT: It's Ajit. I try— I talk to Dave very frequently, but I talk to Ajit every day. We have a lot of fun talking every day. I forget what the deal was he was— we were talking about yesterday, but it was— it was some insurance over— as you know, they've had two earthquakes in New Zealand and then floods in Australia, so that part of the world has been hit very hard by catastrophe. So there's a demand for more catastrophe insurance, for example, over there. And so Ajit and I just sit down and try and figure out what the chances are of another earthquake in New Zealand. And who better than us?
BECKY: You also just saw— we saw some headlines crossing about how Berkshire's going to be getting into the India insurance sector. That's a new move. Is that what this is...
BUFFETT: Yeah, that just happened. And I think we just got approved within maybe the last 48 hours. And we are going to have an agency over there that will be selling— I think it's going to be called Berkshire Direct.
BUFFETT: And I'll be over there in about three weeks, and I think by then we will be up and running. We just got the permit the other day, and so we're hiring people for the phones and all of that. So that should be fun.
BECKY: Hmm. All right, real quickly, just to bring this back to jobs because we do have ADP coming out in just a moment, there are a lot of economists who are not expecting any significant decline in the unemployment rate this year; some who aren't even expecting any until the end of next year. What's your own personal prediction?
BUFFETT: I think we'll create more jobs this year than we did last year. Now, the unemployment rate bounces around in kind of a funny way depending on who declares themselves in the— in the labor force. But I think we will have better luck creating jobs in 2011 than 2010. Just— I just see businesses improving. And I think— I think they were very reluctant to hired when they first— saw the first robin or two.
BUFFETT: I mean, they— they've been through such a painful period...
BUFFETT: ...that they just, they were not going to bring a bunch of people back on until they really needed to bring them on.
BUFFETT: But they need to bring them on now.
BECKY: OK. And, Carl, I think you have more on that right now.
CARL: We do. We're going to get ADP, Beck, in about 40 seconds.
"THE ECONOMY IS COMING BACK"
CARL: Let's send it back to Becky in Omaha. Beck ...
BECKY: Hey, Carl, thank you. You know, Warren, we just heard the ADP numbers here, and obviously they were a little stronger than had been expected. Everybody's playing this guessing game right now, though, trying to figure out where the economy stands. And that brings us back to a discussion we had earlier this morning, trying to figure out what the Fed does next with its monetary policy. You said if you were Ben Bernanke, you'd end QE2 right now based on how you think the economy's doing.