Warren Buffett appeared live on CNBC's Squawk Box this morning, February 27, 2012, for his annual "Ask Warren" three-hour marathon.
This is part six of a transcript of his comments. (Click here for part five)
ANDREW: Let's get back to Becky who is live in Omaha. Becky, I have got stolen Joe's read. He's giving me a look.
JOE: Thanks, Joe. Thanks, Joe.
ANDREW: Thanks, Joe. It's great.
JOE: You're here, it does...
BECKY: Thank you, Andrew. Thank you, Joe.
JOE: You're out there he does it, you're he does it. It's just...
ANDREW: It all ran together. I apologize.
BECKY: Oh, we're a big family. We all share. We all share, it's all good.
JOE: This is Freud — this is Freudian, though. This is — I mean, it's not really a slip. I mean, you know, I'm just wondering whether it's accidental at this point, Becky. But OK.
BECKY: No. He's doing it just to rattle you for the morning.
Anyway, guys, we are back with Warren Buffett and Warren, we've gotten a chance to ask you about a lot of different things that have been going on. Andrew just picked up with a line about some of the banks and this is a good time to ask you about Wells Fargo, which you own a major, major stake.
BECKY: How's big the — what's the percent of the shares outstanding you have?
BUFFETT: Well, we have — we have a little over 400 million shares, so we're well over 7 percent of the company.
BECKY: We had John Stumpf in — John Stumpf in recently to talk about how things are going at the bank, and a lot of people have said that they think that is the best run bank in the country. We have analysts who were on that day that said that as well. You own now a stake in Bank of America, too. If you had to match all these banks up, what do you think is the best run bank?
BUFFETT: Well, banks are not going to earn as good of return on equity in the future as they had — that they did about five years ago. Their leverage is being restrained, for good reason in many cases. So banks earn on assets, but the ratio of assets to equity, the leverage they have determines what they earn on equity. And if you reduce leverage, you reduce earnings on equity. It's still a good business. And the American banks are really probably, in many cases, in the best shape they've ever been in. Around the world, banks are not in good shape, but the American banking system has really had a remarkable comeback in the last three years.
BECKY: You didn't answer my question.
BUFFETT: What's your question?
BECKY: Which bank do you like the best? You invest in many of them.
BUFFETT: Which bank — you mean of the ones we own?
BECKY: Yeah, of the ones you own.
BUFFETT: Well, I would say that if I had to just own one bank, I would probably own Wells.
BECKY: OK. Wells Fargo is in the news today. There's a story in the Financial Times that says that the company is looking for acquisitions in terms of wealth management, that they're looking to get into some of that higher income gain. Is that a good move from your perspective?
BUFFETT: Well, if they execute it well, it's good. And what Wells has done very well is to sell a wide variety of services to a huge deposit base. The biggest single asset that Wells has is its deposit banks, as is true with the Bank of America.
BUFFETT: They have a consumer-based small business type base that's just huge, more so than will be the case with Morgan or Citigroup. So that's a terrific asset. It really isn't a big value now because you can't put money on it at any rate. But over time, it's a terrific asset. And they sell other products to that group, and the more products they have that they effectively can deliver to those clients, the better.
BECKY: Well, that brings us to a question that we got from our viewers. Again, we have a lot of questions that have come in from our viewers. This one comes from Charles in New York, New York. Control room, it's number 84. And he picks up on this idea about the low rates. He says, "If the employment picks up substantially this year, do you think it will prompt the Fed to reconsider its considerably low rates policy?" And would that, in turn, end up helping those financials?
BUFFETT: Well, if it picks up enough.
BUFFETT: I mean, if the economy really started roaring, the Fed would act sooner than 2014. They will respond to what they — what they see in the economy. I doubt that it picks up at that rate. I think it will get better as the year goes along, but who knows? You get a lot of surprises in economics.
BECKY: So you don't necessarily worry about inflation before that? I guess the Feds looking at its best forecast and it says 2014. Does that jibe with what you see?
BUFFETT: Not necessarily. But I just — I don't think I'm great on some crystal ball.
BUFFETT: I can tell you that business is getting better. Now, it's been getting better for the last three years, and I think it'll keep getting better, barring some, you know, bolt out of the blue. But I don't think anybody knows the pace at which — it'll really start improving when housing construction picks up significantly.
BECKY: If you had to bet, again, you don't have a crystal ball in this, but if you had to bet, do you think that it would pick up enough if you had to bet earlier or later, that you'd say 2013 or 2015?
BUFFETT: I think it'll — I think it'll look strong before 2014.
BUFFETT: And interest rates will pick up some, but we have, you know, we have — we have sown the seeds of a lot of inflation for the future. Now, whether we can unsow those seeds and dig them up again, that's not so easy to do. It's easy to talk about, but it's a lot easier to sow the seeds than it is to replant.
BECKY: I know you said that you don't like gold or a lot of other places to put your money, but John Merrill writes in with a pretty good question. He says, "Would you rather have, if you had to have one of the two, all the gold ever mined or all the paper dollars ever printed? The choice is between two monetary assets, either of which could be used to buy Exxon or farmland." And what's your answer on that?
BUFFETT: I definitely don't like paper money. I like physical assets. So I would — I — but I wouldn't buy gold or I wouldn't buy rare stamps, although I was a stamp collector. I wouldn't buy paintings, although, you know, a number of them I appreciate. I would buy something that's productive. I bought a farm in the mid-1980s. You know, I mean, that farm is more productive now in terms of it actually — farming techniques have improved somewhat, fertilizers and all that, and then prices are somewhat higher. That farm will always be a good asset, and I don't get a quote. I've never had a quote on it in 25 years. I've never turned into the farm channel, you know. But it will be a productive asset. I would rather own that than own some asset that just looks at me.
BECKY: Andrew, you have a question, too?
ANDREW: Hey, Warren. I — just going back to banking because I was listening to some of your comments about Wells Fargo and some of your praise for Bank of America, reading some of the things you said about Brian Moynihan. And one of the companies that wasn't in there, though — I don't know, actually you may still be a little bit invested in some of the...
ANDREW: Well, the preferreds that were paid back. Goldman Sachs. I was curious to sort of — how you see that business model and how you look at Lloyd Blankfein. I know you've praised him in the past.
BUFFETT: I'm unequivocal in my praise of Lloyd. I think he did a terrific job in bringing the company through a crisis. I — he's a fine human being. He's very smart. He's straightforward, he's decent.
ANDREW: But what's your take on the larger business model?
BUFFETT: And we own — the business model is not as good as it was five years ago. And that's true for all the investment banks, and it's true for the commercial banks. You know, they are subject to much more scrutiny and particularly in terms of leverage and in terms of the activities they can engage in and that will reduce the profitability, the return on equities that they get now compared to what they can earn five or six or seven years ago. Our position is that we own warrants on about 43 million shares or there about at 115 that are good in — for about a year and a half, or just a little more.
JOE: Warren, why haven't — why haven't you just bought a whole fertilizer company?
BUFFETT: Well, no one's offered...
JOE: I mean, not that — not that you don't manufacture enough yourself, as we've seen today.
BUFFETT: I understand that one. I do.
ANDREW: Oh wow. Wow.
BUFFETT: I knew there was a reason for that question. Well, I...
JOE: No, no, no, no, no, no. That came out — I really wasn't planning on saying that, but I listen to you...
BUFFETT: Oh, I know that. But, listen, why don't — I'm in the factory.
JOE: No, but honestly, you look at everything I read and I'm back to that Grantham piece in Barron's, I mean, you think about the long-term trends and demos for fertilizer companies or any kind of ag-related company. I'm just wondering, you know, you got all — you never know what to do. You have — money keeps building up and you buy a whole railroad. I mean, I'm just surprised that at some point you haven't decided to just do something like that.
BUFFETT: I don't rule it out. None has ever been offered to us. We tend to buy businesses that are offered to us. I do not go out prospecting very often. But it is — it's a commodity business, but it's a commodity business that it takes a long time to bring on additional supply. The demand overall — but the demand overall for corn, the demand for wheat and soy beans and all kinds of things. The real question is whether the supply grows faster. That will determine the pricing. And as you know, fertilizer prices have moved around a lot over the last 10 years.
BECKY: Mm-hmm. Warren, why don't we talk about something you've talked to us about the last time you were on, IBM, a new company that you've been making major acquisitions in. I believe you own about 5 1/2 percent?
BUFFETT: Five and a half — we call it HAL around the office, yeah.
BUFFETT: Five and a half percent, yeah.
BECKY: ...have you continued to buy shares of IBM since we spoke with you?
BUFFETT: Oh, we bought just the tiniest bit. We — you'll see in the first quarter, we just bought a few shares. I was willing to buy a lot, and then it moved up. But anything we own, with the few exceptions, we can't buy more American Express because it's a bank holding company and it's against the rules. But anything we own is at the top of our mind in terms of when we buy something additionally. In other words, I measure any new purchase against what I like least in our portfolio now and unless it — unless it meets that test, I'll just buy more of something in the portfolio.
BECKY: So have you been buying more of Wells?
BUFFETT: And we bought more Wells — we bought more Wells. Yeah. We bought more Wells just year after year. And we bought...
BUFFETT: We bought more Wells since year end, as a matter of fact. And we bought just a few shares of IBM. But if we like something, you know, we're going to — the money does keep coming in, so we will — we'll look first at the things we own.
BECKY: The new CEO of IBM, management changed.
BECKY: Even since you began buying that stake.
BECKY: Ginni Rometty, have you met with her or talked with her?
BUFFETT: Yeah. She was out here for lunch about a month ago, but she was also making sales calls.
BECKY: And what did you think after meeting with her?
BUFFETT: I think she's terrific, you know. But I would expect that. I mean, you know, IBM is a very well-run organization. I didn't know who she was, you know, a year or 18 months ago. And I knew that Sam Palisanto was going — they tend to retire early there. So I knew he was going to retire fairly early. I did not sit there and, you know, write to Sam and say, `I can't buy this stock unless I know who your successor is going to be,' or anything of the sort. I knew they'd make a good choice, and they did.
BECKY: Are there any other new companies you've been delving into?
BUFFETT: There are always things on the horizon.
BECKY: Would I be wrong in assuming — well, is IBM a one-off in the technology field? Because there are a lot of people who did not expect that. You've never really invested in technology companies. Is that still — does that standard still apply for the most part?
BUFFETT: It — probably for the most part, but if I think I understand enough about the future of the business and I like the management and I like the price and it's big, because we need sizeable ones, we would buy it. But, as I've told you in the past, Microsoft is off limits because people would think I had some kind of inside information if anything good happens, so it's a no-win situation from our standpoint. But it's unlikely we do a lot in that area, but if I — if I felt a strong enough conviction on something, and I liked the management and price, I would do it.
BECKY: OK. When you take a look at Bank of America, people have written in wondering what you think about Brian Moynihan's performance there since you've stepped into the stock.
BUFFETT: I think he got — he got handed a — it was a terrible situation he got handed. I mean, it — you know, with the — all of the problems — particularly of Countrywide more than anything else, but some of their own, too. So he was handed a mess. And, fortunately, he was also handed, you know, as great a deposit basis as exists in the world, and that deposit base continues to exist. You know, they have a contact with a significant percentage of all of American homes, and that's a huge asset. And what he has done is he's working through the problems he inherited, and you can't do them in a day or in a week or a month, particularly ones that involve litigation. He's pared off some of the assets that aren't central to it. He's done exactly what I would do if I was in there, and it's going to take him a significant amount of time from this point forward. Litigation can't be pushed. If you just say, `I'm willing to settle with anybody,' you're going to be a patsy, you know, so he has to — he has to weigh the costs of diversion of time and all that's involved in litigation against just being a patsy in terms of lawsuits.
BECKY: That stock right now, we just saw, is at $7.85. You bought in at 6 percent preferred, but you've also got warrants.
BECKY: Seven hundred million?
BUFFETT: Seven hundred million, yeah.
BECKY: To buy at below 7.50, I believe.
BUFFETT: Seven fourteen.
BECKY: Seven fourteen, anytime between now and 2021?
BUFFETT: Yeah. They were 10 years from the time we got them.
BECKY: OK. So, again, you feel pretty confident in that investment, not necessarily because you're buying on the open market, but because you have a different deal.
BUFFETT: No. We like the preferred and we like the warrants, and we will be there for a long time. Now, you know, we are prohibited from selling. I mean, we do not have something that we can turn around and sell tomorrow. Like somebody buys a stock in the market, they can change their mind tomorrow if the stock goes up a point, they can sell and make a quick profit. We can't do any of that. We have to make our money out of the fact that the business really does well over time.
BUFFETT: And I think it will.
BECKY: You brought up Apple a little earlier today when you were talking about Tim Cook as the successor there. You're not somebody who's ever bought Apple shares, correct?
BUFFETT: No, I've never bought Apple.
BECKY: But you...
BUFFETT: I wish I had.
BECKY: But you have talked to Steve Jobs in the past.
BUFFETT: Yeah, Steve — I got — Steve went on the board of Grinnell College when I...
BUFFETT: He was in his early 20s. He was a big admirer of Bob Noyce's, and Bob was connected there. And so I saw him just a few times over time, but he called me — he did call me a couple of years ago. It was an interesting conversation because I hadn't talked to him for a long time, and he said `We've got all this cash, Warren,' and he says, `what should we do with it?' So we went over the alternatives, and it was kind of interesting.
BECKY: What were the alternatives that you laid out? Stock buybacks, dividends?
BUFFETT: There's only four things you could do.
BECKY: Stock buybacks, dividends, acquisitions? What am I forgetting?
BUFFETT: And sitting with it.
BECKY: And sitting with it.
BUFFETT: And sitting with it, and he had many, many, many, many billions. And I said — I went through the logic of each thing. Now, the — he told me they would not have the chance to make big acquisitions that required lots of money. I mean, they were internally, and that's exactly what they should be. And then I asked him the question, I said, you know, `I would use it for acquisitions if I thought my stock was undervalued.' I mean, `I would use it for repurchases if I thought my stock was undervalued.' And I said how do you feel about that? Stock was around 200 and something. He said, `I think our stock's really undervalued.' I said, `Well, you know, what better can you do with your money?' And then we talked a while, and he didn't do anything. And, of course, he didn't want to do anything. He just liked having the cash. It was very interesting to me because I later learned that he said that I agreed with him to do nothing with the cash. But he just didn't want to — he didn't want to repurchase stocks, although he absolutely thought his stock was significantly underpriced at 200 and whatever it was.
BECKY: Well, he was right, it's over 500.
BUFFETT: Yeah. I said, look, you can buy dollar bills for 80 cents or 70 cents and you know the dollar bill. I mean, it's not a counterfeit, it's your dollar bill. I said go to it, and the truth was he didn't. He just didn't want to repurchase stock. But he was certainly right about his stock being undervalued.
BECKY: You've said in the past that you would never do stock buybacks and you would never issue a dividend at Berkshire. Last year you broke the idea of the stock buybacks by laying out how and when you would buy back stock from Berkshire and actually starting to buy some back.
BUFFETT: Yeah, and I — but I never said we'd never buy stock back. As a matter of fact, in the 2000 annual report, we announced we'd buy stock back. I've always said buying stock back makes great sense when you're buying it at a significant discount. Now there is that ethical question about you're buying it from your partners. I mean, the first line we have in our economic principle is that although our form is corporate, our attitude is partner — partnership. So we want to be sure if we're buying it back from our partners at a discount from what it's worth that they understand what it's worth and why we're doing it. But there's nothing like buying your own stock back at a big discount. I mean, one of the things I like about IBM is the fact that they have aggressively bought their stock back over time. That's made their shareholders richer.
BUFFETT: And they've announced they'll continue to buy their stock back big time and that will make their stockholders even richer. I love it.
BECKY: There is a viewer who wrote in on this exact question. Chris Sales from Freeland, Michigan. He says "in the letter released on the 25th you indicate that you don't enjoy cashing out partners at a discount when you rebought — when you repurchase Berkshire shares, yet at the same letter you prefer IBM buying stock from your fellow IBM partners at the lower — and he lower prices the better." Why do you have the different views?
BUFFETT: Well, I say if we buy our own stock the lower the price the better.
BUFFETT: I mean, we are running the company for the shareholders and I don't think there's anything wrong with IBM buying their stock at all. And they have laid out a plan — they laid one out five years ago, a road map and they've laid out another road map. They've told their shareholders exactly what they expect to do and if the shareholders elect to sell the stock at a price that's attractive for the company to buy it, there is no moral stigma in the least attached to them buying it. I'm — and I'm all for it.
BECKY: We've got a question from Hunts Point, Washington. A lot of people wrote in similar questions. This one comes, it's number 31, control room. "Even though the book value, as well as incremental stock prices increasing, why not now give a dividend?"
BECKY: Why not give a dividend?
BUFFETT: Well, a dividend essentially would have hurt Berkshire at any time since I've been there.
BUFFETT: I mean, every dollar that's been reinvested in Berkshire has turned out to have a greater than a $1 value. So what's the sense of paying out somebody a dollar that's worth $1.10 or more in the business? And we say that we'll buy it at $1.10.
BECKY: All right, we've got more to get to. We're going to take a very quick break. Guys, we'll send it back to you in the studio. When we come back we're going to talk a little bit more about Simpson-Bowles and some other issues, too.
ANDREW: And as Becky just said, coming up we're going to get more from the Oracle of Omaha. He's answering your emails and tweets and big news on the Twitter front. Warren Buffett, he's trending in the US right now right behind "The Artist" and Meryl Streep. And today's a very special day for our colleagues at "Squawk on the Street." They're unveiling their new set at the New York Stock Exchange. We're going to get a sneak peek of it in the next half-hour. SQUAWK is coming right back after this.
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