Buffett Watch

Here is the full transcript of billionaire investor Warren Buffett's interview with CNBC

Investing icon Warren Buffett on Trump, Apple and airlines

Following is the unofficial transcript of a CNBC interview with Berkshire Hathaway Chairman & CEO Warren Buffett on CNBC's "Squawk Box," Monday, Feb. 27. Video from the interview is available on CNBC.com. All references must be sourced to CNBC.

Becky Quick: And again, Warren Buffett is with us in Omaha to ... this morning at the Nebraska Furniture Mart. Warren, this is ten years now.

Warren Buffett: Ten years.

Quick: ...That we've been doing the Ask Warren Show, where you've let us come out, bring questions from viewers along with us, and we wanna thank you for that, and for taking the time to be with us once again this morning.

Buffett: It's always been fun.

Quick: It has always been fun. We have a lot of questions, as Joe was just alluding to, this morning. But why don't we start talking about the letter ... the letter that was just released on Saturday morning. A lot of people had a chance to look through it. How many is this, 53 for you now of letters?

Buffett: It's been 52 years, maybe 50. A lot of it.

Quick: It's been more than 50. I remember.

Buffett: Well yeah. It's been maybe 53.

Quick: All right. So in this letter you start things off with a message that is a familiar message for you, the American dynamism, the ... just how powerful this country is.

Buffett: It's unbelievable.

Quick: It's a very common message for you. But is there a reason that you chose to put it so high in the letter this year?

Buffett: Well, I usually put it pretty high in the letter because it's the dominant theme that's run through my life since I bought my first stock in the spring of 1942 when I was 11 years old. And it overwhelms everything else over time. I mean, we have hiccups in the economy and we even had a panic in 2008. And we had a war during that period that when they started we were losing the war, actually, in the spring of 1942. But this country always comes back and wins. And it's astounding when you think about it, what's happened in 240 years. That is less than three of my lifetimes. And let's look at this place, I mean, there wasn't anything here 240 years ago. And civilization is gone on, you know, for centuries, and centuries, and centuries with people making very little progress in their lives. And then America showed the way and it ... and we have not lost the secret sauce.

Quick: In terms of what the message is you want to get across to people, I mean, when we're looking at markets at such high levels, as Joe was just alluding to, it has a lot of doubters and a lot of people saying: "Wait, it's too late for me to get in. I've missed it. We're past Dow 20k, now I have to wait for the pullback." What would you say to someone like that?

Buffett: Well, I would say they don't know, and I don't know. And if there's a game it's very good to be in for the rest of your life, the idea to stay out of it because you think you know when to enter it-- is a terrible mistake. I don't know anybody that can time markets over the years. A lot of people thought they can. But, if you were buying a farm and you decided that farms were gonna be worth more money ten, or 20, or 30 years from now and that would be a productive asset, go out and buy it unless it was just ... some absurd price. And the best thing with stocks actually is to buy 'em consistently over time. You wanna spread the risk as far as the specific companies you're in by owning a diversified group, and you diversify over time by buying this month, next month, the year after, the year after, the year after. I ... but you ... making a terrible mistake if you stay out of a game that you think is going to be very good over time because you think you can pick a better time to enter it.

Quick: Although you have had times where you thought stocks were incredibly cheap, like in 2008, 2009, when you talked about that, even on our program. You thought that there were times that stocks were greatly overvalued where you've said, "Forget it, don't do it." Are we near an inflection point right now, as best as you can tell?

Buffett: Well ... I've been talking this way for quite a while, ever since the fall of 2008. I was a little early on that actually. But I don't think you could time it. And we are not in a bubble territory or anything of the sort. Now, if interest rates were 7 or 8 percent then these prices would look exceptionally high. But you have to measure, you know, you measure everything against: interest rates, basically, and interest rates act like gravity on valuation. So when interest rates were 15 percent in 1982 they'd pull down the value of any asset. So, what's the sense of buying a farm on a 4 percent yield basis if you can get 15 percent in government's? But measured against interest rates, stocks actually are on the cheap side compared to historic valuations. But the risk always is, is that — that interest rates go up a lot, and that brings stocks down. But I would say this, if the ten-year stays at 230, and they would stay there for ten years, you would regret very much not having bought stocks now.

Quick: Joe, this sounds like the perfect jumping in point for what you had just been talking about, where you were watching the ... what's happening with interest rates?

Joe Kernen: I think it's, as much as we talk about, economic nationalism it is still global, and I don't know when the rest of the world's headed one way it's just, you know, the money's gonna come in here for our bonds. And as long as that happens I guess we stay low ... you know, I was thinking about something else, Becky, and I mean, I don't wanna take this too far afield. But with Warren, I was wondering what it is about us ... about the United States. And I wonder that is so different from historically the way, you know, countries have prevailed, Warren. And I wonder if eventually we can't just assume we'll always be this dynamic? Or was it ... is the Constitution and the way they set things up, those guys were that smart? Or is it the people that we have? Is it that we're ... we've brought in so many people from around the world that came from places where, you know, they didn't wanna be, and they came to this great spot here? And, I mean, have we selected genetically for people that are entrepreneurial and work hard ... I don't know. Have you got your finger on what it is? If any, if you don't, I don't know who does. You've had plenty of time to think about it. I mean, you're not old.

Buffett: Well...

Kernen: ...But you've had a lot of time to consider these things.

Buffett: Yeah. If you go back to 1790, Joe, there were four million people, roughly, in the United States of whom 700,000 were slaves. There were 900 million people around the world. So we had at that time a half of 1 percent of the world's population. And it was a friendly country in terms of the soil, and the minerals, and the temperature and all of that. But there were other friendly spots around the world. And so why did this ... why did these four million people do something that 900 million people hadn't been able to do before, where progress had been very slow? And I would say that it was a combination ... none of these perfect, but I think the market system was absolutely essential to it. It was not a planned economy and I would say that rule of law was important, never perfect but far more than many places. I would say that equality of opportunity was a factor. I would say that immigration did select for people that to some extent selected for people that were ambitious and really wanted a new life. But I would ... if I had to pick one thing I would say the market system ... was the overwhelming factor that contributed to it.

Kernen: You know what? Life is weird too, because I think it's weird that Adam Smith wrote that book in 1776 and it...

Buffett: Yeah, exactly.

Kernen: That's not a coincidence. That when you're able to own an idea, and you got, like, a court system that will back up your ownership of patent law, and then you can commercialize it, I think maybe that was it. I think intellectual property, and property rights, and things like that. Because prior to that, after 10,000 years of spinning our wheels no one ... What was the average GDP per person? And then all of a sudden, starting when you were able to own an idea and commercialize it, suddenly it exploded, GDP, like, in multiple times.

Buffett: It unlocked human potential, Joe. I mean, you know, we aren't smarter now than they were 240 years ago, and we certainly don't work harder. But once you started opening up human potential,the sky's the limit. And it's just starting.

Quick: Yeah, there are times, Warren, where you hear pundits or other people saying, "Look things are at risk at this point. Our American way of life, our system is under threat." And I've heard this from all sides at all different times. Is there ever a point where you thought that was the case?

Buffett: No, and you say you've heard it at all times from all sides. I've been hearing it, you know, all my life. And in the spring of 1942 I was 11 years old, and the Dow was at about 100. And we were losing the war in the Pacific at that point, that was early ... was shortly after Pearl Harbor. And there was no doubt in this country we were going to win over time. I mean, and people said, "Well, this is let's wait till things are clear, let's wait till we start winning the war." There's always a reason to wait and I've listened to that all my life. You know, when I got out of school the Dow had never been above 200. There'd never been a year when the Dow had not been below 200 during the year. Even in 1929, when it got to 381, the low was below 200. Never been a year. Well, so what, you know? But that was a big subject at that time. And then you know, we ran into price controls, we ran into the oil shocks, you name it, just all kinds of things. And those are diversions. So all my life I've been hearing, "You know, maybe there's a better time to invest, you know?" Or, "Things are more unpredictable now." They're always unpredictable. I can't predict what's gonna happen tomorrow. I mean, you could have anything happen tomorrow. We've had October 19th, 1987, 22 percent down in one day. So I can predict what'll happen ten or 20 years in a general way, but I have no idea what'll happen tomorrow. And the important thing is if you got these wonderful assets out there, to own 'em, and which ones do you own? I mean, if you ... if you save money you can buy bonds, you can buy a farm, you can buy an apartment, house, or even buy a part of American business. And if you buy a 10-year bond now you're paying over 40 times earnings for something whose earnings can't grow. And you know, you compare that to buying equities, good businesses, I don't think there's any comparison. But that doesn't mean the stock market can't go down 20 percent tomorrow. I mean, you never know what it's going to do tomorrow, but you do know what it's going to do over ten or 20 years. And people talk about 20,000 being high. Well, I remember when it hit 200 and that was supposedly high. The Dow, I mean, the Dow, in your lifetime. You know, you're going to see a Dow that certainly approaches 100,000 and that doesn't require any miracles, that just requires the American system continuing to function pretty much as it has.

Quick: You know, you had made some headlines when you said maybe a month or two ago that you had spent about $12 billion in stocks since the election. Have you continued to spend since that time?

Buffett: Well, not sure exactly when I said it. But we certainly bought in two groups. I'm adding 'em together now. We spent $14 billion with ... we probably spent ... since a little before the election, maybe. 'Cause we were b — maybe $20 billion, even.

Quick: $20 billion? You're just counting the billions in your head as you sit here doing this?

Buffett: Well, I was ... yeah, yeah. I quit when I got to $20 billion.

Quick: And why now? Again, is there a reason for this? Or is it just, you look at individual stocks that you wanted to own, and you bought them?

Buffett: I absolutely look at individual stocks. It has nothing to do what the Federal Reserve, it has nothing to do with the election. As it does have, it would have something to do with interest rates if they did something extraordinary. It hasn't had, because they haven't been, they haven't changed that much. But there just were a couple of things I wanted 'em to do and we had the money. And I like investing. And I would much rather have that $20 billion in these companies that I don't look at it as being in stocks, I look at it as being in businesses. It's just small pieces of businesses. And I would so much rather have that than have the money in treasury bills, which is my alternate, that I don't have any problem with the decision at all.

Quick: What are the businesses? Should I assume it's Apple and the airlines, based on what we've seen?

Buffett: I think that's a good guess.

Quick: But $20 billion ... is that more than what we have been told based on the 13-F filings? I'm just going back...

Buffett: Yeah, it was more than showed on Dec. 31 because we spent a lot of money since Dec. 31.

Quick: On what? Is it more Apple, more airlines?

Buffett: Since we're not buying it now — it's at a price different than I would buy it now. But we bought a lot more Apple after year end.

Quick: With the holdings that you'd had, Apple was already ... was it the fifth biggest holder, the third biggest?

Buffett: I think we showed $59 million, or something like that.

Quick: Yeah, I'm sorry, I'm just looking through the report right now to grab that page. Yeah, it was already your fifth-biggest holding as of Dec. 31 at $7 billion. How much more did you buy?

Buffett: Well, it...

Quick: $7 billion.

Buffett: You know, we could change our mind tomorrow and all of that, but we have not bought Apple in the last ... well, since the earnings report came out because it shot up some then. But we would have, one of the fellows in the office has about 10 million shares, and I have for Berkshire's account about 123 million. So, we got about 133 million shares.

Quick: One of the fellows ... that's Todd or Ted?

Buffett: Yeah.

Quick: Would you care to say which one? Or?

Buffett: I never identify which one does which.

Quick: So, one of them bought, and then you as a result bought some additional?

Buffett: One of them had had 10 million shares, and then I bought another 123 million shares, or something like that.

Quick: Why?

Buffett: 'Cause I liked it.

Quick: You know, you've always said that you're not a technology investor, and now when you start looking through the earnings, through the holdings...

Buffett: Say, I'm not a technology investor.

Quick: Wait, but again, hold this ... hold that up higher, they can't see it. That's your phone.

Buffett: There's a vast, untapped market out there. I mean, 86-year-old guys who haven't got it yet.

Quick: So, you say you're not a technology investor, but you're buying shares of Apple, which is now Berkshire's fifth, or maybe even larger than that based on how many that you've put in since then, how many you've bought since Dec. 31. IBM is your third-biggest holding, too?

Buffett: Well, I would say Apple's — I mean, obviously it's very, very, very tech-involved, but it's a consumer product to a great extent too. And I mean, it has consumer aspects to it. And one of the great books on investing, which I've touted before, is one that Phil Fisher wrote back around 1960 or thereabouts, called "Common Stocks and Uncommon Profits." It had an effect on me. I went out to meet Phil Fisher after reading the book, I found him in this little office in San Francisco. And I recommend any investor read that book. And it's still in print. And he talks about something called the scuttlebutt method, which made a big impression on me at the time. But I used it a lot, which is essentially going out and finding out as much as you can about how people feel about the products that they ... it's just asking questions, basically. And Apple strikes me as having quite a sticky product and enormously useful product that people would use, and not that I do. Tim Cook's always kidding me about that. But it's a decision-based ... but again, it gets down to the future earning power of Apple when you get right down to it. And I think Tim has done a terrific job, I think he's been very intelligent about capital deployment. And I don't know what goes on inside their research labs or anything of the sort. I do know what goes on in their customers' minds because I spend a lot of time talking to 'em.

Quick: Have you spoken with Tim Cook about this?

Buffett: No, not about this, not about this. He would've seen our 13-F filing, and he would've seen the one before, so he would've known somebody had — Berkshire owned some shares, and then he would've seen the 13-F filing. And I usually see him maybe twice a year. I see him at Sun Valley and perhaps one other time.

Quick: Wow. Can I ask you, you said it's how many shares that you own, 133...?

Buffett: Well, 133 million.

Quick: Million? Which, I'm sorry, how many did you own as of Dec. 31 that worked out to $7 billion? I can't do it in my head.

Buffett: Well, I think we had 59 million at year end.

Quick: So, you've more than doubled it since that time?

Buffett: That's correct. And we act ... it's amazing how much you can buy of some of these things. 'Cause we had bought that, the added 70 million plus, we bought that all by the time they reported their earnings. So, it was done probably in 20 business days, or...

Quick: And their earnings were better than people had expected, and the stock jumped as a result. So.

Buffett: Yeah, I don't think they were that much better than people expect. I mean, they, the company.

Quick: Stock was up after the earnings report...

Buffett: Yeah, yeah. It did jump, and that's why we couldn't buy. We probably would've bought more. But the stock, they tell you every quarter what they expect in sales and in gross margins and they've been pretty accurate on that. So I don't think the fourth quarter, well, in the fourth, fifth — I mean, the December quarter, they're on a fiscal year. I don't think that was that big, or should've been that big a surprise. But they've got an extraordinary business. Yeah, there's always people—

Quick: Wow—

Buffett: Trying to knock you off. And the market system, one of the things it does is, if you've got something good you've got a lot of people who are gunning for ya. And you've got some very smart people that are gunning for them.

Quick: You know, we could talk more about this in just a moment, if you don't mind if we sneak in a commercial break.

Buffett: Okay, yeah.

Quick: By the way, for anybody who didn't think we were gonna get to big news very quickly, you're already missing a lot. Warren Buffett already telling us he's been buying more stock since the beginning of the year, since the last 13-F filings, telling us he's bought more than double the amount of Apple that they had disclosed at that point. Stick around, 'cause you never know what's gonna come out of his mouth. We'll be back with more from Warren Buffett in just a moment.


Quick: Welcome back to "Squawk Box" everybody, we are live in Omaha, Nebraska this morning with Berkshire Hathaway's chairman and CEO, Warren Buffett. And if you thought you could sleep in this morning and catch up with us, well, you are late already. Warren Buffett has already told us this morning some secrets that nobody else knew until just now. Warren Buffett and Berkshire Hathaway have been buying a lot of shares of Apple. In fact, as of the end of the year, according to SEC filings and the annual report it was the fifth largest holding of Berkshire at $7 billion in that stock. Warren just told us that he had continued buying that stock, even through the beginning of this year. And at this point he now owns $17 billion worth of Apple shares. That gives him about 2.5 percent of the shares outstanding of Apple, and is now the second largest holding after Wells Fargo for Berkshire Hathaway.

Buffett: Yeah, it'd be very close, but—

Quick: Very close to Coca-Cola?

Buffett: Yeah.

Quick: Very close, neck and neck, with Coca-Cola, but it looks like it edges it out, at least where the price is right now. Warren, we were talking a little bit about how you came about to this decision and I, you know, I assumed you had people who would go out and do some of these channel checks for you and do some of these things. But you just mentioned to me you've done some of the research yourself right here in this building.

Buffett: Well, I've, yeah, I had learned that from a fella named Phil Fisher who wrote this great book called "Common Stocks and Uncommon Profits." And he calls it the scuttlebutt method. And Phil was a remarkable guy. And I first used it back in 1963 when American Express had this great Salad Oil Scandal that people were worried about it bankrupting the company. So I went out to restaurants and saw what people were doing with the American Express card, and I went to banks to see what they were doing with travelers' checks and everything. And clearly American Express had lost some money from this scandal, but it hadn't affect their consumer franchise. So I ask people about products all the time. When I take my great-grandchildren to Dairy Queen they bring along friends sometimes. They've all got a iPhone and, you know, I ask 'em what they do with it and how ... whether they could live without it, and when they trade it in what they're gonna do with it. And of course, I see when they come to the furniture mart that people have this incredible stickiness of — with the product. I mean, if they bring in an iPhone, they buy a new iPhone. I mean, they're ... it just has that quality. It gets built into their lives. Now, that doesn't mean something can't come along that will disrupt it. But the continuity of the product is huge, and the degree to which their lives center around it is huge. And it's a pretty nice, it's a pretty nice franchise to have with a consumer product.

Quick: Hey, Joe, you can relate to that, the stickiness of the product and being hooked into the Apple eco-sphere, right?

Kernen: So many different ways, too. I think it's funny, that Warren doesn't have one. But it's weird 'cause you're walking around. You're walking around with the Encyclopedia Britannica on your back, but it's the size of this little thing. And anytime, anywhere you need to look up anything and, I mean, you could be on Jeopardy, and if people didn't see that you were looking at your iPhone you'd get every question right. And I could listen to every song that's ever been recorded. And, you know, I used to live in L.A. and I was afraid to leave the freeways because I had no idea, I'd get lost. So I'd just sit in that traffic for, like, 11 hours to get five miles. All of a sudden with this, you just press it in and I got all the surface streets ... it's so bizarre, it's so life-changing. But the thing that I, you know, you don't buy stocks, Warren, for 10 percent, 20 percent, 50 percent normally. You like to buy stocks at — that over time double and triple. So you're fully saying that this $700 billion company is gonna be $1.3 trillion, then it's gonna be $2 trillion, then it ... right? It's $700 billion...?

Buffett: You're saying it. I'm hearing...

Kernen: Okay, but—

Buffett: Joe—

Kernen: You're not worried about the law of large numbers. 'Cause it's over — it's the most valuable company in the world right now at, what — at something like $720 billion. So you have no problem thinking that it's gonna go, be the first company to go over $1 trillion in market cap? And, I mean, sooner or later it's gotta happen, obviously—

Buffett: I won't make any prediction of that, Joe. But what I do know is when I take a dozen kids, as I do on Sundays out to Dairy Queen they're all holding their Apple, they barely can talk to me except if I'm ordering ice cream or something like that. And then I ask 'em how they live their lives. And the stickiness really is something. I mean, they do build their lives around it, just like you were describing. And the interesting thing is, when they come into ... when they come into get a new one, they're gonna get they overwhelmingly get the same product. I mean, they got their photos on it and, I mean, yeah, I know you can ... you can make some shifts and all that. But they love it.

Kernen: That's my point. I mean, you see what I mean about the law of large numbers? It will be $1 trillion company even it's only gotta go up 40 percent from where it is now. So I mean, I don't think you'd buy it if you thought it was gonna peak at $800 billion.

Buffett: Well, or they could, Joe, which they, you know, they've bought shares quite aggressively—

Kernen: Buyback stock? Buyback, yeah.

Buffett: Yeah, so they could — yeah, you could have a lot fewer shares outstanding at some time and still do very well on a per share basis. They bought in about 4 percent of the company last year. And they've been pretty, pretty aggressive on that. So my guess is they've got about 5.25 billion shares out now, but my guess is that ten years from now they'll have substantially fewer.

Quick: Let me ask you a question. What would you put a bet on? Which company goes to $1 trill first: Apple or Berkshire Hathaway?

Buffett: Oh, I'd bet on Apple just 'cause they've got a stronger position. And, if Tim wants to swap and even up, you know, I've got an' 800 number for him.

Kernen: I can't believe you're for—

Quick: While we're on the subject—

Kernen: Oh, sorry—

Quick: Oh, go ahead, Joe.

Kernen: No, I was just thinking that one of your, one of your guys, you wouldn't say which one, you know, I mean, did you really have to do that, Warren? I mean, would you say he had, like, "Oh yeah, I've built up quite a position. I've got..." what did he have, Becky? How much did he have? Like, ten—

Buffett: Ten million shares—

Quick: Ten million shares... ten million shares?

Kernen: Ten mill — "Yeah, I like it. I've really, I love it. I've got ten million shares." And you go, "Yeah, I like it, too. I got 133." I mean, that's just ... that's cold, Warren. To just—

Buffett: 123 actually.

Kernen: You know what I mean? I mean, you took his idea and then you ... he had ten and thought —he was feeling good about himself. And you bought another 123 million on top of him, seriously?

Buffett: He gets to go first, Joe.

Kernen: He was feeling good. "Yep, I'm a big investor."

Quick: I'm feeling good about Warren.

Kernen: Yeah, right. Yeah.

Quick: Look, if Warren Buffett takes your ideas and follows you, man, I think that would make you feel pretty good.

Kernen: That's true.

Quick: Walking around with that. Right. All right, let's talk about another thing that you've been buying a lot of, and that is the airlines. We just found out, at least at the end of the year, how much you owned in each of them, and they were pretty significant stakes ... for the four majors. That would be American, Delta, United Continental and Southwest. At the end of the year we were reporting that you had stakes of about 7 to 8.5 percent for some of these airlines. Where are you now?

Buffett: It's about the same. They may have been tweaked just a shade. They're, again, one of the fellows in the office has essentially one of those positions. While he was building that position he owned a couple of the others, just 'because he wanted to get the money invested and then he was going to shift over. So, but one of them has, he has the American Airlines position and I have the other three. Those positions you mentioned we're fairly close to 10 percent. We don't wanna go over 10 percent, virtually on any stock. It complicates life for us. We do it occasionally, but it's a big decision to make to go over 10 percent.

Quick: Why is it complicated, for people who aren't familiar with the rules on what you can and can't do once you go over 10 percent?

Buffett: Yeah, once you go over 10 percent you become subject to what they call the short swing rule. So if you buy and sell a stock that you have over 10 percent of in six months you actually have to give any profit to the company. Actually, if you sell and then buy, or buy and then sell and they take the lowest purchase price, and they take the highest sell price. It's been on the books a long time. And it just ... it can complicate things. Plus you have to publish what you do every, within two days or so after you do it, which is not the case when you're below 10 percent, when you report quarterly. So we don't go over 10 percent very often. And with the airlines, all four of the ones you named are repurchasing their shares. Now, at Wells Fargo we went over 10 percent, simply because the company repurchased its shares. We didn't buy any stock that cost.

Quick: Well, you couldn't. For a financial company you're not allowed to buy over 10 percent?

Buffett: Not unless you want to become a bank holding company, yeah. There's more laws on that. In any event, on the airlines, if we own 9 percent we might find we were 9.5 percent, or something like that, because of repurchases. So we will stay under 10 percent in all probability. And that's where we are now. And, like I say, one fella owns the American, and I own the other three.

Quick: All right, let me read a couple of things back to you. In the past you've said things like, "I have an 800 number that I can call if I get the urge to buy an airline stock. 'My name is Warren and I'm an air-acholic,' and then they talk me down." You also said that, "If a capitalist had been present at Kitty Hawk back in the early 1900s he should've shot Orville Wright; he would have saved his progeny money."

Buffett: That's so true. He'd a saved him a lot of money. If you look at the last 30 years you can look it up on the internet, I think there have been almost 100 airline bankruptcies. I mean, that is a lot. So it's true that the airlines had a bad first century. I mean, they're kinda like the Chicago Cubs, you know, everybody had a bad century now and then. And they got that century out of the way, I hope. But it's, it's been a disaster for capital. I mean, it's got glamour to it so you can always get guys to put some money up for an airline. And you can go to the internet and look at 100 of them that failed then, and all of them now that are operating, you know, with the exception, Southwest, I mean, the — they've been through bankruptcy. And I bought into one called U.S. Air, that was my previous investment in the late 1980s. Ed Colodny, who was the CEO, came out here. We had dinner at Garazzo and I gave him $358 million, and it disappeared almost before we finished dinner. I mean, the airline ... U.S. Air had some favored routes, but Southwest was coming at 'em over time. And I tried to sell that stock at $0.50 on the dollar ... it was a preferred stock. Fortunately, I wasn't able to do it, and then they had this blip so we actually made quite a bit of money. I mean, we're one for one on airlines, actually, but not because we were smart. And then it went bankrupt twice afterwards, U.S. Air did. It's part of American Air now.

Quick: So why in the world do you buy back in now? If you are so—

Buffett: Well, I—

Quick: I'm sure that this was a horrible business, what's changed?

Buffett: It's a very tough business because it's got the marginal cost of a seat ... is practically nothing. You have these huge fixed costs, and yet if you take one more person on there's virtually no cost to it. So you're very tempted to sell that last seat too cheap, and if you sell the last seat too cheap it becomes the first seat for, in a way, so it has- it has this dynamic to it. And unless the airlines operate in the well over 80 percent capacity — what kills ya is when they really have too many airplanes around. I mean, they do what anybody else does. If they got too many airplanes around they just think it down to marginal cost, and marginal cost cause you to go broke over time in the airline business. I- the hope is that they will keep orders in reasonable relationship to potential demand. And-- lately they've been operating in-- in the 80s now for a while. But it's a business you can always mess up.

Quick: You know, Charlie Munger was your partner, your vice-chairman of Berkshire Hathaway was speaking at The Daily Journal meeting just couple of weeks ago. And he talked about how you guys are in the airlines at this point and then said, "You know, I just went on and bought a ticket to Europe for $400 or $500 and I thought, 'What are we doing in this business?"

Buffett: Exactly--

Quick: Was Charlie on board with this decision?

Buffett: Well, Charlie's generally- goes along with me. I mean, he may say, "Well, I've never heard ya come up with a worse idea, Warren," or something like but when Charlie says that to me I know he's going along with me. So we get along very well. You know, he's okay with both these decisions. And- but he, as he would say (and correctly), "It's not like the old days." But I've been hearing that a long time, and it's true.

Quick: Joe?

Kernen: I I was just thinking about the irony of this. So he loves Apple and doesn't own an iPhone, doesn't know anything about it and- loves airlines but hasn't been on a commercial flight since the Wright brothers, I don't think. You- know absolutely nothing about being on--

Buffett: You are giving away my secrets.

Kernen: Huh? What? When's the last time you were on a commercial flight, Buffett? Tell me.

Buffett: Well -- we'll save that for after the show. (LAUGHTER)

Quick: Fair to say it's been over 30 years?

Buffett: My family brings up to the same thing to me so I've-- been hearing this before.

Kernen: Was the in-flight movie the- that just released, Casablanca?

Buffett: Actually it was Birth of a Nation.

Kernen: All right. I just thought about that, that you don't need obviously to—

Quick: Hey—

Kernen: --use these things to have an investment opinion. But it's amazing, it's amazing. it's very interesting today, Warren. I'm enjoying this. I haven't left and I'm gonna stay here. I'm all alone.

Buffett: Well, you gotta realize I started in textiles and department stores, so some of these things look good to me just on a comparative basis.

Kernen: Yeah, right.

Quick: You know, Warren, it does occur to me, though, if you're building up such a significant stake in all the major players, is that anything that's, like, monopolistic behavior? Is there any concern to think that you would say something to the airlines to make them make sure that they're not competing on prices quite the same? What would keep somebody from worrying about that?

Buffett: Yeah, I've never met— I've never met the CEOs of any of the four airlines — I may have met one down in a Texas business Hall-of-Fame thing, shake his hand. I mean, Herb Kelleher was down there for sure. But-- no-- have no communication with 'em. And-- index funds own a significant percent of each one. And-- we'll see how it turns out. I mean, it's-- the orders that they have now would not look excessive. I mean-- they usually take options, and they can delay deliveries, and so on. But it can be brutal. And I mean, ever-- you've got lower cost airlines, you've got startups that can come at 'em. And-- historically-- the pricing has been a very tough game. I do like the fact that they used lots a money to repurchase shares most of them have these huge tax carry-forwards, too. So they had a lot of cash coming in for a while. They've used up the carry-forwards in general. But they-- the idea that you're buying something that had a huge carry-- tax loss carry-forward is not the best signal in the world. getting into a wonderful business. But-- they bought in a lot of stock, I like that. And--we'll see how they do. We bought 'em at lower prices and we're not buying 'em now. And I don't wanna-- run out and buy airlines.

Quick: But you're a passive investor?

Buffett: Oh yeah, totally, totally.

Quick: Okay. Folks, we will have much more from our special guest, Warren Buffett, when we come back after a very quick break.


Quick: Welcome back to "Squawk Box," everybody. We are in Omaha, Nebraska this morning with Berkshire Hathaway's chairman and CEO, Warren Buffett. And Warren, thank you again for taking the time to walk through a lot of these issues with us. We have some questions from viewers and I'd like to start with one right now. This comes from Michael Khan who wrote in-- I- believe this came in on Twitter. He says-- "Have there been -- have there been any stocks you purchased that you changed your mind about and sold before they could even show up on a 13-F?"

Buffett: Well, that's probably happened sometime but I don't remember--

Quick: Off the top of your head?

Buffett: No, no. that would be-- that would be quite unusual. And--of course, it could be that it'd be one of the other two guys in the office might-- have done that. But I-don't really remember that happening with any of us.

Quick: The reason I ask-- that question just now is because Dow Chemical preferred shares-- they called those the preferred shares on December 30th. And from what I read it said that it should've translated into about 6 percent of the shares outstanding of the company—

Buffett: 70, 72 million shares, yeah.

Quick: But I did not notice Dow Chemical on the 13-F in this most recent filing. Would have--

Buffett: We timed our sales so that once it got above the conversion price-- we timed our sales-- we tried to time 'em—because 72 million shares would be a lot of shares to get and we did not want to own the common stock we don't own any common stocks of any chemical companies so and as the stock when higher we sold it more aggressively because we wanted to get 72 million shares done by the day which was becoming more probable all the time that they would call it and they called it exactly when we thought they would call it. And I think our last shares were sold the day before, the day after, the same day we timed it to be out of 72 million shares when we received those shares.

Quick: So I was going to say you didn't sell 72 million shares on December 30 and 31st

Buffett: No we didn't want to be in that position.

Quick: but you had been timing those shares all along and preparing for it.

Buffett: exactly and it became you were in a very strong market and as Dow kept moving up we would get more aggressive so towards the end we might have been selling a couple million shares a day when it got up to 56 or some price like that. We were hoping to get out of it, out of the common by the time they sold the common and like I said it worked out to the day we were kind of lucky on that we could have ended up with 10 million shares but we were going to quit obviously when we got to the amount that was going to be handed to us.

Quick: Why don't you like Dow or the other chemical shares?

Buffett: We've never owned chemical shares. We own a specialty chemical company Ebersol a chemical common stock we own we bought the preferred stock of Dow because we wanted a preferred position and we held it. It was kind of interesting we bought that stock in July of 2008, the preferred and they were going to acquire, Dow was going to acquire Rohm & Haas and they needed money for it and then the world fell apart in the fall and Dow wanted to get out of the contract, they sued Rohm & Haas to get out of the contract but it was held that they had to stick with it. So we closed the deal to buy the preferred stock in April of 2009 by which time the market had totally disintegrated the time we closed that we bought $3 billion worth it probably wasn't worth tops more than
60 cents on the dollar so we showed up with $3 billion for something that was worth $1.8 billion at the time which is one reason why people offer us deals they know we will be around at the closing. We showed up for the Wrigley closing too that was on October 4 or something but during that whole period we had commitments and that kept me from doing some other things we might have done at that time. The fact that we had this $3 billion going out the door

Quick: What did you ultimately end up making on Dow Chemical shares.

Buffett: we ended up making about a billion dollars and plus we had an 8.5 percent coupon those years.

Quick: You made a billion even before the preferred dividend that was paid?

Buffett: We had a billion dollar of capital gain very roughly, and then we had $255 million a year dividends during the time we owned it.

Quick: Wow, okay. I have a few other questions From viewers I'd like to get to. Joe, by the way, jump in if you want to. Meantime why don't we ask a question from Curtis Carson. He said how many suits do you Have in your closet at home. I bet my wife fewer than five, most over 10 years old.

Buffett: He would be right except for the fact I met a woman in China many years ago, Madam Lee and I arrived at the hotel at 11:00 in the morning. Immediately two guys jumped in the room a couple minutes later, I didn't know what was going on. They started sticking tape measures around me and everything, then they showed me a book with a whole bunch of samples and said pick out a suit. Madam Lee wants to give you one. I never met her and picked out another. Then I met her. She had started with a sewing machine 15 years earlier, longer Than that, she employed 15,000 People. She was a marvelous woman. She just started sending me suits. I was thinking of opening up a men's clothing store for awhile, everyone would have to be my size. I literally have – certainly Have close to 20 and they were All made by Madam Lee. I'm very grateful to her. She's come to the annual meeting once or twice and brought her Family. She made Charlie a suit and Bill Gates a suit, Walter Scott.

Quick: Because you can't afford your own suits.

Buffett: Not if we don't have to buy them.

Quick: Joe had a question as well.

Kernen: The old expression, Warren, If you have money a lot of times You can make money. Back during financial crisis when people would love to have Berkshire sort of as, I don't Know, an endorsement, at least If you invest in it you don't think they are going out of Business. You don't even have to like a Chemical company, do you? If they are going to give you 10 percent at that point all you think about they are going to be too make good on dividend payments? You don't have to like the prospects for growth at that company. Anyone in a 2 percent world, get 10 percent. They know they are going to get, It's like a no-brainer for you, Isn't it?

Buffett: Well it's a fixed income decision. It's a credit decision more than an equity position.

Kernen: Right.

Buffett: the equity part enters in, you're making, first of all, a credit decision, which is what I made back in 2008 on I made back in 2008 on Dow Chemical and I made it on US Air back in the late 80s. They passed the dividend while we owned it. Fortunately we had a clause in the US Air preferred where any dividends they didn't pay us compounded at a pretty good rate.

Kernen: other people can't get that Kind of deal.

Buffett: they could have had my US Air deal at $0.50 on the dollar not very long after i paid it.

Kernen: that's true. You double your money in seven years. All you need is a credit decision at 10 percent. You know what i mean?

Buffett: Well, I haven't gotten 10 percent, We got 8.5 on the dollar.

Kernen: What about Goldman and GE. I thought you got almost 10 on those, didn't you?

Buffett: 10 on Goldman and GE. We got some warrants there. But i will tell you in September, late September 2008, I don't think there were any other buyers around for it.

Kernen: There weren't. That's true. If the world ended, we'd all Be -- you might as well have done it. The world doesn't end and you're fine. The world doesn't and we're all screwed, right?

Buffett: Yeah. What's the difference -- if the world is going to end, what's the difference dying broke and $1 million in debt.

Kernen: I heard it can only end once. That's something to keep in mind If you're investing in the stock market. If it ends more than once I'm not thinking about it right.

Buffett: Yeah.


Kernen: Good morning and welcome back to "Squawk Box" here on CNBC live from the NASDAQ market site in Times Square. I'm Joe Kernen; Andrew's off today, and Becky is in Omaha, Nebraska, this morning, speaking with the billionaire investor and Berkshire Hathaway chairman. He's a lot more than just those two things Becky. He's funny, he's witty, he's a little wild at times, I think. You can probably confirm that. Warren Buffett is a CEO. You know, this year, Warren, I was watching Creighton the other day and I was hoping Creighton was going to win. They got a pretty good team, but I can't – these brackets, as I told Becky, I may not even do them this year. We're going to get into the futures. But it's so hard I don't know who's good.

Kernen: Kansas? I don't know.

Buffett: Yeah, it's a season where they'll stand out. Creighton started very fast, as you know, but we are going to announce again probably in the next week or so we'll send it out to our managers. We're going to have the same contest among our employees that we had last year.

Kernen: Love that.

Buffett: And if they manage to make it to – if they can get to the sweet 16, if there's only one of them, whoever it is, he or she gets $1 million a year for the rest of their life. Now, we also have a prize of $100,000 for whoever gets the furthest, and last year, we had two fellows that tied. One of them knew a lot about basketball, the other didn't know anything about basketball, but they each got $50,000 out of it. And we're going to do the same thing for Berkshire employees this year. We had 85,000 entries last year but I'll bet we go over 100,000 this year.

Kernen: That's so fun. That's so great too. And you know, getting all 16 of the 16 –

Buffett: It's fun.

Kernen: -- it's like, please. I mean, I've tried. I've tried. It's like if you get if you can get ten or 12, you're doing pretty well.

Buffett: Yeah, but it's not impossible.

Kernen: I know.

Buffett: And somebody's going to win. Somebody's going to win $100,000 or they'll divide it up. And actually, some of our individual companies then they – last year, they joined in with a tournament of their own. So, I mean, it really caught fire. And what's particular fun is you can go to this website we have and you can see after each game how many are left and how many have gone for – in the next game coming up – gone for team A or team B. And we have a good time.

Kernen: It is good. Gonzaga now lost. And, you know, I like Jesuit schools, like you, and Xavier, we lost Edmond Sumner. He was so good. And he got the torn ACL. I mean, that killed me. And then, you know, I was going to start watching Cincinnati then they lost yesterday to – it's hard. It's hard, Warren. Anyway—

Buffett: I'll tell you what we'll do.

Kernen: Okay.

Buffett: Joe, send me a ballot. I'll have one of the people put it in under their name. I mean, you could be – you can get in this game.

Kernen: I can be in this game.

Quick: Last year, he offered to let you be in it and you didn't send it in.

Kernen: You know why?

Quick: Remember?

Kernen: Because Warren is very smart. And, you know, the side of the tray that he takes, I want to be him. I'll give people money if they get them all right. That's like selling calls or – he's always on the right side of these trades. No one's going to do it. No one – he's safe. It's like those people that insure the hole-in-ones, you know what I mean? I'd like to be the insurer; I don't want to be the person swinging. Anyway we'll get back to –

Buffett: Well, that's usually a good idea.

Kernen: Yeah, exactly. I like to be the house. Let's check on the markets.

Buffett: The house is where the money is.

Kernen: Yeah, the house. You know, I'm going to see – I thought the Dow might turn up because you're going to juice Apple today, there's no doubt about it, Warren. And I thought the Dow might turn up. But Apple, I mean, who wouldn't buy Apple after hearing that type of financial outlay that the greatest investor in the world –

Buffett: Yeah, but, Joe, I want to emphasize—

Kernen: Go ahead.

Buffett: I want to emphasize, we have not bought at this price. I mean, we quit buying when the earnings came out. So if I were buying now I wouldn't be talking about it, for one thing. You know, we're certainly not selling either, but I wouldn't be talking about it.

Kernen: Yeah, exactly.

Buffett: But we're not – I don't want anybody to think we are buying it at this price.

Kernen: And, you know, and your IBM stock. That call is looking much better at this point, too. And I'm sure we'll talk about that, Becky, a little bit more. We'll probably have a whole segment on IBM. But and that, you know, $172 billion, not $720 billion. So that who knows where that could run if they get it going there. Anyway, Beck, back to you.

Quick: You know what, Joe, ask about IBM right now because we have so much stuff, I'm afraid I don't want to miss anything. But if you have a specific question on IBM, why don't you jump right in on it right now. You're right that is a much higher price than where he bought in.

Kernen: I just wonder, you know, what do you attribute that to? What has started – has it been the cloud part of the business has gotten to be a larger part of, you know, of the results at this point? And so some of these initiatives are starting to bear fruit, Warren? What do you think happened?

Buffett: Yeah, Joe, you know, well, the whole market has moved so much, you know, to start with. And they increased the dividend. I think there's been some more interest in dividend stocks and they increased it here recently. But, I've got no information for you on IBM except those two factors. But a lot of stocks, I mean, they've really moved in the last few months.

Kernen: Yep, they certainly have. I guess that'd be a good segue to lead into President Trump maybe, Becky, because you can attribute it to a lot of different – attribute it to a lot of different things.

Quick: Go ahead. Start.

Kernen: I have people every day come in here that said the market was going to go down 5,000 points if he got elected. And they're all like, you ought to see them dance now explaining this, Warren. They're – it's they don't know – it's the equinox or something. I mean, it's the witches. They come up with all kinds of stuff to attribute why the market's up. They'll never say that maybe some of these policies could be pro growth, but some of them are pro growth.

Kernen: You must like some of them.

Buffett: Last year at our annual meeting, you know, it was clear I was for Hillary, but I got asked a question about the market based on who got elected. And that does not – and I said, America's going to do fine under – in terms of economically under – under either candidate as president. People who mix their politics up with their investment activities I don't think that makes sense. I've watched it all my life and obviously probably half the time, my adult life, I've had a president other than the one I voted for. But that has never taken me out of stocks. I mean, the American economy, you know, we're up to number 45 or so and we've done awfully well. If you mix your politics with your investment decisions, you're making a big mistake.

Kernen: Although in terms of just—

Quick: You know, Charlie Munger—

Kernen: Oh, sorry, I just—

Quick: Go ahead. Go ahead, Joe.

Kernen: I was just going to—

Quick: Go ahead.

Kernen: Just one last thing. You talk about how great democracy and this country is, and the dynamism. And I have seen people, you know, in the Journal op-ed or wherever, just people that say that democracy is ending. They look at this election, they say, wow. This is, like, the way it happened. Another orderly transition of power. You know, and it was the way that it was done is like, it brought tears to their eyes in terms of this is still an – this was a prime example of how well things work and that democracy is alive and well, right?

Buffett: Yeah. Joe, in 1951, I proposed to my wife. And my father-in-law was the most conservative guy in Nebraska except maybe for my dad. My father-in-law said, "I want to have a talk with you." So I went over to his house to have a talk. And he sat there and he said, "Warren," he says, "I just want to absolve you from any worries. You're going to fail. And the reason you're going to fail – my daughter may starve to death and you're going to fail, but I'm not going to blame you because it's because the Democrats are in and they're all Communists." And I listened to this thing for three hours. And I almost withdrew my proposal at the end. But I have seen people make economic decisions based on their political feelings and it is not the way to do it.

Kernen: Well, now, Warren, if Bernie Sanders got elected, I might make a few investment decisions. I'm sorry, but that's just me.

Buffett: Yeah. I understand. Yeah. All my friends feel that way one way – on one side or the other. But I grew up in a household where when Roosevelt got elected for the third term, my dad said, you know, "There'll never be another election." We couldn't have dessert at our house, if you were a kid, unless you said something nasty about Roosevelt. And but I bought that stock in 1942 when Roosevelt was president. And it worked out pretty well.

Quick: You know, Charlie Munger made some comments also at the Daily Journal annual meeting just a few weeks ago, Warren. And he said that look, he's mellowed on Donald Trump because he had some things that were not so nice to say about him before. He also said, "Look, not everything he's doing I disagree with." He's in favor of some of the things he's said about Social Security and some of other moves he's made. Have you mellowed as well?

Buffett: Well, I would say that I would agree with Charlie on that, in terms of the entitlements and Social Security. And I certainly, you can't help but feel, if you're in business, everybody, you know, there are a lot of regulations that I think probably have gone too far. So I will judge President Trump after four years based, number one, on how safe the country has been kept. I mean, that is the number one job of the chief executive of the United States. And that's not an easy job. And I'm not thinking of random killings or anything like that, I'm thinking of weapons of mass destruction. I mean, that's my number one worry. And that's the number one test I have. Secondly, I'll judge him, to a degree, although, they have less control over this – well, they need a little luck on weapons of mass destruction too, but how the economy does overall. And then third, I'll judge him on how if the economy does well, which I expect it to do, how wide the participation in that in a better economy extends. And those are the three primary tests I would have applied to Hillary Clinton or to Donald Trump.

Quick: Meaning that, if he passes on all three of those, you would consider voting for him in four years?

Buffett: Well, depends who he's running against. I would say it would be unlikely, but those are the three tests. I mean, those would have been my tests for Hillary Clinton. I think being president of the United States is the most important job in the world. It's not all-powerful, and you need luck. But we've had weapons of mass destruction, Kennedy got us through the Cuban missile crisis, and somebody else might not have. And there is when you look at North Korea, you know, trying to get an ICBM that can hit the West Coast, and with warheads and everything, I mean, it is very, very, very important that you have a president for whom that's the number one priority too. And I actually think that with both Hillary Clinton and Donald Trump, they have an understanding of that. And that's number one. And I think the odds are good, as I said last year at the annual meeting, that we'll have prosperity in any four-year period. It's not a cinch. I mean, there are certain times when the economy has hiccups. But the odds are pretty good that any president has a reasonably good economy. And then I would like to see more people share in that good economy.

Quick: All right, let's go through this one by one. In terms of trying to keep us safe. Part of that must be appointments like secretary of State. What do you think about Rex Tillerson in that position?

Buffett: Well, I don't know any of the appointments well, but I certainly think Rex Tillerson makes a lot of sense. I mean, you've got an absolutely outstanding person. And incidentally, I would say this too, because you get a lot of this in politics: Rex Tillerson is going to be working for the United States in that job. I mean, people that get all upset because he was with ExxonMobil or something, or because he's got a fair amount of money, I have seen a lot of people enter high levels of public service. And I think the great majority of them take it very seriously, that their employer is the United States. And so I don't worry at all about the fact that somebody comes from the oil industry or that they've got a lot of money or anything of the sort. I do think most people rise to the occasion to quite a degree. Not always, but quite a degree. So, I don't know Tillerson. I've sat next to him one time at dinner. But, you know, he'd be the kind of person I would choose.

Quick: There's also people like Wilbur Ross, Steven Mnuchin, Gary Cohn who are all in these cabinet-level positions, too.

Buffett: Yeah. They're Wall Street guys. They're smart guys. And, again, I would say that those people, none of whom I know well, but I know of them and I know people that know them, and I would say that they will take very seriously the fact that they are in public service. I mean, you know, you may run into an exception every now and then. Spiro Agnew didn't come through too well or a few in the past. But I think people take it seriously.

Quick: In terms of judging the economy, a lot of that's going to be done based on – we've seen the stock market run, as Joe brought up, to this point. The next thing people are waiting to see what happens is tax reform. Before that happens, they're going to be looking at Obamacare for a repeal of that. All of these things will weigh on the economy. What's your overall take of the direction that we are headed right now?

Buffett: I think, just on a probability basis, not specific to actually to any given administration, I think the odds are very high that any administration ends up better four years – with the economy better four years later than at present. You know, I mean, but I would say that absolutely—

Quick: But what about the specifics of what have been proposed in terms of potential border adjustment taxes, in terms of immigration policies, in terms of regulation rollbacks, all of these things?

Buffett: Yeah. I would still say I think the economy will be better off four years from now, even though I disagree with some of the specific policies. But I disagree with the policies of most administrations – of some policies. Border adjustment tax, I mean, it's an import tax, and an import tax is a sales tax. You're looking – we're here at the Nebraska Furniture Mart. This store is in several buildings, does over $400 million a year; 75 percent of what you see is imported. I mean, if we pay an import tax on it, our customers are going to pay for it. It's a sales tax, and it's a sales tax, in this case, on items that are not yachts or anything like that. They're things that the ordinary person buys. So it would be a big sales tax. I think the president said initially that it was – it'd be too confusing or too complicated or something of the sort. My guess is that the Republicans, you know, you don't get a shot like this where you control both houses and the presidency. They will want to do things. I mean, McConnell will want to do things, and Ryan will want to do things. And my guess is that they will find doing something really comprehensive will be too difficult. They'll want to get something done. You remember Russell Long by any chance?

Quick: Well, I know the building, the Long building in Concord.

Buffett: Yeah. Well, Russell Long was Hughie Long's son, and he was the head of the finance committee. He was a senator. He actually owned Berkshire Hathaway stock. And I knew him just a little bit. He's the guy that coined that line, you know, "Don't tax you, don't tax me, tax that fellow behind the tree," you know? And if you're going to be revenue neutral, without the craziest dynamic scoring in the world, if you're going to be revenue neutral, it's going to get very, very tough. You'll have everybody in there saying, "Tax the fellow behind the tree." And I think they will end up going for something not as dramatic as they might even like to do because they simply don't want to spend the time and the political capital getting it done. People realize, as you control the whole place, you know, you better get your stuff done at that time. And they look at the first term, you know, of the last Obama administration, and you use up capital and you use up time, and pretty soon they're thinking about the midterm elections and everything. So I just have a feeling when the Treasury secretary says, "We'll try and have this by August," or something, you're not going to get a really 1986-type overhaul or a 1954-type overhaul or a 1969-type overhaul in that kind of a time period.

Quick: Meaning you think something gets passed with lower rates, but not a border adjustment tax or something that we haven't tried in the past?

Buffett: Right. I think – I don't think it's likely to get terribly complex because I think as soon as you try and make a revenue neutral and you change one big segment, you will have every lobbyist in the world in there who says, "That isn't reform," you know? "My idea's reform, but not your idea." So, and that's just – who knows? I mean, you've got some master legislators in McConnell and Ryan that will be handling things so as to get as much as possible of what they would like through. But I think if you're trying for speed and you're trying for complexity, I think complexity will give way to speed. But that's – I don't know any more about this than your viewers.

Quick: You know, you mention that the border adjustment tax would be something that's a tax on consumers. I can certainly see that happening.

Buffett: Sales tax.

Quick: But you also have American manufacturers who say, "We're not competing on a level playing field. We're the only one of 35 OECD nations that doesn't have some sort of a border adjustment, some sort of a VAT," or something along those lines. "And as a result, it's hurting us. And we are not able to create jobs here as quickly." And that has been an issue that's been very important to the president. Is there another way around that? Another way to—

Buffett: Well, I wrote an article for Fortune a long time ago on import certificates. It's too long to describe here. But there are various approaches, and I actually have one I kind of like, but it would take a long time to explain. But I understand there's an article today by Marty Feldstein – I may be wrong on that – about how the dollar would adjust upward enough so that you really would be buying these things cheaper —

Quick: That's the idea. That, in theory, over time, the dollar would adjust. But it's never been tried. So we don't know.

Buffett: Yeah. No, I would not bet on that. For one thing, that kills exports. So free trade is wonderful for the world and for the United States, but its benefits are diffused among 320 million people. You buy your bananas cheaper because we don't try and produce them in the United States. But the penalties from free trade are terrible to specific industries. And as an investor, I can own – make a dumb decision on owning a shoe company. But if I own a good insurance company, I can diversify away the problems. If you're a 55-year-old steelworker, you can't diversify away your talents. I mean, you had it if steel or textiles or shoes become subject to total, it all moves offshore. So you want to have free trade, but you also have to take care of the people who, through no fault of their own, have spent their life learning one profession. And you can talk about retraining and all that, but it just isn't practical. And just take Berkshire Hathaway. We started with 2,000 employees in New Bedford, Mass, turning out textiles. And that business was doomed. And we had workers there who really they didn't have alternatives at age 50. Fair number of them just spoke Portuguese. They didn't have a chance. And a rich country that's prospering because of free trade, and as the world is prospering, should keep the free trade as much as possible. But they also should take care of the people that become the roadkill, you know, when an industry moves.

Quick: Well, apparently that's been a problem. I mean, if you look at –

Buffett: It's a real problem.

Quick: --the election was a huge referendum on that.

Buffett: Sure.

Quick: And both the Democrats and the Republicans are moving away from the idea of free trade, depending on how – the free trade that we've seen as free trade to this point.

Buffett: Yeah.

Quick: Some of them will say this isn't free trade.

Buffett: Yeah.

Quick: But what happens now?

Buffett: You've got to take care of those people. And if I were somebody that had spent 25 years in shoes or textiles or you name it, and somebody came around to me and said, "This is great for the world and it's great for those guys on the Forbes 400, but it's just too bad because you lose your job and it makes – we can buy our shoes a little cheaper, our underwear a little cheaper, our steel a little cheaper abroad," I would say that a rich society should figure out a way to take care of those people.

Quick: Okay. Warren, we're going to continue this conversation in just a moment. We do have much more to get to. Folks, we are live in Omaha, Nebraska, today with Warren Buffett, the chairman and CEO of Berkshire Hathaway. Still have a lot of ground to cover. Got questions from viewers coming up; we're also going to be talking about Unilever and other important news that's been hitting here. So stick around. If you have any additional questions that you'd like to send into us, go ahead and you can do that using the #AskWarren. You can send those out on Twitter or on Facebook. And "Squawk Box" will be right back.


Quick: Anyway, our guest host again this morning is Warren Buffett, and he's been talking with us for an hour and a half at this point about things that have been going on. And Mr. Buffett, I can't believe it's been an hour and a half and we have not gotten to a massive piece of news, and that would be the Unilever deal.

Buffett: That's right.

Quick: It was I guess just little over a week ago that we first heard about this deal that Kraft Heinz and 3G would be putting together. Deal came out on Friday and some news broke on it. Stocks for a lot of the other suitors that were not being considered, stocks like Mondelez and Campbell's, dropped. Stocks of both Kraft Heinz and Unilever soared. By Monday, all of that had been kind of doused. What happened?

Buffett: What happened? I can tell you what happened. Most of what I can tell you, I can tell you for sure. And then the other side couple things I have to draw inferences on. But Alex Behring, who's chairman of Kraft Heinz, and part of the 3G operation with Jorge Paulo and they and I agreed on making a friendly offer for Unilever if they were open to it. And Alex Behring went over to London, I don't know how long ago, maybe four weeks ago or whenever it would have been, and met with their CEO and had a conversation. And he brought up the idea of possibly making an offer late in the conversation. And he didn't get a yes, he didn't get a no, he got perfectly polite conversation. And the CEO actually Greg Abel of Berkshire, knowing him 20 years ago I mean, we had nothing but good reports about him. We felt fine about it. So Alex came back and said that he hadn't been thrown out. And so would we want to go ahead? So we went to see him again maybe two weeks later. And he had a letter that was an outline of a deal, which he thought if he got a neutral response, he would give. But if he got a negative feeling, he would not. And he went over and felt he got a neutral response. And therefore, gave the letter. Now, I might mention you know, it reminds me of that old story about the difference between a diplomat and a lady. I don't know whether you've ever heard that or not.

Quick: No.

Buffett: Well, if a diplomat says yes, he means maybe. If he says maybe, he means no. And if he says no, he's no diplomat. And if a lady says no, she means maybe. And if she says maybe, she means yes. And if she says yes, she's no lady. So he probably got a maybe and didn't know whether it was coming from a diplomat or a lady, essentially. I mean, that's what frequently people get. I don't work on acquisitions that way myself, I just go in and say, "If you want me to make an offer, I'll make one. If you don't want me to make an offer, I won't make one. And I'll tell you a price if I do it." But there's usually much more of a mating dance than that. And so you get this, "I'll take it to the board," and all that. And you're dealing with different kinds of people. Some people are different cultures, they're more polite than others, and so on. So Alex took it as being a maybe. And gave this letter outlining a deal to Unilever. And it was said it would go to the board. Well, it became very apparent that Unilever did not want this offer based on – within a few days, press reports. For one thing, it leaked somehow on a Wednesday prior to the Friday one. And so on Saturday, I got – after that Friday – I got calls indicating that the offer was unwelcome. And I was said, "It's unwelcome?" And Jorge Paulo said the same thing, I mean, if it's unwelcome, there is no offer. I mean, it was only intended to be presented if there was a possibility.

Quick: It was never intended as a hostile offer?

Buffett: No. Zero. And on the other hand, it may have been interpreted that way. And, you know, I can't argue about that. If people say, "We don't like the price," that's usually a maybe. I mean, and—

Quick: Is that what was said in this case?

Buffett: Well, that was said the first time; it wasn't said the second time because they – when I was called about it by a representative of Unilever on Saturday, I just said, you know, "I mean, if this is regarded as hostile or unfriendly, you don't have to worry about it. There isn't any offer. But if it's simply because you're negotiating," which people often do, when they take it to the board and they say, "Well, it's not enough money," and all that. And then, you know, I'm not a negotiator myself, but the 3G people are more that way. So, but once the three of us learned that it was regarded as unfriendly, we had no intention of making one. And I think the Unilever people understand that now.

Quick: Is this a case, you're saying, of the Unilever CEO being exceedingly polite and that's what it was?

Buffett: Well it can be polite. I mean, it can be differences in culture even, in the way people express themselves. I mean, Alex's second language is English. I mean I've seen misunderstandings before. And that's one reason I like to do it the way I do it. I mean, when I went to Precision Cast and Mark Donegan, I just said, "I will make an offer if you want me to. And if you don't want me to, forget it." I just said the same thing at the N.S.F. But that's not the way – there's usually more of a dance back and forth, and part of that's sort of what subtle law is. Now, the law's much different in the United States than in the U.K. But in any event, within an hour, we got across to them that we were not making a friendly offer. So, you know, we would go away.

Quick: That clears up a lot because we had many questions that came in from viewers saying, "Is this the first time that you've done a hostile offer? Should we expect more to come?"

Buffett: No. We don't do hostile offers. Yeah. I don't have any – I don't think they're morally wrong or anything. I think there are plenty of companies that could use some shaking up. And sometimes it takes a hostile offer to do it. I mean, there are companies that deserve hostility, believe me. But Berkshire doesn't do it. And Unilever wasn't one anyway. But we don't do it.

Quick: So what happened in terms of Unilever? What attracted you to that company? What made you look at it and think this was a good deal?

Buffett: It's a great company. And I think, you know, they'll do fine things. I wish them the best.

Quick: With Unilever off the table, does that clear the way for a potential backup deal, something like a Mondelez or a Campbell's that the market had anticipated as a potential?

Buffett: Yeah. There isn't any backup deal. I mean, there was an – that was the only one that certainly I seriously thought about, that made sense. So, no. Will there be another deal with Kraft Heinz someday? My guess is yes, but who knows when, you know? I mean, there's no backup deal. And, again, it would have to be friendly. And, frankly, the prices in that field make it very, very, very tough to make an intelligent deal.

Quick: But Unilever was more undervalued than companies like a Mondelez or a Campbell's?

Buffett: Yeah, it was. That's why Mondelez went down the next day and Unilever went up. But that's just my opinion. I mean somebody else might have different opinion on that. But Unilever looked more attractive by some margin – and it was larger. And we always like size.

Quick: Is that to say that you have, as a group – you and 3G – have looked at all these other companies and are constantly assessing them?

Buffett: Well, you always look at everything, yeah. But that doesn't mean you're going to do anything at all. But-- you can't help but be in the business and be aware of what various companies do, what they're selling for. I mean, that's the wonderful thing about investment. I mean, there's thousands of choices out there, and they change in price daily, so that the relative attractiveness can change. But there's nothing in the works.

Quick: I had someone tell me recently that simply the activities of what Kraft Heinz and 3G and Berkshire's involvement with that, simply by them being there and watching 3G's operations, has put pressure on all the other food companies in that arena to make sure that they are shoring up their operations too, so they don't become an easy target. Does that make sense to you?

Buffett: I think that's true. No, I think that when people see what the 3G management has accomplished, you know, it may make shareholders of other companies somewhat unhappy. I mean, you've heard it expressed in a couple places. One thing I would emphasize about 3G: They are wonders at productivity, there's no question about that. But I've been on 20 boards; I have never seen anybody any better about marketing and product development and all of that. I mean, that is what we talk about at board meetings. And it's hours and hours. And I've been on other consumer goods company boards, and they're nothing like the intensity they bring. They don't just bring it to productivity, they bring it to new products. They bring it – I learn about what's going on in the marketing world a lot when I'm at their – at the meetings of Kraft Heinz because it's their game.

Quick: I mean that's interesting that you bring that up because the detractors of 3G, those who've been on the other side of some of these issues have said things like, "3G is just a roll-up company. That's what they're good at." That's not your experience?

Buffett: That's not true. Well, I mean they built the biggest beer company in the world starting with nothing. And, I was at the last meeting, just a month ago, A) we spent hours and hours – everyone was having different channels. And, you know, the online retailers versus the brick and mortars – they really understand their business. I mean, it's so much more of an informed discussion than I've heard at most board meetings in my life. It's night and day. And I might say that they've developed a new dessert which I had three different helpings of. So they're working on the right thing, as far as I'm concerned. They are – every aspect of management, they excel in.

Quick: What's the dessert that has caught your fancy? What is it?

Buffett: Well, it's – I don't know how much I'm supposed to talk about new developments. But it involves – it's cheesecake. But I can't go beyond that, but I did have three helpings. And then I took four or five of them home as well.

Quick: So they won your vote at least?

Buffett: Yeah, 170 calories each. I had three; that's 510 calories, the best 510 calories I've had in a long time.

Quick: When did you start counting calories?

Buffett: I don't count them. I find them interesting, just in terms of evaluating the product.

Quick: But it's not something you're worried about on your own though?

Buffett: I don't pay any attention.

Quick: Okay. Thought we had some new diet that was going on here.

Buffett: No.

Quick: Warren, in terms of how much money you have in cash equivalents, the annual letter that you just wrote laid out $86 billion.

Buffett: Yeah.

Quick: That is money that is piling up at this point?

Buffett: I hate it.

Quick: Do you have an itchy trigger finger at this point?

Buffett: No. You can't afford to have an itchy trigger finger, but – well, in one sense you could say I always have an itchy one in the sense that I'm always looking for things to do. But it doesn't change my standards in terms of having it, but I'm always looking. If we only have the $20 billion, we regard it as our minimum. I'd be looking because we could sell some things if I found something attractive enough to do.

Quick: But if you have $86 billion, if it doesn't change your standards, it certainly broadens your horizons. There are—

Buffett: We can do something big. And we'd love to do something big.

Quick: Are you working on anything right now?

Buffett: I'm always looking but I would say that there's nothing close.

Quick: Nothing close?

Buffett: I don't think so.

Quick: Okay. I want to go to a few questions from viewers. There was one that was sent in – sorry, I was just jumping through. One sent in from Ken Melotte. This is T13 control room, if you guys want to follow along. It says, "You only find out who's swimming naked when the tide goes out. Do you feel that there are many naked swimmers right now?"

Buffett: Well, it's not like during the internet boom or – and there have been various real peaks – I've written a couple of times when I thought things were getting out of hand on the high side. And-that's not now. Now, if interest rates dramatically upward, then these valuations would come down, in my view. But I don't see the games being played on a big scale that you had in the late '60s or that you had around the internet time, you know. I don't see lots of just fallacies being promoted. Or games being built on accounting tricks and that sort of thing.

Quick: Is it fair to say though, you point to interest rates. Is it fair to say that much has been built on the idea that interest rates are not going to necessarily rise rapidly or dramatically anytime soon?

Buffett: Yeah. Low interest rates push stocks up. You know, I mean the ten-year bond is selling at 40 times earnings. And it's not going to grow. And if you can buy some business that earns high returns on equity and has even got mild growth prospects, you know, at much lower multiple earnings, you are going to do better than buying ten-year bonds at 2.30 or 30-year bonds at three, or something of the sort. But that's been true for quite a while. And I've been talking about it the whole time. I said people were idiots in 2008 to put their money in cash. I mean, it was the one thing that wasn't going to go anyplace. And interest rates are enormously important over time. And that's – if bonds yield a whole lot more a year from now than they do now, stocks may well be lower.

Quick: You know interest rates though, the Fed has been talking a tougher game this year than they had been before. The Federal Reserve meets again this month, or later – in March, they have a meeting, and they could raise rates as quickly as then. Do you think that this is a position—we're getting into a position where the Fed could raise rates rapidly or not?

Buffett: Well, I don't really know. But what I do know that when you've got Europe and Japan with the rates they have, and particularly Europe, I mean, it's – the spread gets – you've got to be thinking about the spread. You're not have 8 percent rates in the United States and 1 percent rates in Europe or something of the sort. So Europe is a big factor. And you know, you widen it out, the dollar gets stronger, that hurts export. I mean, there's a lot of consequences to everything. You never can do just one thing in economics, you always have to say, "And then what?" And if I were the Fed, I'd probably be saying, "And then what?" if I got too big a spread against Europe.

Quick: Right. Okay, we're going to continue this conversation in just a moment. When we come back, we have more of your questions to Warren Buffett. We're going to run through many of them that have been coming in. In the meantime, why don't you check out the futures this morning.


Quick: Welcome back to "Squawk Box" everybody, we are live in Omaha, Nebraska, this morning with Warren Buffett. You all have been sending questions in, and we want to run through a bunch of these as quickly as we can. Warren, first of all, I had someone right in Gary Gambino. Folks in the control room, it's T26. Says, "Self-driving car technology continues to advance rapidly. How do you see it affecting GEICO earnings?"

Buffett: Well, self-driving cars will be adopted if they're safer. If they're safer, there's less in the way of insurance costs, that brings down premium by significantly. So, if all the cars – if a safe autonomous car had been developed, then there's 260 million vehicles on the road, so it takes some time to break in. The average age is about 11 and a half years or something. But if the day comes when a significant portion of the cars on the road are autonomous, it will hurt GEICO's business very significantly.

Quick: It sounds like you potentially see something like this happening sooner maybe than you had anticipated a few years ago. That's the case with me, but—

Buffett: It's the last 1 percent though that's the problem. I mean it's going to happen one way or another, but, you know, who knows? You had that situation in St. Louis a year ago and if you were driving down the road and somebody took control of your car, only one or two experiences like that can slow it down a lot. But it'll come. If I had to take the over and under ten years from now on whether 10 percent of the cars on the road would be self-driving, I would take the under. But I could very easily be wrong. You've got very, very, very smart people, lot of them, working on it. You've got the big auto companies – I mean, it's something that billions and billions and billions of dollars are being spent on, and brains are being involved in it. So it could easily come sooner than I think. But it will be negative for auto insurers.

Quick: Let's go to a question. T129 from Paul Howard. He says, "What would you to do tackle the country's debt? Would you like the 50- or 100-year bond idea?"

Buffett: Well, I think that when rates have been where they've been the last five or six years, or even a little longer, selling very long bonds makes sense for the same reason I think it's dumb to buy them. I wouldn't buy a 50-year bond, you know, in a million years at these rates. So if it's that dumb for me to buy it, it's probably pretty smart for the entity to sell them if I'm right. So I would say that the Treasury – I would've been – there's a lot of considerations they have. But I would be shoving out long bonds. And of course at Berkshire, you mentioned we had $80-some billion in very short stuff. I mean, everything we buy in the way of bonds is short.

Quick: Is short term. Okay. One more question, this was T70. The question is, "What does he think of the Fannie and Freddie lawsuits and housing reform?"

Buffett: Well, I think that Freddie and Fannie were broke in September of 2008, and they were a big cause of what happened in that month. They were the first of the really big dominoes. I mean Bear Stearns had been some months earlier, but those were huge dominoes, huge dominoes. Holdings of their paper around the world and everything else. And they were broke. And the people that encouraged policies that caused them to go broke deserved some responsibility for what happened subsequently. For various reasons, the government didn't want to take over 100 percent of it. For one thing, I think they'd have to show it on their balance sheet and all of that. So they came up with this conservatorship. They have changed the game when they went into the sweep arrangement here, and they just did it overnight. They just said, "We're just going to take all the money out so that there can be no recovery, essentially, for the Freddie and Fannie securities." That's getting tested in court. And you can argue that if you go all the way back, there wasn't then any equity at all for those securities. The government made the equity by coming through with huge amounts of money. But the courts will decide it.

Quick: We'll leave it right there and, Joe, I'll send it back to you.

Kernen: All right, Beck. Still to come, more of your questions for Warren Buffett, plus his take on the markets, the state of America, trade, jobs and much more. "Squawk Box" will be right back.


Kernen: Keep it business oriented, and then I wanna revisit some of the stuff-- that we've talked with-- to-- Warren about because, you know, he knows insurance in and out, through and through. And it's such a great business for a guy like Warren. We already talked about, you know-- some of the ways he can, you know, he can do things where it seems like he's gonna be on the right side-- like the dealer. It seems like he's, just by definition, gonna be on that-- and insurance is such a great thing, isn't it--

Quick: The house—

Kernen: --war-- if it's done right, insurance? Like, you get—

Buffett: If it's done right, yeah.

Kernen: If it's done right, you get—

Quick: Joe, just do this now. Just jump in—

Kernen: Well-- oh—

Quick: Let's do this now—

Kernen: -- Warren, you got one year where you get-- we ran outta letters for the named hurricanes, you know what I mean? And so it's, like, oh boy. And so—

Buffett: Yeah, yeah.

Kernen: --this is for good and you're, like, go-- you're like this, "Ooh, go," you know? The premiums are go-- and then the next ten years, you got -- you know, basically, not a single category. And so the way that it can be done-- is pretty amazing. But I hesitate to delve into this, but you have said in the past that you haven't seen catastrophic events increasing in terms of the insurance business, right? And year after year. Is that-- is that fair to say? It's been sort of static, or it's been predictable?

Buffett: Oh-- well, it's not predictable, but it's been-- the frequency of Florida hurricanes, for example, has been quite low-- for the last ten years or so, compared to history. That's not been true in the-- you know, in--in Asia. I mean, New Zealand had a quake a while back that would've been equivalent to, in relation to their population, probably three times or so what we've ever seen in the United States. But-- most of the cap covers do relate to the United States. If you see ha-- Matthew came close last year to being a big one. But-- it's been remarkably benign in terms of Florida, Texas, the southeast-- for quite a while. But--that doesn't tell you anything about next year.

Kernen: I know.

Buffett: But the prices went to where we don't-- we don't wanna ride it. I mean,we did not feel like the house anymore, as you put it-- when rates got to where they are now.

Kernen: Right. The reason I'm bringing this up, - I'm also thinking about, I mean, of even paying off more in flooding or-- do you whether the increase of tornado damage has stayed relatively flat? Has it gone up? How about wildfires? How about-- the idea-- the notion is that all these things are happening with this great frequency now. And I'm just wondering, is that true in terms of insurance? And I can understand how damages would go up because there's more people and they're populating the cost and they're-- you know, there's just more people around for tornadoes to hit. So I could see that. But do you know-- is the incidence absolutely increasing-- as a show of-- that we're screwing things up?

Buffett: Well-- last year-- , tornados were unusually frequent. And if you wrote comprehensive auto, or you wrote homeowners in Texas-- you probably lost a lot of money on that line. We have, I don't know, 25 auto dealerships-- or thereabouts in Texas. And we had losses that were I think seven or eight times the premium we paid, for example, on cars damaged at our auto dealerships through tornados. So Texas got hit hard-- well, a lot of places got hit hard. So what you've seen in the last few years is there's more tornadoes than you might expect and-- fewer hurricanes. But who knows what's gonna happen next year? You know, you've seen--you actually had a big quake over in New Zealand not that long ago.

Kernen: Yeah, quake that—

Buffett: It's nothing like we had a few years ago.

Kernen: Yeah. I mean, we haven't quite started attributing quakes to increased CO2. That's coming-- I'm sure. But-- no, I'm just trying to get a feel for whether—

Buffett: Well—

Kernen: I'm trying to get a feel for whether I saw, you know, one ofthe most vocal advocates of anthropogenic global warming, m-- this Michael Mann gentleman, said, "We don't need to really measure things anymore because we can just see things-- we can see the catastrophes happening." So that we don't need to-- actually do-- you look at-- any data, we know it's real because it's happening. And I-- I don't know, I remember things happening when I was young too. So I don't know whether the frequency is higher or not.

Buffett: Sure. No, I've-- I have not seen anything yet-- that would cause me to change the way we look at evaluating quakes, tornados—

Kernen: Floods.

Buffett: --hurricanes—

Kernen: Droughts.

Buffett: --by atmosphere.

Kernen: Right. More snow, less snow—

Buffett: Now, that may happen someday—

Kernen: -- It's unbelievable. Okay. That-- that-- I--you know, I'm not gonna ask you anything else beyond that because, I mean-- there's nothing more important, obviously, than-- than things like clean water and clean air and keeping chemicals-- and, you know, the EPA has a lot of work to do with waste sites and all these things. I just don't know whether it's a slam dunk that we've changed the entire-- climate at this point. That's my only point.

Buffett: Yeah, the only thing I've changed my view on is I would now-- I now charge a higher rate for hole in one insurance when you're playing in the tournament. I mean, we have done that. But that's- been the only major change in our underwriting policies, Joe.

Kernen: When you start—

Quick: you saw his game out in Pebble Beach—

Kernen: -- when you're sarcastic, it doesn't work well Warren, it—

Buffett: Oh, okay. Okay. I'll back off. I'll back off—

Kernen: You're so safe. You're so safe. But-- the only thing you're safer is if I've got a wedge

Buffett: We've written a lot of hole in one insurance over the years.

Kernen: Well, that's perfect for you. It is. That's, like, your perfect thing. That's, like, your—

Buffett: It is.

Kernen: that's why for you, to win that Final Four March thing, make it $1 billion. You've got it, no one's gonna do it. Just make an even bet-- d-- what do you got-- just make it m-- you'll get more headline. Make it $1 billion. Right?

Buffett: I'd rather get more premium. Forget the headlines, I want more premium.

Kernen: All right.

Quick: Hey, Warren, I wanna give you a moment to follow up on what we had just ended talking about, Fannie Mae and Freddie Mac.

Buffett: Yeah, one-- one point I'd like to make is that I think it's-- enormously important for the economy that we have readily available, 30 year government guaranteed mortgages. I mean, I--think this -- country will function better. Homeowners will borrow-- for less with a government guaranteed mortgage. I think the problem comes when you try to mix up the private sector with the government because serving two masters is tough. And you had that boards of Freddie and Fannie with some government representatives. You had you had-- Congress telling them what to do and you had Wall Street telling 'them what to do. I think that's a bad model. But I do think it's important that we have a government guaranteed 30 year mortgage. I think that's good for our citizenry and I think-- it's good for the economy.

Quick: But you don't think we need Fannie and Freddie to do it?

Buffett: no. I- don't think that-- I think-- I don't think you need Fannie and Freddie at all to do it. I think you need a program-- that is government sponsored. And you may want to have private insurers have to take 2 percent of everything they do or something of the sort-- just as a check on pricing and all that sorta thing. But basically, it's gotta be the government.

Quick: Warren, I wanna get back to the annual letter. And something that jumped out at me this year was a phrase that you put in that you don't hold stocks forever. You just wanted to make clear, there was a section, a small section that you put in, just said, "Look, people have said we own stocks forever. That is not the case." Why did you put that in this year?

Buffett: Well, there's a section in the report which has been there for 30-some years saying that we won't sell a business just because we get offered a fancy price for it or anything. But if it ever has one of two things happening, that it promises to lose cash forever, or we have major labor problems of some sort, we would consider selling. But I've gotten calls on businesses saying, "I'll pay you way more than it's worth," and I say, "I'm not interested." People have interpreted that-- in fact, one of our directors had interpreted that as meaning it applied to the stocks as well. Well, the truth is, we keep selling stocks a and we-- our favorite holding period is forever. I mean, it'd be nice to find stocks. I've owned Berkshire forever, I mean, for 52 years. So I followed myself, and I-- a lot of my family's followed it. But we don't commit to owning anything-- stocks forever. We do commit-- when a fellow sells me his business-- I commit that we're gonna keep it. We're not gonna resell it to anybody. It's-- we're not a private equity firm. And if it's disappointing, we'll keep it unless it gets in that those two categories. But that one section in what I call the-- ground rules-- that proved ambiguous is proved by the fact one of the directors actually mentioned it to me. So I just thought I'd better make-- clear it up.

Quick: should that lead us to think that you might be selling any of your ultra long term holdings? If I think of Wells Fargo or Coca Cola or American Express, stocks that have seemed like you've owned forever.

Buffett: Yeah, we've got no intention of selling those. On the other hand, let's say the world's greatest deal (LAUGH) came up. I mean, I have not-- there's no self-imposed ban on selling-- those. I've got no plan to sell 'em, but I just wanted to clear up that one point because it was-- the way I'd said it earlier wasn't clear.

Quick: Let me ask you a question. This is T-20 control-- and I'm going out of order on this. T-20 comes from Chris who writes in, "What are your thoughts on the border adjustment tax?" We've talked about that already, but he does wanna know, "Was this a factor regarding your recent sale of Walmart?" Maybe you could talk a little about the sale of Walmart and why you did that?

Buffett: Yeah, well, Walmart's a fabulous company. And what Sam Walton and his successors did, I mean, that's one of the great stories of American business. I think retailing is too tough for me. Just generally, I-- we bought an department store in 1966 and I got my head handed to me. I've been in various things in retail. B-- we bought Tesco over in the-- in the U.K. and I-- it wasn't we. I bought Tesco over in the U.K. and got my head handed to me. It-- retailing is very tough. And I think the online thing is very hard to figure out, you know? Now, we own we're sitting in a retailer we own that does very well. I mean, I think this particular business is relatively immune from the online business, although we do a lot of online-- business here. But this does very well. I think it'll continue to do well. But I think that-- I think Amazon in particular-- is someone that's going to-- it's an entity that's gonna have everybody in their sites. And they've got delighted customers. And it's extraordinary what they've accomplished. And a lot of people like-- they like the delivery, they-- you know, and that is a tough, tough, tough, competitive force. Now, Walmart's pushing forward online themselves and they've got all kinds of strengths. But I just decided that I'd look for a little easier game.

Quick: A major investor I spoke with recently asked me this question. And I'm not sure if it was supposed to be on the record or not, so I won't use the name. But this investor said that he or she had heard you recently making some comments about Amazon, where you were very-- complimentary of Amazon, its founder, Jeff Bezos, said he's probably the best manager you've ever seen.

Buffett: I-- think maybe he is, yeah. You know, I've said that. I mean-- it's remarkable. I mean, here, a guy -- you know,- gets in a car with his wife leaves-- leaves Shaw and starts driving across and he thinks, "How am I gonna take over the world? maybe I'll sell books online." It's he is one terrific businessperson.

Quick: That investor then asked me, "Why don't you own shares of Amazon?"

Buffett: Well, that's a good question. And-- but I don't have a good answer. Obviously, I should've bought it-- long ago because I admired it long ago, but I didn't understand the power of the model-- as I went along. And the price always seemed to more than reflect the power of the model at that time. So it's-- one I missed big time.

Quick: Is it too late or you just don't know?

Buffett: I just don't know. Yeah. I d-- retailing is tough for me to figure out. I mean, it-- I-- if you go back to when I was a kid, in every town, the guy that owned the big department store was king, I mean, whether it was Marshall Field or, you know, or Dayton or Hudson in Detroit or Frederick and Nelson, Seattle, or you name it, , the department store was king. And people said, "What can happen to it?" You know, it's down there where the streetcar lines crossed and the women took the streetcar to shop there. And they could see 500 spools of thread and 500 wedding dresses. And they couldn't see anything like that. That-- it offered this incredible array of goods. And then somebody came along with a shopping center. And instead of making it vertical with all this display owned by one person, they spread it out, owned by many. And now comes the internet, and that's the ultimate variety of things that you can get to very easily. So people love variety. They love low prices and a whole bunch of things. So it's-- it just keeps evolving. And the great department stores, many of 'em have disappeared and the rest are under pressure.

Quick: It's a business that has changed rapidly. And it reminds me of another business you're invested in, newspapers. Newspaper, the publisher used to be the king of the town as well. What's happened to newspapers?

Buffett: Newspapers have-- there are only two papers in the United States that I think have an assured future because they have a successful internet model to go with their print model, and that's The Journal and The New York Times. And I'm not saying it'll even be easy for them. But they have developed-- an online presence that people will pay for. Now, the third that may do it, again going back to Bezos, is The Washington Post. And he's improved dramatically their situation online. And so it's conceivable that their math works. But if you look at-- there's 1,300 daily papers left in the United States. We've got 31 of 'em. There were 1,700 or 1,800 not that many years ago. And it was an incredible business when you were first in everything. I mean, you could tell people how their stocks closed. I learned how my stocks closed by looking in the paper. I learned who won football games or what the box scores was in baseball. I learned all kinds of things from the paper first. And now, you've got-- you know, you've got an internet. And-- aside from the ones I've mentioned, 1,400-- 1,300 or 1,400 papers haven't learned-- haven't figured out a way to make the digital-- model compliment the print model in such a way as to guarantee the future. So circulation is going down significantly, advertising. I mean, used to be dozens and dozens of pages of help wanted ads. it's basically disappeared. And--no one has found the answer to that yet.

Quick: President Trump has-- looked at the media as a potential enemy. Steven Bannon has said they are the enemy. You've had-- a long relationship with-- these newspapers that you read every morning. You've been invested in newspapers like The Washington Post and many other newspapers. What do you think about that?

Buffett: Well, I-- think that every-- president I've known and every politician virtually I've known one way or another, doesn't like the media. They-- they just are smarter about it. They handle it maybe in terms of covering up, or maybe he's smarter taking 'em on. But in any event, the media's looking for things to write about. And they should. I mean, that's their job. But who wants somebody looking at everything you do with a critical eye? And-- the higher the office, the more they're going to look at it with a critical eye. The more air time it's gonna have and everything. So he expresses his feeling. But I would say that he is not unique in having those feelings--

Quick: Not at all.

Buffett: --among politicians.

Quick: Not at all. You know, you-- are not somebody who has embraced Twitter, although you do have a Twitter feed. How many times have you tweeted?

Buffett: Well, I-- think there're seven tweets up there, but I haven't done any of them. I have this friend that talked me into getting a Twitter feed. She's put up a couple things. But-- the answer is I've never tweeted anything really myself.

Quick: Do you find yourself following through-- anything on Twitter? I mean, I know you don't have an iPhone, but I know you have an iPad, right?

Buffett: I have an iPad. Somebody gave it to me though.

Quick: Do you ever —

Buffett: No-- well, I would say this. There's two things I was told in life many, many years ago that turned out to be terrific advice. One is to praise by name and criticize by category. Somebody told me that 40 years ago and Tom Murphy 40 years ago said, "Warren, you can always tell somebody to go to hell tomorrow. You haven't lost the option." Both of those pieces of advice have been very good. And I would say that both email and Twitter really can cause you to stray from that very easily 'cause if you can just whack out something-- it's very easy to tell somebody to go to hell in ten seconds if you get mad at 'em, or. And-- the very act of having that available instead of writing a letter or doing something of the sort, I think has made a lot more things come outta the-- that people shouldn't have said. I think they'd do better following my philosophy, but I think it's harder to do that-- if you can tweet something out in five seconds, or go to email and - do the same thing.

Quick: So how often do you think, "That guy's an asshole," but not tell him?

Buffett: Well, I've certainly thought that over the years. It hasn't always been guys either.

Quick: Did you just think that about me?

Buffett: No, no, no. No, I-- think-- but w-- I mean, sometimes you really do feel differently the next day. And you haven't lost the option. You know, I-- people have done things where you feel like, you know, exploding-- over it. And--

Quick: How many times have-- you had to use your own advice?

Buffett: A fair number of times. Yeah. For one thing, it's reinforcing in that you see that it works. Yeah. lot of people have said things in emails or whatever I wish they hadn't said. And they didn't to say it. You know, I mean, it-- - and they don't lose the option. You can't tell them to go to hell tomorrow.

Quick: Is-- that-- more of a lesson in business or in life?

Buffett: It's very important in both places. No, it-you learn about that. I mean-- I think was it Kierkegaard that said life can-- life can only be understood backwards, but it must be lived forwards, basically. And-- you do learn about a lot of dumb things, including writing letters in the past, but now including tweeting and emails. It-- your first impulse is not necessarily your best course of action.

Quick: Is that why you don't email and you don't tweet?

Buffett: Well, it's probably just that I'm inept. But-- that is a good rule, not to-- it's-- but it's a good rule to follow. I mean-- I would say that if you had a delay system on every email or tweet and it couldn't go out for two hours, I don't think they all would go out that people send.

Quick: The trouble is we all still have our mouths that get us in trouble.

Buffett: Yeah, definitely. I'm a walking example of that. No, it's-- really is a mistake to give an instant reaction, you know, to everything that comes along. I guess you're gonna have some things that are irritating for one reason or another. But-- people will tweet and they'll send emails. And I sent, you know, the one email I sent in my life, you know, ended up in Federal Court

Quick: Tell people about that. What was that email?

Buffett: Well, what happened is that Jeff Raikes, a friend of mine from Nebraska was at-- in a top position at Microsoft in the 1990s—on my one email. He emailed and said, "Doesn't Microsoft meet all your tests for a wonderful business," and laid out some reasons. And I emailed him back as to why I didn't buy Microsoft. And I also threw in some comments on Nebraska football. Well, I guess the U.S. government decided this email that he'd sent me or I'd sent him had some meaning in terms of Microsoft's position in the economy. So it-- one day in The Wall Street Journal-- I see my email is posted for the world. And I thought I didn't worry about what I said about Microsoft, I was worried I'd said something negative about Nebraska football and would have to leave the state forever. Fortunately, I didn't.

Quick: Hey-- Joe is somebody who shares your concern about Twitter, who tweets very rarely. And Joe, I know you want in here too.

Kernen: I block. I block. That's the best thing about it. You can block people very quickly. So in the past-- Becky, I-- whenever I wanted to use that word, I would say someone is a royal A-hole. And that's a company--

Quick: It slipped--

Kernen: --and I can get--

Quick: It slipped--

Kernen: I can get away w--

Quick: I meant-- I know, but he said, "Tell people to go to hell," and the other phrase jumped in my head and--

Buffett: Well, it show--

Kernen: Well, no-- no--

Buffett: --it shows the problem of--

Kernen: --but, okay, here's--

Buffett: --quick response.

Kernen: --here's the deal. If you're-- I have said, "Ass," but g-- isn't an ass a donkey? Isn't we-- a donkey? So I can say, "Ass."

Quick: It is.

Kernen: And I say, "Hole" all the time. So-- can I--

Buffett: I don't think we should pursue this too far--

Kernen: Is it o--

Buffett: --you know, but go ahead--

Kernen: If you're gonna start-- Becky, if you're gonna go here, I w--

Quick: I slipped--

Kernen: --I would like to use--

Quick: --I slipped--

Kernen: --that word all the time. If it's now fair game, I'm gonna just l-- I'm gonna just--

Quick: It's not fair game.

Kernen: It may be in every sentence.

Quick: Do not take that as fair game. That was a mistake.

Buffett: Do you wanna illustrate it-- Joe, for example--

Quick: I thought he said the other I thought he said the other. I thought I was repeating his words--

Buffett: Well--

Quick: I was not--

Buffett: --Charlie and I have a code word we use. When we've-- see some guy that we really think is a jerk, we will say to him, "Boy, you think like a CPA." And the guy kinda gets all pumped up. And-- of course, our code word is crooked, psychotic, and you could fill in the last.

Kernen: can I fill in--

Quick: So you don't wanna be a CPA--

Kernen: -- can I fill in the A? I'm--I'm still

Quick: No, don't. Don't.

Kernen: Royal A-hole.

Quick: Don't.

Kernen: Royal-- it was actually bought by del--

Quick: Thank you--for harping on this.

Kernen: Well, - me and your husband here, I looked over and we're both, like--

Quick: Is that the only thing you wanted to jump in one? I thought you had something else.

Kernen: No. I wanna know-- I wanna start using it. If it's okay now, I wanna 'cause I need it--

Buffett: You lost our PG rating. We've lost--

Kernen: No, I've used

Buffett: CPA, u--

Kernen: --I've y-- I've used it before. I have used that before. And, you know, I think shitzu all the time--

Quick: My mistake.

Kernen: I say, "Shih tzu" all the time and I will--

Quick: Okay.

Kernen: --continue too the dog--

Quick: Never mind. Let me out of my embarrassing snafu. Let's go.

Kerne: It wasn't a snafu--

Quick: Ask something else.

Kernen: All right. Go ahead.

Quick: Ask something else.

Kernen: Oh, oh, ask something else? No, no, no--

Quick: No?

Kernen: Okay. Do-- yeah, have we exhausted--

Quick: No, we--

Kernen: --the-- the talk about the ten year, Warren? You

Quick: This topic? Yes.

Kernen: No, you never answered me whether it's weird to see the bond markets so well behaved when so many people are suddenly worried about reflation or-- you know-- deficit spending. You know, we're not gonna do anything with entitlements. We're gonna increase military spending. We've spent $1 trillion on infrastructure. We're gonna cut taxes across the board. Why do you think that the bond vigilantes, which is Becky-- that's the way she likes to say it. I like it too. But why do you think that it's so quiet, Warren?

Buffett: I-- it absolutely baffles me who buys a 30 year bond. I just don't understand it. And-- they sell a lot of them so-- clearly, there's somebody out there buying them. But the idea of committing your money, you know, at roughly 3 percent for 30 years-- now-- I think Austria sold some 50 year bond here, you know, at-- below 2 percent. I just don't understand the-- in Europe, there are certain inducements actually for the banks in terms of capital requirements to load up on governments. But it doesn't make any sense to me.

Quick: You just said that-- a 50 or-- or 100 year U.S. Treasury might be a good idea for the Treasury to sell, but is that an indication that you would not be a buyer?

Buffett: Absolutely. I would not be a buyer, yeah--

Quick: And you wouldn't necessarily recommend anybody else buy it either?

Buffett: No. But that, you know, -- that's why I think the government should sell it, it's a bad buy.

Quick: Okay. Warren, we're gonna continue this conversation in just a moment. We're gonna slip in a quick break here. When we come back, we'll have (MUSIC) more with Warren Buffett. Stay tuned. You are watching "Squawk Box" right on CNBC.

Quick: Welcome back to "Squawk Box." we are live with Warren Buffett in Omaha, Nebraska. Warren, we've talked about a lot of different issues but so much news we haven't gotten to, one of those being Wells Fargo. We haven't gotten a chance to sit down and talk to you since everything happened with Wells Fargo. We had some viewer e-mails that came in as well. This comes from Norm. Guys, this is T-31. He says to ask you given your ownership of Wells Fargo, please explain your criticism of management, why it's been muted for Wells Fargo versus the Salomon Brothers incident.

Buffett: well with Salaman the company was failing and might have been out of business following week with huge repercussions for Wall Street. That was a whole different thing. They asked me to come in. I was on the board. With Wells Fargo because they repurchased shares We actually owned slightly more than 10 percent. We have to be a passive investor there by law unless we want to become a bank holding company which we don't want to become. I might well have been passive anyway. I can tell you i had to be passive in any event. They made a huge mistake. The huge mistake was not necessarily the dumb incentive system. Everybody comes up – incentives systems are fine sometimes they incent the wrong things they certainly incented the wrong things. The problem is they didn't do i anything about it when they learned about it. Same with Salmon in that sense. I keep preaching to our guys. If you see a problem, attack it immediately. It's going to get better. A huge mistake was made at Wells not in cooking up the incentive -- if you want incentives and people to do it but you don't want it to lead to crazy behavior which it did. The big mistake is when they found out and didn't do anything about it. They are fine was something like $180 million or $185 million. I think they saw that wrongly as in the light of $5 billion fines put on for mortgage practices at some other banks, $3 million fines. They saw the problem as sized by the size of the fine and it wasn't at all. Any time you have people making up accounts and doing all the thing they were doing, it isn't the size of the fine that measures the customer impact, it's how your reputation will suffer. It's what you were doing and it was wrong.

Quick: The fine came five years later after they had been doing it for five years.

Buffett: Clearly they knew what was going on to some extent and they didn't do anything about it. I will say this, if the top guy doesn't do anything, the people below won't. John Stumpf is a perfectly good guy. I wouldn't worry for a second. But somehow when he saw the evidence, he didn't do something about it. Now, maybe he thought somebody else was going to do something that part is similar to what happened at Salomon, John Goodfriend thought that he postponed calling Jerry Corrigan. Late April, may 15th another government bond offering came along and the guy behaving badly behaved badly again and now it was too late. To some extent when you get behind the eight ball and don't do it immediately you think it will go away. If i come in now, why don't i come in six weeks ago or six months ago. Whatever it was, it's a terrible mistake when you see a problem not to attack it immediately. It can be unpleasant. Get it right, get it fast, get it out, get it over. I keep telling our managers that. I'm sure something is being done now with 367,000 employees the Berkshire and i hope i find something about it and do something about it.

Quick: What do you think of Tim Sloan the new head.

Buffett: I had lunch with him and I'm going to have lunch in a week or two. I think he's doing fine. They made a big mistake and they are correcting it. I don't think in terms of the earning power of the company in five years from now it's material.

Quick: Tim Sloan was there at the time. Did he have any involvement in any of this?

Buffett: not that I am aware of what I would guess is consumer banking, it goes up the chain and that there's a person that's got a very responsible job ahead of consumer banking that should do something about it. If that person doesn't, then the CEO has to do it. The board isn't going to know anything about it. You don't learn about that sort of thing at board level.

Quick: Can we talk about Bank of America?

Buffett: Sure.

Quick: That is another large holding. You don't count it in your 15 biggest holdings of the different way it's structured.

Buffett: Yeah.

Quick: You talked about in the annual report about when you might or might not go ahead and exercise those warrants. You want to lay it out for people who didn't read that deeply?

Buffett: Yeah. We can use our $5 billion preferred as payment for the warrants which are 700 million shares at $7.14 so we can have a cashless exchange. We're getting $300 million a year from owning preferred. If we use that preferred you exercise the warrants, it would only make sense if the common we received paid us more than $300 million. The magic figure is $0.44. I have no idea whether they will pay that or not. I wanted to be clear in the annual report that would cause us to exercise the warrants earlier than normal time which would be a day before expiration.

Quick: You also used the annual letter this year to really lay into investment managers, hedge funds in particular, and people who think they can get ahead by relying on experts when it comes to investing. There was a viewer e-mail that came in, and the gentleman said if you were looking at these issues, you talk about the know nothing investors.

Buffett: All you have to do is America is going to do okay.

Quick: Know nothing investor. He took umbrage to that. What is a know nothing investor?

Buffett: It is someone who is not a professional. I'm a know nothing doctor, I'm not in that business. The idea you're going to be in a game you're not trained for or spent your life, not saying a zero IQ, you can have 200 IQ and not be involved in investments. I don't know why light switches go on. I think I'm generally reasonably intelligent but I don't know. I'm a know nothing physicist.

Quick: Your point is for investors who don't do this for a living, it's really really difficult to beat the indexes.

Buffett: They aren't going to. One might be lucky for a while. The beauty is you're going to do wonderful with American industry. You don't have to be an expert. The experts aren't going to do it in large measure either. You're going to do fine. It isn't like I'm saying know nothing investors are going to be left out on the street or anything. They are going to get a great result. I mentioned in the past when I die, I told my wife, 90 percent of her and trustee have it in an index fund. It will do better unbalanced than what they will get if they go to professionals.

Quick: Because?

Buffett: Professionals don't know how -- after fees they don't know how to get a better result. If you take half the people in the country and they don't do anything, they just own the average, they are going to get average results, right? If they don't have expenses they will get growth from that. The other by definition average, the other part average left for them, they are going to incur all kinds of fees and they are going to do way better – way worse than the people in the -- who do nothing. And I made this bet in order to just illustrate. The difference is incredible. The amount of money people wasted getting investment advice is just ridiculous in this country.

Quick: You mentioned there are ten managers in your lifetime you have met. I want Joe in on this conversation and we'll come back to that. Joe.

Kernen: I was going to say a lot of those hedge fund guys are assholes. I'm going down with you, baby.

Quick: I'm never going to hear the end of this.

Kernen: I'm going down with you.

Quick: Thank you, joe.

Kernen: sink or swim.

Buffett: Next year -- i'll be doing this show by myself next year.

Quick: Uh-oh.

Kernen: Two in twenty and they can't beat the index. That's something -- I'm glad someone shared that. Some year after year are good but there's a lot of naked emperors charging two and twenty. They have a couple of good years and give it all back. They keep their two and twenty and lose it all for the people that are there, right?

Buffett: No. Two and twenty is going to make a lot of people rich. And it actually – it borders on obscene. As I said in the letter, I've known 10 or so people with modest amounts of money, I would bet a lot of money that they would do better than average. And I say that there are hundreds, maybe even thousands. But there's thousands, and thousands, and thousands and thousands of hedge fund managers charging two and twenty is just ridiculous. And you don't get better because you charge a lot. I mean, that does not make you a better judge of securities or anything like that. And so the good salespeople, overwhelmingly, are the ones that attract the money, rather than the very few who are extraordinary at managing money. Phil Fisher, who wrote that book Common Stocks and he was going to do better than average. Charlie was going to do better than average in life in investments. Bill Ruane, a friend of mine, was going to do better. There have been a few. But there are very, very few. And then only if they work with fairly modest sum of money.

Quick: Is that why you don't want to tell us anybody we could actually invest with right now?

Buffett: Well partly being 86 – my crew is, you know, the fella you never heard of, Herb Wolf. Probably if I'd picked one guy to manage money, I would've had Herb do it, you know? But Bill Ruane was outstanding and I recommended him to my partners. And my partner Sandy Gottesman in many things. There's no question he was going to do better than average but very, very, very few people – well, when we were looking for a couple people to hire at Berkshire-- I think you were on that trip, CNBC was, when I had hundreds and hundreds and hundreds of applications from people. And the truth is, I let anybody in the world that wanted to challenge me nine years ago come up with 500,000 bucks for their half of the bet. And all of these guys who make billions of dollars a year, they didn't want to put up $500,000 and bet on themselves. You know it's amazing what's happened in investment management.

Quick: Joe?

Kernen: I have one more philosophical question Warren. And it goes against what you normally speak to. But just in terms of looking at the market and whether it's had, like, a run where it's done too well and it needs to regress to the mean, or where it hasn't done well enough and it'll come back, if you look in an eight year analysis, let's say it's triple in eight years. That's, like, 16 percent a year or something I think because it doubled twice. Or not quite. But it if it tripled, that's one way of looking at it. But if you go back to 1999, 17 years it's only doubled. So that's only 4 percent a year. So which is it? Has this market gotten ahead of itself because it's tripled in the last eight years? Or it's taken forever to go from 10,000 to 20,000, so we aren't necessarily in this rarified era. Do you have an opinion on that?

Buffett: Yeah. Well, I would bet my life well, it doesn't mean much when I'm 86 to bet my life on a 30 year bet. But I would bet my life that stocks over 30 years outperformed the 30 year bond. I would come close to doing it, betting that over ten years, they'll do better than the ten year bond, versus the one year bond or two year bond. I have, you know, no idea whatsoever. But stock if you look at American equity, basic business of America, American equity earns a tremendous return on tangible net assets. That's what the business is about. That's what the farm is producing. Now, a bond is limited in what it can produce. But when you say reversion to the mean, I'm not sure what the mean is. I mean, the mean is going to be based upon returns on equity, the amount of equity reinvested and reemployed. And I would say there the prospects are so much better than in fixed dollar investments, that, you know, admittedly, I liked stocks a lot better a few years ago. And I've said that on this program. But the stocks versus bonds right now, it's not close. Now, bond yields can change a lot. If bonds go to 15 percent, I may be recommending bonds.

Quick: Warren, were you considering yourself among those ten people that you thought could outperform indexes? Did you always know that you were going to be able to be—

Buffett: I always felt I would. Yeah. It's kind of disgusting, but I really did. I mean, I retired, when I left Grant Millman with $175,000 and I thought that would be enough to provide me a good living you know, the rest of my life. And I had a couple kids then. And no, I thought I was right for this business. Now, I thought Charlie was right for this business. I thought Bill Ruane – I mean, I knew ten or so people, Walter Schloss – and I didn't think they were the smartest guys necessarily in the world, although maybe Charlie is. But I thought they were well adapted to the business. People have different talents. I mean, you look at chess champions or bridge champions. Sometimes they're not so good in other areas and-- I'm wired for this business to some degree. So and I felt that, yeah. And I learned from the greatest teacher you could have.

Quick: What would you have done what other jobs did you consider besides going to work for Ben Graham?

Buffett: Well, when I got out of Columbia, I only applied for one – I went to Graham and said I'd work for nothing and he turned me down. But I did go down to Merrill Lynch. I went down to Merrill Lynch. And this woman said that she put me in this little room to wait. And about, well, there were a couple guys in there already. And they got called up. But then there were about three or four that came in after me. And these guys were all really fat. And they kept getting called in ahead of me. And I finally decided Merrill Lynch had some minimum weight requirement. So I left. If they'd called me in earlier, I might be working for Merrill Lynch today. But they – I just got tired of all these fat guys going in ahead of me. And I thought it I must've been at a pro football tryout or something. So I only weighed about 135 or 140 pounds at the time. So I decided that there was some requirement at Merrill that they hadn't told me about.

Quick: And, oh, how different your life might've been.

Buffett: It'd been different. Yeah.

Quick: You keep talking about the ten guys, maybe, ten people, maybe that you've seen that could outperform. Is there anybody who's actively managing money today, who investors can still get in within that group of people?

Buffett: Well, I'm sure there are. But they will only be effective, in all likelihood, with fairly modest sums of money. And, of course, they'll attract more money.

Quick: Yeah the reason I keep coming back to this is because that's got to be a question everybody's saying is, "Who do I go to to beat the average?"

Buffett: Yeah. I hired two guys who I thought were very good. And they are very good.

Quick: Todd and Ted?

Buffett: Yeah, but they're running $10 billion each, and they would do better if they were running $1 billion in terms of percentages than they will. It's just that we have a lot of money around. But added funds work wonders for the general partner who's getting the two and 20. And they're totally against the interests of the limited partners beyond a point.
BECKY QUICK: There was a question that came in from a viewer, and I don't know the number on it you guys, if you can find it, the gist of the question was does the market still have plenty of GEICO's out there that you could find that are great investments, that are going to continue to grow phenomenally? Or is it just a different market, is it a different time?

Buffett: It's tougher than it was, obviously, 50 years ago. I mean, my best year actually was 1954. So see how far I peaked very early. But I was working with tiny amounts of money and in a market that was not combed over the same way as presently. So there are way more people looking to compete with. And I think still think, because of temperamental differences, I think there are a fair number of people that, with small amounts of money, can do well. But the chances that the average person is going to be – pick them out or that the person sitting across from you, trying to sell you, is that person, is betting against the odds. Significantly against the odds.

Quick: You mentioned in the letter that that's something that your wealthiest friends just don't want to hear though.

Buffett: That's a very interesting phenomenon. I've talked this way, and people with small amounts of money say, "That sounds good to me," and then they just go and they buy index funds. They keep buying them. And they've done better than the people who have gone to hedge funds. But if I say that, I get asked various pension funds, sometimes they're local. And I've been asked by very big retirement funds, some other states. And I say the same thing to them. And they basically can't stand the idea that their big money won't buy special performance. And , of course, they get called on by these people all the time. You know, and a good salesman will –

Quick: The hedge fund guys, you mean?

Buffett: Yeah, they're going to fall for good salespeople. And what really gets me is sometimes they hire consultants. They say, "Well, I don't know enough to pick good managers, but I know enough to pick a good consultant." I have never quite figured out why they can't figure out who a good manager is, then some guy comes in, says, "Well, I'm a good consultant." So it's really sad, but they're really outclassed, in many cases, by the salespeople. I mean, that's true in a lot of fields. But in investments, you're talking big, big, big money. And somebody's got $1 billion, they want to have a family office, or they want to feel special. And the truth is, you don't need to be special.

Quick: Okay. Warren, if you don't mind, we're going to slip in one more quick break. When we come back, folks, we're going to talk a little bit more with Warren Buffett about some issues concerning the markets and some of the securities that he's been bulking up on. You're going to want to hear this, so stayed tuned "Squawk Box" will be right back.


Quick: Welcome back to Squawk Box, everyone, where we are live in Omaha, Nebraska with Berkshire Hathaway's chairman and CEO, Warren Buffett. He's been answering questions for the better part of the last three hours. And Warren, again, thank you for your time today.

Buffett: Thank you.

Quick: Before we go, I'd like to make sure we hit a few points for people who weren't up three hours ago, right at very beginning of things. The one question everyone asks me when I come back from talking to you on one of these things is, "What does he think about the stock market right now?" There are a lot of concerns from investors who have watched things run very rapidly over the last few months. We've watched the DOW go past 20,000, watched the S&P go past 2,300. And there are investors who feel like, "Wow, I missed my chance. I've been sitting on the sidelines. Now I have to wait for a pullback." What would you say to those investors?

Buffett: Well, I don't have the faintest idea what the stock market's going to do tomorrow or next week or next month or even next year. I do know that over time – and we'll talk ten years of something of the sort – that equities will do better than bonds, which is the main alternative or bank deposits or whatever it may be. Fixed dollar investments for people. And they're not going to be able to pick the time to come in. I don't know how to pick the time to come in. I bought a lot of stocks in the last couple months. They turned out – the stock market goes down 20 percent or 30 percent. But that won't bother me if I like the businesses I bought.

Quick: You know, there are a lot of people who think you need to be balanced. If you're going to be in stocks, you also need to have balanced in bond. Maybe 60/40 or 80/20 or whatever it may be. I have money in Fidelity Retirement. I have everything in S&P 500 index funds like you've written, like you've told people to do with the exception of Comcast shares, which I own. But everything else is in S&P 500 index funds. And I get a red signal back from Comcast – from Fidelity saying, "This is dangerous. You should not be invested in stocks." Are they right to warn me off?

Buffett: No, I think that's totally wrong. I mean, it depends – obviously, you shouldn't be invested in stocks with money you might need to use in the next –

Quick: It's a retirement fund.

Buffett: Yeah. But if you're going to need – you shouldn't borrow money against stocks. And you shouldn't – if you're going to need some money for college or something in a year, you don't want to be in stocks because you don't have any idea what stocks are going to sell for in a year. It's inappropriate. But stocks are safe for the long run and they're very unsafe for tomorrow. If you call unsafe being will you be bothered by a decline in market prices. But Berkshire, three times since I took over, has gone down roughly 50 percent. Did I feel poor then? No, not at all. I mean, you know, but I didn't owe it on borrowed money. I knew it was going to be worth more over time. American business is going to be worth more over time. You know, that's what you're buying, is a business. You're not buying a stock, you're buying a piece of a whole bunch of businesses. Are those businesses going to be worth more ten or 20 or 30 years from now? Of course, they are. But if you think you can jump in and out or that you know the time to come in, then I think you're making a mistake.

Quick: In my lifetime, you said, you wouldn't be surprised to see the DOW go to 100,000?

Buffett: Yeah, well, you're probably, what, 30, 35 and you got another 50 years or 60 years left—

Quick: You're kind.

Buffett: You'll see it. You know, I mean, it's going to go. I mean, they retain earnings every year. Just retained earnings. A fellow named Edgar Lawrence Smith wrote a great book about that in 1924. It was the rationale for the great bull market in the '20s. But you know, he pointed out how retained earnings actually add-- to values. And if you owned a private business and you retained the earnings every year, Berkshire's done that. And it gets to be worth more money. And that's what's happening in this world.

Quick: You told us earlier in the program you've put probably $20 billion to work just since around the time of the election because you've liked two areas. One of those areas is Apple, one is the airlines. And we do have a question that came in from a viewer, James Lee, it's T51, folks, who says, "Why do you believe that managements in boom and bust industries like the airlines will act prudently and rationally for a long time?"

Buffett: Well, that's the question. But hey, it's certainly easier to act rationally when you're doing 80 percent plus loan factors than if it was a lot less. So the big problem if they get too many airplanes around you know, you can be sure that it'll be a lousy business for a while.

Quick: Does that mean that's a number you watch, kind of like the canary in the coal mine – is the loan factor itself?

Buffett: Well, you can see what the orders are and all of that and delivery's expected to be. And airline usage – will go up over time. You know, not necessarily dramatically, but that will increase. So it isn't like demand is ever going to go away. If you get too much supply, you got a problem.

Quick: Speaking of supply and demand, crude oil is another one that we've watched very closely. I know you mentioned in the letter that Marmon Industries, things like the railcar, the leasing business that was there – it's been down significantly. You said it was not just because of crude oil. What are the factors that go into that?

Buffett: Well, crude oil is a factor. But general heavy industry has not been super strong. It's very interesting. Since the fall of 2009, we've had about a 2 percent a year growth, you know, year after year. And people get more optimistic than that sometimes and strengths and weaknesses are moved a little through the economy. But the oil business, you know, it looked terrific a few years ago. And more oil products in the United States are going to move with $100 crude than move with $50 crude. And people got very excited about ordering tank cars a few years ago. And then they got less excited. Actually, there's been a little pick up lately.

Quick: I can't believe we've gotten to this point in the program and we haven't asked you your take on the economy. Where is the economy right now?

Buffett: The economy is – everything I see has been the same since 2009 – the fall of 2009. It keeps moving ahead at a couple percent a year, which is terrific, incidentally. Not as terrific as 3 percent or 4 percent would be, but if it just stays at 2 percent, you'll add in one generation 19,000 of GDP per capita to our present economy. We'll have so much more stuff then than we have now, it'll be fabulous, one generation away. So your kids are going to live better than you do. But people – would rather have 3 percent or 4 percent, and maybe we'll get it. But 2, we're moving forward.

Quick: We just spoke with Treasury Secretary Mnuchin last week and he said he sees a way for us to get to 3 percent growth based on a few things, if it's tax reform, if it's cutting regulations and other things that go along with that. Do you see us getting back to 3 percent growth?

Buffett: I just don't know. I mean I wouldn't bet on it, but 2 percent will be – will do perfectly. 3 percent would be better. Anything – well, I shouldn't say anything – but there's a lot of policies that might bring it to 3 percent. If they do, I'm all for it.

Quick: What do you think would help us improve growth?

Buffett: Well, productivity is the only thing that gives you growth. I mean, if we hadn't changed productivity since 1776, we'd be living like we were in 1776. If 80 percent of the people had to be on the farms to feed us, we wouldn't be producing much of anything else. So it's all productivity over time that counts.

Quick: Well, we got a lot of people who wrote in about artificial intelligence and robots and where you think they are moving along. Are they hurting our productivity?

Buffett: Yeah, I don't really know anything about robots. But I'll put it this way. If you eventually got the world so that one guy could push one button and everything that's being produced now would be produced from him pushing that button, it'd be a better world. Now, you'd have to make sure that guy didn't keep all the output, but the idea of getting more productive, it benefits everybody. And I shouldn't say it benefits everybody. It benefits society. It can hurt individuals in their given industries. But we should long for more productivity. That'll give a fewer hours worked, it'll give more output per capita, it'll give better living for people. And that's what we've done, actually, in this country. We saw it dramatically in farming. I mean, it's unbelievable what has happened in farming. And we now have 2 percent of the population working on farms, doing way better than when we had 80 percent. But if we didn't have tools and fertilizer and all those things, we'd be an agrarian economy and we'd be living like we did in 1776.

Quick: Very quickly, the dollar has continued to climb. Is that good news or bad news for America?

Buffett: That depends whether you're an exporter or importer. It makes it very tough if you're exporting. But it's, you know, with interest rates being what they are in Europe, you know, compared to here, the dollar just has gotten stronger. And when people tell you what the dollar's going to do, they'll be very careful. I mean, it just suggests they take up currency trading for a living and see how they do.

Quick: Warren, I want to thank you very much for all your time today.

Buffett: Thanks for having me.

Quick: Again, this is our tenth annual Ask Warren show. And we can't thank you enough for hosting us and having us here.

Buffett: It's been fun.

Quick: It has been. Thank you.

Buffett: I've learned a few new words.

Quick: On that note, Joe, we'll send it back over to you.

Kernen: Yeah, right. Exactly. Okay. That's his story and he's sticking to it. What do you mean, you had an acronym for it, CPA. That's not certified public account. Don't kid a kidder. Don't kid a kidder, Warren. We know exactly—

Buffett: Okay.

Kernen: In your business, like you don't need to have that one on the tip of your tongue half the time? You definitely do. Anyway, Becky, great job.

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