[On the Las Vegas shooting]
"You never should get inured to this -- and the one thing I would say is that I've heard that the shooter got off 200 rounds in 90 seconds or something like that, and I think the Las Vegas metro police did an incredible job in getting there. When somebody is shooting at that rate, the police force may have saved maybe even hundreds of lives by reacting as fast as they did. You've got 325 million people in this country, and a certain percentage of them, their brains don't work like brains should.
[On current market valuations]
Well, valuations make sense with interest rates where they are. I mean, in the end you measure laying out money for an asset in relation to what you are going to get back, and the number one yard stick is U.S. governments.
When you get 2.30 on the ten-year, I think stocks will do considerably better than that. If I have a choice of the two, I'm going to take stocks at that point. On the other hand, if interest rates were on the ten-year were five or six, you know, a whole different valuation standard for stocks. And we've talked about that for some time now.
Interest rates are gravity. If we knew interest rates were going to be zero from now until judgment day, you could pay a lot of money for any other asset. You would not want to put your money out at zero. I would have thought back in 19 -- I mean, 2009 that rates would not be this low eight years later. It's been a powerful factor, and the longer it persists, the more people start thinking in terms of something close to the rates they've seen for a long time. The one thing I'm sure of is that over time stocks from this level will beat bonds from this level. If I can be short the 30-year bond at 3 percent or something and long the S&P 500 and just have it put away for 30 years, stocks are going to far outperform bonds. The question is which variable is going to change. Everybody expects interest rates to change. But they've been expecting that for quite a while.
I don't try to guess the stock market: I find businesses I like. But if I were to guess: if interest rates -- if the ten-year moved up to 5 percent, stocks would be somewhat cheaper.
It's been so wide I've written about it in annual reports. Stocks have been so much more attractive than bonds for a long time now and that's partly intentional on the part of the fed. I mean, they want assets to increase in value and the way to do it was to reduce that gravity force of higher interest rates.
I think they expect it to increase, but the question is how much. If three years from now interest rates are 100 basis points higher than this, stocks will still be cheap at these prices. If it's 300 or 400 basis points, they won't look cheap. Janet Yellen doesn't know what she would do three years from now. She's got more of a job than --that's a simple factor of the stock market. It's interesting because the fed has said that they would like to see 2% inflation. That's fairly recent. Paul Volcker would not have slept if he'd ever heard that in the 80s.
If the U.S. government is borrowing at ten years from you at 2.3%, and their own instrument, the fed, is saying 'we would really like money to become more 2% a year or less,' they're not promising you very much in terms of real terms for saving.
[On who will be the next chairman of the Federal Reserve]
I don't spend time thinking about it. It wouldn't do any good to think about [who will be the next Fed chairman].
I wouldn't know the answer in the end. Most of the time the Fed is not that important: occasionally it's the only game in town. It can be the only game in town. There is only one person that, in September of 2008, could walk out like the sheriff into the street and say, 'you know, that this isn't going any further. We're going to do whatever is necessary and have the power to do it.'
The Fed is of enormous importance during a panic. People tend to hang on their every word in between. But we don't pay any attention to it. If they really think they could figure it out, they might as well play the bond market. They don't really have to get over to the stock market. I can't remember a decision we've ever made based on the Fed, except for the fact that I felt that Bernanke and Paulson and Geithner, but I felt the Fed would do the right thing in the fall of 2008. We had an incredible machine that was in the hospital, and the Fed could bring it out.
[On Congressional tax cuts or reform]
Well, I think about [tax cuts] plenty right now because we may or may not have a change in the tax code, and we have lots of stocks with lots of gains, and we have a few stocks with losses, and here we are in October. If something happens that changes the tax rate significantly on January 1st, it would pay me something -- assuming that they would reduce rates on capital gains or corporate rates. It would pay me to sell the losses now and defer the gains until next year. I think there's a lot of that going on because I think there's an expectation that if they reduce -- that if they have a tax act, it will be -- they will cut the rates -- certainly corporate rates. It would be kind of foolish to have a gain now and pay 35% tax on it if by waiting a few months you were likely to pay 25%.
So it actually very seldom enters into our thinking.
On balance we would rather sell things with losses than gains. Right now were sitting and watching because within three months -- actually, less than that -- well know the answer on this whether this is was the year to take losses and not gains. We've got actions on both sides that we would take.
It doesn't happen very often that, during the month of October, with there being a major tax act, whether it's a 20% chance or 50% chance. One thing I know is that I'll know the answer within a month or two. There's not that many days left to legislate, and I would feel kind of silly if I realized $1 billion worth of gains and paid $350 million in tax on it if I just waited a few months and would have paid $250 million. If enough people were doing that that may mean that the market is being affected fairly substantially.
And you may be talking about people -- it would tend to depress stocks that have behaved badly because people would be taking the losses now, and it would tend to defer gains and reduce sellers currently that would be in stocks with very large appreciation. I can tell you, it's an actual fact at Berkshire, and it's very, very, very seldom in my 87 years that it's ever been a factor.
I personally think they're higher probably than most people think because I think that – I think having had the healthcare bill pulled away -- just generally and no infrastructure, if you take maybe the three big items, this is the only one left to do this year, and I would think the Republicans controlling both houses and the presidency, they would not want to have a shut-out in their first year, and of top priority. I think they can get it done. It's not a tax reform act, it's a tax cut act.
I think that any politician that can't pass a tax cut probably is in the wrong line of business. If you can't pass that -- it's a different thing with the health care act, but I think there could be a lot of compromise. I think it could be bipartisan to a degree.
[On Berkshire Hathaway's stake in Flying J]
I do like -- I do like the products of virtually all our companies. I suppose if we ever bought a funeral parlor, I wouldn't be as -- generally speaking, I like our products.
I like good economics to go along with them too. Well, if you do it, you do it with your own money and not Berkshire's. I wouldn't argue against that. I mean, if you had a lot of money and there's something you like, if it isn't profitable, you buy it, but you don't buy it with Berkshire's money.
[On Flying J deal] We set up a lot of different structures than what the managing party would like to have, and, you know, with the Blumkins in 1983. It's the same structure. Their situation in terms of their family and their partnership and everything made this logical, and we have this two-step arrangement.
We've got other two-step arrangements. Marmon with the Pritzker family we had a three-step arrangement. We try to fit what the seller would like, and with families and everything, you can have different arrangements.
Jimmy is based in Knoxville, and we bought another company 14 years ago: Clayton homes. Their employment has gone from 5,000 to 16,000, and they've seen me exactly once. They might have done better if I hadn't gone down the one time -- Jimmy knows and the families know each other, and so they've got a chance to check to see exactly how much we do interfere with operations.
The truth is I wouldn't know how to build a manufacture home or a truck travel center—we depend on management.
[On Wells Fargo]
Well, I didn't hear all of what [Senator Elizabeth Warren] had to say. She's absolutely right that you should – same situation as at Salomon -- 8,000 people four or five of them had caused the problem. The job is to remain – remove the stain from almost all of the 8,000 and get it where it properly belongs with the people that either performed the act or condoned them after they were performed. That's what we did at Salomon.
I think that's what they've been working at Wells. You can't do that necessarily in a day or a week. Well, I proposed, actually, in the annual report of Berkshire -- that would be four or five years ago, sometime after 2008 -- the problem is that the bank gets fined and the shareholders are the ones that pay for it, and they didn't have anything to do with it, basically. And I suggested that probably more extreme actions than Senator Warren in terms of clawing back all the directors fees for five years. I think that you really want -- you want as much as possible – you want the people that were responsible to pay, and ideally you would have the people that were innocent not pay. It doesn't work that way in the American judicial system.
I think that if you have a very large company -- Berkshire is large -- you have a hotline. I think the CEO has to be very attentive to what comes in on the hotline.
Now, most of its silly stuff, but there's real stuff too. And you get anonymous letters. You've got to follow through on the ones that actually sound like they have real meaning, and clearly you couldn't have activity as broad as it was at Wells without the hotline here Somebody messed up on the job as to find out who messed up and ideally to make the penalties be such that it discourages other people in the future from doing similar things.
I say when you got a problem -- and you are going to have problems -- I mean, if you had a very big -- You can't have 280,000 people working without something, and most things are minor, but you get something systemic, you have a big problem. Once you find out about it, you have to get -- get it right, get it fast, get it out, get it over. Getting it right is hard: I mean, because you turn over rocks, and sometimes you find dome things, and it's very seldom there's just one big thing going wrong in a big institution if something like that is going on you've got get it right, and the one thing you don't want to do is be wrong about it.
Yeah, like I said it happened to me at Salomon. Salomon had my faith: It doesn't mean every person at Salomon had my faith after I got there. I had some surprises I mean, I was worried about surprises every day. But the truth was that 99% of the people were perfectly decent people, they were just like the people working at Goldman or some other place, and somebody had gone off -- totally gone off the -- gone haywire and other people didn't report it.
When you find a problem, you have to jump on it. I mean, that is – that's just basic.
I was in Las Vegas last week talking to about 400 wells people and Tim was head of this. It was there top group from around the country. I did the same thing about five or six years ago for wells in Chicago. I did it for B of A maybe seven or eight years ago. I mean every now and then they ask me to come around just so that people can see who owns a lot of shares. So I must have talked for at least an hour last week.
I mean, [Sloan] knows that I testified many years ago in connection with Salomon. Both to the House and the Senate, and I told him something of my experience, but it's all on tape, in terms of being able to see it anyway.
I gave him -- I told him what I would do.
[As to whether Buffett has reduced his holding in Wells Fargo]
Only to stay under 10%, which was something that the Fed requires, and since Wells repurchases their shares and we were right up against 10 %, that way we went over because they repurchased shares not because they bought. We keep -- we will sell enough to stay at around 9.8. That's to avoid becoming a bank holding company. You will find with just keeping a little below 10%.
We have not sold the share except for that purpose.
[On his favorite bank]
What's my favorite bank?
I'm not so -- what's your favorite child? Bank of America has done a sensational job under Brian Moynihan.
Brian had all kinds of problems when he came in. They were not of his own doing. But he had a ton of problems and
He had a lot of rocks to turn over, and it cost a lot of money. And he just set out step by step to bring the bank back. He's gone from 280,000 people down to 210,000 people. He gone from a run rate of expenses in the $70 billions down to $54 billion.
He has really done a job, and we will be holders of B of A stock for a long, long, long time.
[Additional thoughts on tax reform, his long-term plans for his money]
I don't think I need a tax cut. For example, the current proposal eliminates the estate tax, and it's not a death tax.
There will be 2.6 million people die this year in the United States and there will be 5,000 tax returns – states that pay tax. If you start going to a funeral every month, it's going to be 40 years on average before you go to one where there's any estate tax to do it with, and it's a pejorative term. The truth is: if they passed the bill that they're talking about, I could leave $75 billion to a bunch of children and grandchildren and great grandchildren and if I left it to 35 of them, they would each have a couple of billion dollars. They could put it out at 5% and have $100 million. Is that a great way to allocate resources in the United States?
That's what you are doing through the tax code is you are affecting the allocation of resources. If they were lucky enough to come out of the right room and have the right name, Buffett, they could build tombs for themselves like Egyptian pharaohs never dreamt of. They could do anything and capitalism was all about intelligent allocation of resources. Now, some people say, well, you don't have to worry about that because they'll blow it all.
But if they blow it all, that means that they've done some dumb things with some important resources. That's not good for capitalism I don't think it's good for the children. I sure don't think it's good for a society where there's a ton of inequality to start with. I think that's a terrible mistake for example. I don't think that setting it up so children and grandchildren -- let's say I died when they were 20 I don't think they would be the same individuals that they are.
I didn't encourage that foundation program until they were in their 40s and I had seen what they had done with their lives, and they had a chance to live for a long time going to public school, living just like other people in Omaha live.
I just think that -- I don't think we should have our Olympic team 20 years from now be the eldest sons of the Olympic team currently. I don't think dynastic systems with huge sums of wealth – and bear in mind, the wealthy are so much wealthier now than 25 years ago. We're talking about the 400 now having $2.4 trillion against $90 billion, 25 times as much money. You have sprinkled around these children and grandchildren that just with those 400 could have $2.4 trillion passed down to them. That's a lot of resources in this country with not even a $20 trillion in GDP. I think -- I think it goes
Totally against what's built this country, what this country stands for, and if those 5,000 people can't stand to spend the $20 billion or $25 billion they have lots left over, believe me. Incidentally, it wouldn't be bad for philanthropy people would -- a certain number of people would elect to set their kids up with the billions and billions of dollars rather than that would go to philanthropy -- I don't think that's the primary reason, but I do think that would be a by-product.
If I haven't lost all my friends by now, ill finish it off. We have a lot of businesses. 60 or 70 I don't think any of them are non-competitive in the world because of the corporate tax rate. I mean, American business earns a return on tangible equity under the present tax system that is extraordinary compared to history in the last 100 years in America. I'm talking about tangible equity that's the money actually you Invest.
You could add the five largest companies in the United States by market value. That's almost 10% of the value to market. They don't need capital. It's not like the old days where big steel companies and auto companies and oil refineries, where huge amounts of capital were needed. We do not -- we are among the high earners of the world in terms of return on tangible assets But if you make it very easy to take back money from jurisdictions in which you pay very low rates, it's going to encourage even more investment over there because you still have a higher rate in the United States.
Listen: on a personal basis and for Berkshire Hathaway shareholders, I hope they do change it now. I would like it in the sense that it would be good for a million shareholders of Berkshire in terms of their net returns. I do think that some of the arguments I think people they may find their nose growing a little bit after they make them. Well, a decrease in taxes would mean an increase in profits. It might not be totally the amount of the decrease in taxes, but it would increase earnings. There's no question about it: The question is whether that's already built into the expectations. I doubt if it fully is built into expectations.
The lower the taxes -- actually, if you had a negative tax rate for corporations, it would really be great. You're right about banks: Incidentally banks tend to pay a pretty full rate unless they -- they own some tax exempt bonds, but that's not a big item. Some of them do low income housing tax credits and that sort of thing, but the tax rate on banks is right up there among the top of various industries. Berkshire: Most of our income is taxed at 35%, but we do have a lot of unrealized appreciation in securities, close to $100 billion, that hasn't been realized yet, but if we were to sell all of the stocks we own today, we would pay 35% on about $80 or $90 billion. But I can say this: The banks are doing okay. They're not doing as well as they were eight or ten years ago, that's primarily because of the capital requirements. Capital requirements can kill the return on equity, and banks. And they reduced it significantly from what was available 10 or 12 years ago.
Let's just say, let's just say the rate in some country was 2% and you charged people 10% -- 10% for bringing it back and you had a domestic rate that was 25 or something like that. There is rates lower than 12. You're right about Ireland, but there is rates lower than 12.
There is some of that one think, interestingly enough, Joe. The money is coming back to some extent. When Berkshire Hathaway sells a bond issue, guess what: The foreign subsidiaries of certain very cash rich American companies buy those bonds so the money comes back to Berkshire Hathaway, we pay interest to the foreign subsidiary of the cash rich country over there, but that money ends up in the United States think of it this way -- Let's say you have two companies, Company A and Company B and both have a trillion dollars over there and Company A borrows a trillion from Company B and company B borrows a trillion from Company A, now all $2 trillion back here and it is available for investment.
I can tell you exactly the secret about not having any estate tax: give it all away. It will eliminate all estate tax.
Well, anything that increases profits tends to push higher. There can be ten other variables happening for other -- but as a single variable, in the equation, for profits and profits determine stock prices over time. No, it is a plus for American business, and like I said, I got a million shareholders at Berkshire Hathaway and they would all love to see a corporate tax cut.
[Passive management] will absolutely kill every one of the fund to funds and bear in mind, each one of the fund to funds add a strong financial incentive to pick the best funds they could find, ten years ago, meant real money to them so it was overwhelming and passive investment, I've written about it, passive investment and aggregate will be active investment because of fees. And they didn't have to pay 2% or 3% a year to somebody to get those, average results were going to be very good. And they were good, they have been good all my life and these ten years they have been good. You've done perfectly okay with passive investment.
I get letters all the time from people who say I would like to do it, I'll put up $100 or something, become famous they love the idea of me giving them a lot of publicity -- if anybody wants to put up a significant percentage of their net worth – If they want to put up a significant percentage of their net worth, their family's net worth and want to make a bet on ten years, on active versus passive, maybe my estate has to be the one to settle with them. At 87, anything involving ten years is kind of a triumph of hope over statistics, but nevertheless, the ones that have written me, they really want to Get their name in the paper.
They can pick a group, got to pick a group, you know, I'm picking a group of 500 in the S&P 500, and they can pick the date of the start. The date of the start has nothing to do with it. The truth is, the market behaved fairly typically in terms of aggregate return for the decade. This is not some extraordinary period in the least. Nothing unusual about this the thing that was unusual is the size of the fees that ate them alive, basically. The managers of the funds did very well during this period and the managers of the underlying funds did very well and investors got killed compared to something they could have done.
[His thoughts on early 2020 presidential campaigning]
I haven't talked to Oprah for quite a while. Not -- nobody has come to me to fund-raise.
I'm not a great prospect on that either.
No solicitors allowed, you know, or something on the door. It is going to be a very interesting run up to 2020. There are going to be a lot of people that think about getting into this race. You have somebody come from totally outside politics to get elected President, it starts the wheels churning with a lot of people."