WHEN: Today, Monday, February 26th
WHERE: CNBC's "Squawk Box"
Following is the full unofficial transcript of a CNBC interview with Berkshire Hathaway Chairman & CEO Warren Buffett on CNBC's "Squawk Box" (M-F, 6AM-9AM ET) today, Monday, February 26th. Video from the interview is available on CNBC.com.
All references must be sourced the CNBC.
JOE KERNEN: Good morning, and welcome to Squawk Box, here on CNBC, live from the NASDAQ market site in Times Square. I'm Joe Kernen. Becky, you just saw live in Omaha with-- oh, with Warren Buffett, okay. All right. I got it. We'll get back to her-- in just a minute, though. I didn't-- I misunderstood. So-- that's why-- that's why you're out there, three hours with the--
BECKY QUICK: That's why I'm here.
JOE KERNEN: Excellent. Excellent. How many? I gotta look these futures though. How many questions do you have from our viewers, do you think, Becky? Do--I mean, everybody—
BECKY QUICK: A lot. And I—
JOE KERNEN: --everybody should get in.
BECKY QUICK: --and I have to say, the questions are really good this year. People have gone through. It's not just like, "What's your favorite stock? Tell me which stock to buy." Like, 58,000 variations of that same question. Lot of other things that are happening here too. But yeah, questions are good, so a lot going on—
JOE KERNEN: Excellent. All right. Let's-- the-- the markets are crazy, Becky. Three-- what-- was that on-- 350 on Friday when it was all said and done, and-- strongly higher again this morning. Almost 200. And--also-- well, we'll take a quick look. Here's a check on the markets. U.S. equity futures-- at this hour are, as you can see, 193 points indicated on the Dow. The NASDAQ up another 25. The NASDAQ had been diverging a little bit last week, until Friday. 127 points-- for the NASDAQ on Friday-- which was almost 2%. That's a big move that we saw. And-- continuing buying going on in-- across the board-- in this country, and actually in Asia and Europe overnight. Some strong market action, and some interesting moves in the ten-year note as well. But there's-- you can see the NIKKEI was up more than-- a percentage point, which added 22,000. That gives us 260 points. Hang Seng-- up-- sharply as well. Check out Europe, green across the board in-- in Europe when I watched, or at least looked-- this morning. Not quite the gains that we're seeing here, or in Asia. But we'll see what happens as we move forward. It's only 6:01. And then-- treasury yields moderating on the ten-year. Which, that is-- you know, it-- I guess it's a double-edged sword. As we get closer to 3%, sometimes you see a little pressure on the stock market. I guess if we don't immediately go there, and if we trade below 290, and I don't know if it went below where it is now, let's say it goes down-- maybe that becomes-- you know, maybe that lights a fire under the stock market when-- just by not going to 3%. We'll see. Anyway, we now know-- Becky, that there was-- quite a bit of margin-- selling, I guess, going on-- in that route, which explains how quickly it moved, andhow far it moved. But we'll get back after you, and you can answer to Warren--
BECKY QUICK: You're talking about the lead story, or one of the lead stories in the Wall Street Journal today about the margin selling that—
JOE KERNEN: Yeah. I don't know if Buffett buys
BECKY QUICK: --$642.8 billion.
JOE KERNEN: --I assume he probably doesn't-- buy-- you know. Maybe he does. When-- huh—
BECKY QUICK: Never. And in fact, he wrote a big chunk about that in the annual letter. The-- he wrote a big part about that in his annual letter to shareholders this year is the dangers of margin investing and-- and using leverage, right, Warren?
WARREN BUFFETT: Yeah. Uh-huh.
JOE KERNEN: Yep. Yeah.
BECKY QUICK: Right. So we will talk about that.
JOE KERNEN: That-- would be a yes. Okay, good.hey, Warren, my man, Creighton, did you—
WARREN BUFFETT: Hi.
JOE KERNEN: --did you watch—
WARREN BUFFETT: Joe, how are you?
JOE KERNEN: I'm great. Did you see-- that was so awesome. That game the other day. It was-- I'm not a big Villanova fan. Not for nothing. But just because Xavier-- I'm not. I really am not. And-their good players absolutely drive me nuts. That DiVincenzo, he is-- he sticks a dagger into Xavier so often. But how great that they-- I thought they shoulda won in regulation, and then you saw how it went to-- I don't know if you saw the game, but wow, they really came on strong. They got the initial tip in overtime, right, and then they won. And then they beat Villanova. It was awesome.
WARREN BUFFETT: Joe, we're having our basketball bracket contest for Berkshire employees here in a couple of weeks, and with the same prizes as last year. But if either Creighton or Nebraska ends up winning the tournament, we're going to double the prize. So instead of being $1 million—
BECKY QUICK: Really?
WARREN BUFFETT: --it's gonna be $2 million—
JOE KERNEN: This is breaking news. This is-- what I was looking for—
BECKY QUICK: Wow.
JOE KERNEN: But you know—
WARREN BUFFETT: This is breaking news.
JOE KERNEN: Yeah, Creighton almost-- Creighton just barely-- lost to Xavier, and then they beat Villanova. So any-- I mean, I wouldn't-- how big is that coach? 'Cause I-- he looks big, but then I saw him with his players—
WARREN BUFFETT: He is. He's big. He's big.
JOE KERNEN: --he's got-- he's, like, 11 feet tall—
WARREN BUFFETT: He—
JOE KERNEN: I think. He's like Hagrid, that dude—
WARREN BUFFETT: Well, he's got a big son, too.
JOE KERNEN: He does too. He's also awesome— All right, we better get-- we-- you know, Becky, we got three hours, though, right? We got three hours. So-- we can—
BECKY QUICK: We do. We have plenty of time. Just the three of us for the next three hours. We're good—
JOE KERNEN: --okay. And that was breaking news. Doubling—
BECKY QUICK: It-- was. And I'm sure this was going to come at some point. Doubling the prize, the bounty.
WARREN BUFFETT: If Creighton or Nebraska wins the tournament—
BECKY QUICK: And-- by the way, is Joe allowed to play this year?
WARREN BUFFETT: You know, I will include him. I'll book him personally. The company is going to award the prize for whoever goes the furthest. And if you get through the Sweet 16, you get $1 million a year for life. Which, if Creighton or Nebraska won, would be $2 million a year for life.
BECKY QUICK: I want a finder's fee, Joe, if you win.
JOE KERNEN: I want-- so he'll do--we can do our own little bet, Warren? Can we do somethin' w-- like, right, here we go again-- I'm like a broken record. Can we do somethin' with NetJets? I mean, can we do -- something like-- private jet travel for life—
BEKY QUICK: You win $1 million for life, you can buy your own NetJet.
JOE KERNEN: Oh, that's true--
WARREN BUFFETT: Is it- your brick against my NetJets? Is that what-- you're suggesting--
JOE KERNEN: That's-- right. It's my brick. My brick. All right, we're done. Go, go, go. I'm-- get start--
WARREN BUFFETT: Well, we'll negotiate.
JOE KERNEN: All right.
BECKY QUICK: All right, let's get right to the news with our newsmaker of the morning. Berkshire Hathaway's chairman and CEO Warren Buffett is with us. And-- Warren, you're here, or we're here, I should say, we're here in Omaha because you just put out your annual letter to shareholders, and you've sat down with us for-- seven or eight years at this point, and let us come out and have viewers-- read your letter, have questions about that, and then get the chance to talk to you about it. And this is the 53rd letter to shareholders that you've written—
WARREN BUFFETT: I think it's the 53rd, yeah. Uh-huh.
BECKY QUICK: All right, so the 53rd annual letter. And this one was a little different. You actually broke with some of the formatting that you've been doing for years now, where you lay out and go through each of the companies and tell us how they're doing. Why--did you decide-- to shake things up after 53 years—
WARREN BUFFETT: Well, I'm 87. Maybe I'm in my second childhood. In a different way. I just felt we'd sorta worn out that format, and there was quite a bit of information that I would put in the letter that was repeated in the 10-K. So we just append the entire 10-K, and-- you're right, it's-- probably 60% or 65% as long as-- previous letters.
BECKY QUICK: Yeah-- which is-- look, as somebody who doesn't like change on any level, I'm amazed to see you doing this. I-- yeah, like, throwing it right out the window and going with it. But let's talk about some of the big news items that come right at the top of the letter. The first is that there's a $65.3 billion increase in net worth for the company in 2017. $29 billion of that comes from the tax changes, from the U.S. government making those tax changes. Why don't we dig into that. Explain what that means. How significant is that?
WARREN BUFFETT: Well, there were two primary items, but they both reduced a deferred tax liability. We had about $100 billion of unrealized gain in equities. Now, when they're sold, you pay tax on that. And--previously when the tax was 35%, we would've had a $35 billion reserve for taxes against that as a liability. That would drop to about $21 billion. So $14 billion, roughly-- was a reduction in the amount of tax that, when we sell those securities, we will pay. Wasn't cash now, but it reduced a liability. And when you reduce a liability, net worth goes up. And the other important point related to the same thing, deferred income taxes, when we buy some kind of fixed asset, locomotive or whatever it may be, we're entitled-- in previous years to 50% depreciation in the first year, and let's say it's gonna last ten years. That may last longer, to make it easy. Well, you would normally, on a book basis, depreciate it ten-- $1 million a year on a $10 million asset over ten years. For tax purposes, you've got to have what they call bonus depreciation and take 50% of it the first year, $5 . So you're gonna get the same amount of depreciation over time. But you got the tax deduction earlier, and that became a deferred tax. And we have a lotta that. We've got it in the railroad, we've got it multiple places. The amount that was saved with the utility companies goes to the customers. So that was about $6 billion. And we gave-- we set that up as a liability, 'cause that will go to the customers. But the amount that related to the normal-- you know, the locomotives or whatever it may be-- we got a reduction because that depreciation we'll take later on, which-- for book purposes, we've already taken for tax purposes, will come and be taxed at 21% instead of 35%. Those are the two big items.
BECKY QUICK: You-- were not a proponent of pushing through this tax reform, but you have talked pretty extensively about it--what it's going to mean for American business. It is a huge tailwind for American business—
WARREN BUFFETT: It's a huge tailwind. And it's particularly a tailwind if you've got-- particularly for companies that have had lots of depreciation and taken bonus depreciation up front. So it's a big item-- there. Not as many companies have lots of appreciation and marketable securities, but it's a big item for those that do.
BECKY QUICK: What-- will it mean for American business overall, and-- as a-- posit of that, what will it mean for the economy over the next year and over the next several years?
WARREN BUFFETT: Well, it-- certainly means corporations will pay quite a bit less in tax than they otherwise would. And-- because the ongoing rate is 21% instead of 35%. So forget about these changes that apply to the past. When we make money in 2018-- domestically, and subject to a lotta little things here and there, but basically we'll be paying at 21% instead of 35%. So that's a lotta money. And-- you know,we haven't really gotten cash yet from this, but we will save cash as we go along.
BECKY QUICK: Joe?
JOE KERNEN: In-- just thinking about some of your comments in the past, Warren, I don't think you thought American business was overtaxed. You've made that point many, many times. Or maybe you were saying that if they were taxed less, it wouldn't necessarily make it better for them. They're doin' just fine the way they were with the old tax rate. You said that many, many times-- on the show. And I know you think people like you and Bill Gates and others of the wealthy should pay more. So I think you have a stated-- sort of objective that the government needs more money to do what it wants to do. In this case, what you just said, is that a positive for the country, that Berkshire now is going to have more control about where that capital is allocated, rather than the government having control of where that capital is allocated-- is that a net positive for the country or a net negative for the country, in your view?
WARREN BUFFETT: Well, it depends whether they'd instead of allocating it to us, they'd allocate it to the people who-- on very low incomes, or as-- if they were going to give a tax cut, the question is who they gave it to. And you know, and there are all kinds of provisions there, but--
JOE KERNEN: Well-- no, I just mean-- but-
WARREN BUFFETT: --but basically—
JOE KERNEN: --we're not talking about we're talking about Berkshire Hathaway now gets that money instead of the government. Do you think that's a net positive that it's kept in the private sector, or a net negative-- because if you think it's-- a net negative, you're free to write that check and say, "I--don't like this tax law. Take the money from Berkshire and give it to the low-income people," or whatever. You could do that. Or-- do you think it's better that—
WARREN BUFFETT: Well, I-- we--Joe, we have 1 million shareholders. I think I'd get shoo-- sued by about 999,000 if I start making voluntary payments from--
JOE KERNEN: If that wasn't the case-- if that wasn't the case, would you do it? Would you give it-- if the shareholders would go along with you- I just think it's really good for Berkshire, and I wonder if you can just agree with me on that.
WARREN BUFFETT: No, it's really good for Berkshire. There's no question about it. That's the point—
JOE KERNEN: What about for society in general? Don't you think you can do great things with the-- incremental addition that-- that you-- with-- wouldn't you rather have it than have the-- you know, maybe people that don't use it as effectively—
WARREN BUFFETT: Everybody would rather have it. The question is whether-- but, you know, whether-- whether—
JOE KERNEN: Okay. I'm-- all right , I-
WARREN BUFFETT: --who you give it to.
JOE KERNEN: --you're-- I've never been able to get you—
WARREN BUFFETT: I-- would so—
JOE KERNEN: I can't get you on these things. I—
WARREN BUFFETT: Well--
JOE KERNEN: --but I think, if I read between the lines, I think it's-- I think you like this. I think it's good. And I think that it's not a net negative for society that-- that the private sector gets to compete globally better. Whatever you-- however you wanna look at it, it's a net positive. And-- you know, if you don't like it, I think you oughta just-- 'cause I can-- just sign that check and send it off. It'd be, what'd you say, $29 billion?
WARREN BUFFETT: Unlike some people, I don't believe in giving away other people's money.
BECKY QUICK: I think that's probably an area where you two could agree.
JOE KERNEN: I-- think there's times where you've recommended giving away other people's money, although it would include you. Anyway, okay, that's all. That-- I just wanted to-- now I'm goin'—
WARREN BUFFETT: Okay.
JOE KERNEN: --I'm goin' back to the brackets. Let me just see here. (LAUGHTER)
WARREN BUFFETT: Well, if you were in the money, Joe, you're gonna pay a big tax on this. I mean—
JOE KERNEN: Okay
WARREN BUFFETT: You'll--wish they cut personal rates a lot more, believe me, unless you incorporate your—
JOE KERNEN: ask Becky. Talk to Becky. Talk—
WARREN BUFFETT: --your brackets.
JOE KERNEN: -we both know about this, don't we Becky?
BECKY QUICK: We do.
JOE KERNEN: I mean, b-- between the agencies and the-- and—
BECKY QUICK: State and local taxes, the state and local taxes goin' up—
JOE KERNEN: --and the state and local taxes. Right.
BECKY QUICK: --it's gonna hit a lotta people.
JOE KERNEN: I think my taxes are similar to yours, Buffett— I think I'm paying more than you, 'cause you take no income. I do. I think I'm probably paying more than you. (LAUGH) I know how you work things.
WARREN BUFFETT: Yeah. I-- think you probably pay a higher rate, Joe.
JOE KERNEN: Yeah, there's no—
WARREN BUFFETT: I don't think you're paying more in dollars, probably, but you're paying a higher rate—
JOE KERNEN: But I don't mind. I don't mind. I'm fine. I'm good. I live in the greatest country in the world—
WARREN BUFFETT: I don't mind either.
JOE KERNEN: I'm not complaining.
WARREN BUFFETT: I agree with you on that. No, I do not think we're undertax-- or overtaxed.
JOE KERNEN: Excellent.
BECKY QUICK: Warren, let's talk about another big change that you mentioned in the letter too. And this is about accounting change that's gonna come. And--it's going to make your results a little-- tougher-- for individuals to really realize what's happening on--- a actual basis with the company. So how the companies are performing. What-- is that accounting change? And it's accounting. It sounds boring. But I think it's important.
WARREN BUFFETT: Well, it is important. I mean, we will report-- well, we would of reported, I don't know how much more, maybe $15 billion or something like that more income last year than we did under the rules that have just been adopted. Because they are going-- the accounting profession requires that we now run gains or losses, unrealized, just as our stocks go up and down, we run those through the income account. So here we're running a normal business like the railroad, and then you're interested in how that does on an operating basis. But we have $170 billion of stocks, and they might go up $10 billion in a quarter, and down-- or down $10 billion. We formerly always reflect that in the balance sheet. Now it has to go through the income account. So you're going to see a bottom-line net income figure which really has no relevance to operating results. And-- you know, people will look at the report and they look at the bottom and it says, "Net income." It-'ll be a totally deceptive figure. And--
BECKY QUICK: You said—
WARREN BUFFETT: --and we're warning people about that.
BECKY QUICK: Right. You've said that you and Charlie are gonna make-- take pains to make sure you explain to people exactly what this means. Have you talked to Ajit and Greg-- Ajit Jain and Greg Abel, about making sure, if they were in charge of things, that they would continue to do the same?
WARREN BUFFETT: Oh, they would understand that in one second. But people are used to seeing an item that says, "Net income," and have that mean something. The answer is, it doesn't mean anything at Berkshire—
BECKY QUICK: Is that-- a Berkshire-specific situation, though, because you have $170 billion in stocks?
WARREN BUFFETT: Yeah, it makes us-- it makes us like securities firms. A Goldman Sachs would have to report that way in the past, but they're in the trading business of stocks and bonds going up. But-- we've got an unusual amount of marketable shares. But other insurance companies are gonna have to do exactly the same thing. So you'll see, you know, you name it-- Chubb or whatever it is, that they're going to report-- unrealized gains or losses as net income, or against net income, each quarter.
BECKY QUICK: Obviously that'll fluctuate with market-- with the markets going up or the markets going down. That'll have a huge impact on things. What you also said in your letter that's so interesting is that you've got $116 billion in cash, at least you did at the end of the year, that you'd love to put to work. But when you look around, you have a hard time finding values. You said basically, prices were decent but far from spectacular. Business is at an all-time high.
WARREN BUFFETT: That's true.
BECKY QUICK: Does that mean that-- market overall is overvalued, based on what you-- what you think is fair—
WARREN BUFFETT: Not necessarily. I mean, it--in fact, I-- the market-- the stock market relative to the long-term bond market-- people have free choices, pretty much, if they're going to be in marketable securities. They can own reasonably long-term bonds, they can own equities, or they can keep it in short-term cash equivalents. And--- if-you had to choose between buying long-term bonds or equities-- I would choose equities in a minute now.
BECKY QUICK: You would choose equities in a minute? They are—
WARREN BUFFETT: That doesn't mean I think the stock market is gonna go up or anything else. But if- I were going to own a 30-year government bond or own equity for 30 years, I think equities will considerably outperform that 30-year bond over the 30 years. I don't know what they're gonna do in any day or week or month, but I think that-- I've thought it for a long time, and- we can talk more about that later. But--
BECKY QUICK: Well, overall, is Berkshire a net buyer or a net seller of stocks right now?
WARREN BUFFETT: In-- so far this year we've been-- a net buyer, although we sold-- a chunk of Phillips to get below 10%. So the-- that was a three and a fraction billion dollars—
BECKY QUICK: I think it was three and-- three-- $3.3 billion.
WARREN BUFFETT: Yeah. Yeah. So we've bought more than that on—
BECKY QUICK: Really? So even with that purchase,
WARREN BUFFETT: Right.
BECKY QUICK: --sale, you've still been a net buyer.
WARREN BUFFETT: Correct—
BECKY QUICK: Is that because of the huge-- spikes in volatility and the big declines we've seen in the market—
WARREN BUFFETT: No, it's just because we found stocks that we like. We- if we buy something, we don't have the faintest idea whether it's gonna go up next week or next month or the next minute. But if I like it, I--we buy it. And we've got $170 billion of stocks. I mean, we like-- there's plenty of stocks we like. We have not found businesses that-- because you have to pay more, the stocks are selling more if you buy in the public market by some margin. And-- we just haven't seen anything to buy there.
BECKY QUICK: All right, let's-- ask a couple of questions from viewers. One is T-60. It comes from Chris Rogers. He says, "With $116 billion and growing, how confident are you in the future opportunities to deploy such a large amount of capital that would fit the Berkshire mold? And at what point would you consider a dividend?"
WARREN BUFFETT: Well, we would-- if-- I'm fairly confident that-- that we'll find ways to deploy money. I mean, we are deploying money right now. But--we'll get a chance as we go along, based on history. It's gone a long period now we've been in a bull market. And-- the best chance to deploy is when things are going down, obviously. But if we don't, we'd probably be more likely-- it would depend on the price of the stock entirely, but we-- the inclination might be more toward repurchase than dividends. Because dividends have the implied promise that you keep paying them forever and not decrease them and so on, whereas repurchase is assuming the price of the stock is such that continuing stockholders' benefit from the repurchase, we would probably lean toward repurchase.
BECKY QUICK: Would you I mean, you've been very clear about what price you would buy back shares.
WARREN BUFFETT: Right.
BECKY QUICK: Would-- you change the equation?
WARREN BUFFETT: We might-- you might have to change it a little bit. If you had to change it too much, it wouldn't make any sense. So then we'd have to look at something else—
BECKY QUICK: What's the equation right now? It's—
WARREN BUFFETT: 120% of book.
BECKY QUICK: Of book value. That's when you buy back shares on the marketplace
WARREN BUFFETT: We know that we're doing the continuing shareholders a favor if we buy it at that price. And then that gets increasingly more questionable as you move along from there. And-- obviously I leave some margin of safety when I do the 120%. And-- if we were going to spend a lotta money to buy in stock at some time in the future, and it was 125% or 127% or something like that, we'd probably go that direction.
BECKY QUICK: Rather than a dividend. Although there-- there-- I'll ask this question from Alan Buckey. It's—number T-23. A lotta people came into this very question, "Why not come up with a one-time dividend? Would you pay a one-time special dividend?" And Alan himself asks, "You don't like to invest in companies that pay-- or you like to invest in companies that pay dividends, and buy back their stock. But Berkshire does not do either. Why is that?"
WARREN BUFFETT: Yeah, well, we'd rather have a company whose stock was undervalued spend all their money buying a stock. But the trouble is if you establish the dividend, you're not going to eliminate the dividend to repurchase shares. So they're-- a company that's paying a dividend, take Apple or you name it, I mean, they're not gonna cut their dividend-- to repurchase shares. And-- they're probably not gonna cut their dividend under any circumstances unless their business changed in a dramatic way. So-- we would do what made the most sense for shareholders. But, you know, I have--I pointed out years ago, you can-- you can sell a little piece of Berkshire every year and still end up owning more of it than-- you had before. So if you wanna create-- the people who wanna create-- turn a little bit of what Berkshire earns each year into the equivalent of a dividend, into cash, can do it. And they don't force that policy on the other people. And we had a vote prompted by shareholder I never heard of a few years ago Some shareholder put on our ballot, he said, "Let's pay a dividend, and you know, let's get this Buffett out of-- keeping the money from us and pay a dividend." We had the vote, and the shareholders, 47 to one among the B shareholders, the smaller shareholders, 47 to one, they said, "Don't pay us a dividend." So-- that-- that was a pretty and we didn't campaign on it or anything else. The votes just came in.
BECKY QUICK: Because they figured you'd do a better job of-- what-- by the way—
WARREN BUFFETT: Well, we .
BECKY QUICK: --did that include you voting your shares?
WARREN BUFFETT: I probably voted my shares. But I'm not counting the A shares
BECKY QUICK: Okay, just the B shares.
WARREN BUFFETT: But-- Berkshire, in effect, for 53 years, has been a savings account. I mean, we-- Charlie-- put his money in, I put my money in. Berkshire-- my partners put their money in. We-- all my partners put it in. And it's a way of saving money over time. And the money gets left in, and we invest it. And to the extent that it's worth more than 120 cents on the dollar after we save it, every dollar we save is worth more than if they got it out in cash. Forgetting all about tax factors, we would've had the same dividend policy if we'd been taxed-- if the individuals had been tax-free the whole time.
BECKY QUICK: All right, Warren, we're gonna continue this conversation, but we are gonna slide in-- a quick break. When we come back, we'll talk more about some of the individual stocks that Berkshire owns-- that Warren didn't comment about in that annual letter. First, though, some big news out of China over the weekend as the Communist Party looks to abolish term limits for its president. Details are straight ahead, and Squawk Box will be right back.
JOE KERNEN: Good morning. U.S. equity futures sharply higher this morning. We'll see whether we made it to up 200. Yeah, we're up 190. 182 right now on the Dow, after a 350-point gain on Friday. The S&P indicated up 12, and the NASDAQ also indicated higher after a 120-plus point gain also that we saw on Friday. On this week's agenda, today look for January new home sales. Tomorrow we get durable goods. The S&P Case-Shiller Home Price Index and Consumer Confidence, and Fed chair Jay Powell will deliver his first monetary policy testimony before a House panel at 10:00 a.m. Eastern. Then on Wednesday, the second estimate on the fourth quarter GDP is out, along with Chicago PMI as well as pending home sales. Oh boy. I just saw some – I'm trying to do two things at once here. Some GE news out, we'll get to in a second. Thursday we get personal income and spending. The ISM, Manufacturing Index and Auto Sales. Fed chair Powell will testify before the Senate Banking Committee. And that's followed by consumer sentiment on Friday. As for earnings, about 30 companies, stragglers in the S&P – not really. They have different fiscal years, et cetera. Retailers and the like, including Macy's, Toll Brothers, Lowe's, TJX, SalesForce, Kohl's, Gap and J.C. Penney. All right, here's some news just out from GE. The company's adding three new directors, including former Danaher CEO Lawrence Culp, American Airlines former CEO Thomas Horton, this is the one where I said, "Oh boy," and former Financial Accounting Standards Board chairman Leslie Seidman. Might be Sideman. However it's pronounced, Becky, get back out to Becky, and maybe we have someone who can comment on this. I know you must've had like a book of GE questions for Warren Buffett today, Becky.
BECKY QUICK: There have been plenty of GE questions that have come in.
JOE KERNEN: For you, yeah. From viewers, and from you, and from us. But what do you think of that, Beck? So a former person that ran the account--
BECKY QUICK: Well—
JOE KERNEN: Yeah. Is that – they need someone maybe to come in—
BECKY QUICK: Probably not a bad idea, at this point.
JOE KERNEN: Exactly. The FASB, a person that ran the FASB to come in and maybe they can sift through, you know, the power systems and the pension issues that are, you know, who knows how those are finally—
BECKY QUICK: And how some of these things were being—
JOE KERNEN: Yeah. You know, my question –
BECKY QUICK: Being booked and accounted –
BECKY QUICK: Warren's here.
JOE KERNEN: Yeah, Warren loved the CEO. Gave a huge – the former CEO. And remember that big sort of at a time when GE really needed Buffett or Berkshire, in terms of saying, you know that big investment, that helped GE a lot, Warren. Looking – Becky, you can ask all these questions. But I wonder if looking back on it, Warren, you feel like you were duped, to some extent, by Jeff Immelt?
WARREN BUFFETT: No, I don't feel that way. My job is to make up my own mind on things. And we're talking, that investment was made at the very end of September, or the first days of October of 2008. And GE had been funded with extraordinary amounts of commercial paper, and the commercial paper market ended. And they really had a problem, and there was no question in my mind that it would be temporary if the government got its act together, and the economic engine got back on the tracks, which I was sure it would. And so we did buy a $3 billion worth—
JOE KERNEN: No, I know.
WARREN BUFFETT: Piece of preferred with some warrants. And –
BECKY QUICK: But it came with a 10% –
WARREN BUFFETT: It came with a 10% coupon –
BECKY QUICK: Coupon on it, yeah.
WARREN BUFFETT: We made some money on it. We didn't make as much money on that as we made on our Goldman investment.
JOE KERNEN: But Warren, looking back, I mean, there was a time where I think Immelt had your full confidence. Looking back on it, do you think that that was misplaced? Have you revised your overall viewpoint of how he led GE over the last – over his tenure? Have you looked at that and revisited that and think, "Wow, this wasn't what it appeared to be," or no?
WARREN BUFFETT: Well, I keep looking at GE. I won't comment on, you know, Jack Welch is a very, very good friend of mine and Jeff's a friend of mine. And clearly there were mistakes made, and they made mistakes in long-term care. We made mistakes in long-term care. They weren't on the same – to the same degree, but that turned out to be a huge one. And I will read their 10-K when it comes out. I'll read it very, very carefully. It'll probably take me all day to do it, but I'll do it. And no. Insurance cost them a lot of money, and it's cost other people a lot of money. You can make big mistakes in insurance.
JOE KERNEN: And it did –
WARREN BUFFETT: Like I say, we made a –
JOE KERNEN: Yeah, sorry.
WARREN BUFFETT: Go ahead.
JOE KERNEN: I'm just seeing some more stuff here. I'm just wondering what – Becky, are you seeing – we're trying to get through all the stuff that GE said. And I don't know whether to go with this yet.
BECKY QUICK: No, I don't.
JOE KERNEN: From Mark Grant. Did you see this? I don't know what this means, that maybe there's going to be—
BECKY QUICK: I have not gotten that yet.
JOE KERNEN: A look back at the past—
BECKY QUICK: Oh, here it is.
JOE KERNEN: I think you do. But there's going to be a —
BECKY QUICK: Well, look. We already knew this. We already knew this, that GE was going to restate earnings for 2016 and 2017—
JOE KERNEN: For both years, yeah.
BECKY QUICK: For both years. That they – Warren, this is news, I think that was out yesterday –
JOE KERNEN: We don't know the extent of it, though. Yeah.
BECKY QUICK: We don't know the extent of it yet, but they are going to be restating earnings, in large part because of how they were booking some of the issues at power. How they were booking revenue at power, and some of the things that were coming through. What would your comment be, not knowing everything that's gone out at this point?
WARREN BUFFETT: There's a lot of flexibility when you're booking that, either construction in progress or potential service contracts, everything. I'll be very interested in what they have to say on that. You know, I would say the accounting at GE has not been a model at all, in recent years. But you can make mistakes in something like insurance reserving, big time. And long-term care has probably been the biggest single element of mis-reserving in insurance throughout the industry. And they were in it big time, but I was staggered by the amount of it.
BECKY QUICK: By the amount of this most recent issue where they had to call up the reserves—
WARREN BUFFETT: Yeah. That was huge.
BECKY QUICK: To the tune of billions of dollars.
WARREN BUFFETT: Yeah. Yeah, and the question gets to be, I mean, it was the Kansas department supervising them. And that doesn't happen overnight. So it'll be interesting to see just exactly what the correspondence was between the Kansas department and the company and all of that sort of thing.
JOE KERNEN: Yeah. Do you remember when—
WARREN BUFFETT: But GE is a wonderful—
JOE KERNEN: Oh yeah? How wonderful? To the tune of buying how much percentage of the common stock right now? How wonderful are you feeling about it, Warren?
WARREN BUFFETT: No, I mean, we haven't bought any stock. But—
JOE KERNEN: If it's wonderful, are you going to?
WARREN BUFFETT: In fact, we sold our stock. We had a small amount of stock that came from the warrants of the company, the preferred –
JOE KERNEN: Right. From the –
WARREN BUFFETT: And we sold it. I know we sold it at $29, whatever that was awhile back. It was a relatively small investment for us. But we did sell it.
JOE KERNEN: It's on sale. It's on sale today.
BECKY QUICK: But we did get questions from – yeah. We did get – $14.58 is the latest tick. We did get questions from viewers, I believe one came from the Rational Walk, that ask very specifically, "had the company approached you, would you be interested in buying parts of this?" There's another question that came in saying, "Would you be interested in buying parts of either General Electric or Siemens, particularly if it was something that would help you in your health care initiative? It's a star investor, vacuous star investor with liquid assets, earning less than projected inflation. Why not buy a cash generator industrial like GE or Siemens's health care unit? This could strengthen the health care partnership with JP Morgan and Amazon, as early diagnosis provides long-term savings to fixed health care." What do you say to something like that?
WARREN BUFFETT: Yeah, we wouldn't buy a health care business to try it in with the health care initiative.
BECKY QUICK: Would you buy it just simply because of prices on this?
WARREN BUFFETT: If we like the business and the price was right, we could write a check for cash. And that would apply to GE. They've got a few big businesses. I don't think they want to sell them, but they have some smaller units that they're interested in selling. But we're always in the market for a big business that we can understand and that we like, and we think that we've got the management for and so on.
BECKY QUICK: Do you understand GE?
WARREN BUFFETT: I don't understand the whole place, no. But I think I'd be capable of understanding, given the businesses or managers that we have at Berkshire would be capable of understanding those.
JOE KERNEN: Hey, Beck?
WARREN BUFFETT: So, you know, they have not approached about any big business.
JOE KERNEN: Just –
WARREN BUFFETT: They've got some small businesses – go ahead, Joe. I'm sorry.
JOE KERNEN: Sorry, Warren. And I'm going to let you go. But just for the record, GE is, I don't know, they're – do you see this, Becky? They're worried about how we're reporting it. So the accounting rules – this is not – the restatement of earnings is not due to the S.E.C. investigation. It's due to new accounting rules. Every, you know, I guess after the tax cut, every company is required to do it. So they're worried that –
BECKY QUICK: Well, this is – these are the changes. Let me ask. I've been very confused by this, and maybe we can hash through some of this. Those accounting changes, those accounting changes that we were just talking about with Warren at the top of the program, accounting changes the will affect what you are doing going forward, is that a reason to restate 2016 and 2017 earnings?
WARREN BUFFETT: Well, that just from what you've said this morning – I don't know anything about it. Obviously, they miscalculated their insurance reserves in a big, big way. That doesn't usually –
BECKY QUICK: I think this is – that's not related to restatement of earnings.
WARREN BUFFETT: No, that doesn't usually count as a restatement.
BECKY QUICK: That is not what we're talking about.
WARREN BUFFETT: Right.
BECKY QUICK: That is not restatement of earnings on any of these issues—
WARREN BUFFETT: No. No.
BECKY QUICK: These are things that GE has already said on this, that we're talking about from that front.
WARREN BUFFETT: Yes, if in process business or amount capitalized as possible earnings in the future and – were put on the books for in terms of service contracts or something like that, anytime you get extended pieces of business, as you get an aircraft or engines and that sort of thing, there's a lot of flexibility in when you record both costs and revenue. And my guess is the S.E.C. is looking at that. I don't know a thing about it in that respect. But my guess is that they're looking at that. And I have seen companies use much different – and I'm not referring to General Electric at all – I've seen them use much different approaches to contracts that extend over years, and how they treat the first few units, which obviously have a higher cost because you're just getting into it. There's a lot of flexibility. And whether you have a conservative or an aggressive management can determine the earnings for at least a few years.
BECKY QUICK: Right. Right. All right, we have much more with Warren that we're going to continue to talk about. We want to talk about Wells Fargo, too. It's an issue that a lot of our viewers wrote in about as well. We'll get to that in just a moment. Also, a big weekend for Black Panther at the box office. The movie just did something that only three other movies have done, ever. We have the details right after this.
JOE KERNEN: Black Panther joining an elite group at the box office. It brought in $108 million in North America over the weekend, making it just the fourth film to top $100 million in its second week in theatres. The others were Star Wars: The Force Awakens, Jurassic World and The Avengers. Now after 12 days in theaters, the movie raked in roughly $704 million globally, and according to comScore, and it hasn't yet debuted in China and Japan, believe it or not. Those are two of the Hollywood, obviously, industry's biggest markets. Coming up, we'll get back out to Becky quick in Omaha, where Warren Buffett is answering questions from our viewers. As we head to break, here's a quick check on what's happening in the European markets right now.
BECKY QUICK: Welcome back to "Squawk Box," everybody. We are live in Omaha, Nebraska with Berkshire Hathaway's chairman and CEO Warren Buffett this morning. He's been answering questions that viewers have sent in. And Warren, one that we got lots of questions about was Wells Fargo.
WARREN BUFFETT: That's understandable.
BECKY QUICK: Yeah. There was a question that came in from Value Mojo who says, "What are your current thoughts on Wells Fargo? Do you think the market reaction was justified after the Fed's announcements of the asset's growth plan? What's the impact on Wells's normalized earnings power? And do you still have confidence in CEO Tim Sloan?"
WARREN BUFFETT: Yeah, I have confidence in Tim Sloan. But Wells did – it goes way back, but they came up with some terrible incentives. And incentives work in both directions if you got the right incentives. And you do the same thing with your family, and all kinds of thing. And they had some incentives – they had an incentives system which incentivized bad behavior. And the bad behavior became somewhat contagious, apparently, in some offices more than others, where people put in phony accounts and all that sort of thing. I mean, once people saw their superiors doing it, I'm sure it picked up. But that was a bad problem, but that happens. But what they didn't do was they didn't correct it when they were getting word that effectively these terrible practices were taking place. So it gets back to the fact that, you know, the same thing that happened in Salomon, you know, 28 years ago, is that management didn't react when they found out that something had gone very much awry. And then it just compounds like crazy.
BECKY QUICK: The company took action. That's why the former CEO John Stumpf lost his job. But then chairman – former Fed Reserve chairman Janet Yellen weighed in just as she was leaving her office and said, "We cannot tolerate pervasive and persistent misconduct at any bank. And the consumers harmed by Wells Fargo expect that robust and comprehensive reforms will be put in place to make certain that abuses do not occur again." That is a huge rebuke, one that I can't recall seeing something like this from the Fed Reserve in recent memory. And that brings up questions about current management, too. What do you think the Fed's doing? And I'll bring this up, too, Charlie Munger, your partner, just recently said he thinks regulators, it's time for them to let up on Wells Fargo. What do you think?
WARREN BUFFETT: Well, I don't know all the facts on it. I do know that in 1991, I became the CEO of a company that similarly insulted the Federal Reserve. And if the Federal Reserve is mad at you because you've flouted them in one way or another, you know, you're in a big, big, big doghouse. And digging your way out of it takes time. And you find other things. I think I said last time, you know, there's never just one cockroach in the kitchen. I mean, and you find other things out. I was always terrified of that at Salomon, because I didn't know what had happened prior to my stepping into the job. So you know, you obey your government. And if you don't, you can have plenty of consequences. And Wells Fargo is suffering through those. But they will get through it, and they're not the consequences of what Tim Sloan did. He's been working like crazy and trying clean things up. But he's had a lot to clean up.
BECKY QUICK: Do you think you've seen the last of the cockroaches?
WARREN BUFFETT: I think so. But that's what you never know. I mean, if you've got 260,000 or 270,000 employees, and there was bad activity someplace, you try to find out. But that – and I actually have been in that situation, well, you know, had 8,000 employees. And when I was – I woke up every morning terrified while I was in there that I would pick up the paper and find out that somebody else had done something. And you just – you can't be sure. Although I would – my guess is, and it's just a guess, is that they have scrubbed and scrubbed, and that they have found out the things that were done wrong, and the Fed and any other supervisor is going to make them pay, which they have, for past sins. And they don't just do it in one day and wave at you and say, "Congratulations."
BECKY QUICK: Back in 2009 at the annual meeting, you were asked if you had one stock that you'd put all your money in, you said it would be Wells Fargo at that point. What stock would it be today, if you had one stock you had to put all your money in?
WARREN BUFFETT: Well, I've got all my money in Berkshire. 99% plus. Yeah, 99.8% or something like that, aside from treasuries. So that's the one I feel the best about. Not that I feel the best about it having the greatest upside potential, because it doesn't. But in terms of anything bad happening to it, I feel better about Berkshire.
BECKY QUICK: Outside of Berkshire, is there another stock, if you had to pick one?
WARREN BUFFETT: Well, if you look at our holdings, you would assume that we like them in the order in which they rank by dollar value of holdings. But if you look at them in terms of recent purchases, you know, over the last year, we've bought more Apple than anything else.
BECKY QUICK: Can I take it and run with that as a headline? Apple's your favorite stock?
WARREN BUFFETT: I don't think – no because I haven't told you what I might have been buying in the last week. Or month.
BECKY QUICK: But Apple ranks up there?
WARREN BUFFETT: Well, Apple, you know, it was – but it was selling at $105 or something like that when we first bought it.
BECKY QUICK: Okay, great. Warren, we are going to continue to press you on some of these issues in just a moment.
WARREN BUFFETT: I can tell.
BECKY QUICK: When we come back, we have more with Mr. Buffett. In the meantime, we will also give you a rundown of today's top stories. All of this coming up including big changes to the board of General Electric. Stick around, "Squawk Box" will be right back.
JOE KERNEN: Good morning and welcome back to "Squawk Box" here on CNBC live from the NASDAQ MarketSite in Times Square. I'm Joe Kernen. It's just me. Becky is in Omaha this morning. It is for a good reason, obviously, speaking with Warren Buffett. But I've got no one to talk to. I've got Stec, our guy on the set here, Becky. But we are in close contact. We are in close contact at least.
BECKY QUICK: We are, we have been talking through the commercial breaks.
JOE KERNEN: Well, I needed to.
BECKY QUICK: A lot to get off your chest.
JOE KERNEN: Well, anyway. This is unbelievable. I mean I'm glad – you know, people need people. They just do.
BECKY QUICK: Joe's worst nightmare.
JOE KERNEN: U.S. equity futures at this hour – I'm going to hurry up and get back to you because it is very lonely. Anyway, here's what's making headlines. You can see the futures are up 175. The NASDAQ is strong. Making headlines this hour, and there are some pretty amazing things happening. Chip maker Qualcomm has urged rival Broadcom to engage in direct talks on a price for a takeover deal. Qualcomm continues to maintain that Broadcom's prior offer materially undervalues the company. And economists are looking for a rebound in new home sales for January, when those figures are reported at 10:00 Eastern time. Consensus forecasts call for a 4% jump partially reversing December's 9.3% slide. And General Electric is making some moves with its board, shrinking the board and adding three new directors. And now there will be 12. The three are former – one of them, former Financial Accountings Standards Board chairman Leslie Seidman, former American Airlines CEO Thomas Horton and former Danaher CEO Lawrence Culp. And as previously announced, the overall size of GE's board will be reduced to 12 from 18. So if you're adding three and still going down six, that leaves a who's-who list, really, of directors that won't stand for reelection. And I look at some of these names, Steven Mollenkopf, think he's pretty well known, Shelly Lazarus, Jim Rohr, Mary Schapiro, Marijn Dekkers, Susan Hockfield, Peter Henry, and Andrea Jung. And I think Jack Brennan will be staying as the lead director, or the, yeah, lead director for awhile to transition, to facilitate the transition to a new lead director until 2019. But then he won't stand for reelection either. So let's get back to Becky and Warren Buffett in Omaha. And there have been some questions, Becky, and you can talk to Warren about it, about where was the board, and I guess this is sort of an answer to those questions at this point. I mean, that's a pretty big reshuffling of the board. I guess maybe Flannery would want a different board, obviously. But seems like a pretty big—
BECKY QUICK: So Flannery has talked about this when he came in about some changes. But I don't think we realized quite how extensive those changes would be.
JOE KERNEN: Right. And you know, Rohr from PNC, and Mollenkopf, is he Qualcomm or where – no, he's not Qualcomm, but I know the – I got to figure this out, but – Shelly Lazarus—
BECKY QUICK: The well-known names.
JOE KERNEN: Mary Schapiro. These are really a who's-who list, right? So, I'd like to hear Warren's thoughts on that, too. Yeah.
BECKY QUICK: That's right. Warren, what do you think? I mean, obviously you've watched GE for a long time. You were a shareholder for quite a number of years, from 2008 through when you sold those shares that were at $27 at that point. Big changes there. Restating earnings for a couple of years, and talking about some different accounting standards that have been put into place, but it does sound like they are changing the way they account for some long term contracts.
WARREN BUFFETT: It-- sounds that way. I mean, I haven't read anything-- just been sitting here, but it sounds like they are changing--when you build a ship or something like that over five years-- not that they're building ships, but you do have ways of accounting for sorta the in process activity. And companies can be quite aggressive in that. They can be quite conservative at that. And-- I had-- I don't know anything specific about General Electric.
BECKY QUICK: You would understand John Flannery coming in and wanting to—
WARREN BUFFETT: Clean house, yeah.
BECKY QUICK: Well, yeah, make sure that he's doing things his way going through the entire process.
WARREN BUFFETT: Sure. Yeah, if-- I were brought in to run GE which they never would do, and they'd be wise not to, but there'd be a lot to get your mind around. I mean, you know, from the old insurance contracts to these long term contracts and service contracts, and there's just a lot on your plate. And-- so the fact that you don't have it all in place the first day, the first week or the first month I don't blame anybody for that. There's-- things to learn with something that complicated and widespread.
BECKY QUICK: Okay-- one thing that we got a lotta questions that people wrote in about are- variations on forms of corporate social responsibility. I'll start with one of the questions-- that came in. This is from Tominori Isakawa who wrote two topical questions. Does Berkshire investor or own gun manufacturers and then number two, actuarially does gun ownership have an effect on property and casualty premiums? And-- these are-- there were a lotta questions in this vein that came in just given the headlines that have been out there-- about what's been happening with school shootings. But broader than that, just corporate social responsibility overall and some of the things Larry Fink's talked about.
WARREN BUFFETT: Yeah, we don't own any gun manufacturers but I have not issued any edict, for example, to the two managers that-- run money besides me at Berkshire that they can't own stock in gun manufacturers. They can own stock in man-- gun manufacturers. They can own stock in liquor manufacturers. We do own stock in Diageo and have for a long time, which-- liquor manufacturer. And so-- we have-- but to my knowledge we don't--I know we don't own any happen to own any-- gun manufacturers. And-- the second point was—
BECKY QUICK: The second point was-- does-- from an actuarial perspective does gun ownership have an effect on propertyand casualty premiums.
WARREN BUFFETT: No, it really doesn't. It really doesn't. No-- there might be some very weird personal policy that you might conceivably-- but in terms of standard business, no. The-- that-- I don't know of any-- I don't know of any time it's come up in the years I've been in the insurance business.
BECKY QUICK: There-- is a movement from Larry Fink-- at Blackrock and from others who are kind of stepping into this saying that they would like to have more of an impact on the companies that they are investing in, that they would like to have maybe a little more say in what's happening. It's an arena that can get pretty fraught-- with potential missteps, though. Because by taking a step you're potentially alienating half-- up to half of your customers. Sowhere do you come down?
WARREN BUFFETT: Yeah, it-- it's complicated. I mean, did I-- but I've been cheering for what was going on at Wells Fargo if I'd known about it years ago. But Wells Fargo-- we do lots of business with them. They-- made a big mistake and some others that flowed out of the big mistake. But-- Berkshire's made mistakes and, you know, I got involved in Solomon when they made a mistake. I-- you will not find any large company that doesn't have some problems of one sort or another. I mean-- the best-- the best defense is a hotline. And-- we have found out more things that have been wrong at Berkshire through the hotline—
BECKY QUICK: But I--think this is a little different than finding out cases of fraud or wrongdoing or somebody doing things that are wrong. This is a case of investing companies, of banking companies potentially getting in and saying, "We don't agree with a particular group," be it the NRA, be it-- we want to take a stand on immigration, something along those lines. You do see more and more CEOs who are kind of wading into the political arena and making their views known. You are somebody who's not shied away from talking about who you vote for and who you support.
WARREN BUFFETT: Yeah. No, in terms of politics-- you know, I have not put my politics in a blind trust. On the other hand, I don't speak for Berkshire in doing that. Berkshire, to my knowledge-- Berkshire the parent company never had any contributions to politicians. And I don't believe that imposing my views on 370,000 employees and a million shareholders-- I mean, they d-- I'm not their nanny on that. And if I worked for Hillary but I don't know who our managers voted for and-- so I think you have to be pretty careful-- if you're saying, you know, "We're not gonna fly on this airline because of that, or we're not gonna use this railroad because of that in terms of social." Because -- you'll find something. I mean, I-- admire enormously Walmart and Costco. They sell cigarettes. We-- actually distribute between the manufacturer through our Mclane company to Walmart and 7-11s and all kinds. I think that-- I think it's a mistake to get-- start getting personal views andtrying to impose 'em on an organization.
BECKY QUICK: Yet, we have seen-- a lot of that just over the last couple of weeks since the last school shooting.
WARREN BUFFETT: Yeah.
BECKY QUICK: And there have been some companies—
WARREN BUFFETT: Well, I've got views on gun laws, but I don't think they're Berkshire's views.
BECKY QUICK: And so you don't think it's something that corporate boards should be talking about?
WARREN BUFFETT: I think you should be pretty careful before-- a company takes a big political opinion and something that society has decided that they say, "Well, we're going to-- we're going to have a different view." Now-- I also think people individually should very much express their views. I mean, I think what the kids are doing-- there is very admirable. But-- I don't think that Berkshire should say, "We're not going to do business with people that hold guns." I think it'd be ridiculous.
BECKY QUICK: Okay, let's talk about some of the holdings that-- we mentioned before. At the end of the last block we were talking about Apple which is the stock according to the filings that we've seen that you've been buying most frequently and most heavily. There are a lotta questions that have come in on Apple and-- people wanna know why you're doubling or tripling down on this stock at this point?
WARREN BUFFETT: Well, they might wanna know but I'm not gonna tell 'em. I mean, they can look at our actions and we have to report those every three months. But we're not in the investment advisory business.
BECKY QUICK: Why do you like it—
WARREN BUFFETT: It's propriety-- the views-- you know, those are proprietary, in effect, to Berkshire. They belong to the Berkshire shareholders.
BECKY QUICK: Just in terms of one question that came in, there was someone who was asking about you've long touted the stocks that you bought into by drinking some-- drinking Coca-Cola or eating at Dairy Queen or doing all of these different things to talk about the stocks and the companies that Berkshire owns. But you still have your flip phone. Wanted to know if you were ever going to get a smart phone, an Apple phone.
WARREN BUFFETT: Yeah, well, Tim Cook's ac-- asked me that Well, the answer is just I'm out of touch. But-- I tell Tim that as long as I haven't gotten one, the market's not saturated. I mean, the day I buy one, there's probably nobody left after that.
BECKY QUICK: Wanna talk through a couple of the other stocks that you hold too. One question that came in-- from Kraft Heinz was a question about the announcement that Kraft Heinz just put out. This came from Ivan the K. He says, "Is this a sign that Mr. Buffett is scaling back his direct participation in the business?" He was referring to the headline, "Kraft Heinz reports retirement of Warren Buffett from board."
WARREN BUFFETT: No, that's-- I wasn't on any outside board till the Kraft-- well, till the Heinz deal came along first, and then the 3G, our partners, asked if I would go on for a while and I said, "Fine." But it takes-- there's five meetings a year. It's about a day and a half for a meeting. I mean, you go in the previous afternoon and-- they-- so, it-- it's really a day and a half. So if you have five meetings, that's seven and a half days a year. We have two other people on the board from Berkshire. And the truth is I'll talk to the 3G fellows the same way. And so it doesn't change anything about it. It just saves me seven and a half days a year, and I don't wanna be on any outside boards. I mean, it just-- it's time consuming and-- - I haven't got that much time.
BECKY QUICK: But it doesn't indicate any—
WARREN BUFFETT: Zero.
BECKY QUICK: --of-- a declining interest in the business at all.
WARREN BUFFETT: Oh, no, no, we-- we're not gonna change a share. We've got Greg Abel and-and Tracy Britt Cool on the board. We could've put somebody additional ourselves, but Alexander Van Damme is going on there. I know him. He's got a huge investment in the company. I love the fact-- he's much-- gonna be a much better director than I am he likes to travel.
BECKY QUICK: Okay, great. We're gonna continue this conversation with Warren. But, Joe, right now we'll send it back to you in the studio-- as we head to a break.
JOE KERNEN: Warren, always-- you know, sometimes-- I feel likewe're drifting and then he pull-- he pulls me back in. And that answer on the-- on your questions, Warren, was so apt and so appropriate. We all have personal views, and we should act on those in every way that we can to try to-- to get what we want in society the way that we think it should be based on our personal views. But isn't that the operative word, "personal views?" I can just play devil's advocate. And I can think of some things that certain individuals would want companies to take a stand on that are diametrically opposed to what other people want. And-- you can think of 'em, too. The-- hot button issue in society, whether it's abortion or LGBT issues, and, you know, the left always feels like they're-- they're so sure that they've got all the answers and that they're right that they can't believe anyone would disagree on how they feel about virtue and things. But if you had the right come in with some of-- what they-- what the left would feel are insane ideas and you had-- and you were pressuring corporations to take a stand with you, it just doesn't work that way. But that-- that's not gonna stop the-- that's not gonna stop the thought police in the media. The media goes crazy and tries to shame-- corporations into-- but your answer was so right on. And-- you didn't pull any punches, either. I mean, would you tell Larry Fink, if you had a conversation with him-- would you say, "Larry, what are you thinking?" I mean, would you say that to him? It's like, "I love your views but--"
WARREN BUFFETT: I would tell him what I thought. But it's the-- it's the extremes on both sides-- whenever people get going on those kinda questions, I always say, "Let's talk about something noncontroversial like religion."
JOE KERNEN: I mean, exactly.
WARREN BUFFETT: It just—
JOE KERNEN: I mean, salt-- you know-- red meat-- God almighty, any of that stuff. If you-- there's just-- everybody's got it. That's why they're called personal views. You know, so-- I don't know. Anyway-- but I digress, and we love hearing from you. But-- Warren, like I said-- great answer. Thank you and then Becky, that was-- that was a good discussion. We'll have-- much more from Warren and Becky after the break. Let's get-- a check on the markets-- right now. As you can see sharply higher up 190 points. Up 13 on the S& P. NASDAQ up 30. The ten-year note changing hands now below 2.9%. Maybe that has something to do-- 2.85, in fact. Maybe that's why the markets are strong. They like it when rates stay low. And here's oil-- which is back to 63.5. You're watching Squawk Box. More Warren Buffett, all the way till 9:00 today. Stay with us.
JOE KERNEN: Welcome back to Squawk Box. A few headlines before we head back to Omaha and Warren Buffett and Becky. Samsung unveiling its new Galaxy S9 smart phone yesterday at the mobile world congress in Barcelona. It's the first phone to use QUALCOMM's-- QUALCOMM's new Snapdragon 845 chip. The phone is pretty expensive, priced at $720 for the S9 and $840 for the larger-- S9 Plus. Both will be available on March 16. We gotta talk to Warren. Maybe-- that's the smart phone that-- you know, we just assume he'd buy. And I guess he'd probably buy an Apple, though-- since he owns all that stock. We'll ask him, anyway. Fiat Chrysler's planning to eliminate-- diesel models-- from its vehicle lineup by 2022. Financial Times reports that the move follows a drop in demand in the wake of Volkswagen's emissions cheating scandal. Fiat Chrysler doesn't-- sell diesel cars in the U.S., but they're popular in Europe and Asia. Prices at the pump edging lower. The average price of regular unleaded fell six cents in the past two weeks-- to $2.59-- a gallon. That's the first decline since December-- but gas prices are still about 25 cents higher-- than a year ago. Are we goin' back to Becky or we goin' to break? I think we're goin' back to Becky. Becky, I-- you know, when I text people and-- when I send it and it goes in blue and I get things back in green, it's like I don't even-- is that, like, not an Apple phone or somethin'? I don't-- I like the blue. You know, I don't know. Why do-- do some people really have Galaxy phones or Samsung or-- do you know what I'm talk-- you have no idea what I--
BECKY QUICK: I think so. Yeah, I do know what you're talkin' about, but I don't know what the answer is. I guess there's a change, whether you're in the iPhone ecosystem or not. Is that part of the reason.
JOE KERNEN: I think less of people when they're not-- in the iPhone ecosystem.
BECKY QUICK: That's because you are all about status and-- status symbols, right.
JOE KERNEN: I'm just very tech savvy. I'm very tech savvy. But if-- I like blue a lot better-- it's like green and white. What---- hey, where-- what century are you living in? What is this green thing? Get a 10. Get an X. Get a 10-- Warren. Come on.
BECKY QUICK: You-- if you were buying a smart phone what-- which one would you buy?
WARREN BUFFETT: Oh, I'd definitely buy an Apple.
JOE KERNEN: See?
WARREN BUFFETT: Incidentally--
JOE KERNEN: See?
WARREN BUFFETT: Samsung, although they didn't-- they made the money in semiconductors to a very great-- but they could be the second highest earning company in the-- you know, in-- in the world. I mean, they earned about-- I think they earned about-- well, you get into one, so $50 trillion or something like that. But-it's a lot. Is it-- what is it? I don't know, 108. But-- they probably earned somewhere around $45 million or something. I haven't looked at it recently. And there aren't too many companies around that earn $45 million.
BECKY QUICK: Right. That aren't in commodities--
WARREN BUFFETT: They—but they did not make as much-- remotely as much money, it didn't look-- doesn't look like it in phones. It was semiconductor business ran wild last year.
BECKY QUICK: Just shows you a little bit about how-- Mr. Buffett is always reading-- the financial statements of just about every company out there.
WARREN BUFFETT: I like to read.
BECKY QUICK: It's what you do for your fun time, right?
WARREN BUFFETT: Yeah-- yeah, that is my fun time.
BECKY QUICK: That is your fun time, right. Warren, I wanna talk to you about something you wrote in the annual letter this year, and that's talking about leverage and how dangerous that can be. And I bring it up because it happens that one of the stories on the front page of The Wall Street Journal today is all about margins, margin bets, fueling the selloff. Part of the reason we've seen so much volatility is that-- $642.8 billion had been borrowed by retail and institutional investors against their portfolio. That can lead to all kinds of-- machinations in the stock market, send some real impact to people when prices finally go down.
WARREN BUFFETT: Yeah. Well, it-- it's interesting. After the '29 crash when they had ten percent margins, they actually-- gave the Federal Reserve the power to set margin requirements and everything. And then of course-- and I think the Fed-- does have that power. But-- the whole thing has been-- they moved by derivatives and index, futures and that sort of thing. So people can gamble in stocks and people like to gamble. I mean-- a lotta people like to gamble. But you can't-- four times in the 53 years I've been at Berkshire, the stock has gone down anywhere from 40% to 60%.
BECKY QUICK: Berkshire shares?
WARREN BUFFETT: Berkshire shares.
BECKY QUICK: Yeah.
WARREN BUFFETT: Just-- and some not-- well, very fast in October of 1987. And-- people had a perfectly decent investment. If they borrow against it, they lose it. I-- it is crazy in my view to borrow money on securities. You-- you do not know to borrow more. You don't know whether the stock exchange will be open tomorrow morning. I mean, they-- we have closed the stock exchange, one time during World War I. We closed it for months. We closed it after 9/11 for a few days. It-- when-- it's-- I put in the annual report-- it's insane to risk what you have and need for something you don't really need. And---- you know, borrowing money is a way of trying to get rich a little faster, but there are plenty of good ways to get rich slowly. And-- you can-- you can have a lotta fun while you're getting rich as well. My partner, Charlie, says that there's only three ways that a smart person can go broke. He says, "Liquor, lays and leverage." Now the truth is the first two he just added because they started with L. It's leverage, and-- when somebody tells you how they came back and made a second fortune, I'm not impressed 'cause why the hell would they lose their first fortune? I mean, you know, there's no reason. There's just no reason to borrow money except you're in a hurry to get rich and you're risking going broke and all the effects it can have on your family. I'm-- I do not believe in borrowing money on security.
BECKY QUICK: There was a question that someone had written in-- just asking-- about how you do that just in terms of-- let's see if I can find it -- just in terms of getting yourself to not do it. Because you have at times in the past have had more ideas than you had money.
WARREN BUFFETT: Always. Come on—
BECKY QUICK: How did you have the self-discipline?
WARREN BUFFETT: --well, first 30 years, yeah.
BECKY QUICK: How did you have the self-discipline to not go ahead and get levered up in those situations?
WARREN BUFFETT: I wasn't unhappy when I had $10,000 when I got outta school. I was having a lotta fun. I was looking for things to buy. And the fact that after I spent $10,000 I ran outta money meant that I just kept looking for things that were better than the ones I already had. But-- I was-- if you think that-- if you have $100,000 that means that you're an unhappy person and a million dollars is gonna make you happy, it is not gonna happen. You know, I mean-- then you'll look around and you'll see people with two million. And it-- it just-- it--doesn't work that way. -- you will not be way happier if you double your net worth. You get-- you'll get-- kind of a euphoric surge or something like that, but-- to risk, you know, starting all over again, you know, and losing everything and you've got children and-- it's just-- it's madness.
BECKY QUICK: Warren, we're gonna continue this conversation. We'll have a lotta questions from viewers that we'll go through rapid fire when we come back, as well. In fact, when we come back, from-- from Omaha, we'll have your questions that you've been sending in through the morning, plus your morning corporate stories including changes to the board of General Electric. We have the details straight ahead. Right now, though, as we head to a break take a look at some of the names of-- folks who are gonna be joining us tomorrow right here on Squawk Box. Stick around. We will be right back.
JOE KERNEN: Good morning and welcome back to Squawk Box here on CNBC, live from the NASDAQ market site in Times Square. Among the stories-- front and center, General Electric shuffling its board of directors is one word for it. The company's adding three new directors-- including-- former financial accounting standards board-- chairman, Leslie Seidman or Seidman. We're-- I'm gonna know.I'm gonna know eventually when we actually do something and figure it out. Seidman-- let's call it Seidman. Former American Airlines CEO, Thomas Horton-- former Danaher CEO, Lawrence Culp and as previously announced the overall size of GE's board will be reduced to 12 from 18 which means there are quite a few departures-- or at least directors who won't stand for reelection. There's the list. Many-- are-- you're familiar with. Remember on-- Andrea-- Young and-- Shelly Lazarus, Jim Rohr, Mary Shapiro, Steve Molinkopf-- Susan Hockfield, Peter Henry-- many, many-- well known names. Lead director-- Jack Brennan will stay on to facilitate the transition, but he won't stand for reelection in 2019. Elsewhere, Daimler and its China partner, BAIC, plan to invest nearly-- two billion to modernize a factory in China-- which will build Mercedes Benz and high end electric cars. And that move-- comes after the chairman of China's Geely Auto disclosed Friday he bought a ten percent stake in Daimler, worth nine billion. Makes him Daimler's largest shareholder. Geely is a parent company of Volvo. And in other-- global news, the ruling communist party-- in China has proposed eliminating-- the two-term limit for president-- Xi Jinping-- for all of 'em, I guess. But this mainly applies to President-- Xi, and he will remain leader of China indefinitely. The proposal also covers-- the office of the vice president. Let's get back-- to Omaha and Warren Buffett-- and Becky is there. And I-- I don't-- did-- did I say any th-- did-- should Android users feel like I-- I really-- I was just kidding around about-- I happen to use-- the iPhone. I mean, they're people, too. They're-- I don't want them upset at me.
BECKY QUICK: You're getting angry responses on Twitter?
JOE KERNEN: Yeah. Myopic and Android that's fine. Hey, but I did have a question about Warren for Samsung, to give them a plug. But then I thought, "I wonder if Warren actually has a flat screen." Do you still have one of those boxy TVs? You have a color TV, probably. Right, Warren? But have you actually got a flat screen?
WARREN BUFFETT: I've got an 85-incher. I like to watch sports on television.
JOE KERNEN: See? I knew.
WARREN BUFFETT: And it's interesting. And I sit very close to it. It's interesting how in the theater you get a bad result if you sit in the front row, but you can sit very close to this screen of mine and I love it.
JOE KERNEN: Is it a Samsung, Warren? Can you disclose that?
WARREN BUFFETT: Yeah, it is a Samsung, yeah.
JOE KERNEN: Mine, too.
WARREN BUFFETT: It's a Samsung.
JOE KERNEN: I like it. So you watch Creighton. You watch Creighton from, like, this far away.
WARREN BUFFETT: Absolutely, absolutely.
JOE KERNEN: All right.
WARREN BUFFETT: And I watched the Super Bowl, and I watch everything.
JOE KERNEN: Olympics?
WARREN BUFFETT: Just think of, you know, yeah – and think of what that is compared to 40 or 50 years ago. I mean, the experience is just incredible.
JOE KERNEN: It's unbelievable. High def. It's fantastic.
WARREN BUFFETT: Yeah.
JOE KERNEN: And all right, and you can tell it to – you can verbally tell it to, you know, switch to something else. Switch to "Squawk Box," for example, which is apparently one of the most common verbal instructions – or switch from Squawk Box when I'm – no, I'm kidding. Anyway, go on.
BECKY QUICK: All right.
WARREN BUFFETT: I watch you on an 85-inch screen, Joe.
JOE KERNEN: Oh, my God. I know we don't pay our makeup people enough, I know.
BECKY QUICK: No, we don't. Wow. All right, Warren, we want to take this part of the show and get some questions from some of the viewers who have been writing in and sending things in, too. A lot of these are people who read your annual letter and have additional questions about Berkshire, too. First one comes from Piyush Pant, who says, "both you and Charlie have the vast majority of your net worth in Berkshire stock which means that you share the pain if things go south. Can you clarify how much of their net worth Ajit and Greg Abel have in Berkshire and are there plans to increase?" Now, they disclose their holdings as directors.
WARREN BUFFETT: Yeah.
BECKY QUICK: In terms of Berkshire, but that doesn't really tell about their net worth.
WARREN BUFFETT: Yeah, well, I've never asked them about their net worth. That's their business. But Ajit obviously has a very substantial investment. He's bought every share of that in the open market, and he came into my office in 1986 on a Saturday and I don't think he had very much net worth at that time. And he's just bought Berkshire as he's gone along. And Greg has been with MidAmerican Energy, now Berkshire Energy for well over 20 years and his net worth is virtually 100% in Berkshire. I don't know that it's 100% because I don't know what he has outside, but I'm sure it's a very, very high percentage of his net worth is in Berkshire Hathaway Energy. And it pays no dividend, incidentally, and Berkshire itself owns 90% of it, so our interests are very aligned.
BECKY QUICK: And by the way, you don't hand out stock options like a lot of companies do.
WARREN BUFFETT: No.
BECKY QUICK: These are sums that they've kind of built up themselves over the years.
WARREN BUFFETT: Ajit has bought every share of that, come on, you know, in the open market and he buys it just like anybody else. If it goes down, he suffers. I mean, we do not have one way things. We don't grant the directors restricted shares or anything of the sort. We want our directors to stand in the shoes of the shareholders. We don't have directors and officers insurance liability. I think maybe one other company on the New York Stock Exchange does it. If we do something really dumb and they lose – a company loses a lot of money, they lose money and it's real money to them. It isn't just something that was given to them.
BECKY QUICK: You didn't know how much either of them owned before, did you? Before they were—
WARREN BUFFETT: Well, I knew how much Greg owned of Berkshire Hathaway Energy. I had no idea what his holdings were of Berkshire, and I didn't know, I mean, I knew Ajit owned it, but I had no idea what the amount was.
BECKY QUICK: Okay. Here's another question that comes in. This one's from The Rational Walk. It says, "Berkshire has become a large player in the real estate brokerage, a field that's still plagued by high commissions. I recently sold a home using Redfin and saved at least two percent in commissions relative to traditional brokers. Is this a threat to HomeServices?"
WARREN BUFFETT: Yeah. I don't think it's much but, you know, I could misjudge that. But it's obviously the Internet's going to try and take away any business that existed in a more traditional form in the past. Buying a home is the biggest deal that most people make in their lives. Sometimes they're moving from another city and they want somebody that explains the schools to them, and then, you know, just how the whole city – where they really want a helping hand in coming in. And it's a very personal transaction. It's a scary transaction sometimes to people. A lot of paperwork involved and all that. They really want somebody they trust, and I have a feeling that it will be very much a person to person operation ten or 20 years from now. But the people who are backing an Internet operation think otherwise, and certainly, Amazon has proved that a lot of businesses that you thought had to be done face-to-face can be done very well from thousands of miles away.
BECKY QUICK: Right. This question comes in from Jeff Vaughn. He says, "Warren, when you talk your about your thought process and discussion that you and the investment team had about taking a large position in BYD, which segment of the business was most attractive and why?" And that comes up because BYD made its way into the top 15 holdings of Berkshire again this time around.
WARREN BUFFETT: Right. Well, I've said in the past it really wasn't me or the investment team. Charlie called me one day and says, "We've got to buy BYD. This guy that runs it is better than Thomas Edison." And I said, "That isn't good enough." And then he called a little later and said, "He's a combination of Edison and Bill Gates." And I said, "Well, you're warming up but it still isn't good enough." Anyway, Charlie wanted to do it. Now, it's worked out so well that I'm actually starting to remember that it was my idea. As it's coming back to me. I think I persuaded Charlie. But unfortunately I'm on the record that it's his deal. But BYD, Charlie's in love with the company, and it's done very well. And the fellow that runs it, you know who's autos and batteries, but he's got big, big ideas and he's very good at executing. So, but I leave it to Charlie.
BECKY QUICK: There's another question that came in from David Rolfe and he's asking about Precision Castparts. He says, "What's the percentage gain in intrinsic value of PCC since the closing of the aacquisition? Can you state it if it's even positive?" You've described the $37 billion PCC acquisition as a singular bet on Mark Donegan. Are you pleased with his performance so far?
WARREN BUFFETT: Yeah, I am. But it has not earned as much as was in the projections. But that's a very long term business, and the contracts they get can run out in to the mid 2020s. And Mark, I just saw him about two days ago. And he is an extraordinary business operator. I mean, he just loves figuring how to make things and he hits it off terrifically well with our fellow who runs his car. Because they've got that kind of mind, and they're very, very good at it. And Mark never stops working, and he built a sensational company and he will continue that with us.
BECKY QUICK: Okay. And finally, Market Folly writes in about the relationship with Todd and Ted, the investment gurus in house. He says, "Has Buffett ever disagreed with any of Todd or Ted's investments, and why?"
WARREN BUFFETT: Yeah, well, they make their own decisions, 100% and they each manage $12 billion or $13 billion now.
BECKY QUICK: It started as what, about $5 billion each?
WARREN BUFFETT: Pardon me?
BECKY QUICK: They started out with each of them having five to six –
WARREN BUFFETT: Well, they started actually, I think when Todd came about a year ahead of Ted. And I think maybe it was $2 billion, but it has increased at various points and then they've earned a lot of money for Berkshire, which builds up for them, too. There's certainly – they've done things I wouldn't have done. But I've done things they wouldn't do, too. I mean, I want them to figure out their own. The choices – they are good at managing money, and they've got the advantage of managing smaller sums than I'm running. But they've got the disadvantage of running quite a bit larger sums than most people run. I mean, it gets more difficult with size. But they not only have done a good job of managing the money and trusted them. But they've contributed to Berkshire in just dozens of ways. They were sensational hires.
BECKY QUICK: Do you talk about the investments with them ahead a time?
WARREN BUFFETT: No, not ahead a time. And there's a number of them I haven't talked with them at all. I couldn't even – I couldn't name three quarters of their portfolio. I couldn't tell you the amounts. I don't remember that well. But I've gotten ideas from them. But they take on other tasks. I mean, Todd is on the health care situation. He's there on Saturday. I was there on Saturday. He's there all day talking to people around the country in terms of looking for the right CEO and that sort of thing. They are enormous contributors to Berkshire.
BECKY QUICK: We are going to talk more about the health care proposal between Berkshire Hathaway, JPMorgan and Amazon coming up in just a little bit. In fact, Warren, this'll be the first time that we've gotten to talk to you about it since this announcement came up. But we'll do that just a little bit later this morning. In the meantime, Joe, we'll send it back to you.
JOE KERNEN: And you might prepare Warren to answer some of the most pressing social issues facing us, Becky. Like, can you – do you know whether he's a Taco Bell or a Chipotle guy? Have you ever asked him?
BECKY QUICK: I'd have a guess. I don't know. Have you been to Taco Bell or Chipotle?
WARREN BUFFETT: Neither one.