WHEN: Today, Monday, February 24th
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 24th. 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 side in Times Square I'm Joe Kernen along with Andrew Ross Skin, Becky Quick live in Omaha with Warren Buffett. Good day to have him. Hey, Beck, we'll get-- to them in just a minute. First, the breaking market news. We're right around down 800. I was glad to say we're down 799 when I started read this read but-- we're back below-- 800 again. U.S. Equities futures plummeting as the Coronavirus outbreak widens and worries about-- global growth and the effect that-- the all-important supply chain that China provides for the rest of the world-- that really what's dampening-- expectations this morning. On a percentage basis, not the end of the world. But it-- it'll get your attention. And if it's down 800 in the pre-market session you might see a-- you might see four numbers up there eventually--
ANDREW ROSS SORKIN: You might.
WARREN BUFFETT: --at some point. I'm not forecast-- maybe it recovers. I heard some comments from Warren Buffett a couple minutes ago about-- you know, when stocks are cheap that's when I like to buy. When-- they're cheaper than they were the day before. Maybe he can assuage-- market participates fear at this point. Let's look at the treasury yields. Looking at the ten-year which you would expect-- bonds to be strong this morning and you do see the yield at some of the lowest levels on the ten-year that we've seen-- in a while. Down below 1.4, 1.389.
ANDREW ROSS SORKIN: Okay, let's-- break down what's going on here with the latest-- on the Coronavirus this morning. China now reported 150 deaths. And 409 new cases. That happened overnight. South Korea raising its Coronavirus alert now to the highest level after the number of cases. They're ballooned from 31 to more than 750. And that took place in less than a week. Now stocks in Asia are plunging overnight. Honk Kong, Hang Seng falling 1.8%-- South Korea-- the exchange there three-- down 3.9%. Now shares of-- South Korea's two largest airlines tumbled as they canceled flights to the city-- to go where many of these new cases were detected. Meantime, Italy's government is scrambling itself to deal with the biggest outbreak of the Coronavirus outside of Asia. And you're looking at stocks there tumbling as well. Now-- off about four-- over f-- nearly 5% this morning. The government there placing at least ten towns in Northern Italy under quarantine. Canceling the last few days of the Venice Carnival. Elsewhere in Italy, schools, museums, universities and cinemas were all closed. And major soccer matches were canceled as well. And all of this contributing-- to the red arrows that you're seeing on your screen. But as-- Joe mentioned earlier-- Becky's gonna be talking to the one and only Warren Buffett right now-- who may have some unique views about all of this. So we wanna get-- to both of them in Omaha. Good morning to you, Becky.
BECKY QUICK: Hey, good morning, Andrew, good mooring, Joe. It's good to see both of you. We are here in Omaha, Nebraska this morning with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He has just released his 55th annual shareholder letter to the shareholders over this weekend. And this is actually the 13th year that we are now in Omaha talking to him after that letter. This is a show that we call ask Warren so the people can write in their own questions to Mr. Buffett after they've read that shareholder's letter. But obviously this morning given the news there are a lot of other questions that people have concerning the stock market. Let's jump right into it with Mr. Buffett who is here with us right now. And-- Warren, thank you for being here today.
WARREN BUFFETT: Oh thanks for having me.
BECKY QUICK: It's good to see you. I wanna talk about the letter-- obviously one of the things that you touch on the level-- on the letter is when people should be buying stocks. We're gonna dig into a lot of it. But when you're looking at the futures down about 818 points this morning, I think probably the first thing viewers wanna hear from you are your thoughts on what's happening with the Coronavirus, if this is a reason to panic and if you were worried about this.
WARREN BUFFETT: Well, I-- don't know if I have any special thoughts beyond the news on the Coronavirus. The very first day I bought stocks was March 12th, 1941 '42. And-- the stocks were down about 2% that day as it turned out. Unfortunately I bought in the morning. So when I came home in the evening and my dad told me the execution price it was down 2%. If you're buying a business-- and-- that's what stocks are, businesses, in fact, people would be better off if they say, "I bought a business today," not a stock today because that gives you a different perspective on it than presumably good and buy a farm, if you buy an apartment, a house, if you buy a business you're gonna own it for ten or 20 or 30 years. And the real question is is has the ten-year or 20-year outlook for American businesses changed in the last 24 hours or 48 hours? And we're gonna-- you'll notice many of the businesses we own-- partially own, American Express, we've owned it for 20 years, Coca-Cola, we've owned it for 40 years-- but those are businesses. And—you don't buy or sell your business based on-- on-- today's headlines. And-- if it gives you a chance to buy something that you like and you can buy it even cheaper then it's-- you're in good luck basically.
BECKY QUICK: Although there are a lotta people who look at the market and say, "Look, I wanna buy but I don't wanna buy when the market's sitting at new highs, when it's been hitting new records every day. Maybe it's off 800 points this morning but maybe there's more of a decline to come because the effect of the Coronavirus is going to be an impact on the global economy." IMF said that over the weekend. You are going to see weakness as not only China but other countries try and address this. You're right, it may not change things over the five or ten-year span of things. But if I think I can buy something for potentially 10% cheaper, maybe more than that if I wait a week or a month, maybe that's what I'm sitting around--
WARREN BUFFETT: Well, if you think that then you gotta-- you're gonna get fabulously rich if you're right. All you have to do is just keeping buying in ten-day intervals and keep making your ten-day prediction. If I knew what the market was gonna do obviously. But you-- don't-- I don't think anybody knows what the market's gonna do. I think you know-- do know whether you're making an intelligent purchase at a given price. Everybody when they buy a stock, if you're gonna buy, say, General Motors that has a billion-- 400 million shares out, you should be able to take a yellow pad like-- there and on one page say-- let's say it's selling for 30. It isn't selling that low but that'd be $42 billion. You should say, "I am buying the General Motors company for $42 billion because--" and you should get it on a piece of paper. And then if you wanna have a separate piece of paper that says, "I think I know what the stock market's gonna do so I know whether it'll be higher or lower in a week," but you don't. You don't have that--
BECKY QUICK: You don't but if I worry that the economy is gonna slow down, not just for the quarter but for the year that would impact how many cars I think they might be able to sell or even produce.
WARREN BUFFETT: I guarantee you cars are gonna slow down some day. They-- and-- in 1932 General Motors had 19,000 dealers. That's more than all the auto dealers in the United States today. There are only 125 million people. But they had 19,000 dealers. They produced-- or sold and-- there was one month I think when they sold less 1/10 of a car or right at a 1/10 of a car per dealer. That was a terrific time to buy General Motors. And-- forget about the market, if you can put a good market, you know, you don't even have to read balance sheets. You don't-- you don't even need-- you don't even read any-- you certainly can't predict the market by reading the daily newspaper. That is for sure. And you really can't-- you certainly can't predict the market by listening to me. But you're buying businesses. And if you plan to buy a local service station yesterday and it was closing today I don't think you'd tear your hair out or anything like that. You'd have already looked at it where it was located, the contract that they had with the suppliers and made a decision on competition. People-- because they can make decisions every second in stocks, whereas they can't with farms, they think an investment in stocks is different than an investment in a business or an investment in a farm or investment in an apartment house. But it isn't. If--- you get your money's worth in terms of future earning power over the next ten or 20 or 30 years you're gonna have made a good investment. And you can't pick them from day to day. If you can do that you can, well, I haven't met anybody yet that-- that knows how to do it.
BECKY QUICK: You-- made a point of that in a letter this year where you-- highlighted a book that was written by Edgar Lawrence Smith back in 1924. And you said until he came along nobody really realized the compound interest effect of buying stocks. Not just buying businesses but buying stocks themselves.
WARREN BUFFETT: Edgar Lawrence Smith changed the world with that book. And people have forgotten all about it now. Although in the 1920s it became more and more gospel as the boom went on. But Edgar Lawrence Smith set out, "I'd like to write a book on bonds versus stocks." And he said-- he went in with the idea that bonds would be a better investment in times of deflation and stocks would be a better-- investment in times of inflation. And the first line of his book was to say that he'd been wrong. But he had enough sense to look at his evidence. And, I mean, I think Darwin said if you found evidence that was contrary to what you already believed write it down in 30 minutes or your mind will just block it out. I mean, people have a great resistance to new evidence. And he said, "If a stock yields 4% a bond yields 4%," which is what he was talking about then, "The stock was going to outperform the bonds because there were retained earnings that we're building beyond that yield." And that's-- that has been true for a long, long time but nobody paid any attention to it. We don't get rich on our dividends that we receive. While we happy to receive them. We get rich on-- the fact that the retained earnings are used to build new earning power, repurchase-- shares which increases your ownership in the company. And- Berkshire has retained earnings ever since we started. That's the only reason Berkshire is worth a lot more as we retain earnings.
BECKY QUICK: That-- led Keynes to actually say that this was an important book. People paid attention to it. But you're right, it added to the frenzy that built up to 1929.
WARREN BUFFETT: Well, that is true because you can get-- an old boss Ben Graham told me very early on, "You can get in more trouble with a good idea than a bad idea," because the good idea works. I mean, it's a good idea to buy a home, for example. And then people go crazy sometimes. A good idea works and it works and it works. Stocks work out better than bonds most of the time. And after a while, people forget that there were some other limiting conditions. With Edgar Lawrence Smith's book it was that when bonds yield the same as stocks, which was the case then, that stocks are gonna outperform because they have this retained earnings. So stocks started going up in the '20s. And all of a sudden they were selling at five or six times the prices as when he bought the book. And the original correct-- perception on his part had experienced changing conditions. But people just looked-- they-- they got their confirmations for the stock price. And that's what happens in bull markets. People-- start out thinking stocks are cheap and then they start thinking stocks have gone up. And-- a stock can be a good buy or a bad buy. A bond can be a good buy or a bad buy. It depends on price.
BECKY QUICK: And-- but that leads us to today. I mean, if his premise was that stocks are always going to be a better-- a better investment than bonds that's kinda what you hear today which we've been hearing for a while is TINA, there is no alternative. Right? You have to buy stocks because bond yields are so low because interest rates are so low.
WARREN BUFFETT: Well, if you look at the present situation, we've talked about this before, that you get more for your money in stocks than bonds. That doesn't have to be the case. I mean-- but it's usually been in the case in America. Very usually been the case. And-- if you buy a 30-year bond today with yield 2% you're paying 50 times earnings for an investment where the earnings can't go up for 30 years. Now if somebody said to you, "I wanna sell you a stock that's at 50 times earnings. The earnings can't go up for 30 years," you'd say that doesn't sound very good. Stocks are way better than 30-year bonds. I mean, it's--that's clear. And--that's one of the alternatives people h-- people really have three basic alternatives, short-term cash which is an option of doing something later, long-time bonds or-- long-term stocks. And stocks are cheaper than bonds.
BECKY QUICK: Charlie said recently-- Charlie Munger, vice chairman at Berkshire Hathaway had his daily journal meeting just a couple weeks ago. And at that meeting he said that there's a lot of wretched excess out there and that there's a lot of trouble coming as a result. Do you agree with that?
WARREN BUFFETT: There's always trouble coming. Yeah, there was trouble coming in 1942 when I bought that first stock. All kinds of trouble. Phillipines were gonna fall pretty soon. there's all kinds of trouble in 1949. There was trouble-- certainly trouble in 2008 when I wrote an article for The New York Times. I said, "Trouble is coming." But I said, "Buy stocks."
BECKY QUICK: Would you repeat that this time, if trouble's coming would you still say buy stocks right now?
WARREN BUFFETT: I would say buy stocks if you get enough for your money. You know, we buy a few stocks. But we don't look at-- we're not buying the stock market. We're saying I am buying-- say American Express. We own American Express. There's 815 million shares out. And sells at-- this morning it was $126 or something like that. So it's selling for roughly $100 billion. Now the real question is whether the company's worth or more less than $100 billion. It isn't what the stock is gonna do tomorrow or next week or next month.
BECKY QUICK: You said-- just a few minutes ago when we asked you on worldwide exchange, right now Berkshire Hathaway is a net buyer of stocks. You are in a net buying position?
WARREN BUFFETT: We've been a net buyer of stocks-- or I've b-- actually been a personal net buyer of stocks ever since I was 11, every year. And-- there's been 15 American presidents in my lifetime, more than 1/3. I've lived under 1/3 of the I didn't buy stocks under Hoover. I was only about six months old then. But there've been seven Republicans after that and seven Democrats. I bought stocks under every one of 'em. Now I haven't bought stocks every day. There've been a few times I've bought stocks where-- were really quite high. And I've even written an article once or twice. But that's very seldom.
BECKY QUICK: But you wrapped up your partnership at one point too.
WARREN BUFFETT: I wrapped up my partnership once because of that.
BECKY QUICK: Because you thought it was too expensive.
WARREN BUFFETT: Yeah.
BECKY QUICK: Okay. But this is not a time like that?
WARREN BUFFETT: We own $240 billion worth of stocks now. We look at that as $240 billion worth of businesses-- that we own parts of. But-- I love owning those businesses.
BECKY QUICK: You've also got more than $125 billion in cash sitting around.
WARREN BUFFETT: Yeah, well, that's-- we'd like to buy more businesses.
BECKY QUICK: All right, we're gonna talk more about that in just a little bit. When we come back we have much more from Warren Buffett. Right now though I'll send it back to Joe and Andrew. Guys, back over.
JOE KERNEN: All right, thanks, Becky. Much more to come-- from The Oracle.
BECKY QUICK: Good morning, everybody. And welcome back to Squawk Box here on CNBC. I'm Becky Quick, I'm live in Omaha with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He's just released his 55th annual letter to shareholders over this weekend. We've been taking questions from you. We'll be getting some of those questions in through this morning. We are here, Warren, with you at Berkshire Hathaway's headquarters building. This is upstairs in the room that's called the cloud room. And this is a room where you often take students, kinda talk to them about questions they have when they come to visit you. You also do some other things up here too, other presentations.
WARREN BUFFETT: Yeah, I-- have students here for dozens of years. And-- for many years, 40 schools would come in. They'd come in groups of eight-- at-- five days I'd spend-- a year. And they-- come from all over the world. We have them from Peru, we have them from China, we have from Israel. And-- we have a good time obviously. Ag-- I've given it up now. I-- but I-- started teaching when I was 21. And I-- when I got to about 88 I thought I'll take a rest.
BECKY QUICK: Well, there are a lotta questions that are coming in from viewers that have been hitting here today. They're waking up this morning, looking at the stock market indicated down by almost 800 points for the DOW. We're actually off our worst levels of the morning which is something to say when you're still looking at the DOW down by about 786 points. But people have a lotta questions about the economy. They're wondering what's happening right now, particularly with the Coronavirus out there. You have a lotta economic data at your fingertips because not only are the many businesses that Berkshire owns but the businesses you own pieces in. What-- are you seeing right now around the globe?
WARREN BUFFETT: Well, it-- affects various businesses. I would say that I received commentary-- I get some commentary monthly with-- from-- from almost all of the companies. And-- a good many of them had some comment about how it was affecting them and how it was affecting them at-- that time I'm sure it's sure it's accentuated. But they've been affected by-- they were affected by tariffs, they're affected by taxes, they're affected by-- the most thing is they're affected by competitors and supply and demand over time. And I don't have the faintest idea what our businesses will be doing six months from now or 12 months from now. I do think that not only our businesses but American business generally will be doing fabulously better 30 years from now or 20 years from now. And the-- long-term is very-- in my view is very easy to predict in the general way. But an important way. I don't think there's any way to predict what the stock market will do ten minutes from now, ten days from now or ten months from now. So I work on what I think I-- I'm able to do. And as desirable as it might be to know what was gonna happen ten minutes from now that's just-- not something I'll ever be able to master. So fortunately I can come to a pretty firm conclusion that 20 or 30 years from now American business and probably all over the world will be far better than it is now.
BECKY QUICK: What are the momentary implications that you've seen from Coronavirus? What's an example of the business--
WARREN BUFFETT: Well, an example-- is that we have maybe 1,000 Dairy Queen-- franchises in-- China here. And they're just treat only, so they're-- the old type of-- food. But-- a great number of them were closed. But the ones that were open weren't doing any business to speak of. And-- Apple is-- I mean, a much bigger holding is Apple. We own 5.6% of Apple. And-- the company came out and said that it's affecting not only its stores but all kinds of things, supply chain and I find that certain of our companies have got supply chain arrangements that are being affected that I didn't even know I had those.
BECKY QUICK: Like what?
WARREN BUFFETT: Well, I got one-- from John Mandal the other day, for example, you wouldn't normally think of them as having a big supply chain, but Shaw Carpets or you name it. I'll guarantee you that a very significant percentage of our businesses one way are affected by this. But they're being affected by a lot of other things too. And the real question is where are those businesses gonna be in five or ten years. They'll have ups and downs. Our-- candy business is a wonderful business. But it loses money seven months out of the year. But the nice thing is Christmas comes every year.
BECKY QUICK: When you look at the economy and how things were kind of chugging along, let's say, beginning of this year, when-- first things-- first picked up, how would you gauge the U.S. economy at that point?
WARREN BUFFETT: Well, it-- it's-- strong but a little softer than it was six months ago. But that's over a broad range of-- you look at car holdings-- railcar holdings, that-- that's moving goods around. And there again, that was affected bythe tariffs too because people front-ended purchases, all kinds of things, all-- a lotta variables. But-- business is down. And-- but it's down from a very good level. So I would say that looking at our 70 businesses-- and that actually-- they represent hundreds-- in addition-- they're a little softer. And on the other hand I was out with the fellows from the Nebraska Furniture Mart just Saturday night and--their business was up quite a bit in February. But that's because weather was good. So you have a lot of variables that hit.
BECKY QUICK: Why--do you think business was down, let's say, the last six months? Is it-- a decline in confidence or is it coming off of levels where there was unusual activity ahead of that?
WARREN BUFFETT: Well, it isn't really down. It's just-- it leveled off and a little softer maybe now. But, look, tariffs the-- tariff situation was a big question market for all kinds of companies. And--still is to some degree. But that-- that was front and center for a while. Now Coronavirus is front and center. Something else will be front and center six months from now and a year from now and two years from now. Real question is-- where your-- where are these businesses gonna be five and ten and 20 years from now? Some of them will do sensationally, some of them will disappear. And overall I think America will do very well-- you know, it has since 1776.
BECKY QUICK: But you still watch things like railcar load--
WARREN BUFFETT: Oh yeah.
BECKY QUICK: --very closely.
WARREN BUFFETT: I watch everything. But I don't do it to make in-- specific investment decisions. I-- it-- but I-- enjoy, I mean, I-- wanna know what's going on. But I also don't think that I can make money by predicting what's gonna go on next week or next month. I do think I can make money by predicting what's gonna happen in ten years.
BECKY QUICK: All right, tell us more about what's going on just since you like knowing about those things.
WARREN BUFFETT: Well, I-- as I say-- you know, the-- certain businesses depend on weather to quite an extent. In retail, for example, in given months-- but the big trends you see are going on, I mean, in terms of movement-- to online commerce. And, I mean, the big stuff-- keeps moving. But we've got a big investment in airline business and I just heard they're-- even more flights are canceled and all that. But flights are canceled for weather. It so happens in this case they're gonna be canceled for longer because of-- Coronavirus. But if you own airlines for ten or 20 years you're gonna have some-- ups and down in current business. And some of them will be weather related and s-- they can be all kinds of things. The real question is you know, how many passengers are they gonna be carrying ten years from now and 15 years from now and what will margins be and-- what will the competitive position be? And-- but I still look at the figures all the time. -- I'll admit that.
BECKY QUICK: You-- you mentioned the airlines. And you own stakes in all the major airlines but--
WARREN BUFFETT: All.
BECKY QUICK: --not as much as Delta. I think you own-- north of 11% of Delta at this point?
WARREN BUFFETT: Well--
BECKY QUICK: Or right--
WARREN BUFFETT: --we-- the-- our largest position is in Delta-- three of the four positions are mine. One of the positions is one of the other fellows-- the four positions. But we own a very roughly ten-- close to 10% of-- the four largest airlines.
BECKY QUICK: There's been a lotta speculation. In fact, some of the questions that came in over this weekend-- were questions about those airlines. Wondering if you would buy any of them outright. Have you considered buying any of those companies outright?
WARREN BUFFETT: It'd be very unlikely that we would do that. I'm not saying it's impossible. But-- it's complicated.
BECKY QUICK: Why?
WARREN BUFFETT: Well, for one thing, they're regulated and-- there's an interplay. I'll just give you an example, not that we would be doing. But with Delta we own 18% of American Express and American Express is a bank holding company and bank holding companies have limits as to what they can do. And we're a passive holder of a bank holding company with American Express. But instead we own an airline that was tied up with them they'd have lots of arrangements. There's-- a lot of complications because it's--a regulated industry. Anytime you get in a regulated industry you-- have more complications and---- in transactions.
BECKY QUICK: So, is it fair to say you like these stocks and you would own more if it wasn't complicated?
WARREN BUFFETT: Well, we – to go beyond 15% in any company we'd have to go in on – I mean, there's a lotta rules as you increase your ownership. Obviously almost anything we own we like to own more of.
BECKY QUICK: Are you buying more of any of those stakes right now? Apple shares –
WARREN BUFFETT: I get pretty closed mouth when it comes to what we're buying.
BECKY QUICK: You thought about that for a second.
WARREN BUFFETT: All of a sudden, I feel my jaws lock up.
BECKY QUICK: But fair to say--
WARREN BUFFETT: But it's fair to say that anything that we own we like. You know, and there's very few stocks that we own and I look at them as part ownerships in businesses. There's very few that are selling at some price where I would sell them a little higher.
BECKY QUICK: All right, well, let me ask a question that came from Tony Dickinson. He said, "In the fourth quarter Berkshire sold 55 million shares of Wells Fargo. Should shareholders view this as a lack of confidence in the new CEO turnaround plan? And what is Warren's future outlook for Wells Fargo?"
WARREN BUFFETT: Well, I won't give him any advice specifically on Wells Fargo. But it's absolutely true that we've sold down our position. Some of it was sold down to avoid being over 10% because then you do have some filings with the Fed and so on, but—
BECKY QUICK: They've sold well more than that.
WARREN BUFFETT: Yeah, we've sold – more than that.
BECKY QUICK: I think it's 8.4% was the last—
WARREN BUFFETT: Yeah. That sounds right. And now we sold Wells Fargo in the fourth quarter and we sold earlier.
BECKY QUICK: Can I ask why? Only because I did get a number of questions about--
WARREN BUFFETT: Yeah, well, I can understand that. But we don't want to give any advice on what we're doing because I could change what I'm doing tomorrow. We talk about everything except we don't give stock advice.
BECKY QUICK: Ok. I'll try one more from Tony Dickinson just because I think I got 15 or 20 different questions on this. "Berkshire owns 32.58 billion of Bank of America and 17.39 billion of Wells Fargo, one position's been increasing while the other's been decreasing. Does Warren like Bank of America twice as much as Wells Fargo? And how should shareholders see the holding?"
WARREN BUFFETT: Yeah, well, I think they've sees that we've bought Bank of America and we've sold some Wells Fargo.
BECKY QUICK: All right, let me ask you a broader question that comes in just on interest rates and the impact that they might have as well. Varun Jain writes in on Facebook, "Hi, I'm a huge fan and student of Mr. Buffett. Please ask him what impact does the zero-interest rate environment across places like Japan and Europe have on their banks, whether the business is still good. And does the prolonged low-interest rate regime in the United State hurt the prospects of American banks like JPMorgan, etc.? And in such circumstances do Indian banks which have high return on equity look attractive to Mr. Buffett?"
WARREN BUFFETT: Yeah, well, I can't comment on that, but–
BECKY QUICK: I know that, but—
WARREN BUFFETT: Generally speaking, but there are a lot of other variables too – but the banks are going to make more money if there are higher rates with a steeper curve. The curve makes – is more important than there was the ten year versus short-term rates. They make more difference than the absolute level. But American banks have made very good money with very low interest rates. Around the world, if you look in the U.K. or Europe or Japan even lower rates have made it pretty tough for banks. The returns on equity are not as high. And they have to use more leverage to even get the same returns and I don't like that as well.
BECKY QUICK: If you were talking about the curve that we're looking at this morning, the five-year, two-year is inverted. Two-year ten is not right now. But the ten-year's below 1.4% this morning.
WARREN BUFFETT: And think of it, the ten-year at 1.4% that means you're paying 70 times earnings for something that can't increase its earnings for ten years.
BECKY QUICK: That's a good way of looking at it.
WARREN BUFFETT: If somebody came to you with a stock and said, you know, "This is a terrific stock. It sells at 70 times earnings. The earnings can't go up for ten years," you'd say, "Well, explain that to me again." But no – we've never seen a situation like this in the world. Literally. I mean, you can go back and read Keynes and you can read Adam Smith and you can read, you know, all the great ones. And they don't talk about negative interest rate. It never crossed their mind. Always supply and demand and all these marginal costs. But brilliant economists never really anticipated that you would have negative – you've got 13 trillion or something like that – worldwide at negative interest rates. And we don't know what that means. And we've got a lot of people that can speculate what it means. But ten years from now or fifteen years from now we'll look back and say, "Well, it was obvious what would happen with that, and we'll see it." But it is not a normal situation. And well, interest rates are the basis of all value. I mean, you know, if you knew interest rates we're going to be zero for 100 years you would think 1% was a great rate of return. But you also would know if you bought something was yielding 1% or that was what it paid and rates went to 8% you'd lose practically all your capital. So, it's an enormous factor. And we don't know the answer, central banks don't know the answer. All we know is that it's been useful in stimulating things, and particularly asset prices now for ten years and what we thought was temporary in 2008 and '09 in the way monetary policy to stimulate we've just put our foot on the gas even further. The whole world has.
BECKY QUICK: You made a point in the letter of saying that you don't know how long these interest rates will last. You and Charlie never try and figure these things out. But we did have St. Louis Fed president Jim Bullard on the program last week. And he said that he expects to see these low interest rates for a long time to come. That does raise a lot of questions. If that happens about what this means for the stock market, what that means for banks, what that means for insurance companies, which you touched on in the letter too.
WARREN BUFFETT: It's bad for insurance companies. But it's good for stocks.
BECKY QUICK: Bad for insurance companies and what happens to the insurance companies as a result? Are they getting more – are some insurance companies going to push out risk?
WARREN BUFFETT: Well, the ones that really get hurt on it are either life or annuity companies that have promised returns. Property casualty business doesn't promise returns. It still holds money, so it hurts them. But if you promise somebody an annuity that's clearly to pay them 3% or 4% and now you find that you're reinvesting your money at 1% or something, you know, you're going to disappear.
BECKY QUICK: Are insurance companies being forced to make riskier and riskier bets?
WARREN BUFFETT: Well, they shouldn't. I mean, the answer – if you need to get 3% and you're only getting 1%, the answer is to quit giving 3%. It's not to try and get the one up to three and do more dangerous things. You should always adapt your consumption to your income. You shouldn't try and adjust your income to your consumption. That's a basic principle for individuals, businesses and everything else. And reaching for yield is really stupid. But it's very human. I mean, and I understand it. People say, "Well, I've saved all this money all my life and now I can only get 1%. What do I do?" The answer is you learn to live on 1% unfortunately. And you don't go and listen to some salesman come along and tell you, "I've got some magic way to get you 5%."
BECKY QUICK: Do you think though that's what should be happening. Do you think that there is more risk-taking place in the insurance market as a result?
WARREN BUFFETT: Sure. And you see that in – they call leverage loans and weaker covenants. No people are reaching for yield. There's no question about that. And that's stupid. And it has consequences over time. But it's very human.
BECKY QUICK: Consequences that could have a big market impact?
WARREN BUFFETT: Depends how far it goes. Yeah. Yeah. it's something that – things that get built in slowly, people going crazy and tech companies in the late 1990s. It could take a lot longer than you think. But eventually you get to midnight and everything turns to pumpkins and mice.
BECKY QUICK: You know, that's the downside of low interest rates, pensions, savers, anybody who gets left in a raw position of that. On the alternate side of things, if rates were to rise rapidly or maybe not even so rapidly, what does that mean for the federal debt?
WARREN BUFFETT: Well, it depends on the average maturity of the debt. But our maturities are fairly short. They've got lengthened a little. But if you take 20 trillion and you're borrowing at 2%, you've got 400 – what have you got? Two trillion – 200 billion. I mean, you got 40 billion of the expense. But close to 5% you got 100 billion of the expense. I mean, no at 5% you got a trillion of expense. I'm sorry. We are benefiting enormously in our national budget by the fact that inverse rates are very low. And so, interest cost has not gone up as you would've anticipated if you were looking at the scene 20 or 30 years ago with the increase in national debt. You know, Wall Street issued 100-year bonds. You know, but 2% or thereabouts. And then they've gone way, way up and that – maybe they yield 1.1 or something like that. I don't know where they are now. But it's great if you're a borrower, gee, maybe everybody should refinance their mortgage.
BECKY QUICK: Is that an argument for the federal reserve or I'm sorry, for the treasury department here issuing longer notes?
WARREN BUFFETT: Well, yeah, but I would've said the same thing five or six years ago and been wrong. But if we – under the present slope it still would cost more to lengthen it out. But you're lengthening it out at very, very low rates. And it would be what I would be inclined to do if I were secretary treasury. But I would have missed a lot of bets in the last ten years too.
BECKY QUICK: All right, we're going to have much more with Warren Buffett when we come back. We'll talk a little bit about conglomerates and whether Berkshire Hathaway is being discounted in the market because it's a conglomerate. But, guys, right now I'll send it back over to you.
BECKY QUICK: Hey, Joe, thanks very much. Warren, again, for people who are just waking up, they're tuning in and they want to know what you think about this sell-off this morning. To see the DOW down 700, 800 points in the morning, what's your reaction when you see something like that?
WARREN BUFFETT: Well, my reaction is that I like to buy stocks, so I don't wish ill on anybody else. But I like to – if they want to sell them to me cheaper, I prefer it. So that's you know, roughly a 3% decline or thereabouts. I don't know how many 3% declines I've had in my lifetime but there have been a lot of them. And I can't think of one that you shouldn't have bought on. You know, basically – not as many stocks are going to go up or down next week or next month or next year. But if there's something – if you like to own American businesses, you're getting a chance to buy it 3% cheaper. I don't consider that a lot cheaper. I mean, but how can it be bad news unless you have to sell stocks? Now if you have to sell them for some reason, you're worse off. If you don't have to sell them, I mean, somebody can come around and offer you a quote on your house today. And it could be 2% less than they offered you yesterday. But if you like the house it really doesn't make any difference to you.
BECKY QUICK: Does that mean Berkshire will be buying stocks today?
WARREN BUFFETT: Well, we certainly won't be selling. And yeah, we could easily be buying something, sure.
BECKY QUICK: Okay. Let's talk a little bit about a Barron's cover story that was just out last week. The good news on the cover story is they think that Berkshire is worth more than it's selling for right now. The bad news is they said think that's in part because it's got a big conglomerate discount. And they think if you weren't running it that it might get broken up. What your response to that line of logic?
WARREN BUFFETT: Well, conglomerates have had a bad name and for good reason over the years. I mean, I closed my partnership up at the end of the 1960s. And there was a run, a very abusive run in conglomerates where they played with numbers and they had dirty pooling as they call it of accounting. They wanted to have their stocks up and put out stories to do it so they could issue more stock. They were kind of chain-letter arrangements. There have been a lot of bad conglomerates. And probably disproportionately so compared to sort of honest to God single-industry businesses over time. We don't think we're that kind of a conglomerate. We've certainly never wanted to issue shares. We never touted shares. You know, it's done for business reasons in our case. The interesting thing is, of course, is the American public has been going wild in their enthusiasm for conglomerates in the last few years, if you think about it. I mean, it's been an incredibly popular area. But they call them index funds. You buy 500 businesses—
BECKY QUICK: I was trying to figure out what you were talking about.
WARREN BUFFETT: Yeah, well, 500 businesses all put together. I mean, that's the ultimate conglomerate, isn't it? I mean, I recommended index funds to lots of people and when they do it they're buying into 500 businesses. And they're going to have 500 businesses a year from now and five years from now. And they think that group of businesses will do very well. And I think our group of businesses will do okay.
BECKY QUICK: The difference with an S&P 500 index is it's 500 different companies run by 500 different management teams who are all focused on their business. Maybe not having a centralized operation that is loosely running all of those businesses.
WARREN BUFFETT: Well, we've got – our businesses are run by separate people. I mean, we just finished Valentine's Day. And I did not select what pieces went in the boxes. And it's probably been ten years at least since I've been to a See's Candy factory. Now, you know, I get the figures every month. But I don't know how to make chocolate. You know, anything of the sort. I don't pick out the new locations. We have managers for our businesses that are very much like the managers we have for the businesses that we own pieces of like American Express or Coca-Cola. And there's a couple things we can do. We can determine the dividend policy of our subsidiaries. We can control their capital allocation to some extent. But on most capital allocation whether buy new equipment or anything like that they make the decision. The BNSF railroad is going to spend $3.5 billion on – I don't approve a single dollar of that in terms of capital expenditures. They know what they need to do, where they need to lay track, how many locomotives they need – whatever it may be. So, our managers are I would say in a sense they're almost more independent than the managers of the S&P 500 who go around and report to Wall Street week after week. They go to investor relation meetings and they're always explaining what they're doing and trying to get the approval of the analysts and all that sort of thing. And we just tell our managers to do what makes sense.
BECKY QUICK: Okay, outside of the idea of them not having to report to individual shareholders or the investment community, what's the advantage of having you there? The capital allocation part of it?
WARREN BUFFETT: Well, yeah, we can move capital within – if you move capital from one stock to another and you got a gain – particularly, I mean, you pay a tax. And then they pay a dividend tax or if you sell part – but there's a lot of taxes incurred in moving from one business to another. Either at the corporate level in some cases but certainly at the individual level. And we can move capital, well, just take See's Candy again. We bought that in 1972. We've moved a several billion dollars from the candy business to other types of businesses. And we'd love if it we can use it all in the candy business. But it just isn't that sort of business. And in addition to that we free up our managers from all dealing with Wall Street, dealing with bankers, dealing with all kinds of things that are what I regard as a less productive use of their time.
BECKY QUICK: However, you also have a situation where you have gotten some activists who have been interested in the stock, including Bill Ackman. He's built up a stake. Hasn't said too much about it. But I think he has made some comments about how maybe Burlington Northern Santa Fe's margins could be improved. You could look back at Bill Ackman's experience with the Canadian Pacific Railway and kind of wonder if he's building up a position because he would like to see you take a more active role there.
WARREN BUFFETT: Well, we notice what other railroads are earning and when their margins are better. I mean, and we certainly put way less pressure on than Wall Street might who would want them next week. But our managers are well aware of what's going on in other industries. And we've made changes where we don't think some businesses are performing as well as they should. But overwhelmingly, we've got managers there that are very, very good. They've got capital available to them for anything that makes sense. And we decide how much they distribute, where the capital moves. And sometimes it moves from one industry to another. And in certain industries, a consolidated tax position really is very helpful to us.
BECKY QUICK: There's a viewer question that came in from Ben Comston and he asks, "it was recently pointed out by Bill Ackman that some subsidiaries like Geico, BNSF lag their peers in some areas. Would you agree with that? And how can your successor push improvement in subsidiaries while maintaining a decentralized management structure?"
WARREN BUFFETT: Well, at Geico we bought control in 1995. We had about 2.5% of the market for auto insurance. And we're at about 13.7% of the market. So, we've gone from 2.5 billion of premium volume or thereabouts to 35 billion of premium volume. We're number two now to State Farm. We were number six or seven at that time. So I would say that not due to Berkshire at all, but due to Tony Nicely during almost all those years. Geico's been the envy of every other company in the auto insurance business expect for Progressive. They've done a good job too. But Geico is worth tens and tens and tens of billions more than when we bought it in addition to all the earnings we've gotten, just a good will value. So that's been extraordinarily well-run. And with Burlington, I think we paid a dividend of $5 billion last year. And we paid $35 billion for it. So, it's gained in market share and its business. Its operating margins have improved but they haven't improved as much as some other railroads.
BECKY QUICK: Do you believe in precision scheduling railroading?
WARREN BUFFETT: Well, we'll see. I mean, we've watched it plenty.
BECKY QUICK: And for those who don't know what that is, it's something that kind of irritates customers because it makes things a little more rigid. But it does improve –
WARREN BUFFETT: Yeah, it makes the customers adapt to the railroad more than the railroad adapting to the customers. And practically everybody's done it. And a fellow named Hunter Harrison was enormously successful—
BECKY QUICK: Who worked with Bill Ackman at the Canadian Pacific—
WARREN BUFFETT: Yeah, he worked with BNSF if you go back far enough. And there's a book about it. It's very interesting. But he did – at the Illinois Central, the Canadian National, the Canadian Pacific. And then he was going over to the CSX. He developed a method of railroading where the customer does adapt more to the railroad. And improved margins dramatically. Our margins are close to what the better railroads – well, there's only a few you get from precision railroading. I mean, and we've gained share—
BECKY QUICK: Because the customers don't like it.
WARREN BUFFETT: because the railroads apparently – railroad customers like us better. And over the long-term we'll see. But it isn't like it's something we can't do.
BECKY QUICK: We've got more questions to come with Geico and Todd Combs' role there. There were several questions that came in on that. But we do have to flip in a commercial break. So let's go back over to Andrew and Joe right now in New York.
BECKY QUICK: A global sell-off underway as investors track a surge in the number of coronavirus cases outside of China. The latest on the outbreak and the moves you need to make with your money from legendary investor and billionaire Warren Buffett.
ANDREW ROSS SORKIN: We're tracking stocks on the move, the sectors being hit the most, and market reaction.
JOE KERNEN: Warren Buffett's perspective on the global economic impact of the virus and his advice to investors is straight ahead as the second hour of Squawk Box begins right now.
ANDREW ROSS SORKIN: Good morning. Welcome back to Squawk Box right here on CNBC. I'm Andrew Ross Sorkin, along with Joe Kernen. Becky Quick is in Omaha this morning with investor and Berkshire Hathaway Chairman and CEO Warren Buffett. We're going to hear from them in just a second. Couldn't be a more important day to hear from them, in large part because U.S. equity futures at this hour are in the red. Getting marginally better, but not much better. Dow looks like it would open off about 702 points right now, in large part about-- because of increasing fears of the Coronavirus-- which has spread some the numbers over the weekend. We'll talk about those in just a minute. NASDAQ looking to open down about 250 points. The S&P 500 looking to open down about 75 points all in. And check out European markets at this hour. The spread of the coronavirus in Italy really putting pressure on stocks there. You're looking at numbers across the board with 3% and 4% off, but we want to show you oil prices really quickly at this hour, as well. You're looking now at WTI crude, a barrel will cost you $51.35. and that's down about nearly 4% right now.
JOE KERNEN: And here's the latest on the coronavirus. China reported an additional 150 deaths and 409 new cases overnight. South Korea raised its coronavirus alert to the highest level after the number of cases there ballooned from 31 to more than 750 in less than a week. Stocks in Asia falling overnight. Hong Kong's Hang Seng fell 1.8%. South Korea's KOSPI fell nearly 3.9%. Shares of South Korea's two largest airlines down, as they canceled flights to the city of Daegu, where many of the new cases were detected. Meantime, Italy's government is scrambling to deal with the biggest outbreak of the coronavirus outside of Asia. Stocks there were lower overnight. The government placed at least ten towns in northern Italy under quarantine and canceled the last few days of the Venice Carnival. Elsewhere in Italy, schools, museums, universities, and cinemas were closed and major soccer matches were canceled. At this point, I mean, Boris Johnson out earlier today, Andrew, saying that the risk to U.K. citizens just over there remains low. I would say that our officials would say that here, too. The risk—
ANDREW ROSS SORKIN: Yes.
JOE KERNEN: --to U.S. citizens remains low. But there's a significant difference between-- supply chain disruption, slowing dozens and dozens and actually, hundreds—
ANDREW ROSS SORKIN: Absolutely.
JOE KERNEN: --of companies.
ANDREW ROSS SORKIN: Absolutely.
JOE KERNEN: And that's dampening global growth. What worries me is that we don't know, three months, six months, nine months. If it ever gets to the point where we start to see, in a lot of countries around the world, these breakouts where they don't even know the origin of some of these. And if they multiply like that, that's when I think it could really get-- at this point, it's still—
ANDREW ROSS SORKIN: No, that's—
JOE KERNEN: --it's still a global growth slowdown. Nobody in-- in most of the world is worried that they're going to catch Coronavirus.
ANDREW ROSS SORKIN: Right.
JOE KERNEN: --and they can't go out, and they can't, you know, go to the movies, or the health club, or to a restaurant. But that-- I just want to—
ANDREW ROSS SORKIN: But, look, there are—
JOE KERNEN: --we don't know.
ANDREW ROSS SORKIN: --major travel that's being changed right now. Conferences are being canceled. There was an article in Time Magazine speculating whether the Olympics in Japan over the summer will be canceled. So, there's real implications here that could reverberate. Having said that, the farther we get to the spring, the better it gets. There's weather. There's a whole sort of--about how the flu--you know-
JOE KERNEN: You know, I was looking at Jim's-- some of Jim's tweets earlier. If you go too far with the fear and the panic, you're accused of one thing. If you don't—
ANDREW ROSS SORKIN: Yep.
JOE KERNEN: --go far enough, you're accused of the other thing. So, we really just need to sit here and each day, report on the facts and try to remain detached. But there's something about a pandemic that just is different than other black swans. It's a frightening prospect. Anyway, let's get right back to our guest of the morning. Warren Buffett joins Becky in Omaha following the release of his annual letter to shareholders over the weekend. And, I mean, Becky, you took a plane. I mean, were you--it's in the back of our minds. Is it not—
BECKY QUICK: I did.
JOE KERNEN: It's just in the back-- there's nowhere—
BECKY QUICK: It is.
JOE KERNEN: And-- and the-- the risks are low—
BECKY QUICK: Joe, it goes back to 1918. It goes back to—
JOE KERNEN: Right.
BECKY QUICK: --1918. You know, if you look at the numbers of what happened in that pandemic when it came around the globe, up to 50 million were killed in that. It was a third of the planet's population that was infected. It was 500 million people that were infected at that point. 675,000 Americans died at that point. So, inevitably, your mind kind of goes back to what's happened in the past. Because, as humans, we always look back to history to try and predict the future. Doesn't always work. It's not always prophetic. But it does give you something of what to kind of play out if this were to get worse and worse. Now, Andrew brought up the idea that it's warm weather. We're approaching spring in a lot of parts of the country or a lot of parts of the planet. That may be good news. We just don't know if this time around if this is one of those viruses that does die off in warmer weather. Wait and see, and kind of hope.
WARREN BUFFETT: Well, I, actually--I think this, from what I've heard from people that know a lot more about viruses than I do that, unfortunately this will make it through the summer. And, in terms of having a vaccine, it's, you know, a long ways off. So, you've got-- you know, it is scary stuff. I don't think it should affect what you do in stocks. But, in terms of the human race, it's scary stuff when you have a pandemic.
BECKY QUICK: Yeah. I guess this one's particularly frightening because it's new. So, there's no natural immunity that's built up in any of the populations. And you wonder what happens, particularly in areas where there's not the same health care structure that we have in America or in some of the developed nations. I guess that's a big part of the question, too.
WARREN BUFFETT: Yeah. And it's—well, I think about it in terms of our annual meeting. I mean, which is May 2nd. I mean, it could very well affect-- by that time, it could affect—
BECKY QUICK: We've got questions from viewers asking just that. Will the annual meeting be any different this year, particularly because you have a large Chinese contingency of shareholders who—
WARREN BUFFETT: Yeah, I don't think—
BECKY QUICK: --will be here for that?
WARREN BUFFETT: Yeah. And-- and that certainly will be affected. And, incidentally, I mean, flu is particularly tough on old people. You are going to have two guys on the stage whose combined age is 185. So, we'll-- we won't be looking for people that show are getting signs of contagion. But that's one of the problems with this, is it does have a long gestation period. And it's highly transmissible.
BECKY QUICK: And, again, you did talk about it earlier. It's something that you see in the results of the businesses. Even—
WARREN BUFFETT: It's true.
BECKY QUICK: --some of your own fully owned businesses--
WARREN BUFFETT: Sure.
BECKY QUICK: --that you didn't anticipate.
WARREN BUFFETT: Well, we own airlines, for example. No, it-- it affects businesses now. Actually, my dad used to tell me stories. He was 14 in 1918. And and he told me what went on in Omaha, you know, during the big Spanish flu epidemic. I mean, it was-- it was something in those days. And, pandemics will occur in the future. Now, what they hope to get is a universal flu vaccine. But, that's a long way off. It isn't impossible. I mean, I asked my-- my own science advisor is Bill Gates, so I talk to him, I call him. I talked to him the last few days about it. And he's bullish on the long-term outlook for a universal prevention of it. But, this is not going to come, you know, for -- it's not going to be here in 10 years.
BECKY QUICK: What are Bill's concerns, as somebody who spends a lot of time traveling around the globe, as somebody who is trying to help medicine in some of the less developed parts of the world?
WARREN BUFFETT: Yeah. The Gates Foundation is very active in trying to be helpful on this. And Bill says the CDC is the best in the world. And, I mean, we've got terrific resources in this country. But a pandemic is a pandemic. And, there's just no evaluating. And--but I have heard that the summer is not likely to cause the end of this.
BECKY QUICK: Do you know why?
WARREN BUFFETT: But I don't know. And-- you know, you shouldn't be ask—I shouldn't be offering my opinion on it. Because I pass along things I hear from people I think are smart, but—
BECKY QUICK: I'm actually asking for Bill's opinion, not yours.
WARREN BUFFETT: Yeah. Well, I shouldn't-- and I shouldn't really quote him, but I do--he's the guy I ask. And I did talk to him just a few days ago. And, he loves to talk science. And he can make it so I could understand it, which is-- quite a trick. Well, at the Gates Foundation, they're taking it very seriously. I'll put it that way.
BECKY QUICK: Is money going from the Gates Foundation to try and—
WARREN BUFFETT: I'm—
BECKY QUICK: --find a vaccine?
WARREN BUFFETT: --I'm-- I'm sure they are expending human and financial resources.
BECKY QUICK: Have-- I mean, maybe this is more than you know. But do you know if they have put human resource out either into China or other places where there's—
WARREN BUFFETT: I don't know that. I don't want to comment on that. But I know that they're--that is-- something they've always spent, they've been very involved in, is human health. And, even particularly this. Bill knows a lot about vaccines.
BECKY QUICK: Let's talk a little bit about Berkshire Hathaway. We were in the middle of a conversation when we had to go to a break before. But there has been this question raised, not only about Barron's and the cover story there but by other places, too, about whether Berkshire Hathaway would be worth more if it were split up.
WARREN BUFFETT: That's a good question. And I will tell you that-- that if you were to say--and let's say the stock market didn't change for two years and interest rates didn't change. So, if you had a two-year period and you said, 'We'll sell off all the businesses,' I don't think-- I mean, you have the expenses of selling them. Now, if you sold them all to people who leveraged them up to their maximum, you might get a little more than the stock is selling for. It would be very tax inefficient, very tax inefficient. Interestingly enough, up until 1986 it wouldn't have been. I mean, there was as general utilities doctrine that governed corporate breakups. And so, you could dispose of businesses or securities-- if you did right, you could dispose of securities or businesses that are depreciated without a tax at the corporate level. That was done regularly in various ways up till 1986. They revised the tax code big time. They killed general utilities. You can't do that now. Now, you can go-- you can have spinoffs, this business or that business. You probably have to lie a little in terms of your purpose in order to get the best tax ruling. And it takes time. But you cannot break up-- you cannot dispose of the entire business, business by business, without having very substantial tax liability. It would not produce a gain. On the other hand, having them together produces—there are some very valuable synergies in there. Now, we don't use leverages much as the people who would buy them piece by piece would do. So, we could leverage Berkshire up to the sky. I've promised people we won't. Because we have insurance promises to people out 50 or 100 years and we've got shareholders who are going to own the stock for 50 years, and they do not want us to leverage to the sky. But there would not be a profit if we were simply to announce that over the next 24 months that you could come in and buy any business we had, and we'd sell them to the highest bidder.
BECKY QUICK: You made a point of talking about this in the annual letter.
WARREN BUFFETT: Yeah.
BECKY QUICK: You said: Key to my only Berkshire—or, key to my Berkshire-only institutions is my faith in the future judgment and fidelity of Berkshire directors. They will regularly be tested by Wall Streeters bearing fees. At many companies, these super salesmen might win. I do not, however, expect this to happen--at Berkshire.
WARREN BUFFETT: That's exactly true. And I think by writing it, it helps it a little, too. No, there's no question that Wall Street would love to come along and sell anything that we've got. I mean, there's a fee every time that there's a transaction. And, they are big fees. And, there's fees for the NASDAQ. I mean, there's—so, we've had all kinds of people snoop around. And they know they're not getting it done with me, but they're not-- they won't-- it won't get done later on either. I am leaving-- every share of Berkshire I have goes to charity, and it's 99% of my net worth. So, I've got-- nobody cares more than I do about getting the most money to those philanthropies over the years following my death. And that's going to take place over 15 years. And I say keep it all in Berkshire. But if I thought that it was going to be run in a way responsive to Wall Street, I would instead do something else, and have the money distributed to these philanthropies, and not have it all tied to Berkshire. But Berkshire has a very usual shareholder base. I mean, we have individuals that own Berkshire. And a lot of them have owned it 50 years just like-- it's-- people buy it to own for a lifetime. And we're going to run it in a way that they won't be disappointed.
BECKY QUICK: Do you think the people who are newer--relatively newer shareholders, buying the B shares, have the same mentality as the people who have been in it for 50 years in the A—
WARREN BUFFETT: Well, we try to because—
BECKY QUICK: --shares?
WARREN BUFFETT: --that's who we encourage. I mean, in effect, we don't want everybody to buy our stock. I mean, there's only so many seats. There's about a million, six-hundred-and-some thousand A shares out. All the seats are filled. I love the shareholders we have. I don't want to go to Wall Street and try and get some new shareholders that are going to replace the people we have. So, look, we want to have people in those seats that are in sync with us. You can run a French restaurant, or you can run a hamburger stand. And if you serve good hamburgers, you'll do good business with hamburgers. And, at the French restaurant, you can do the same thing there. But you can't run the French restaurant and then serve hamburgers inside, and you can't run the hamburger stand and serve French food inside. So, we advertise in our deeds, in our words, in every way we can what we're about. And we're looking to have the seats filled at our church by people who are in sync with us. And we do have them there. We get the same people every Sunday. And I see no advantage in going out and telling everybody on Wall Street we're going to do wonderful things and having those seats replaced. Because the only way you can get a seat is to throw somebody else out of that seat. There's only so many seats, and they're all full. And you want them filled with people who are in sync with the policies at the company. And therefore, you have to explain those policies and you have to live up those policies. And for 55 years, we've tried to.
BECKY QUICK: So, you get the shareholders you deserve.
WARREN BUFFETT: Exactly.
BECKY QUICK: Alright. Not to mix metaphors, but can you have a decentralized central office running both the French restaurant and the hamburger place?
WARREN BUFFETT: Well, they aren't trying-- we're not trying to have railroad management run the utility here.
BECKY QUICK: No, decentralized. That's what I mean. A decentralized headquarters that's in charge, a conglomerate in charge of all those different businesses.
WARREN BUFFETT: Well, you-- we could run-- we have decentralized management as it is. We could have somebody in charge of all the little companies, another one, the big. We could visualize it in all kinds of ways. I think we'd have more overhead. I think we'd have eight different sort of manager. Our managers like running their own businesses. And they like -- they never have to finance their businesses. I mean, we-- and they never have to go to Wall Street. They never-- they probably save 25% of their time. And, I want them to feel they own their businesses. And that's all they're responsible for. If we mess up some other way, you know, they still-- they get paid based on how they do. And, there again, we attract managers who like to operate on that basis. We don't attract managers particularly who think they're going to keep moving step by step through various divisions and eventually run the whole place.
BECKY QUICK: All right. We can talk more about succession later, because you did write an awful lot about that in the annual letter, too. But right now, we're going to send things back over to Andrew.
ANDREW ROSS SORKIN: Thanks, Becky. We're going to have a lot more from Omaha and Warren Buffett right after the break. Do take a look, though, at futures. As we speak, we're back to about being off about 700 points on the Dow. The NASDAQ looking to open down about 247 points. The S&P 500 looking to open down about 77 points. All on additional new fears about the spread of the coronavirus. We'll talk about that and so much more. The Oracle of Omaha right after the break when we return.
BECKY QUICK: Welcome back to Squawk Box. This is CNBC. We're here with a special show with Warren Buffett in Omaha, Nebraska. But before we continue with that, let's get a quick check on the financials this morning. If you've been watching the futures, you're going to see that overall the Dow futures are indicated down by over 700 points. We've seen levels of worse than 800 points off this morning. But you see a big part of that comes from the banks themselves. The banks, if you look across the board, are down by about 3%. If you're looking at Goldman Sachs, Bank of America, Citigroup down by 2.9%, JPMorgan Chase off 3%. Wells Fargo down a little less, it's down by about 1.9%. Again, we're with Warren Buffett, the chairman and CEO of Berkshire Hathaway, today. And, Warren, one of the things that people wrote in--a lot of people had questions about the banks, about what's happening with the banks, what you've changed with some of your investments of over time. Jason Goldberg writes in. He says:
'Please ask Warren about his views on the bank stocks in general and on Wells Fargo in particular. Over the last few quarters, he has sold almost one-quarter of his longstanding Wells Fargo stake. Also, in the fourth quarter, he dumped a third of his Goldman stock--Goldman Sachs shares, although, he still owns over $75 billion in bank equity.' So, what do you think about banks? Not necessarily the sell-off today, because you don't look at day by day.
WARREN BUFFETT: Well, banking is a good business if you don't do dumb things on the asset side. I mean, basically. And, it's a business that the banks we own earn between-- the commercial banks earn between 12% and 16% or so on Net tangible assets. That's a good business. It's a fantastic business against the long-term bond, you know, at 2%. If you have a choice between a 2% instrument and a 12% instrument, which one's going to win over time? So, if you asked me whether I think banks are going to go down when they only earn 3% or 4% on tangible assets, I don't think that will happen. The question is really whether they do something massively dumb. I mean, which periodically a number of banks have done. And I feel very good about the banks we own. They're very attractive compared to most other securities I see. And, most of them are buying-- Bank of America's buying-- a lot of stock every year. So, our ownership of the Bank of America this year probably will go up 7% or 8% without us spending a dime. I'd like to own any business-- any good business where my ownership goes up 7% or 8% every year without me spending any money and on top of it, I get a dividend. So, they're very attractive, both against interest rates and against-- or against bonds and against other stocks in my view.
BECKY QUICK: You say occasionally "they do dumb things." Maybe you're talking about Wells Fargo with the scandal that it had? It just settled on Friday, with a number of the regulatory institutions that were kind of looking into it, the investing allegations that were taking place, for $3 billion.
WARREN BUFFETT: Yeah.
BECKY QUICK: Does this mean that they have kind of finally gotten through that and can move forward?
WARREN BUFFETT: I don't know the answer to that. I know that they're paying $3 billion because it was announced. I don't know what else is outstanding. But Wells Fargo's classic, in terms of one lesson. My partner, Charlie Munger-- he's-- you know, he says, 'Whenever we have a problem, you attack it immediately.' He says, 'An ounce of prevention is not worth a pound of cure. An ounce of prevention is worth a ton of cure.' And we've seen that time after time. And the interesting thing, I-- and I don't know the details at all, but the original thing was a bunch of-- whole bunch of phony accounts. Now, I don't know how if you open up a couple million phony accounts you make any money on it at all. I don't, the shareholders didn't make money. People say, "Well, the—
BECKY QUICK: Well, the incentive structure was set up so that some of the employees did--
WARREN BUFFETT: It was the dumbest incentive—
BECKY QUICK: --make most of the money.
WARREN BUFFETT: --system you can think. And as soon as you learn, you can devise dumb incentive systems. We've done them ourselves. I mean, you can-- you can cause people to do the wrong thing. Because they will do what they're incented to do. And they had a—obviously, a very dumb incentive system. People started playing it various ways. And the big thing is they ignored it when they found out about it. I mean, you're going to do dumb things in business. And we do them every day, you know? But you absolutely have to attack a problem as soon as it occurs, and you know about it. And if that had happened, Wells Fargo shareholders would be a lot better off. But Wells Fargo shareholders did not profit from opening up accounts that were phony accounts that had nothing in them. I mean, somebody was getting paid so much per account. So-- and the practice spread because bad practices do spread if they're allowed to spread. And they were ignored, which is a total disaster. And look at the consequences. So, two or three years later, who's paying? The shareholders are paying for something that didn't do any good whatsoever.
BECKY QUICK: Is that why you've sold off some of the shares?
WARREN BUFFETT: No. Not specifically.
BECKY QUICK: I know you don't want to get specific on why you--
WARREN BUFFETT: No, I'm not-- I'm not-- I'm not recommending it--it's what stocks--people have to make up their owns minds on that. But—
BECKY QUICK: Okay. I want to ask you a question about Todd Combs and his new role at Geico. I've got several questions that came in from that. And let's just use this one from Peter Lamperis: 'During last year's interview on CNBC after the 2018 letter was released, you were asked about succession at GEICO, and you mentioned that at a recent meeting at GEICO you met about 40 of their top executives. And after each introduced themselves, they stated their length of time with the company. The shortest was 19 years. Please explain why none of these 40 top executives were qualified to take over as CEO after the retirement of Bill Roberts.' Again, that's Pete Lamperis from Chicago.
WARREN BUFFETT: Bill Roberts took over, not even two years ago. And last-- and he has done a terrific job in connection with Tony Nicely. I mean, GEICO is my first love. Absolutely. I tell the other companies that, you can't-- you can compete for my second love, but you can't compete for my first love, which is GEICO. Because it goes back 69 years. And, it did wonders for me. Anyway, GEICO, Bill Roberts took over a little less than two years ago. And then in either October of November last year, he said he would-- he'd like to retire in a year. He would adjust it in any way that made it easiest for us. And, we did not have the person, in my view, to replace him at that point. And Todd Combs, who's worked with Berkshire now for 10 years, he actually was a product manager at Progressive in the past, and he knows a lot about insurance. Insurance is probably the only business I know something about that we're in. All the rest of them are total confusion. But I understand the insurance business to some degree. Todd understands it very well at the operating level. And so, Todd is there, and I hope very much that he's not there very long because I'd like to get him back in Omaha. But our intention always is to promote from within. And-- we would hope to have-- pick out the right person at GEICO. It isn't that there isn't somebody there. It's just you want to have the right one. Because when you put somebody in, you're going to keep him there for a long time. And-- or her. And—
BECKY QUICK: Does that suggest Todd is not going to be there for a long time?
WARREN BUFFETT: I don't think he's--no, no. The plan is not for him to be. I mean, he has not made a permanent career shift. And-- he-- you know, I don't know how long he'll be there. We have one important problem, which is, which all insurance companies have. But Progressive has done a better job of managing—of correlating our risk with rate. And that is what we're focused on now.
BECKY QUICK: Correlating risk—
WARREN BUFFETT: But we're—
BECKY QUICK: --with rate, meaning—
WARREN BUFFETT: In other words, having the proper rate.
BECKY QUICK: Right. Charging the right amount for—
WARREN BUFFETT: Charging the right amount. If you were in the life insurance business and you thought that 80-year-olds had the same life expectancy as 20-year-olds -- you'd have a big, big problem. And what would happen is you'd write all the 80-year-olds and somebody would write all the 20-year-olds. So, in auto insurance, the same thing. There's a vast difference—
BECKY QUICK: In auto insurance, I'm not sure. I might prefer the 80-year-olds over the 20-year-old.
WARREN BUFFETT: Well, you might. And-- you-- you certainly would prefer the 80-year-olds to 16-year-olds. I mean—
BECKY QUICK: Right.
WARREN BUFFETT: Yeah. Yeah. So-- and you'd prefer the 16-year-old female to a 16-year-old male. There's a whole bunch of things. So, you've got to cor-- you really got to segment risk. And that's enormously important. And every company's trying to do it better all the time. We do it far better than we did 50 years ago, but-- we have-- room for improvement on that. We're focused on that. And in the meantime, we're growing faster. We're gaining market share. GEICO is a fantastic asset. Todd's job is to focus on that, but it's also to work himself out of a job very quickly. And, preferably to work-- definitely preferably to work himself out of a job, with somebody from GEICO.
BECKY QUICK: Eric LeFante writes a follow-up question. He says: 'Warren, why did you and Ajit decide to appoint Todd Combs as the CEO of GEICO?' That part you've answered.
WARREN BUFFETT: Yeah.
BECKY QUICK: But: 'How will he be able to run GEICO, manage a $13 billion investment portfolio, oversee Haven, and be on the board of JPMorgan?'
WARREN BUFFETT: Yeah, well, let's-- it'll keep him busy. And we're-- and we've told him he has unlimited use of a NetJet. So--
BECKY QUICK: Really?
WARREN BUFFETT: Oh, sure. No, I mean, we want him to be efficient. That's what NetJets is for. And-- he, you know, he'll be working 70-hour weeks. The question about the portfolio is interesting. Most months, neither Ted nor Todd makes a single change in their portfolio. I mean, portfolio management is something that you learn over decades. And when I ran Salomon, I-- you know, I was running Berkshire portfolio. It is not something that you have to sit there day by day and do. People do it that way. But if-- there are many years where if I just left the portfolio entirely the same and didn't make any changes, we'd be better off. So, that's not a problem. But you're right in terms of JPMorgan's board, Haven, all that. He's-- he's going to be a very busy guy. GEICO's a top priority, but it isn't going to stay the top priority for a long, long time.
BECKY QUICK: Alright, let me-- run to another question that Max0205 wrote in: 'Have Todd Combs and Ted Weschler outperformed the S&P 500 since they began working at Berkshire? Why don't you disclose their record?'
WARREN BUFFETT: Why don't I?
BECKY QUICK: 'Why don't you disclose their record?' they said.
WARREN BUFFETT: Well-- we're not disclosing-- I think it would be very unusual-- for a firm to disclose everybody's sales last year among their salespeople or anything like that. I think that's-- they're entitled to work in relative anonymity. Our directors know how they do. I know how they do. We've made a lot of money with them. I feel very good--I mean, I feel very good about them in all ways. But we're not going to-- we're not going to tell you how much each candy store sells at See's Candy or who was the top-- the top person at any place, brought in in sales or whatever it may be.
BECKY QUICK: All right. Let's jump to Berkshire's overall record versus the S&P. Berkshire has now underperformed the S&P 500 on one-year, three-year, five-year, and 10-year marks.
WARREN BUFFETT: Yep.
BECKY QUICK: Is that because it's too big? And will it ever be able to outperform the—
WARREN BUFFETT: Well, certainly being too big is part of it. And-- but I would say this. During that same time, I mean, last year we achieved-- now, I don't like-- GAAP earnings very well, but we achieved the highest GAAP earnings of any company in the world has ever achieved-- that's investor owned. And we have the highest net worth of any company in the world, investor owned. Any company in the world. So, it-- I would say related to safety of principal over time-- I feel good about it. And I feel good about the fact that 99% of my money's in it and that it will be the source of all the philanthropic contributions that are made for 15 or a dozen years after I die. So-- but I don't think-- I do not think it will be in the top 10% of stocks performing over the next 10 years. I don't think it'll be in the top 15% of stocks performing in the next 10 or 15 years. I also don't think it'll be in the bottom 10% or 20% or 30%. So-- but our ability to have a huge edge over the market generally with a $550 billion market value-- it's just, it'll be minor, but it'll be done in a very, very safe manner.
BECKY QUICK: Is an investment in the S&P 500 a better investment than—
WARREN BUFFETT: It could be.
BECKY QUICK: - at Berkshire?
WARREN BUFFETT: It could be. You know, on balance, I think we'll do a little better. But it'll be-- it'll be minor. Depends on the kind of market we're in. If we're in a down market, we're-- we're going to beat it. I mean, it's that simple. And sometimes we will beat. The last 10 years. We haven't been. But-- over 55 years, it's worked. And-- and it-- it will continue working. But it-- it will not work at all like it did when we were working with $100 million or a billion dollars. There's no question about that. But we've got good businesses, and we're-- we won't be in the bottom quartile, I promise you that, over any long period of time.
BECKY QUICK: There are people-- like there were back in 1999, who have said maybe you've lost your edge. It was a similar thing in 1999, where you saw the technology stocks that were the big high flyers that people were pouring their money into, the .com companies and a lot of others associated with that. If you look at the markets again, it's the technology companies that have big runs. This time, you're participating in-- in Apple, which is one of those frontrunners. But is this a cyclical thing to you? Do you think there'll be another market downturn and then—
WARREN BUFFETT: Oh, there'll be a downturn—
BECKY QUICK: --Berkshire outperforms?
WARREN BUFFETT: --sometime. There'll be a big—
BECKY QUICK: And-- and-- and Berk-- Berkshire outperforms at that point? Or?
WARREN BUFFETT: Oh, we'll outperform in a down market. But-- but that may not be particularly satisfactory-- to people. But, no, we will because we have these businesses that are making money and that-- I mean, we are-- we are not-- we're geared somewhat away from full market participation in either direction. But that's fine. We own-- if you think about it, we're 80-some-percent in equities. We may show $230 or $240 billion in equities, and that looks like we're against our market cap, we're 40%. But we own 100% of these other businesses. Those are equities, too. I mean, we own a railroad. And we-- we own insurance companies. And those are-- those are equities. So, we're about 80% in-- roughly in equities and about 20% in cash. And I'd rather-- I'd rather have that 20% in other good businesses. But, that is to some extent a curse of size. And it's to some extent the fact that, it's very hard. If interest rates stay at this level, we'll wish we'd-- for the next 10 or 20 years, we'll wish we'd been 125% in equities. I mean, it-- you know, equities are so much cheaper than bonds, long bonds, that-- you know, some-- something will change in a major way. I just don't know what. And I want to be prepared for anything obviously.
BECKY QUICK: So that's why you keep so much cash around. You want to be able to be prepared for a downturn. You want to be prepared for—
WARREN BUFFETT: We—
BECKY QUICK: --a crisis.
WARREN BUFFETT: We want to be prepared for anything, Becky. We want to be prepared for pandemics. We want to be prepared for-- anything comes along. Yeah. That is the chief job I have. I have people's money that gave it to me 50 or 60 years ago, and some of them still have 100% of their money essentially in it. And the one thing-- and I've got the responsibility for five foundations that presently are going to get $80 billion and I think will get a lot more over time probably. We don't want to permanently lose money. And-- you don't want to get that so that you go into a shell and don't do anything. But we have obligations to people on workers compensation claims and auto accidents they've had that go out 50 years. And you know, we have to run the place so that every check clears under any circumstances. And that's why we incident-- we own treasury bills. We don't-- we don't own commercial paper. We don't rely on bank lines or anything. When people get terrified, and they will occasionally, everything freezes, you know? And-- and you're going to have to stand on your own feet at a time like that. It won't happen very often, but it'll happen occasionally.
BECKY QUICK: I know you've developed a thick skin over the years, but does it tick you off when people start questioning whether you've lost it, whether you can still—
WARREN BUFFETT: Well, I-- I'm sure I've lost some of it. I mean, I can tell you all kinds of things I've lost. No, that happens. But-- we haven't lost GEICO, or the railroads we own, or the--, Berkshire without me is worth essentially the same as Berkshire with me. I mean, I-- my-- my value added is-- is not high. But-- but I don't think I'm subtracting value, by the way. But-- the big thing is how our businesses do and what we get to add in the way of businesses over time. And we can add them through marketable securities. I mean, we own 5.5 or a little over percent of Apple. It's-- probably the best business I know in the world. And we own 5.5% of it. And that is a bigger commitment than we have in anything except insurance and the railroad. So it's-- it's our third-largest business.
BECKY QUICK: Yeah. Made the point that it was bigger than your biggest acquisition, Precision Castparts--
WARREN BUFFETT: Oh, for sure. It's our third-largest business.
BECKY QUICK: All right. Let me test you on your thick skin.
WARREN BUFFETT: Okay. Wow.
BECKY QUICK: Here was the kicker of that Barron's cover story. He said, 'There's reason to think that the company will be a market beater when he's gone. In the meantime, happy 90th.'
WARREN BUFFETT: Yeah, well, it's-- I-- I hope it is a market beater when I'm gone. I'm counting on it. I'm telling my estate and then the trustees that succeed my executors in the estate-- I'm telling them to keep every share of Berkshire they have until-- they have this pattern of giving it away. I mean, I want them to look back and say, "Gee, we should have made this change earlier." Because it's going to determine how much we buy in the way of vaccines, and-- you know, and-- and-- all kinds of things, education and all these things. And I feel terrific about Berkshire after I leave.
BECKY QUICK: All right. We're going to continue this conversation with Warren in just a moment. In the meantime, Andrew, I'll send it back over to you.
ANDREW ROSS SORKIN: Thank you, Becky. We're going to get back to-- Becky and Warren Buffett in just a couple minutes. But we do want to get you up to speed on this morning's news. Financial software maker Intuit is reportedly about to strike a $7 billion deal. Wall Street Journal reporting that Intuit, the company behind TurboTax and QuickBooks, will soon announce a deal to buy credit-monitoring service Credit Karma, which-- it will operate as a standalone business. But it will give them all sorts of data about your credit score. Some privacy concerns as well. Separately, PepsiCo has struck a takeover deal in China. It's buying Chinese snack brand Be & Cherry for $705 million. And there's a new challenger in the plant-based burger business. Cargill, one of the world's largest privately-held companies, is launching a new line of plant-based meat products. This would be a challenge to companies like Beyond Meat and Impossible Foods. Now, new offerings will go on sale in April. Squawk Box is live, and we are back with Warren Buffett right after this.
JOE KERNEN: Markets are selling off on fears of the coronavirus, the spreading coronavirus and its impact on the global economy. Here's the latest. China reported an additional 150 deaths and 409 new cases overnight. South Korea raised its Coronavirus alert to the highest level after the number of cases there ballooned from 31 to more than 750 in less than a week. Stocks in Asia slipping overnight. Hong Kong's Hang Seng fell just 1.8%, but South Korea's KOSPI fell nearly 4%. Shares of South Korea's two largest airlines were lower. They canceled flights to the city of Daegu, where many of the new cases were detected. And meantime, shifting to another part of the world, Italy's government is scrambling to deal with the biggest outbreak of the coronavirus outside of Asia. And stocks there dropped overnight. The government placed at least ten towns in northern Italy under quarantine and canceled the last few days of the Venice Carnival. Elsewhere in Italy, schools, museums, universities, and cinemas were closed, and major soccer matches were canceled.
ANDREW ROSS SORKIN: We've got a lot more from Warren Buffett still to come on the broadcast. As we head to a break, here's another look at futures. Dow in the red about 773 points right now. We opened up NASDAQ down about- 266 points. S&P 500 off about 85 points. Here's a look at the biggest decliners in the S&P 500 in premarket trading. You're looking at-- Advanced Micro down 7%, Freeport-McMoran down close to 7%, as well. As a reminder you can always watch us live on the go on the CNBC app. We're right back after this with Warren Buffett.
BECKY QUICK: Good morning, everybody, and welcome back to a special edition of Squawk Box. We are live in Omaha, Nebraska with Warren Buffett, chairman and CEO of Berkshire Hathaway. He's just released his-- shareholders letter that he writes every year, has been writing for the last 55 years now. And, Warren, thank you very much for being with us today--
WARREN BUFFETT: Well, thanks for coming.
BECKY QUICK: We've talked about a lot of different issues. For people who are just waking up this morning, I want to once again point out that the Dow Futures right now are indicated down by about 767 points. That's not the weakest level that we've seen this morning. We have seen off more than 825 points at different various times. We'll be watching this very closely. Of course, this is because of what's been happening with the coronavirus, with the additional cases that have been picked up in additional countries and what that may mean for-- global growth. We'll talk more about that with Mr. Buffett in just a moment. We have been talking about that this morning. But, Warren, I want to talk about another issue that we have not touched on that. And that's politics here in the United States. We just watched the Nevada caucus. Bernie Sanders walked away with the most delegates after that. He-- looks to be-- the clear frontrunner for the nomination for the Democrats this time around. You have long been a supporter of the Democratic Party. What do you think?
WARREN BUFFETT: Well, I think I'm going to wait and-- see who gets the nomination. But-- I'm a Democrat, but I'm not a card-carrying Democrat. And-- I've voted for Republicans. I've contributed to Republicans. In fact, I've only run for two offices in my life. One was head of the-- Young Republicans at the University of Pennsylvania, and the other time I was actually on the ballot running for delegate to the Republican National Convention in 1960. But normally, I vote for Democrats. And-- we will see what happens.
BECKY QUICK: Wow. That's the first time I've ever heard you say something like that.
WARREN BUFFETT: Well, it's-- I've kept it a secret for all these years, but now it comes out.
BECKY QUICK: You just said that you're not a card-carrying Democrat.
WARREN BUFFETT: It's true.
BECKY QUICK: You are a card-carrying capitalist. You actually have--
WARREN BUFFETT: Absolutely.
BECKY QUICK: --one of those in your wallet.
WARREN BUFFETT: Yeah.
BECKY QUICK: I've seen it.
WARREN BUFFETT: I don't know whether-- I'm a card-carrying capitalist, right. I don't think that's consistent with-- inconsistent with what I said on politics. Yeah, here it is. Yeah. I don't know whether that shows--
BECKY QUICK: For those who can't see, I'll show you on this camera right here.
WARREN BUFFETT: Card-carrying capitalist. And--
BECKY QUICK: This is what you carry in your wallet.
WARREN BUFFETT: Yeah. And I think-- I think we will have some of those available at the annual meeting, too for our shareholders.
BECKY QUICK: I think Andrew's got a question that he wanted to jump in with here. Andrew?
ANDREW ROSS SORKIN: I was just going to-- follow up on that question, Warren, which was about a year ago we had asked you about Michael Bloomberg. And you had said that if he ever entered the race, he was somebody you would support. Would you support him? Is he your candidate?
WARREN BUFFETT: Well, I would certainly vote for him. I don't think-- I don't think another billionaire supporting him-- would be-- the best thing to announce. But-- sure, I would-- I--would have no trouble voting for Mike Bloomberg.
ANDREW ROSS SORKIN: And what do you think--
WARREN BUFFETT: And--incidentally-- well, I don't think I want to get into handicapping the race. But-- I-- would say this in terms of Sanders. I actually agree with him in terms of certain things he would like to accomplish. I don't agree with him-- in many ways. But-- in terms of the fact that-- we ought to do better by the people that get left behind by our capitalist system. I don't think we should kill the capitalist system in the process. I think we should make sure that the golden goose keeps laying more eggs. And it's worked wonderfully since 1776. But it doesn't work as well for people whose talents aren't-- really geared to a market economy. And I don't think anybody should be left behind by an economy that has over $60,000 of GDP per capita. And so, I'm a big fan of increasing the earned income tax credit. And-- I'm-- you know, I--think there should be some changes made. But--if given a choice, I would-- certainly vote for Mike Bloomberg as opposed to Sanders.
BECKY QUICK: There is-- a plan. Let's talk about some of Sanders' plans. You said you agree with some of what his intentions are, but let's talk about some of those actual plans. One of those plans would be to give 20% of company stock to employees and put workers on the board. What do you think about that? That would be for any company-- public company that has more than $100 million in annual revenue or a $100 million balance share--
WARREN BUFFETT: Well, I don't want to get involved in evaluating his whole plan, but I think that would be a particularly bad idea.
BECKY QUICK: Because?
WARREN BUFFETT: Well, I just-- I- don't think that-- I don't think putting 20% of the capitalists on a labor union is probably a good idea either. And I-- think the market system works very, very well in terms of developing more goods and services. I mean, when you flew out here to Omaha, if you'd flown out here in-- you wouldn't have been able to fly in 1776. You wouldn't have seen anything. Everything you see is the product of-- a system that's worked like nothing's ever worked in the history of the world. So, I--do not believe in messing up our system of developing output. I do believe that-- that anybody who's willing to work 40 hours a week and has a couple kids should not have to have a second job. And I believe in having a higher income for people. Not necessarily a higher minimum wage. But I--do not think it's at all unreasonable that the income tax credit produces at least $15 an hour, maybe higher in certain areas. So-- I'm in-- very much in sympathy with the fact that Senator Sanders believes that a lot of people are getting left behind and through no fault of their own. And there's all kinds of aspects of capitalism that can-- need in some ways to be-- regulated, but I don't believe in giving up the capitalist system.
BECKY QUICK: All right. Let me-- slip in some questions that viewers have written in on this front. Michael Blank writes in-- "Please ask Warren if he thinks the market will sell off it if becomes clear that Bernie Sanders will win the Democratic nomination."
WARREN BUFFETT: I think-- I normally would never make a comment on something-- like that, but I would say that if you had Sanders and a Democratic House and Senate or if you had Trump with a Republican House and Senate-- there would be a significant difference. But I don't think I would necessarily vote on what-- in fact, I know I wouldn't vote on what I thought necessarily would affect the market the better. I--think it's a very poor yardstick. I-- would not want to cast my vote in a presidential election based on which would be better for the market in the next 30, or 60, or 90 days after the election.
BECKY QUICK: But your reservations with Bernie Sanders, I assume, come with your concerns about what it means for the economy. Not over 30, 60, 90 days--
WARREN BUFFETT: I--
BECKY QUICK: Over a much broader period of time--
WARREN BUFFETT: Certain aspects of the economy. And certain things, he-- you know, I'd like to see done. I would like to see the earned income tax credit change dramatically upward.
BECKY QUICK: Alan Buckey writes in a letter. He says, If Michael Bloomberg becomes the Democratic candidate, would you consider buying his company?"
WARREN BUFFETT: No. I can give you a categorical answer to that.
BECKY QUICK: Because of the price? Because of the--
WARREN BUFFETT: There'd be-- be something to pay more more.
BECKY QUICK: Okay. I think that gets us right towards the end of the hour. So, guys, we will send it back to you in the studio.
BECKY QUICK: Thank you, Joe. Again, we're sitting down with Warren Buffett. And-- Warren, we've talked this morning about the coronavirus. But there are people who are waking up across the country now, kind of tuning in at this hour. So-- maybe we should address this again. With the markets indicated down 750 points-- with concerns about coronavirus spreading and now-- worries about what that will mean for the global economy this year-- I know this is-- not something you look at a day by day basis, but how do you kind of wake up and read this and think through it?
WARREN BUFFETT: I don't think it-- it--makes no difference in our investments. I mean, it-- there's always gonna be some news, good or bad, every day. In fact, if you go back and read all the papers for the last 50 years, probably most of the headlines tend to be bad. But-- if you look at what happens to the economy, most of the things happen are extremely good. I mean, it's-- incredible what will happen over time. So if the-- if somebody came and told me that the global growth rate was gonna be down 1% instead of 1/10th of a percent, I'd still buy stocks if I-- if I liked the price at which and I like the prices better today than I liked them last Friday.
BECKY QUICK: Do you like prices today? Will Berkshire be buying--
WARREN BUFFETT: Sure.
BECKY QUICK: --stock today?
WARREN BUFFETT: Well, we'll certainly be more inclined to buy stock today than on Friday, yeah, yeah. Anything we were buying Friday, we would be buying today. And--feeling better about buying it.
BECKY QUICK: You know, one of the things you talked about in the annual letter was-- stock buybacks in Berkshire Hathaway. And for the first time, you told people to call Mark Millard in your office outright if they have $20 million worth of Berkshire shares and they're ready to sell. That's a really unusual move. Why did you do that?
WARREN BUFFETT: Well, we did it because-- it's very hard to buy blocks-- in the market. Berkshire, we practically never see blocks-- except we do see them from-- estates or-- occasionally. But if somebody's gonna sell 100 million share-- $100 million worth of Berkshire and we wanna buy it-- we-- we'd like them to call us and we'll if it's-- if we're buying at that price level, we'll be buying-- we'll buy it.
BECKY QUICK: Dan Mahoney actually wrote in with a very similar question. He just said, "Is it hard to buy back the shares-"
WARREN BUFFETT: It's hard to buy-- it's harder to buy back Berkshire shares than, say, Bank of America-- is buying back their shares. Bank of America bought back 8% or 9% of their stock last year. And they can really do it without moving the market. I mean, Apple's been buying back a ton of stock. They were buying stock at the same time we were buying stock. But it was easier for us to buy Apple stock even though Apple itself was buying a lotta stock, than it is to buy Berkshire. Berkeley is-- well, it's held by people that are really trying to keep it. They're-- I think the amount of speculation in Berkshire stock is relatively low compared to most stocks. And s-- and so it's-- well, we bought $5 billion worth last year. But that's only 1% of the market cap. And-- I would say with a great many companies, you can buy 4% or 5% of the company fairly easily a year without disturbing the market. American Express has been buying it every year.
BECKY QUICK: So-- with you putting out an ad in the letter to shareholders, does that basically mean you are eager to buy more shares back?
WARREN BUFFETT: Depends on the price. But-- we'll let anybody know if they-- we told them to call us before the opening or after the close. But-- and only if-- only with blocks. And only if they're ready to do business. Yeah, there'll be a few people, probably try and call just to see whether we're buying or not. And we--will-- we will not show a lotta patience with those people.
BECKY QUICK: Let's talk about shares of Apple-- both from-- y-- you just mentioned it with the share buybacks, with it being such a huge holding of yours-- you've got more than 5.3% of the company right now?
WARREN BUFFETT: I think it's 5.6%--
BECKY QUICK: 5.6%--
WARREN BUFFETT: Goes up every day.
BECKY QUICK: Well, l-- let's talk about--
WARREN BUFFETT: Goes up, but not because we're--buying
BECKY QUICK: --what we've seen with the slowdown with the coronavirus because Apple is one of the companies that has said it's going to have an impact, not only with the stores that they've closed there, with the behavior of-- Chinese customers, but also what happens with the supply chain.
WARREN BUFFETT: Supply chain, sure.
BECKY QUICK: W-- how do you read through any of that? What are-- what are you hearing? Do you know more than we do on that front--
WARREN BUFFETT: No. I'm. I don't know one thing more. I--see-- I may see Tim Cook at the annual meeting. I see him in Sun Valley once a year. No, I don't think-- I don't think I've placed a phone call to Tim Cook in two or three years. Or in-- I-mean, it-- - no, I-- it-- all kinds of things are gonna happen to Apple in the next ten years. The real question is-- you know, what is the degree of pervasiveness and strength of that product five or ten years from now. And I don't think of Apple as a stock. I think it's our third largest business.
BECKY QUICK: It's also a high flying technology company. It's one that's been at the forefront. But you've said in the past you didn't buy it because it was a technology company.
WARREN BUFFETT: I think it's a consumer product. In fact, I think I said this on the program a couple years ago. I mean, it-- obviously, it's a consumer product company that uses technology. But we've got a lotta products that use technology that-- that-- at Berkshire. But-- it's an incredible company. And-- I should've appreciated it earlier.
BECKY QUICK: There's a question that came in from-- I guess the handle is @GPG. This is a question that came in on Twitter. And the writer asks, "You've said that you can do fair value estimates of companies you follow at any time in your head. So please do one now for Apple. What went wrong with your estimate for IBM? And how was that miscalculation different than for Apple?"
WARREN BUFFETT: IBM's a entirely different business than Apple. I mean, it-- I-- Apple doesn't resemble IBM any more than it resembles-- but it resembles See's Candy way more. I mean, it is a incredibly useful product for people. It grows more useful as the number of people-- are involved. I mean, it's really interesting. You know, we call them smart phones. If you go back and look at the old telephone, that was an incredible, useful product-- it changed my mother's life and my dad's l-- it changed lives in every day. And they-- took a long time to become pervasive. And it was very expensive initially. But-- it-changed the world. And the smart phone-- is part of hundreds and hundreds of millions of people's lives in all aspects of their lives. They-- it's used for-- has all kinds of utility. It's a consumer product.
BECKY QUICK: Are you a consumer of its products at this point? You've had a flip phone for forever.
WARREN BUFFETT: I'm glad you brought that up. I am now using-- not very often. I'm-- I'm using the latest model. And-- - I'll give you a little preview of our-- movie for the annual meeting-- we haven't done it yet. But-- we'll probably show-- me crushing with my foot my old flip phone, while cozying up to the new smart phone.
BECKY QUICK: When did you get the smart phone?
WARREN BUFFETT: I've been given several of them. But-- in-- in-- including by Tim Cook.
BECKY QUICK: One finally stuck?
WARREN BUFFETT: What? Pardon me?
BECKY QUICK: One finally stuck?
WARREN BUFFETT: Yeah. Yeah, absolutely. No, I- my flip phone is permanently gone. The number's been changed. Yeah.
BECKY QUICK: That's impressive.
WARREN BUFFETT: I mean, you're looking at-- an 89 year old guy that's barely beginning to be with it.
BECKY QUICK: What do you like best about the phone? And what do you like least?
WARREN BUFFETT: Well, I don't use all its facilities like most people-- I mean, most people are living their lives around it. And-- I use it as a phone.
BECKY QUICK: As a phone and nothing else--
WARREN BUFFETT: I--use it as a phone.
BECKY QUICK: Okay. We're gonna continue our conversation with Warren Buffett coming up in just a few minutes. In the meantime though, guys, we'll send it back to you in the studio.
JOE KERNEN: All right. Thank you. What are you doing with your phone right now since Warren Buffett just uses it--
ANDREW ROSS SORKIN: I was just--
JOE KERNEN: --as a phone?
ANDREW ROSS SORKIN: --tweeting out some--
JOE KERNEN: On your--
ANDREW ROSS SORKIN: --Warren Buffett had just said on air.
JOE KERNEN: And you're it on your phone, not on your des--
ANDREW ROSS SORKIN: Computer. Easier-- I think--
JOE KERNEN: Easier for you?
ANDREW ROSS SORKIN: --the phone, yeah.
JOE KERNEN: Okay. I wonder if-- Warren probably doesn't use Google Maps. I wonder what he does besides-- I-- that was a good question. I wanna look if there's anything else that he does. Games, anything, on that phone, besides using it--
ANDREW ROSS SORKIN: After the break.
JOE KERNEN: After we-- I k-- well-- as-- Becky asked him. Coming up, much more-- with Warren Buffett live from-- Omaha, Nebraska. First-- at-- Apple Music. I mean, you think he-- he-- he's got Air Buds, I wonder.
CHARLIE MUNGER (PRE-RECORDED): (IN PROGRESS) --see, I don't like it when investment bankers talk about EBITDA, w-- which I re-- translate as (BEEP) earnings.
BECKY QUICK: That was Berkshire Hathaway vice chairman Charlie Munger about a week and a half ago when he was speaking at-- the annual shareholders meeting for his other company, The Daily Journal, answering questions, giving his-- usual straight answers when things come up as questions. Warren, that was Charlie talking about EBITDA earnings, calling them BS earnings, although he-- said it a little-- more explicitly. You in your shareholder letter for Berkshire Hathaway also wrote about how you don't believe in gap earnings. What-- how do you guys come about this? What do you think? You still have to report these numbers. But you're basically telling shareholders don't listen to them?
WARREN BUFFETT: Well, the-- yeah, it's two different principles. I mean, the gap numbers would show us earning $80 billion, which is more than any company's ever earned in history. And we explain why that really isn't the relevant statistic, because a lotta that was just the stock market going up, which now gets counted in our earnings. And Charlie was expressing an opinion we both have. Charlie's the shy, reticent one of the pair. But-- Charlie is the best partner anybody could possibly have. We've been partners now for 60 years. And-- you could not have a better partner. He, at 96-- a woman since that meeting actually-- in the last couple weeks, a woman said to him, "Is it true- Mr. Munger, th-- you have eight children." And Charlie's reply was, "So far." So-- Charlie is very much-- an active partner, we'll put it that way. Next time I see him, I'll get an update on to see what-- so far.
BECKY QUICK: Okay. Let us know what happens.
WARREN BUFFETT: Yeah, I will.
BECKY QUICK: Well, you know, we watch pretty closely Charlie's shareholder meetings at The Daily Journal. We send cameras out, we watch it. I've been out myself. Do you watch that meeting too to see what he has to--say
WARREN BUFFETT: I watched it all on YouTube afterwards. But my sister and my-- one of my good friends and my niece were all there. And-- no, I end up watching it. And I actually end up reading it-- usually too. But-- I wouldn't miss it. But I don't go out for it.
BECKY QUICK: Was there anything he said that surprised you this time around? I'm just looking through some of his soundbites--
WARREN BUFFETT: Actually, nothin' Charlie says can surprise me.
BECKY QUICK: Was there anything that enlightened you or changed your opinion on something? Maybe something--
WARREN BUFFETT: No--
BECKY QUICK: --you thought--
WARREN BUFFETT: --but I learn from Charlie every time I talk to him. Charlie has the best 30 second mind in the world. So I can go to him with-- a new question, new problem of any kind, and it goes through about eight filters in his mind in-- in ten seconds. And he gets to the essence of any problem. It-- there is nobody better to talk to than Charlie at age 96.
BECKY QUICK: Is there anything you've talked to him about recently that you might be able to share? I don't know if you wanna share the conversations you guys have privately, but anything where you've bounced something off of him and he--
WARREN BUFFETT: Well, I bounced—I we talk about a lotta things. W-- and we talk a lot-- we talk particularly about things we don't know the answer to. And-- you know, we find the whole scene so interesting, whether it's politically or economically, the world. I mean, it's incredibly interesting to us. And--we're particularly interested in each other's view, although I think I'm more interested in his view than he is in mind. And that would be a correct decision to make for somebody overhearing us.
BECKY QUICK: What's something you guys don't understand right now?
WARREN BUFFETT: Oh-- we--do not understand at all what the outcome will be-- in a world where $13 trillion is being borrowed at less than zero. And even-- Greece went on short term and-- I think Greece, the ten year bond is 1%, for example. And- at the same time, in this country we're having-- under very good business and market conditions we're having a 4.5% federal deficit and nobody is concerned in the least. And we're talking about massive new programs and so on. Everybody talks about-- pay form. But that really-- you know, their deficit's gonna widen. So we don't know what world comes out of something where you start with extremely low interest rates and high rates of growth. And then what you do for stimulus-- later on. But the whole game, I mean, the game always unfolds differently than you expect. And that's what makes it so interesting.
BECKY QUICK: You know, the ten year, speaking of these low rates-- just a little bit ago hit its lowest yield since July of 2016 this morning. I think it was 1.377%. We're back at 1.396%. But ten year rate's below 1.4%. Would you have anticipated this?
WARREN BUFFETT: W-- it-- it makes no sense to lend money at 1.4% to the U.S. government when it's government policy to change to have 2% a year inflation. I mean, you've got-- you've got--the government is telling you, "We're gonna give you 1.4% and tax you on it. "And on the other hand, we're gonna presumably devalue that money at 2% a year." So these are very unusual conditions. And-- classical economics, it-- doesn't appear-- that, you know, what do people do under such circumstances? Does everybody buy a mattress and stick their money under the mattress or what? And it particularly seems-- unusual when the world is generally prosperous and, you know. But that's-- the game is always changing. But it always looks logical in retrospect. And it-- - always looks puzzling prospectively. But there's always things to do that make sense too.
BECKY QUICK: Like what?
WARREN BUFFETT: Well, I hope that's what we're doing. It's buying good businesses at decent prices, whether all of the businesses or parts of the businesses through the stock market.
BECKY QUICK: You know, you told me a year and a half ago, maybe longer, that when you went out to try and buy whole businesses right now, it just looks too expensive, which is why you started buying pieces of companies, more stocks, particularly--in places like Apple. Is that still the case? Is it still a huge premium to try and buy a company outright?
WARREN BUFFETT: There's quite a premium. And part of the premium is because you can borrow so much money so cheaply in buying those businesses. Obviously, you can pay more for-- a business if you can-- borrow a very high percentage of the purchase price and of the future cash flow committed to it. And you can borrow low rates with very little in the way of restrictions-- restrictive covenants or anything of the sort. I mean, that's gonna bring higher prices. And the demands of that is huge. And people look at those rates on the 30 year or the ten year and they say to themselves, "Gee, I can't live on that." And so they stretch and buy four credits. But that's-- just part of the human cycle over time. And that-- leads to something else. And that leads to something else. In the end, if you own good businesses at the right price, you're gonna do fine.
BECKY QUICK: You're often quoted-- as saying-- that you don't know who's skinny-dipping until the tide goes out, who's swimming naked till the tide goes out, whatever it may be. You get the sense with the high tide right now there's a lotta skinny-dipping--
WARREN BUFFETT: Well, we-- we're--
BECKY QUICK: --taking place?
WARREN BUFFETT: --certainly doing-- we're allowing people to borrow money on much weaker terms than we were five or ten years ago. You couldn't borrow money at all, for a period ten years ago. I mean, y-- literally-- you could-- Berkshire couldn't borrow money. I mean, - everything stopped. And-- now we've-- the pendulum has swung b-- dramatically. And yet, we still have-- you know, we have very, very, very-- all right, so it's hard to believe that ten years or 20 years from now we will have a substantial continuation of negative interest rates. But I've already seen things I didn't think could happen. So who knows what could happen? That's what makes it interesting.
BECKY QUICK: Okay. Guys, we will send it back to you at headquarters right now. We'll continue this conversation in just a moment.
JOE KERNEN: Right now, let's get back out to Omaha where Becky Quick is with Warren Buffett. And there's a lot of important things happening. But don't forget that March Madness is right around the corner, Becky. And I know—
BECKY QUICK: You should see what he's doing right now, Joe. He was rubbing his hands as you said that. Now you're talking his language.
JOE KERNEN: Now – well Creighton. It was 70 to 35 at one point and I had Creighton yesterday. I don't know if you were paying attention to that. Were you watching that at all, Warren? Nebraska plays tonight.
WARREN BUFFETT: We pay attention to Creighton out here.
JOE KERNEN: They're good.
BECKY QUICK: We talked about it earlier this morning off-camera.
JOE KERNEN: They're peaking. I think they're peaking. I mean, they're getting better, and better, and better. The three-point shooting was – I think that one guy was seven for seven at one point yesterday, which is – I'd be, like, seven for 10,000 for three pointers I think.
WARREN BUFFETT: Not bad.
JOE KERNEN: Anyway, get back to business. I just I'm looking forward to it, Warren. And I know we always have our own personal bet. If I get them all right, you give me Berkshire Hathaway, which would be cool for me.
WARREN BUFFETT: I'll tell you, if you get it all the way, I'll give you my Berkshire Hathaway shares, all the way to the 64.
ANDREW ROSS SORKIN: Wow. Wow.
WARREN BUFFETT: Fill out a bracket.
JOE KERNEN: A giving pledge.
ANDREW ROSS SORKIN: I guess that's the ultimate giving pledge.
BECKY QUICK: That's how sure he is that you won't be able to do it.
JOE KERNEN: I'm pretty sure.
BECKY QUICK: Andrew, I hear you have a question too, Andrew?
ANDREW ROSS SORKIN: I actually have a couple. And I thought – I read the letter like everybody else over the weekend and was fascinated by so many of your comments, Warren. Specifically, I wanted to ask you, you talk about diversity on boards in this letter. And one of the things I wanted you to weigh in on, if you could, is I don't know if you saw, but David Solomon, the CEO of Goldman Sachs, on our air actually announced a couple weeks ago that he won't be taking any companies public, Goldman won't – unless they have at least one diverse board member and are likely going to push that to two. You know, in the state of California, they put a law into place saying that you needed to have a female board member. And I'm curious what you think of not just the push towards more diversity on boards, but the requirement because I also note in your letter that you have very specific thoughts about what it means to be a board member, what it means to be an independent board member, how wealth is involved in all of that. What are your thoughts?
WARREN BUFFETT: Well, at Berkshire for decades we've given the three factors in addition to integrity, but for board membership. And we want people who are business savvy, we want them to have a strong personal interest in Berkshire itself. And we've got directors who really represent shareholders basically at Berkshire. And I think they do a great job. Now, that doesn't mean that they don't think that we should delight our customers, that we should treat associates well, that we should behave well in our community, both local and national. But our directors represent the shareholders.
ANDREW ROSS SORKIN: So Warren, just to follow up on it though, what's your thought about both the requirement that maybe banks and others investors are going to force companies to have diverse candidates on their board, laws, as I mentioned, in California?
WARREN BUFFETT: Yeah. actually, there may be – there's been sent to us a proposal which, unless it's withdrawn, will be on our proxy. I can't tell you precisely what it says. But that relates to this issue. And we will get our shareholder's view on it. I personally I want shareholders – I want directors that represent the shareholders. And, you know in terms of my estate you know, with maybe currently $80 billion worth of shares to give to philanthropy, I hope that we have – and we do have a group of directors that I think will be very conscious of doing the right thing.
ANDREW ROSS SORKIN: The reason I asked the question is because the other point you made, which I think is a very smart one, and is often misconstrued in the corporate governance land, is that an independent director these days isn't always independent, in large part. And you make the point that those that don't come to the table with some form of wealth often need the job. They need the money. They want the money. And therefore, that makes them less independent. And the reason I ask this is one of the things, as we've been trying to get more diverse candidates on boards, more women on boards – as you know, there are fewer CEOs. Fewer people who have made enormous amounts of money. And people therefore, then can question their independence. It becomes a very tricky issue. And that's what I was hoping you might weigh in on.
WARREN BUFFETT: Yeah, Andrew I've been on 21 publicly owned – boards of publicly owned companies. And I've seen them in operation. And I would say that people that I have often seen, and that's perfectly understandable, I have often seen people who are classified as independent directors. And they are getting $300,000 a year for a job that takes them a couple of days, maybe six times a year, maybe four times a year. And the company flies them to their office. And it's very enjoyable and the company's good. And who wouldn't want a job like that? I mean it's an incredible job. And people – I get calls from head hunters, I get calls from CEOs. And they ask, you know, who I think would make a "good" director. And what they are asking is, you know, who's not going to cause too much trouble and who is going to reflect – who their name is going to reflect credit on the institution. And they are not looking for somebody that I would regard as really independent. And I don't blame them. I mean, and if I had spent my life being, you know, a teacher or whatever it might be, I mean my IQ is just as high as the average or higher than the people on the boards and all that. But on the other hand, I want to get on a board. I mean, 300,000 bucks a year would look terrific. And you don't even have to retire probably in most cases at 65 or anything of the sort. So, to call them independent is ridiculous. And if you're on one board like that, you want to really go on another one and make $600,000 a year. And you are not going to do things that irritate your present CEO. So, when he or she gets a call and says, "Would this guy make a good director," that the answer is, "No." I mean, it's just ridiculous to ignore the factor of compensation with board members.
BECKY QUICK: All right, let me ask a follow up question that is similarly related, Warren, and that's just having to do with sustainability, all these issues that are out there. Guys in the control room, sorry, this is not where I told you I was going, with but Abhishek Bhardwaj wrote in a question. He said, "Larry Fink recently said that our investment conviction is that sustainability and climate integrated portfolios can provide better risk adjusted return to investors. What's your view on sustainable investing?
WARREN BUFFETT: Well, I don't happen to make that decision when I'm buying the stocks in our portfolio. What their individual policies are, I think they're all pro social, I mean, obviously. You've got to be in tune with your society. But if you think that I look down at a bunch of stocks and decide whether to buy Apple or whether to buy JP Morgan or – I am not using the factors that he lays out.
BECKY QUICK: Okay. I want to run through a series of questions that have been in. These are kind of all over the map so forgive me. We'll bounce around. But these are questions that came in from viewers that I thought were good ones. Lucas writes in. He said, "Did Justin Sun change your mind on cryptocurrency?" For anybody who doesn't know, Justin Sun bought the dinner or the lunch that you just had from the last Glide Foundation fundraiser. He is actively involved in Bitcoin. After that meeting, his PR people put out some notes saying that, you know, you kind of listened to cryptocurrency and maybe you're a little more in tune with the idea of Bitcoin now.
WARREN BUFFETT: Well, I would say this. When Justin and four friends came, they behaved perfectly and we had a good three and a half hour dinner and the whole thing was a very friendly exchange of ideas. But cryptocurrencies basically have no value. And they don't produce anything. So, you can look at your little ledger item for the next 20 years and it says you've got X of this cryptocurrency or that. It doesn't reproduce. It doesn't deliver. It can't mail you a check. It can't do anything. And what you hope is that somebody else comes along and pays you more money for it later on. But then that person's got the problem. But in terms of value, you know, zero.
BECKY QUICK: So, it sounds like he did not change your position.
WARREN BUFFETT: No, but I didn't change his either. And I had a very pleasant dinner. And those people were – they behaved more than well. And they gave four point – or Justin gave $4.6 million to Glide. And that will buy a lot of meals and provide a lot of beds for people in San Francisco. So, I thank him.
BECKY QUICK: He gave you some Bitcoin. So, what does it feel like to be a Bitcoin owner?
WARREN BUFFETT: I don't have any Bitcoin.
BECKY QUICK: You don't?
WARREN BUFFETT: No.
BECKY QUICK: Okay.
WARREN BUFFETT: No.
BECKY QUICK: You don't own Bitcoin?
WARREN BUFFETT: No, I do not own one – I don't own any cryptocurrency. I never will. And, you know, in the end, I may start a Warren currency. You know, maybe I can create one and I'll say there's only going to be 21 million of them and you can have a little ledger sheet from me and everything that says you have it. And you can have it after I die but you can't do anything with it except sell it to somebody else. And the interesting thing, of course, is that Bitcoin's been out there a long time. And people talked about how it would be used in various kinds of exchange. But none of our companies are doing business in Bitcoin or anything. Bitcoin has been used I think to move around a fair amount of money illegally. So the people that—
BECKY QUICK: Or maybe in countries where you have —
WARREN BUFFETT: Yeah. So, the logical move from the introduction of Bitcoin is to go short suitcases because the money that was taken in suitcases from one country to another, suitcases will probably fall off in demand. I mean, so you can look at that as the economic contribution of Bitcoin to the society.
BECKY QUICK: All right. Let's talk about a question that comes in from Rusty Thomas and he has-- he's got a question on baseball. He said, "Given Warren's love of baseball and the contrast between his deft management of the Salomon Brothers scandal and Major League Baseball's inexplicable mismanagement of the Astros' sign stealing debacle, what advice would Warren provide MLB Commissioner Manfred to restore confidence and integrity in the game?"
WARREN BUFFETT: Yeah, well, it survived the Black Sox scandal back around 1920. And people will continue to love baseball. But, you know, it was one thing to steal signs if you were on second base. But it's bad. But baseball will get past this.
BECKY QUICK: You're a huge--
WARREN BUFFETT: People love--
BECKY QUICK: --baseball fan. Were you--
WARREN BUFFETT: Pardon me?
BECKY QUICK: You're a huge baseball fan. Were you surprised to hear about--
WARREN BUFFETT: Yeah, I was surprised to hear about it, yeah. But-- but then I find out that Bobby Thomson's--somebody just stole the sign I think off, I think, Ralph Branca or somebody, you know? It-- so-- people are going to-- in any games, include the stock market game, you know, certain number of people cheat. And, generally, we have people that administer things to try and minimize the cheating. And-- and I'm sure that Major League Baseball will-- will address the problem.
BECKY QUICK: Should the Astros players get off scot free?
WARREN BUFFETT: Oh, I-- I'm not going to-- make a judgment on that. But-- Joe Jackson certainly didn't. Yeah. Yeah.
BECKY QUICK: Let me ask you about-- a question that came in from several viewers actually-- and that's about the ETF. Dmosley Management wrote this version of the question in: 'News agencies have reported that Berkshire Hathaway purchased two ETFs. So, can you talk about if this purchase happened? And if the purchase happened, who purchased the ETF for Berkshire Hathaway? And how was the decision made to purchase it?' Small numbers.
WARREN BUFFETT: Yeah, it wasn't---me-- it wasn't me or it wasn't Todd or it wasn't Ted. And-- it-- it happened in some pension fund. And we have a few pension funds that aren't actually managed by us. But I-- all I can tell you is that nobody that-- nobody that manages money at Berkshire is buying ETFs. Nor do I see any possibility that they will.
BECKY QUICK: Okay. Another purchase that came up recently, Kroeger. And Jason Escamilla writes in, "Was that one of yours, or-- or a lieutenant's pick?"
WARREN BUFFETT: It was one of the others. And-- you know, I-- I know Kroeger. Kroeger-- Kroeger's done a good job, but it's in a very tough business. I mean, when you have-- when you have-- Amazon and Walmart slugging it out and Costco taking a special part of it and everything, it's a tough business. But-- they've done a good job. And one of our managers decided to buy that.
BECKY QUICK: Okay. And then Kraft Heinz. This comes in from David Hall. He says, "Mr. Buffett, while Kraft Heinz continues to whittle down their total debt, do you feel that the current dividend payout is appropriate? Or should it be reduced further to free up more cash flow to reduce debt more rapidly?"
WARREN BUFFETT: I think Kraft Heinz should pay down its debt and it should-- but I think-- under present circumstances, it appears that it can pay the dividend and pay down debt at a reasonable date. And it has too much debt. But it doesn't have some-- it doesn't have debt it can't pay down. And the debt owners are going to get the interest. And the debt should come down year by year. And I think it will and I think it can with the present dividend. But who knows for sure in the future?
BECKY QUICK: TheoFilos Theo writes in a similar question and says: "Do you still believe in the company and management at Kraft Heinz?"
WARREN BUFFETT: It's still a great business, in the sense that it earns we'll say $5 billion after depreciation pre-tax. And on $7 billion of tangible assets, it uses about $7 billion of fixed assets. It – working --. I mean, it's a very valuable business, but we paid too much for Kraft. And we-- we took on more debt in that. And-- but we paid too much.
BECKY QUICK: Another question comes in from Beale (PH) again on Kraft Heinz. And this person writes in: "Private labels have performed very well against brands like Kraft Heinz. But they haven't made a dent against other brands like Coca Cola or See's. Why do you think that is? And how do you think about brands' modes, given your experience with Kraft?"
WARREN BUFFETT: Brands are always going to be in a fight with the retailer. And it varies by country enormously. It varies by product category. If people -- I worked in a grocery store in 1941. Charlie worked in the same one in 1940. People would call and they'd ask for a can of peas and I'd write down, "A can of peas." They'd call and they'd ask for Heinz ketchup, and I-- I'd better give them Heinz ketchup. They didn't care which brand the peas were. They didn't care that much whether the two quarts of milk we sent them were this brand or that brand. But they cared whether it was Heinz ketchup. That was in, you know, 1941. Some brands are terribly strong. You can't bring out-- a private label Cola and do very well with it. And people have tried for a long, long time. On the other hand, you can bring out private labels and lots of products and-- and they sell very well. And-- you know, you take Costco with their own Kirkland label. I mean, that-- that label grows dramatically. It cuts across categories. It, you know, it's done since 1992 or whenever it was introduced, what-- other people spend 100 years, you know, with huge amounts of advertising and special displays -- all kinds of things. So, the battle goes on. I would say that the retailer has gained ground against brands to some degree. But brands are still terribly important. I mean, try – give me a $10 billion budget and ask me to bring out another Coca Cola that makes a dent in Coca Cola and I can't do it.
BECKY QUICK: Right. All right, we're going to continue this conversation. Coming up, we'll have the final moments of our interview with Warren Buffett. But-- right now, Joe and Andrew, we'll send it back over to you guys.
BECKY QUICK: Good morning, everybody and welcome back to a special edition of Squawk Box. We are live in Omaha, Nebraska with Warren Buffett, the Chairman and CEO of Berkshire Hathaway. He's just completed and put out his 55th annual shareholder letter to shareholders of Berkshire Hathaway. And that came out over the weekend. And we are with him today, answering questions from lots of viewers. Warren, one of the questions that did come in, and it was something that you wrote about in the annual letter, was-- the role that Greg and Ajit play-- Greg Abel, Ajit Jain, the two Vice Chairmen who were recently added as Vice Chairmen, the role that they're going to but playing in the annual meeting with shareholders. You said that they will play a larger role in the shareholder meeting. How will that work?
WARREN BUFFETT: Well, it will mean that any shareholder or any of the journalists there who are presenting questions from shareholders that have been sent to them, can direct those questions to either Ajit or to Greg. So, if they were insurance questions, they might want to direct them to Ajit. And not insurance questions, to Greg. But they will be there. And-- we'll have 60 or so questions. We don't know what they're going to be. And-- if anybody says, "I would like Greg to answer this," or, "I would like Ajit to answer this," then they're right there, adjacent to us.
BECKY QUICK: They'll be sitting onstage with you and Charlie?
WARREN BUFFETT: Well, there's this-- yeah, there's-- there-- we'll -- sitting in front of the crowd, there's two different levels of-- of tiers there.
BECKY QUICK: Yeah. And you said you did this because you've gotten a lot of questions from directors, shareholders, other people who had kind of advised you that they thought it was good for them to be playing a bigger role--
WARREN BUFFETT: Yeah, everybody-- I-- I heard from quite a few people. Now, we directed questions out to them when they were sitting with the directors-- out in front. And the spotlight went down. But this may encourage more questions directly of them. And that will be terrific.
BECKY QUICK: Okay. Jim Beam writes in a question. He says, "In the past, both you and Bill Gates have stated that half of the board meetings are spent discussing succession. How has this changed since Ajit and Greg are on the board? Do they leave the room?"
WARREN BUFFETT: They leave the room. But, if I die tonight, the board tomorrow morning knows exactly what they're going to do. But, I hope they're polite about it. Let the body cool off. Basically, they know what they're going to do. And the-- the interesting thing about it is we own-- you know, the Apple and JP Morgan and all those things. I don't know who's going to succeed-- the CEOs of any of the companies I think that we own stock in. But-- we're well prepared for succession. It's almost going to be embarrassing how well.
BECKY QUICK: All right, let's get to a few more shareholder questions. Chip Crook writes in a note and says: "It was reported that Boeing was looking for a large cash loan. Were you approached about Berkshire loaning the money, kind of like the Goldman Sachs deal from years ago—"
WARREN BUFFETT: I think-- I think Boeing's raised about $13 billion. But that's bank type money. In other words, my memory is that-- that maybe 1%, you know—post--. They're looking for-- they're-- they're looking for traditional bank loans. And we don't make traditional bank loans.
BECKY QUICK: You also talked in the letter about how Berkshire Hathaway has-- Berkshire Hathaway Energy, I should say, has the ability and the talent to manage big investments. $100 billion and more. I think you wrote, "We stand ready and willing and able on such opportunities." California Governor Gavin Newsom asked you at one point to bid on PG&E. Is that such an opportunity?
WARREN BUFFETT: PG&E, we've obviously, I mean, we work with them for decades and been familiar with them. But-- but-- that doesn't-- that doesn't fit Berkshire. But if-- if there were 100 billion transmission lines or whatever it might be, Berkshire could do it. I mean, and we would love it. That happens to be a very tough thing to do because you cross all these states and everybody says, "Not in my backyard" and all that. But-- but-- there can be huge, intelligent investment made in the utility energy area. And no one is better equipped to do it than Berkshire in both talent and resources.
BECKY QUICK: Why does PG&E not fit that bill?
WARREN BUFFETT: It's too tough. I don't-- I don't know the answer to it. I mean, it-- rearranging that utility. And-- I think-- I know Governor Newsom. I think he's a very, very, very smart guy. And-- and in terms of solving this problem, it's just not easy. You've got so many constituencies. And they're at each other's throats. And there's lots of money involved. And-- I don't want to be the guy to try-- I don't know how to solve all that.
BECKY QUICK: Okay. Let's go onto a question that is posed by Ken Ducey. He says: "You sold 31 newspapers after buying them over 40 years as a self-described newspaper addict. You said recently that most newspapers were toast." I know that's not exactly what you said--
WARREN BUFFETT: That's not-- yeah, that's not true, actually.
BECKY QUICK: But this is in his question. You can answer that, too. "Do you believe the problem with local newspapers is a lack of demand or a lack of innovation and a new business model?"
WARREN BUFFETT: Well, bottom is that-- well, getting back to the toast comment, Andy Serwer actually is the fellow that said those things interviewing me and then I repeated it. But the problem is, and-- even-- every day the circulation of the papers in every -- print circulation goes down. And the interesting thing about it, of course is that the three survivors so far that look promising online are The New York Times and The Wall Street Journal and The Washington Post, all three of those papers sold their smaller papers. The New York Times sold I think 11 papers about seven or eight years ago. The Dow Jones, which owns The Wall Street Journal, now is owned by News Corp, they sold the Ottaway Newspapers, eight papers. Washington Post sold the Herald. So, they all saw the handwriting on the wall before I did. And they all sold their papers. That was their reaction. They did not-- they did not try and figure out the online solutions. They got out of them. And, unfortunately, I bought some. And we-- we're still-- you know, I mean, we are financing Lee. And we think Lee has by far the best opportunity to continue print as long as anybody and to find an online solution for these papers. So, we put new money into the newspaper industry here, or we've committed to doing it. It will close in a month or two.
BECKY QUICK: And then finally, very quickly, we are in the Berkshire Hathaway's headquarters building here in Omaha. Strom writes in a question that says: "Why did you decide to rent your offices for all these years instead of buying the building or building your own office building?"
WARREN BUFFETT: Well, we only use one floor of the 15 floors here. But we have signed a lease for the next 20 years on one more floor. So, it shows just how flexible our thinking is about the future here--
BECKY QUICK: How much wealth--
WARREN BUFFETT: --at Berkshire.
BECKY QUICK: --you're anticipating?
WARREN BUFFETT: Yeah-- w-- we don't want a big headquarters office. If we had a big headquarters office, we'd fill it. Believe me. I mean, if we had 15 floors of our own, we'd have 15 floors worth of people.
BECKY QUICK: Warren, before we let you go, let's just go back to the Futures again this morning. Because right now the Dow is indicated to own down about a hundred and-- or 830 points. Weakness again on concerns about coronavirus and what that means. So-- what's your mentality today as you kind of go out and look at the stock market and look at what you're going to do?
WARREN BUFFETT: We're buying businesses to own for 20 or 30 years. We buy them at whole, we buy them in part. They're called stocks when we buy in part. And we think the 20- and 30-year outlook is not changed by coronavirus.
BECKY QUICK: All right. Warren, I want to thank you for your time today. We really appreciate it, your generosity with your time. And we hope to see you again soon.
WARREN BUFFETT: Come every year.
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