CNBC Buffett Transcript Part 2: The 'Zebra' That Got Away

Warren Buffett appeared live on CNBC's Squawk Box this morning, March 2, 2011.

This is part two of a transcript of his comments.

Click here for Part One: Most Berkshire Businesses 'Inching Along.'

BECKY QUICK: Joe, you had a question as well.

JOE KERNEN: I did. And I want to thank Warren for joining us and giving us all his time. Three hours is— it benefits us, obviously benefits viewers. If you were Charlie Sheen, I just figured out you'd make $12 million in three hours. So you're doing this— I don't think we're paying you that. So...

BUFFETT: No, but Charlie Sheen is— Charlie Sheen is paying me for being his media adviser, so I guess I'm actually doing very well.

JOE: Some of those— I— when I saw— when he said, "Gnarly," I said, `That has got Buffett's fingerprints on it,' just because you say gnarly.

BUFFETT: Yeah.

JOE: Here's, you know, listening to you talk, though, Warren, when you say with your comments about bonds, that makes me think of financial assets in general, which includes stocks. And I think about the printing presses not only in this country, but around the world. You've seen the commercial, cha-chung, cha-chung, cha-chung, with the central banks. And there are periods where financial assets are great from the like early '80s to 2000. And I just wonder if there's then periods where hard assets are great. And you see Paulson and gold and some of these other guys and gold or commodities. Are you just not comfortable with commodities? Are there times where you should be downplaying maybe stocks or businesses and going totally full-bore into commodities but you're just not comfortable doing that?

BUFFETT: No, the alternative with me, Joe, the alternative— I don't like— I don't like fixed dollar investments at all. I don't like short-term bonds, I don't like long-term bonds. We own a lot of short-term bonds, but that is not because we like them, that's just a parking place.

But the alternative in my view, I mean, certainly commodities can be an alternative, but the alternative is income-producing assets of one sort or another that are not fixed dollar type investments. And so I— I've said consistently for the last few years I would vastly prefer to own common stocks than fixed dollar investments over a five or 10-year period. I don't know any about the next five hours or five days. And that might very well extend to rental real estate, it might extend to farms. I mean, an investment you're looking for something where you put out money now and that asset that you buy gives you back more money over time. Now, the problem with commodities is that you're betting on what somebody else will pay for them in six months. The commodity itself isn't going to do anything for you.

So there's two types of assets to buy. One is where the asset itself delivers a return to you, such as, you know, rental properties, stocks, a farm. And then there's assets that you buy where you hope somebody else pays you more later on, but the asset itself doesn't produce anything. And those are two different games. I regard the second game as speculation. Now there's nothing immoral or illegal or fattening about speculation, but it is an entirely different game to buy a lump of something and hope that somebody else pays you more for that lump two years from now than it is to buy something you expect to produce income for you over time. I bought a farm 30 years ago, not far from here. I've never had a quote on it since. What I do is I look at what it produces every year, and it produces a very satisfactory amount relative to what I paid for it.

If they closed the stock market for 10 years and we owned Coca-Cola and Wells Fargo and some other businesses, it wouldn't bother me because I'm looking at what the business produces. If I buy a McDonald's stand, I don't get a quote on it every day. I look at how my business is every day. So those are the kind of assets I like to own, something that actually is going to deliver, and hopefully deliver to meet my expectations over time. A piece of art, you know, may go from $1,000 to $50 million, but it's dependent on what the next guy wants to pay me. The art itself— the painting itself is not going to dispense cash. So I have to find somebody that's going to like it more. And with most— with an asset like gold, for example, you know, basically gold is a way of going along on fear, and it's been a pretty good way of going along on fear from time to time. But you really have to hope people become more afraid in the year or two years than they are now. And if they become more afraid you make money, if they become less afraid you lose money. But the gold itself doesn't produce anything.

BECKY: Well, speaking of gold, though, we're looking at gold prices and they were at another record high. They're up another $3 today, $1,434 an ounce. And there have been some big fat hedge fund managers, like a Paulson or a David Einhorn, who have really buckled down on these bids. Why would you steer clear? And do you think what they're doing is the wrong thing?

BUFFETT: Well, I just don't know. I don't know whether cotton's going to go up.

BECKY: OK.

BUFFETT: I mean, we use a lot of cotton. I've watched it go from 80 cents to $1.90. You know, we use a lot of copper and I've watched it go from $2 to $4-plus, so I mean there's all kinds of things in this world that are going to go up and down in price. You know, maybe hamburgers will tomorrow. And— but I— I'm— I don't know how to judge that. I do know how to judge to some extent the earning power of some businesses. And the real test of whether you would like it as an investment is whether you would be happy if it never got quoted again, and just in terms of what the asset did for you. But that doesn't— I will say this about gold, if you took all of the gold in the world it would roughly make a cube 67 feet on a side. So if you took all the gold in the world, we could have a cube that went down there 67 feet...

BECKY: Uh-huh.

BUFFETT: ...67 feet high and that would be the whole thing. Now for that same cube of gold it would be worth at today's market prices about $7 trillion. That's probably about a third of the value of all the stocks in the United States. So you could have a choice of owning a third of all the stocks in the United States or you could have a choice of owning that little block of gold, which can't do anything but kind of shine there and make you feel like Midas or Croesus or something of the sort.

Now, for $7 trillion, there are roughly a billion of farm— acres of farmland in the United States. They're valued at about $2 1/2 trillion. It's about half the continental United States, this farmland. You could have all the farmland in the United States, you could have about seven ExxonMobiles, and you could have $1 trillion of walking around money. And if you offered me the choice of looking at some 67-foot cube of gold and looking at it all day, you know, I mean touching it and fondling it occasionally, you know, and then saying, you know, `Do something for me,' and it says, `I don't do anything. I just stand here and look pretty.' And the alternative to that was to have all the farmland of the country, everything, cotton, corn, soybeans, seven ExxonMobiles. Just think of that. Add $1 trillion of walking around money. I, you know, maybe call me crazy but I'll take the farmland and the ExxonMobiles.

BECKY: All right, that makes sense. Carl, you've got a question, too?

CARL: I'm still trying to get the image of Warren fondling a giant block of gold out of my mind.

JOE: Yeah, and his fondling it occasionally was what stuck with me.

BUFFETT: Well, bring me a giant— bring me a giant block— bring me a giant block of gold and you'll see me fondle like you've never seen before.

CARL: Warren, one question about— my favorite line in your letter, and I'm guessing everybody's favorite line is about your elephant gun being reloaded and that your trigger finger is itchy...

Warren Buffett Speaks

BUFFETT: Yeah.

CARL: ...teasing some investors, as some said, about your appetite for acquisitions. One of the— one of the immediate follow-ups for a lot of investors is, `Well, if he's so ready what's holding him back?' And with the cash levels that you have, some read into that, that at these levels, these multiples, Buffett's simply not interested. He wants things to really go on sale. Is that a coded message that you think stocks need to come down in order for you to buy?

BUFFETT: No, but it makes it easier if they would come by— come down. But it— we're looking— you know, as I said, we're looking for elephants. Well, for one thing, there aren't very many elephants out there, and all of the elephants don't want to go in my zoo either, you know. So I have to find an elephant that thinks being in the Omaha zoo is, you know, the greatest thing there is in life, which of course it is. And then I have to have a feasible price for it, and obviously, the lower stock prices are, generally the more chance of that happening will be.

But, you know, it's going to be rare that we're going to find something selling in the tens of billions of dollars where I understand the business, where the management wants to join up with Berkshire, where the price makes the deal feasible. But it will happen from time to time, and it'll happen more often when stocks are depressed than where they're buoyant. But I don't— we are not— even though stocks have gone up close to double from where we were here two years ago, stocks were really cheap then, and we talked about it then. Now, that, you know, people were scared but they— stocks were cheap. They're not as cheap now as they were then. But compared to most assets, they look attractive. And so it is not the level of the stock market that's scaring me off, it does make it more difficult to make deals now than it would have been two years ago. But we only need one.

JOE: Do we— do we still have more time, Beck, or do we got to— do you know? For this...

BECKY: I know they want to go to a break in just a minute to come back, but we're going to continue this conversation because this is obviously pretty fertile ground.

JOE: Yeah.

BECKY: A lot of our viewers have questions about this, and I know, Joe, Carl and I have quite a few questions, too.

JOE: Yeah, I want to ask him just a quick— a follow-up, too, on...

BECKY: Yeah.

JOE: ...because, yeah, let's just wait and I'll ask him a follow-up to. Because you do get paid back with your investments in dollars. And if those dollars are, you know, are going to be worth much less in the future then I figure you must— you must figure policymakers are going to get it together eventually, Warren, or else, you know, paper money's not going to be worth anything.

BUFFETT: Well, but that's true of— if you're— if you're trained to be a lawyer or you're trained to be on cable or anything else you're going to get paid in dollars. Now, the question is, if you have something valuable to offer even if the dollar gets worth less, you will retain earning power that's commensurate with purchasing power.

JOE: Ooh.

BUFFETT: And if— I mean, Coca-Cola, the— in the year since I've— was born the dollar has depreciated 94 percent. I mean, it's 16-for-1 in terms of inflation. But if you owned Coca-Cola in 1930, you've still done pretty well. Or if you owned a lot of good business in 1930. Because they have the ability to extract real earnings in terms of what they deliver to people. And your doctor is able to charge 16 times as much as in 1930 because his services are still as valuable. So, as the currency gets worth less, it does not make— it does not penalize the service or the good that is really needed by other people. The world adapts.

JOE: Hm.

BUFFETT: And that's why I like businesses or I like my own earning power as the best assets in a time of inflation. They really can't be taken away.

JOE: Hm.

BECKY: Warren, you started talking about how your— you've got an itchy trigger finger. I even saw you kind of moving your finger around like you're ready to shoot something. Do you have any irons in the fire right now?

BUFFETT: We had an iron in the fire that got taken out of the fire just a day or two ago, which did— a deal that did not— somebody else beat us out on it. And I've always got a gleam in my eye, you know. I'm always looking at the girl, but the girl may not be looking at me. I mean, that's my problem. And we— but we will always have something that is at least a very, very, very low possibility; somebody that's talked to me and said, you know, `I'll see what my board things,' or who knows. But we certainly have nothing that's a high probability at the— at the moment.

BECKY: Was this thing that you just talked about, the— this deal that was potentially there, was it a— an elephant?

BUFFETT: It was a— it was a— hm, maybe a zebra, you know. Sort of— I mean, it was big enough to fit a— to make the zoo more interesting, but it— but it wasn't one to cause, you know, new crowds to come out.

BECKY: OK. So it's not as big as Burlington Northern.

BUFFETT: No, no.

BECKY: But it was something that was substantial.

BUFFETT: It was something that caused my heart to beat faster.

BECKY: OK. We're going to talk a lot more about this because ever since you mentioned that you have an itchy trigger finger in your annual letter, it's got all kinds of people trying to speculate, figure out what you might be interested in.

BUFFETT: Yeah. But I would say this, Becky. I've had an itchy trigger finger all my life. I mean, I just, I got a free ad out of it in the annual report this year.

BECKY: OK. We'll talk more about that when we come back. Carl ..

CARL: OK, Beck, a lot more still to come with Warren. What a great first 30 minutes of the show. Joe, you were saying it's like— it's like a lesson with Graham and Dodd, right?

JOE: Right. I said that yesterday.

CARL: I mean, it's the basics of investing.

JOE: Someone made me tweet. He's the closest thing to the living epitome of, like— and you can't argue with it. There's $60 billion behind saying that.

CARL: The scoreboard doesn't lie.

JOE: The scoreboard doesn't lie, no.

CARL: Winning.

JOE: Right. Winning. He's a warlock.

CARL: Winning. He is a warlock. He is a god.

JOE: He is a warlock, and he likes to fondle gold occasionally, apparently.

CARL: When we come back, you asked for it, now Squawk is delivering. Buffett answers your e-mails when we return live from Omaha.

TRANSCRIPT PART THREE: 'ELEPHANT GUN' TARGETS & RIDING THE RAILROAD

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