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This is a transcript of Warren Buffett's live interview with Becky Quick on CNBC's Power Lunch, Wednesday, June 25, 2008 at 12p ET. Buffett tells Becky U.S. inflation is "exploding" and warns that the Federal Reserve must signal controlling prices is not a secondary concern.
Becky Quick: We are standing by at Smith and Wollensky in New York City for an annual gathering, something that's been happening for years now. This is to benefit the Glide Foundation. That's an organization Warren Buffett has been very closely allied with. And Mr Buffett, we want to thank you very much for joining us today.
Warren Buffett: Thank you.
Becky: The first question, we just want to talk about why we're here today. The Glide Foundation is an organization you've been workign with for many years at this point. For people who aren't familiar with it, why Glide and why this lunch where you're going to be meeting with people today who have paid over 600-thousand dollars for this chance to break bread with you?
Buffett: Well, Glide is an organization in San Francisco. It's run by a remarkable man named Cecil Williams, who, more than 40 years ago, went out there as a young black pastor to a dying inner-city church. And they turned it into a marvelous, marvelous, really social organization. he takes people that the world has given up on, and sometimes have given up on themselves, and he brings them back.. He gives them hope. They feed 750-thousand meals a year. They train people. They have child care. They have health clinics. They have 52 rooms where people who don't have shelter can come... As the years have gone by, the people in San Francisco have come to appreciate it and I learned about them some years ago and I just decided that money couldn't go to a better cause.
Becky: Well today, over 600-thousand dollars will be going for this lunch. Let's talk a little bit more about the poeple who are going to be eating lunch with today, but while we have you here, let's cover some of the news of the day, because people have been waiting to hear about some of those things. The Fed is going to be coming out with it's announcement (on interest rates) in little over two hours time. And there's been a huge debate about whether the Fed should be more concerned about higher inflation or slowing growth. In your mind, what's the most important factor?
Buffett: Well, they should be concerned about both, because both are going on. Growth is slowing, in fact, I'm not even sure it's growth anymore. And inflation is really heating up. So, it's not an easy job to have, serving two masters in effect. That's why I'm glad that Ben Bernanke has the job and I don't. (Laughs.)
Becky: Pretend you are in his shoes for the moment. What would you do?
Buffett: I'd probably offer my resignation. (Laughts.)
Becky: Would you keep rates steady, though, if it was your job to decide this right now, you're faced with both those headlines?
Buffett: I think inflation is really picking up, so I think the Fed has to be very careful to do anything that signals that they consider inflation to be a secondary goal and something that they'll worry about later. Because it's huge right now. I mean, whether it's steel or it's oil, you name it. The pressure, you've seen it in chemical prices recently. Dow has announced. We see it everyplace. It's exploding.
Becky: That's almost an argument for raising rates today, but there's still an awful lot of weakness with consumers, with the house prices they've been watching. Would that be too much of a shock, if the Fed came out with a surprise interest rate increase today?
Buffett: I think it probably would be, but the economy is weakening. All the data I see, and I see a fair amount on a real-time basis, indicates that the weakening, if anything, is getting worse.
Becky: You mean from the consumer's perspective?
Buffett: Right, from the consumer's perspective. But the things that fall out from the weaker consumer buying, and the credit card losses and that sort of thing.
Becky: Where do you see that weakness, because you have such a broad array of businesses, everything from the bricks business to the insurance business to actual retail businesses. Where do you see the biggest weakness?
Buffett: Everything connected with construction and with consumer, I see weakness. And if anything, it's accentuating a little bit.
Becky: Along with the concerns about inflation, a lot of people have been screaming the Fed has to do something to save the dollar. It's seen so much weakness recently. Do you have any currency bets right now?
Buffett: Just, I've got the tail end of the Brazilian real. But, over time, if we keep doing what we're doing, and it isn't the Fed, it starts with policy makers in Congress. If we keep doing what we're doing, we're going to keep getting the same result, which is a weakening dollar.
Becky: What do you mean, keep doing what we're doing? In terms of running a budget deficit?
Buffett:In terms of running huge current account deficits. And part of that stems from oil. I mean, there are a lot of things that go into that. But the truth is we can't send two billion dollars a day out to the rest of the world and not expect the dollar to get weaker over time. That's not a short-term forecast, but that's going to happen over time.
Becky: You mentioned oil prices, and there's been a huge debate we've been having on our show, and throughout the day, where people are trying to figure out, is this supply and demand picture or to the idea that there's speculation going on in these markets. That there's a lot more money in these markets than there used to be, say three years ago.
Buffett:It's supply and demand. I mean, if somebody buys a thousand forward oil contracts and somebody sells a thousand forward oil contracts, somebody's speculating on the downside and somebody's speculating on the upside. The only way you could have speculators having a big impact is if you had a huge amount of storage where they started actually withdrawing actual, physical oil from the system. But it's not speculation, it's supply and demand and the situation is that in my adult lifetime, up until the last year or two, there's always been a huge amount of excess supply available. There's been reserve capacity. And that goes back 30 years ago, in this country we produced way more oil than we needed here and we had something called the Texas Railroad Commission that shut down wells. And a matter of fact, we got down to where they would only let wells operate in Texas for eight days, we had so much extra capacity. We don't have excess capacity in the world anymore, and that's what you're seeing in oil prices.
Becky: Except we had a series of people who came to Capitol Hill, to Congress on Monday, who said, the analysts, if you tamp down on speculation, you could cut 50 percent, as much as 50 percent, out of oil prices immediately. Do you think that's just hogwash?
Buffett: (Laughs.) I think if they closed the oil futures trading, I don't think it would make much difference. Incidentally, the five-year oil price, you can buy oil for delivery in 2012 now, or 2013, that price is very close to this price.Now if anyone thinks that short-term speculation is entering into oil prices, where are they paying 130 dollars a barrel for delivery in 2013.
Becky: Mr. Buffett, you are the (second) largest shareholder in Anheuser-Busch. InBev has made a bid for Budweiser, for Anheuser-Busch, for Bud, and there are a lot of people trying to figure out if you think that's a good offer. What do you think about it?
Buffett: (Laughs.) When we get through with this interview, there will still be a lot of people wondering what I think about it. I haven't talked about it to anybody. I've been reported, all these things have been reported, I have not talked to anybody about it. I've been reported to have been seen in St. Louis. There's obviously some double of me that's running around out there. (Laughs). I can't imagine any guy wanting to look like me, but if he's out there, he's apparently in St. Louis and he's apparently over talking to InBev and all these people.
Becky: So you haven't talked to Anheuser-Bush management? You haven't talked to InBev?
Buffett: I have not talked to anybody.
Becky: What do you think about the deal?
Buffett: (Laughs.) I think it's an interesting spectator sport at the moment.
Becky: So you're not going to weigh in on either side of this?
Buffett: (Laughs.) I certainly haven't so far.
Becky: And you don't want to right now?
Buffett: (Laughs.) If we didn't have all these people around I could tell you about it.
Becky: If we didn't have all these people around. Let's talk a little bit about politics, too.
Buffett: Sure.
Becky: Barack Obama has been the person that you're supporting. This is the first time you've really had a chance to talk since Hillary Clinton dropped out of the campaign, but you're holding a fund-raiser for him next week.
Buffett: July second.
Becky: July second. We watched some of the numbers coming in in May and Barack Obama's fund-raising ability slowed down significantly in May. McCain has picked up. Do you think that's a temporary, one-time blip, or are these two candiadtes going to be running neck-and-neck when it comes to fund-raising.
Buffett: Well, I think Barack is going to have plenty of money. I mean, he gave up on federal financing. So I don't think money is going to be a problem for either candidate. The American public, when they go to the voting booth in November is going to have a very good fix on both candidates and the shortage of money will not impair them having that fix. So I think money is going to be a non-issue in the campaign.
Becky: Barack Obama did give up on public financing after saying he would accept it. What did you think of that move?
Buffett: I wouldn't have, I don't agree with that.
Becky: You don't agree with him changing his position?
Buffett: I don't think he should have, yeah.
Becky: What about the idea of supporting windfall taxes against the oil companies? He's the candidate you support, but if you start talking about taking windfall taxes out on the oil companies, is that something you would agree with?
Buffett: I think it's very hard to have windfall taxes. Steel has doubled in price. Is that a windfall for the steel producers? Sure. Corn is, you know, $7 a bushel. Soybeans are at $15 a bushel. I don't think any candidate in his right mind who is standing for election in farm states would say you ought to tax farmers especially because they're getting a windfall. But they are getting a windfall from commodity prices. Maybe they deserve it because commodities have been underpriced. But to pick out one commodity, with copper at $3.60 a pound you could say that the copper producers are getting a windfall. You know, the networks are getting a windfall because the Olympics are being held. So I don't think that taking anybody that's had a commodity that increased in price a lot and saying there ought to be a special tax because of that really makes a lot of sense. I do think the tax code should be changed in major ways, but I don't think that's the way to do it.
Becky: How do you think the tax code should be changed?
Buffett: I think the super-rich should pay more and people in the middle class and lower should pay less.
Becky: If you start looking at the proposal that's been put forth with social security taxes which includes stopping, still, at 102,000 for social security, but then picking up that payroll tax at $250,000. Is that your idea of a good change?
Buffett: The payroll tax is a third of all taxes raised. Over 900 billion dollars out of 2.6 trillion. So the payroll tax is terribly important. It quits at $100,000 for a guy like me. So I pay practically no payroll tax in relation to my income. Most of the people that are going to be -- people are going to be serving us the steak in this restaurant today are paying a very, very high, they're paying 15.3% or so in payroll taxes. I am paying a tiny fraction of 1% of payroll taxes. I think there should be a major overhaul of the payroll tax. I think guys like me should pay more.
Becky: Although there are people who have said, under this new proposal that's been put out, it would end up meaning that someone like an entrepreneur goes back to a tax rate of 50%. And that is even before you include some of the state and local taxes. Do you worry that if entrepreneurs and other people are taxed at 50% to 60%, depending on where they live and how much they make, that it will stop innovation? That it will harm some of the innovation?
Buffett: I worry about my cleaning lady paying 15.3% on payroll tax when I pay on my total income tax, capital gains and dividends, 15. So, she is paying a higher tax rate than I am, but she doesn't have the lobbyists talking for her. The United States government raises about -- spends about 20% of the GDP. Nobody wants to pay their share. That's human nature. But the Congress has the job of saying we're going to get 20% of GDP from the American government because the American people demand these services and so on. And the question is, they get it from anybody that pays it, they're not going to like it. You have to figure out on a basis of your own idea of social justice and making sure that the golden goose keeps laying golden eggs. What is the best system? I think the answer is to tax the super-rich more.
Becky: You are going to be having lunch today with two people that paid more than $600,000 for the opportunity to sit down with you. These two gentlemen, have you spoken to them at this point?
Buffett: No, I've had some correspondence with them. I'm looking forward to speaking with them.
Becky: What do you think you'll be talking about? I know they brought their children and wives along. What's your plan for this lunch?
Buffett: We'll be talking about anything they're interested in. We'll talk as long as they want to talk, and we'll talk about the subjects they want to talk about. If you want to pay $660,000, we'll talk about anything you want to talk about, Becky. Maybe even the Anheuser deal. (Laughs).
Becky: Great. One more question for you. There have been people who have been saying just taking a look at politics and some of the things out there that maybe you would be interested in getting on a ticket at some point. Is there any truth to that?
Buffett: No. I will go Sherman one better, whatever he said.
Becky: Okay. Mr. Buffet, thank you very much for your time. We appreciate it.
Warren Buffett Says Sell to Me, Not `Porn Shop,' as Growth Dips
By Richard Teitelbaum
June 25 (Bloomberg) -- Warren Buffett is in Toronto, fielding questions from a crowd of 300 executives. One asks what makes people want to sell their companies to him.
The Berkshire Hathaway Inc. chief executive officer replies that he tells a prospective seller to think of the company as a work of art.
``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting. ``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''
Buffett, 77, can afford to throw a little mud on his competitors in the private equity industry. Wall Street's acquisition machine has seized up, while Buffett, in the valedictory chapter of a career stretching back more than 60 years, is on a buying spree.
He has $35.6 billion in cash to spend, and he's looking for companies that he can buy at a reasonable price, that have experienced managers he trusts, products with strong market positions or other competitive advantages.
Buffett's biggest catch so far in 2008 was Marmon Holdings Inc., a conglomerate owned by Chicago's Pritzker family. On March 18, Berkshire announced it had bought 60 percent of Marmon from the Pritzkers for $4.5 billion. Buffett is buying the rest in increments during the next five to six years.
Needle-Moving Events
In April, he agreed to pay $2.1 billion for an undisclosed stake in Chicago's Wm. Wrigley Jr. Co. as part of McLean, Virginia-based Mars Inc.'s $23 billion purchase of the gum maker. Buffett, who already owns See's Candies, is helping to fund the deal with $4.4 billion in subordinated debt.
``This is the kind of market where you would expect the pace of Berkshire acquisitions to pick up,'' says Keith Trauner, senior analyst of Fairholme Capital Management LLC in Short Hills, New Jersey. ``In a weaker business environment, sellers moderate their expectations.''
At the same time, Berkshire is now so big that Buffett is having a hard time turning acquisitions into growth. Most of Berkshire's more than two dozen purchases since 2000 are too small to have much impact. ``The larger the company becomes, the harder it is to find needle-moving events,'' Citigroup Inc. analyst Joshua Shanker says.
Buffett agrees. ``Anyone who thinks we will come close to repeating our past performance should sell their stock,'' Buffett told investors at Berkshire Hathaway's annual meeting in May. He declined to comment for this story.
Affinity for Insurance
The Sage of Omaha, by his own count, now owns 76 companies outright, a number that rises to about 200 if Marmon's 125 subsidiaries, which make everything from water treatment gear to brake drums, are taken into account. Among the Buffett companies are names familiar to most Americans: Geico car insurance, best known for the Cockney-accented gecko in its television commercials; Dairy Queen restaurants; Benjamin Moore paints; and Fruit of the Loom underwear.
Berkshire also owns 8.6 percent of Coca-Cola Co., 13.1 percent of American Express Co. and 8.8 percent of Wells Fargo & Co. Those three investments alone amounted nearly $25 billion on June 24.
Insurance firms dominate the list of Berkshire-owned companies. Buffett controls a dozen of them -- Berkshire Hathaway Reinsurance, General Re Corp. and Geico Corp. are the biggest -- accounting for 31 percent of Berkshire's 2007 revenue.
``I would say we have a special affinity for insurance,'' Buffett said at the 2007 annual meeting's news conference.
Competitive Advantage
One reason is that Buffett loves float -- the premiums collected from policy holders that can be invested at a profit until claims need to be paid. As of the end of December, Berkshire had $58.7 billion of float.
In May, an acquisition-minded Buffett took a tour of Europe -- stopping in Germany, Italy, Spain and Switzerland -- where the media and business establishment treated him like a rock star. ``I'm not looking for Pet Rock or Hula Hoop businesses,'' he said at a Frankfurt news conference. ``I'm hoping to make big deals, whether it's in the United States or Germany or Italy or Denmark.''
In Europe, Buffett repeatedly praised the company headed by the man who sat beside him during his European tour, Eitan Wertheimer, chairman of Tefen, Israel-based Iscar Metalworking Cos. Buffett bought an 80 percent stake in Iscar, a maker of metal-cutting tools, in 2006 for $4 billion, his first big overseas acquisition.
Loyal Customers
A close look at Iscar's main factory complex in northern Israel shows why Buffett took an immediate interest when Wertheimer faxed him a letter declaring that Berkshire would be an ideal home for Iscar. The company has the ``durable competitive advantage'' Buffett told the Europeans he always looks for. It's a market leader in the design and production of a variety of metal-cutting tools.
And Iscar has loyal customers. A disposable tungsten carbide insert used to slice steel can wear out in 20 minutes or less, meaning that Iscar must deliver a steady supply of new blades to every customer that uses them.
Buffett's purchase of Iscar made the Wertheimers celebrated billionaires, so it's no surprise that he receives hundreds of letters from other entrepreneurs offering to be bought out.
Among those that have made the grade in the past 10 years are: MidAmerican Energy Holdings Co., which can generate a set return on equity of 10-11 percent from its regulated utilities; electronic parts distributor TTI Inc., which has never posted an annual loss nor laid off an employee; and Business Wire, one of two companies that dominate the niche of sending news and financial releases around the world.
Quick Dividends
Becoming a Berkshire company can pay quick dividends. On June 30, 2005, Berkshire purchased Medical Protective Corp., a Fort Wayne, Indiana-based malpractice insurer, from General Electric Co. for $825 million. The next day, Standard & Poor's raised the firm's A financial rating to AAA. ``It's hard to imagine how MedPro could have done any better than being owned by Berkshire,'' CEO Tim Kenesey, 41, says.
Sometimes the benefit is more subtle. ``There's definitely a halo effect,'' says Steve McKenzie, CEO of Norcross, Georgia- based Larson-Juhl Inc., a custom picture frame maker Buffett acquired in 2002 for $223 million. ``It's realized in the higher- quality recruits we hire and in potential acquisitions' readiness to talk to us,'' says McKenzie, 46.
Buying on Faith
Buffett often decides to buy a company after what looks like a cursory examination of its operations. He agreed to purchase Larson-Juhl after a 90-minute talk with its founder, Craig Ponzio. During his European tour, Buffett told questioners that he had bought Iscar without any due diligence and after just a few days of talks with its top executives, who traveled to the U.S. three times to meet with Buffett and his investing partner, Charles Munger.
No one from Berkshire ever stepped inside an Iscar factory before the deal was done, Buffett says.
``He's buying on faith, and especially with larger acquisitions, that's certainly perilous,'' says analyst Chuck Hamilton, who follows insurance at FTN Midwest Securities Corp. ``If he were to spend $20 billion-$30 billion on a major company, without due diligence, that would really be cause for heartburn.''
With a staff of only 19 at Berkshire headquarters in Omaha, Nebraska's Kiewit Plaza, Buffett says he won't buy a company without management in place that he's sure of.
Modest Backgrounds
``We have to see it in their eyes,'' he said at the May 3 annual meeting, where 31,000 investors converged on Omaha's Qwest convention center to hear Buffett and Munger, 84, answer shareholder questions between mouthfuls of See's candies.
In the case of Victor Mancinelli, CEO of CTB Inc., a maker of poultry feeding systems and other agricultural equipment in Milford, Indiana, Buffett could see it on the balance sheet. Mancinelli had paid off nearly $80 million in leveraged buyout and other debt in just three years. Berkshire bought CTB in 2002 for about $180 million.
One quality Buffett firms usually have in common: CEOs from modest backgrounds, often without Ivy League degrees on their resumes. Mancinelli's father was a truck driver, and his mother was an autoworker.
MidAmerican Chairman David Sokol worked his way through the University of Nebraska at Omaha as a night manager at a grocery chain. TTI's Paul Andrews is a former oil rig roughneck who once sold Bibles door-to-door. Business Wire's Cathy Baron Tamraz is a former taxi driver.
Wagering Billions
Buffett is famous for his lack of pretension. He has honed the fine art of ukulele playing. He still lives in the Dutch colonial home he bought for $31,500 with his late first wife, Susan, in 1958, according to ``Of Permanent Value: The Warren Buffett Story'' by Andrew Kilpatrick (self-published, 2008).
When he eats out, it's often at Gorat's Steak House on Center Street in Omaha, where a luncheon steak will set you back $8.25 -- including soup and a side of mostaccioli pasta. Buffett personally drives visitors to and from the airport. He prefers Cherry Coke to fine wine and saves money buying it by the case.
Buffett's just-plain-folks posture is a bit of a feint. His father, Howard, was an investment banker and a Republican U.S. congressman. Warren attended the Wharton School of the University of Pennsylvania and got a master's degree in economics from Columbia University.
In terms of the businesses he buys, Buffett never tires of telling questioners that he invests only in simple, straightforward industries whose operations he can grasp. Yet he wagers billions on everything from hedge funds to junk bonds. Through December, Buffett had made $2.3 billion in pretax earnings during the past five years on foreign-exchange bets.
Put Options
And as of March, he had tens of billions of dollars riding on two kinds of derivatives -- instruments he dubbed ``financial weapons of mass destruction'' in his 2002 letter to shareholders. The first is a variety of credit-default swap guaranteeing payment on certain high-yield bonds. Credit-default swaps, which are contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.
Buffett also has sold put options -- contracts that provide the right, but not the obligation, to sell a security, currency or commodity at a set price within a set period -- on four stock indexes. In his 2007 shareholder letter, Buffett wrote that because Berkshire holds the cash connected to the derivatives, there is no risk the parties on the other side of the transaction won't pay.
Slow to Sell
Buffett's investment choices have yielded a conglomerate that's profitable in all kinds of weather. Through May, Berkshire's Class A stock, which traded on June 24 for $122,700 a share, has returned an average of 19.3 percent annualized in the past 20 years, nearly double the 11.2 percent return of the S&P 500 Index. From June 30, 2007, through June 24, Berkshire stock rose 12.1 percent, while the S&P 500 Index returned a negative 10.8 percent.
As of Feb. 29, Buffett himself owned 28.1 percent of the combined value of Berkshire's Class A and B shares, worth $53.44 billion on June 24. Class B shares have 1/30th of the value of Class A shares' value and 1/200th of their voting rights.
Buffett could be even richer if he had bent some of his own rules. For instance, he prides himself on buying and holding companies forever -- and is slow to sell his stocks. That has cost him and his shareholders' money. Berkshire's 8.6 percent stake in Coca-Cola was worth $17.6 billion when it hit its high in July 1998. Nearly a decade later, it's valued at just $10.67 billion -- and Buffett hasn't sold a share.
Underwriting Losses
Buffett has stumbled, most notably in 1998, when he spent $22 billion in Berkshire stock to buy Stamford, Connecticut-based General Re, one of the world's biggest reinsurance companies.
``General Re's name has stood for quality, integrity and professionalism in reinsurance,'' Buffett wrote in that year's shareholder letter. He lauded CEO Ronald Ferguson for his leadership.
Yet, as Buffett has pointed out in several annual reports since, the company was selling insurance way too cheaply. From 1999 through 2005, Gen Re ran up a total of $7.69 billion in underwriting losses. FTN Midwest's Hamilton estimates that those losses have been largely offset by investment income.
In 2001, Ferguson stepped down, replaced by executive vice president Joe Brandon. In that year's letter, Buffett compared Brandon to former General Electric CEO Jack Welch. ``He is smart, energetic, hands-on,'' Buffett wrote.
`A Sinkhole'
In 2006, prosecutors accused Ferguson, former CFO Elizabeth Monrad and two other former General Re executives of helping American International Group Inc. inflate reserves by writing sham, no-risk reinsurance contracts beginning in late 2000.
Jurors convicted all four of fraud in February, along with one former AIG executive. They are still awaiting sentencing. Two other former Gen Re executives pleaded guilty to their role in the fraud in 2005.
Buffett was interviewed by prosecutors in connection with the case. He wasn't charged with any crime. Brandon, named by prosecutors as an unindicted co-conspirator, resigned on April 14, and was replaced by Gen Re President Tad Montross.
``It's been a sinkhole,'' Hamilton says. ``Buffett's lost more than a shred of reputation.''
General Re isn't Berkshire's only regulatory entanglement. Connecticut Attorney General Richard Blumenthal said in May that he's investigating whether Moody's Investors Service, which was 19.6 percent owned by Buffett as of March 31, was guilty of a conflict of interest when it gave a AAA rating to Berkshire's new municipal bond insurance firm.
`Purse Strings'
``It is one symptom of a system rife with possible conflicts of interest and problematic relationships,'' Blumenthal said in a May 1 interview with Bloomberg News.
Buffett says his company deserves its rating. ``If Berkshire isn't AAA, I'm not sure what company would be,'' he told Bloomberg Television.
As pressure has grown for Berkshire to spend its cash, Buffett has been willing to travel farther afield in search of companies to buy, says David Carr, chief investment officer of Oak Value Capital Management Inc.
``I think in the past five years, he's loosened his purse strings,'' Carr says. ``There's nothing off limits as long as he understands the model.''
Analyst Hamilton says Buffett is finding it hard to replicate his previous returns. ``The returns on equity and capital are not what they were in years past,'' he says.
Intrinsic Value
Berkshire's growth is slowing. The annual median increase in per share book value, or net worth, averaged 10.3 percent in the eight years ended on Dec. 31, 2007, compared with 26.1 percent in the 1990s and 28.8 percent in the '80s, according to Citigroup's Shanker. He says Buffett is turning Berkshire into a conservative capital preservation vehicle.
``If you're interested in capital appreciation, you have to ask yourself whether Berkshire Hathaway is the right investment,'' Shanker says.
Buffett says there's only a limited number of good, big companies for sale at reasonable prices. As he put it in a May 2007 interview with TV host Charlie Rose, ``The real goal at Berkshire is just to keep building more and more earning power from operating companies.''
What makes Buffett want to buy? He himself says there's no secret formula, because each company's dynamic is unique. Berkshire is most active when markets go awry and companies' market capitalizations dip below their true worth -- their ``intrinsic value'' in Buffett-speak.
`Deal Velocity'
MidAmerican Energy's Sokol turned to Buffett during the stock market bubble of 1999. Investors, infatuated with Internet and technology stocks, were undervaluing the shares of relatively staid utilities such as Des Moines, Iowa-based MidAmerican, which looked especially pallid next to booming energy trader Enron Corp.
``You do two to three deals a year,'' Sokol recalls one analyst telling him. ``Your competitors are doing two to three a month; they have deal velocity.''
Shares of MidAmerican slumped to less than $27 in late 1999 from $42 in '97. ``The irrational behavior was driving me crazy,'' Sokol says.
What Buffett saw in MidAmerican was a company positioned to take advantage of utility deregulation and grow through a string of acquisitions. It now operates regulated utilities in 10 states, plus the U.K. It also owns plants in Australia and the Philippines. State regulatory commissions typically allow returns on equity of 10-11 percent.
`A Fool's Game'
``Warren thinks of our business as a good place to invest money on a long-term basis,'' Sokol says.
Sokol didn't need to join a long line of company owners trying to get Buffett's attention. One investor in MidAmerican was Walter Scott Jr., a Berkshire director and Buffett friend. He is chairman emeritus of Omaha-based construction contractor Peter Kiewit Sons' Inc.
Scott suggested the meetings that resulted in the sale. Berkshire paid $1.7 billion for 85 percent of MidAmerican. Sokol, Scott, now 77, and MidAmerican President Gregory Abel paid some $310 million for the rest.
Midamerican dips into Berkshire's till for acquisitions, while keeping true to Buffett's reputation for thrift by scooping up companies on the cheap.
``With regulated assets, overpaying is a fool's game,'' Sokol says.
Deep Pockets
In 2002, the company paid $450 million for Salt Lake City- based Kern River Gas Transmission Co. Also in 2002, it bought Northern Natural Gas Co. from Dynegy Inc. for $928 million. Dynegy had purchased the pipeline company, now based in Omaha, less than nine months earlier from a collapsing Enron for $1.5 billion.
``It was a brilliant acquisition,'' says Gordon Howald of Calyon Securities (USA) Inc. ``Using standard industry multiples, we could see these assets worth more than $2 billion in today's market.''
Sokol has kept up his buying. He paid $5.1 billion for PacifiCorp, a Portland, Oregon-based utility, in March 2006. That month, Berkshire also agreed to give him up to $3.5 billion in cash for new purchases or other purposes, in exchange for MidAmerican stock.
NetJets Inc.'s Richard Santulli also had Buffett's deep pockets in mind when he made a call to Omaha. The year was 1998, and his partner, Goldman Sachs Group Inc., which owned 20 percent of the company, was pushing for a public offering. In 1986, Santulli had invented the notion of ``fractional'' jet ownership, in which individuals and companies buy shares of a private plane's flying time in lieu of buying the entire jet.
`25-Year-Old Kids'
By 1998, several other companies, including Montreal-based Bombardier Inc. and Waltham, Massachusetts-based Raytheon Co., had crowded into the field. To keep his dominant market share, Santulli expanded both the number and variety of aircraft in his fleet.
Santulli balked at the idea of an IPO for Woodbridge, New Jersey-based NetJets because going public would subject his company to the scrutiny of Wall Street analysts. ``I wasn't going to answer to 25-year-old kids telling me how to run my business,'' he says in his thick Brooklyn accent.
Like Sokol, Santulli had ready access to Buffett, who was a customer and had told him in the past to give Berkshire a call if he ever wanted to sell. Less than a week after he made the call, Buffett picked Santulli up at Omaha's Eppley Airfield in his Town Car and took him to his office. ``The deal was done in 5 minutes, maybe 10 minutes,'' he says. Berkshire paid about $725 million in cash and stock.
Expanding to Europe
Berkshire not only bankrolled NetJets' fleet of Boeings, Citations and Gulfstreams, it also underwrote the company's expansion to Europe. From 2000 to '05, NetJets lost $212 million building up a European fractional jet ownership program. ``If I were public, I would have had to close the European business down,'' Santulli says, adding that today the unit is profitable.
``If I were to sell that business -- which of course we're not -- I would start at more than a billion and go from there,'' he says. According to Jetnet LLC, a Utica, New York-based research firm, NetJets now has more than 50 percent of the U.S. fractional jet market and virtually no competition in Europe.
Business Wire's Tamraz, 54, had no special entree to Buffett's office when she faxed him a letter, along with financial data, in November 2005. Eight days later, her receptionist buzzed her.
``Warren Buffett's on line 2,'' she said.
``Hello, Mr. Buffett,'' Tamraz said, as she scrambled to find her copy of the letter.
``Call me Warren,'' he responded.
Job Security
Tamraz says Buffett asked for more financial information on New York- and San Francisco-based Business Wire and for an idea of the price she was asking for the enterprise.
What appealed to Buffett about Business Wire was its business model, Tamraz says. The firm, founded in 1961, delivers 250,000 news releases a year for 25,000 corporate clients around the world. In 2007, it had more than $125 million in sales, which have been growing about 8 percent a year for the past three years, according to Tamraz.
One reason: Regulation Fair Disclosure, a U.S. Securities and Exchange Commission rule implemented in October 2000 that requires companies to disclose market-moving information to all investors simultaneously.
Tamraz is thrifty. She has no secretary and decorates her office with posters. She's been known to pitch in to format press releases when earnings season picks up. Another feature Buffett liked is that Business Wire has only one significant rival, London-based United Business Media Plc's PR Newswire, which had an operating margin of 35 percent in 2007.
`Cheap Parts'
Tamraz had spent four years trying to sell her business. No private equity or media firm would agree to her roster of demands, including job security for her 500 employees and a free hand to run the company. Two weeks after she talked to him, Buffett agreed to all of her conditions. The price he paid was ``more than several hundred million dollars,'' Tamraz says.
Fort Worth, Texas-based TTI, which Buffett bought in 2007, is also in the distribution business. It buys components that are used in an array of electronic devices and sells them to manufacturers around the world. ``We sell cheap parts better than anyone,'' CEO Andrews declares in his Texas drawl, before correcting himself: ``We sell inexpensive parts better than anyone.''
No Losses
TTI has carved out a niche in so-called passive components -- connectors, capacitors and resistors. They sell for an average of less than 4 cents each. With 2007 revenue of $1.4 billion, TTI operates in an industry with thin margins. Everything about TTI is low cost: Its Spartan headquarters is tucked inside a 276,000- square-foot (25,600-square-meter) warehouse.
Andrews, 65, started TTI in his living room in 1971 after being laid off from a purchasing job at General Dynamics Corp. Over the years, he plowed profits back into inventory and rode out the cycles of the electronics industry that forced many rivals to sell or fold. Andrews says TTI has never posted an annual loss and has never laid off an employee.
Today, TTI's inventory is enormous. An Apple iPod may have about 500 components, and TTI says it stocks 450 of them. All told, the company sells more than a million different kinds of parts. TTI buys them from manufacturers such as Malvern, Pennsylvania-based Vishay Intertechnology Inc. and Greenville, South Carolina-based Kemet Corp. ``When you come down to it, they are an extension of our sales force,'' Kemet CEO Per-Olof Loof says.
Hamburgers and Cokes
Receiving, ``picking'' and packaging orders at TTI is largely automated. For high-volume items, automatic lifts pluck the appropriate bar-coded part -- say, a reel of capacitors -- from a revolving carousel and send it off on a conveyor to be combined with the balance of the order. Given the company's low- priced goods, any error in the process will eat up TTI's profits.
Andrews got his foot in Berkshire's door through John Roach, a friend of Andrews's who had sold Justin Industries Inc., a Fort Worth building supply maker, to Berkshire in 2000 for $600 million. Roach overnighted TTI's 3-inch (7.6-centimeter) thick book of financial information to Buffett and set up a meeting.
Andrews arrived with Roach at Buffett's offices at 10 a.m. on Nov. 15, 2006, for a scheduled two-hour meeting. It lasted twice as long, with Buffett peppering Andrews with questions about his business and family. Buffett treated his visitors to hamburgers and Cokes at a country club, and then they returned to his office.
``Warren made an offer, and Paul made a quick response,'' says Roach.
``OK, let's do it,'' Buffett said and called in CFO Marc Hamburg to work out the details. The price wasn't disclosed.
Katyusha Rockets
Andrews agreed to stay at TTI for at least three years. ``There's nothing in writing, except a handshake and a gentleman's agreement that I'm going to be here to do what I said I was going to do,'' he says.
One reason Andrews says he sold to Buffett was he had no desire to see his company loaded with debt by a private equity firm or gutted by a cost-cutting rival. Iscar's Wertheimer, 56, had the same notion. ``We are very proud of what we've built,'' he says. ``We want it to continue.''
In buying an Israeli company, Buffett took on the kind of geopolitical risk he's accustomed to as an insurer. Within days after the deal closed in July 2006, fighting broke out between Israel and the Shiite Hezbollah group that dominates southern Lebanon.
Wertheimer called Buffett to tell him that Katyusha rockets were slamming into the sun-baked hills around his plants and there was a chance his machinery would be damaged and that his employees would lose workdays.
20-Year Perspective
``I'm not interested in what happens next quarter,'' Wertheimer says Buffett told him. ``I'm interested in the next 20 years.'' Some of Wertheimer's staff did move south while the rockets were falling. Iscar didn't miss a shipment.
Wertheimer says that in the eight months and three face-to- face visits leading up to the Iscar deal, he and the Omaha investor had wide-ranging discussions about everything from philanthropy to ``how to look on life,'' in Wertheimer's words. At one point, Buffett sent him a biography of the Jewish-American educator Abraham Flexner, who helped found the Institute for Advanced Study in Princeton, New Jersey. Both Buffett and Wertheimer have a longstanding interest in education.
``I love talking to him,'' Wertheimer says. ``For me, he's a teacher.''
Wertheimer took over as CEO of Iscar in 1984, when his father, Stef, now 81, who founded the company after fleeing Nazi Germany, was injured in a car accident.
Jews, Arabs and Druse
He transformed it from a local exporter of metal-cutting tools into an international enterprise with 7,500 employees, plants from Barcelona to Bangkok and more than $1 billion in 2007 sales. In 1995, he turned over the CEO position to his colleague, Jacob Harpaz, 57.
``I was just getting in Jacob's way, so I fired myself,'' says Wertheimer, who remains chairman.
On a rainy day in March, Wertheimer leads a tour through some of the 20 buildings that comprise the company's hillside campus. The company's Israeli workers are a combination of Jews, Arabs and Druse, many of whom Wertheimer greets by name.
Iscar's tools are used by makers of cars, appliances and other durable goods to cut metal to exacting specifications. The inserts, as they're called, sell for anywhere from a few dollars to more than $100 each. Teams of Iscar designers are at work every day looking for ways to make them cut faster and more efficiently.
Sharper Tools
One customer is Bolton, Ontario-based Husky Injection Molding Systems Ltd. In April, manufacturing engineer Noel Pinto was looking for a way to improve the milling of the steel plates Husky makes at its Milton, Vermont plant. They are used in plastic bottle manufacturing, among other processes. Iscar's Thomas Raun devised a new tooling process, improving the speed of the operation by 40 percent.
``They find ways to implement new technology,'' says Pinto.
Wertheimer says he's very comfortable linking up with Buffett. ``Warren has a message to the world,'' he says. ``It's balance.'' He points with his index finger to his head, to his heart and finally to his wallet. ``And he does it in a fair, clean and nice way,'' he says.
One of the companies Buffett owns is expected to yield a new Berkshire top executive if the Omaha investor passes from the scene anytime soon. Buffett updates shareholders regularly on the subject of succession and did again at the annual meeting in May. Berkshire's board, he said, has identified three candidates with the qualifications to succeed him as CEO, and one has been selected.
`Nobody Replaces Warren'
Analysts, including Citigroup's Shanker, say based on their ages and accomplishments, the most likely candidates are NetJets' Santulli, 63; MidAmerican's Sokol, 51; Berkshire Re head Ajit Jain, 56; and Geico CEO Tony Nicely, 65.
Four money managers have also been selected as candidates to replace Buffett in his role as chief investor. The board and new CEO will decide which of those candidates he will work with.
These plans could change if Buffett remains in place for an extended period, and men like Santulli and Nicely are seen as too old to don his mantle. The new CEO could end up being the head of a Berkshire company that has yet to be acquired.
Sokol doesn't let the issue trouble him. ``There is more than adequate talent to keep the Berkshire Hathaway way of doing things going forward,'' he says. ``But nobody replaces Warren Buffett.''
Buffett treats the issue of his mortality with characteristic wisecracking humor. One Saturday morning several months ago, CTB's Mancinelli says he called Buffett, as he occasionally does. Buffett asked to call him back, saying he had an appointment with his barber.
``The way I figure it, I have just so many haircuts left in my life,'' Buffett said. ``I don't want to miss any of them.''
Warren Buffett has some advice for young people, like college students, who want to remain financially independent. It's not new and its not a surprise, but it is solid counsel on avoiding a very common money pitfall, and worth repeating:
"The biggest suggestion I have is to avoid credit cards. Interest rates are very high on credit cards. Sometimes they are 18 percent. Sometimes they are 20 percent. If I borrowed money at 18 or 20 percent, I’d be broke.... So if I had one piece of advice for young people generally it would be to just avoid credit cards."
Last fall, Warren a pollster told me that the election was between hope and fear. When it comes to the economy, who's winning, hope or fear?
WARREN BUFFETT:
Well, right now fear is. I mean, you're seeing it everyplace. You saw it at-- in the sales of almost every item at-- at Christmas. There's a lot of fear throughout the country. Even-- even with people whose jobs are fine, and who have money in the bank. But they-- they're worried.
BROKAW:
I've been describing this as the domestic equivalent of war. Is that an overstatement?
BUFFETT:
Well, actually, in September I said-- this is an economic Pearl Harbor. I-- that was the time congress had made it in. It really is an economic Pearl Harbor. It-- the-- the country is facing something it hasn't faced since World War II.
And they're fearful about it. And they don't know quite what to do about it. And the point is-- and-- and it-- and temporarily it looks like we're losing. It has that-- that same aspect. Interestingly enough, we were losing for a while after Pearl Harbor. But the American people never doubted that we'd win. I mean, we had that attitude then. I think, right now, that they're sort of paralyzed.
BROKAW:
Is Barack Obama the right commander in chief for the economy?
BUFFETT:
He's the absolute right commander in chief. That-- you know, that's another thing the American people seem to do, occasionally, is that we elect people that are right for the times. You know, whether it was Lincoln, Roosevelt. And-- and I would say Obama-- you-- you couldn't have-- anybody better in charge.
BROKAW:
But why is he right for the times?
BUFFETT:
Well, he's-- he-- he's smart, he's got the right values, but he also-- he understands economics very well. He's cool. He's-- he's-- he's analytical. But then, when he gets it all thought through, and he's fast-- he can convey to American-- the American people what needs to be done. Not to expect miracles. That it's gonna take time. But that we're gonna get to the other end. And-- and I-- I-- I don't think there's anybody better for the job than-- than-- the president-elect.
BROKAW:
He often cites you as an advisor. And I know that you've been in touch with his economic team. But what often happens to somebody who gets elected to that office, particularly, they're more to you to tell you what they know than they are to listen. Does he listen?
BUFFETT:
He's a listener. I-- I first met him, maybe, four years ago, or something like that. He was a listener then, he's a listener now. But, on the other hand, he makes up his own mind. He will-- he will not be-- his team won't run him. He'll use his team, he'll use them very effectively. He'll synthesize, he'll-- he'll-- he'll analyze. But, in the end, it'll be his decision.
BROKAW:
Apart from his election, in your judgment, is there any other good news in the economy?
BUFFETT:
There's not much good new right now-- no. The-- we are-- we are in the middle of the economic Pearl Harbor right now. I mean, our ships have been sunk. Now-- (LAUGHTER) now we have to get mobilized-- to win the war, which we will.
BROKAW:
Your friend, and my boss, Jeff Immelt -- who is the CEO of General Electric [GE 13.96 0.19 (+1.38%)], had a phrase that I thought, in many ways, not just because he's my boss, but I thought he summed it up pretty well when he said, ]
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BUFFETT:
Well, there's-- there-- there's some real truth to that. And-- we have lived in one way in one type of economy. And-- and-- we're now deleveraging that economy. We're-- we're gonna have to live without the same impetus from credit expansion that-- really helped propel the economic engine for a long period of time. The-- the-- that-- that wind will not be at our back. But there's all kinds of things that will be in our back. But that-- he's right about resetting with-- without credit expansion being the propellant for the economy.
BROKAW:
And the stimulus program, that-- the new president wants to have, and that congress is cobbling together, in your judgment is it sound? Are there some things they're-- they should be doing they're not doing?
BUFFETT:
Well, they're doing-- they-- they-- they're gonna turn the fire hose on this-- on this fire. I mean, the-- the-- and-- and-- it's-- it's-- it's a blunt instrument, to some extent. At-- at-- but it's very, very big. We're-- we're-- we're gonna-- we're gonna have a medicine coming in a dosage we've never seen before. And-- it-- but it won't-- it won't-- it won't have immediate impact. It should-- it takes time for it to-- to hit the economy in real force. So people should not expect miracles in February or March or April. That isn't gonna happen.
BROKAW:
I'm very interested in that. And the conditioning of the American consumer. We've been through some downturns here in the last 40 years. But we've always made a snappy recovery. The first two years of the Reagan administration, that was a very sharp recession. At the end of George Bush 41's administration, very sharp recession. But then we made a big comeback with the information technology. I-- I wonder if the American people don't, in the back of their minds, say, "Well, we'll come out of this one pretty quickly."
BUFFETT:
Well, if they do, I-- I hope they don't get-- (LAUGHTER) feel that way too strongly. And, incidentally, in the-- in the way it was technically-- described, you could describe the 80s as being a fairly quick recession. But if you think of the period from the oil shock all the way through 'til (Paul) Volcker got done, that whole period was one of stagflation and general-- the stock market did nothing. People didn't trust-- money, you know, cash is trash, and they were running from it 'cause they thought--
(OVERTALK)
BROKAW:
Twenty percent interest rates--
(OVERTALK)
BUFFETT:
Sure. And all of that. So-- so I would say that you really had-- a ten year period there where the American economy did not make much progress. I'm not predicting that this time. But I-- that-- that was-- that was a period that most people didn't feel great about the economy. They didn't feel as depressed as they feel right now though.
BROKAW:
We know, or we have a pretty good idea, what the stimulus program will mean to the economy in terms of raw dollars and so on. The economists can't seem to come to a judgment about how long it will take for it to have an effect. Some are saying a year, others are saying it may be up to five years. Do you have a position on that?
BUFFETT:
Well, I-- I don't think it'll be five years Tom. But I-- I don't have the answer to that. I-- I-- I don't know what the stock market will do in the next year. What I do know is that, if you go back to the 20th century, 100 years, you had two great wars, you had other very large wars, you had the Great Depression, you had the flu epidemic, you had a dozen recessions and panics, you had all kinds of things.
At the end of that century the amer-- the average American was living seven times as well as-- the start of the century. The DOW Jones average went from 66 to 11,497. With all those problems. This is a country that has the ingredients that-- that-- well, it unleashes the potential of humans. And-- and they're still here. I mean-- so five years-- you can put me down on that one. You can't put me down on one year. (LAUGHTER)
BROKAW:
And how important is the new president to all of that in terms of instilling confidence, and talking bluntly to the American people saying, "There is gonna be some pain here. And you may have to make some sacrifices."
BUFFETT:
That's exactly what he's gonna say, 'cause it's the truth. And-- and he's-- he's smart enough to know it's the truth, and he-- and he's the kind of person who's going to tell you the truth. So-- I think he's the ideal president for it. But that's not because I think he can wave a magic wand.
It's because I think he can, in a sense, figure, once again, how to get these basic strengths of the American economy in gear again. I mean, we-- we have a wonderful economy that's gummed up at present. And it's gotten gummed in the past many times.
And it is important who's president. It's important that the American people believe in him. It's important that we take the right policy actions. But there are no miracles in a month or two months or three months. And he's going to tell the American people that.
BROKAW:
Has he--
BUFFETT:
He always has.
BROKAW:
You're very good with words. Has he asked you if-- at all for any advice on his inaugural address? (LAUGHTER)
BUFFETT:
No-- no. No. I have not been sitting around writing four score and-- (LAUGHTER) any of that sort. No, he doesn't need-- he doesn't need any help--
(OVERTALK)
BROKAW:
We have nothing to fear but fear itself.
BUFFETT:
That's right. Nothing to fear but fear itself, right.
BROKAW:
But does it have to be in that tone? Like FDR, "We have nothing to fear?" Or John Kennedy saying, "Ask not what your country can do for you, but what-- you can do for your country?" Are we ready for that again?
BUFFETT:
Well, I don't-- I don't have any specific knowledge. But my guess is it will be inspirational. It'll-- it'll be-- it-- it-- it-- it will be asking something of the American people. I mean, he-- he has every right to expect something of the American people.
I-- I think the American people want something to be asked of-- of them. So I think it will have-- it will-- it-- it'll-- it'll have that same tone, I'm sure, as-- as-- as Kennedy, in that respect. And I think it'll have some tones of-- of Roosevelt in saying that-- you know, we still have 305 or ten million people, whatever it is, who have all the abilities.
We still have a rule of law and a market system and-- and we believe, you know, in-- in-- in-- in everybody reaching their potent-- all of these things are going for us. And I think he will convey that a lot better than I just have. (LAUGHTER)
BROKAW:
But, at the same time Warren, we have-- new systems in play too. And the ripple effect seems to happen a lot faster now, and goes a lot deeper. Part of the reason we got in trouble this time is the system is so complex, and no one seems to know what's going on just below the surface.
BUFFETT:
Yeah, we-- we have a negative feedback cycle going on now. We have fear which leads to people not wanting to spend. And-- and not wanting to make investments. And then that leads to more fear. And-- we're in a negative feedback cycle. We were in a positive feedback cycle three or four years ago, when everybody lent you more and more (LAUGHTER) on a house that kept going up, and you could keep spending money you didn't have and so on. We'll break out of it. But-- it takes time, and nobody can predict exactly when it'll happen. But it will happen faster, I will guarantee you. Because we have the right president-- in office-- than would be the case otherwise.
BROKAW:
Do you think that the American taxpayer, or the American consumer, will have learned anything about proportion as a result of this experience? Because we have been on a binge.
BUFFETT:
Yeah, we've been on a binge.
BROKAW:
And I count myself on that by the way.
BUFFETT:
Yeah, well-- well, you look like a guy that's been on a binge, actually. (LAUGHTER) No, I think-- the-- most people won't. But some institutions will. And-- and some will learn it whether they want to or not. But-- but the-- most people have a propensity to spend what they-- what they make and maybe a little more.
And-- and the trouble is they-- they've had a friendly bartender, you know, in-- in terms of this binge. And I think-- I think the bartender is going to, been sobered up materially. And some of the rules about how many drinks he can serve and all of that-- (LAUGHTER) will be tightened up somewhat.
So I-- I-- I do not think we will see a repeat of the factors that led to this soon. We will see bubbles though again in the future. Human nature, you know, greed and fear will keep-- continue to exist. And-- and-- and we will have other bubbles, and they won't be exactly like this one. But they won't-- you won't see this particular type repeated for quite a while.
BROKAW:
And-- and that building behind us, the U.S. Capitol, Democrats controlling both chambers now, there's gonna be a big cry for more regulations on Wall Street. For the financial institutions to be more closely supervised. Is that a good idea?
BUFFETT:
Well, it's-- it's-- it's probably a good idea. But I-- I wouldn't look at that as a panacea. What-- what-- what you have to do, to some extent, is you have to create the right incentives also for that are running those institutions.
And, you know, I'm not sure whether I would shoot the-- CEO of any bank that went broke or anything. But I would-- (LAUGHTER) I would make it much tougher than it's been in the past-- to-- to run an institution into the ground. I think-- I-- I think-- I think there are plenty of things to be done in the board room as well as in the rooms of-- the Senate or the House.
BROKAW:
Well, you've also been very tough on executive compensation. Speaking out on it. Has that era come to an end? Where these huge, huge paydays come whether or not you've been successful.
BUFFETT:
Yeah, that's-- I-- I hope they have, Tom. And they certainly should. That-- and I think-- I-- I think there will be a lot of curbing of that. But I-- I-- I wouldn't underestimate the desire of people who get paid more than they're worth. I mean, (LAUGHTER) and particularly at the top.
And-- you know, so-- one of my friends says, "Failure goes to their head." You know, they start-- (LAUGHTER) they start thinking that they're entitled to-- eight or nine figures. You know-- with an institution that's failed. That's really up to American shareholders and to boards.
There may be some regulations that help on that. But-- but that-- it's been an old boy's club to quite a degree in board rooms. And-- and-- and-- the-- you know, that should have ceased a long time ago. I think the-- the events-- the recent events will help it get curbed. But-- but the urge for people to rig the-- the compensation arrangements-- will not go away.
BROKAW:
Well, someone also said to me that no one had any skin in the game. That old golfing phrase. Where they didn't have a stake in it because these new instruments are passed along, they're complex. There were a lot of guys on Wall Street when I would say to them, "What's a credit default swap?" They couldn't explain it to me, for example.
BUFFETT:
Yeah, well, we may have been better off 'cause they couldn't. That's-- that's-- that enabled them to sell them easier. But they-- you're right. I mean it-- there should be a real downside if you want a big upside. And-- and that has not been the case.
The stock option is all-- you know, it's a one way ticket. I would-- you know, I-- I sort of believe in-- in people that are running businesses having most of their net worth in those businesses. And-- and-- and-- and not just-- not-- not on paper. I mean, with real ownership, having paid for it themselves. And-- but that looked a little old fashioned here a while back. But it may-- it may stage a comeback.
BROKAW:
Did the president-elect talk to you about tax policy? You've been outspoken as well about-- for example, payroll taxes. It's unfair that your secretary pays more of her income, proportionally, than you do.
BUFFETT:
That's true. That's right.
BROKAW:
And there's that whole question about capital gains staying stuck at 15 percent. Did he ask your advice on that?
BUFFETT:
Well, we've talked about that some years back. I mean, not-- not-- not-- not recently. But-- actually, in his-- in his book, The Audacity of Hope we-- he-- he mentions it, conversation or two we had about taxes. But I think that, you know, what we learned in the last 20 year-- we learned that a rising tide lifts all yachts.
But-- but the-- the fellows in the row boat-- boats have been left behind. And-- while the aggregate wealth of the four-- four-- 400 went from 220 billion to a trillion 540 billion. Seven for one. The wage of the average American went no place.
And-- and tax policy has just consistently favored, more and more-- the rich. I mean-- basically you've got, you know, capital gains rates at 15 percent. And-- and-- and I don't pay any-- payroll taxes on that at all. So it's-- it's gotten tilted way to the rich, and everybody said this is wonderful because we need to encourage investment. Well, we've had the lowest tax rates for investment relative to earned pen-- income the last eight years and look at what it's produced.
BROKAW:
When Joe Biden said, during the course of the campaign, it's patriotic for the wealthy to pay more in taxes, those who are more conservative jumped all over him. Do you think it's patriotic for the wealthy to pay more taxes?
BUFFETT:
Well, I-- I-- (LAUGHTER) I-- yeah, but I wouldn't want to rely on patriotism. I'd rather rely on the tax code. (LAUGHTER)
BROKAW:
But is-- is it gonna have to come to that?
BUFFETT:
Well, we-- we're gonna-- we're gonna spend a lot more money now. But here just-- the last-- in the last year-- you know, we spent about 2.9 or-- trillion dollars. We raised about 2.6 trillion. And-- you know, we are raising more and more of that from the people that-- that are-- you know-- are-- are the-- are the working people in the world, (LAUGHTER) and less-- less from people like me.
And we've gotta the money from someplace. I mean, we-- we-- we-- and-- and it's just-- congress makes that decision as to-- as to whom shall contribute to these things that contribute to our common good. And-- and, in the last decade, the proportion that, counting payroll taxes, and you gotta count them, because they're over 30 percent of the receipts of the federal government, but counting payroll taxes-- the proportion has gone down on guys like me and it's gone up on people like my secretary.
BROKAW:
And do you think that that can get changed in this administration?
BUFFETT:
I-- I think it will get changed, yeah.
BROKAW:
Do you think that congress and Secretary Paulson, between them, have been tough enough on the financial institutions that have their hands out all over Washington trying to get money out of this bailout program? Bank of America [BAC 7.18 -1.14 (-13.7%)], Citi Bank [C 3.50 -0.33 (-8.62%)], AIG [AIG 1.42 0.01 (+0.71%)], these huge financial institutions that helped get us in trouble in the first place now are being underwritten by the ordinary taxpayer who's out there worrying about losing his job the next day?
BUFFETT:
Well, I-- I-- I think what's been done has been necessary. I mean I-- I-- if your financial system becomes totally dysfunctional everything else becomes dysfunctional in the country. Now the-- you may hate to help them out, because you-- you may-- you know, they-- they may have gotten us in trouble in many ways.
And the people at the top may have made out like bandits in-- in terms of it. But I wouldn't let that stop me from doing what's right to make next year better. I-- the-- we-- you know, I-- the searching for villains is less important to me now than figuring out a solution that gets us out of this promptly. And-- and-- and-- but I-- I do think that boards that vote big golden parachutes and all that sort of thing. I mean, I think they ought to reexamine their activities.
BROKAW:
Your friend-- Arnold Schwarzenegger, is the governor of California. That state, in many ways, is ground zero for all of this. I mean, they've got a housing crisis that it'll take years for them to get out of. And their budget deficits are running into the, now--
BUFFETT:
Huge.
BROKAW:
--40 billion dollars maybe. Is he asking for your advice?
BUFFETT:
No-- (LAUGHTER) no, I'm not sure what I'd tell him. But what you will see down-- for one thing, the pension plans of states and-- and cities-- has been decimated-- have been decimated in the-- in the last year. And the costs from that, the lack of revenue they're going to face as the-- economy slows, means that you are going to see a parade of mayors and governors to Washington like you've never seen it.
And they're gonna say, "If you can help out General Motors [GM 3.93 0.01 (+0.26%)], and you can help out Citicorp, you can certainly help out, you know, this state or that state." So I-- I think you're going to be-- I think it's gonna make inauguration day look like nothing in terms of the public officials that come in here and say, "We-- we need help." Their revenues are gonna be down. Their expenses, particularly including pension expenses, are going to be up. And you're going to have unbalanced budgets just all over the country with states and cities.
BROKAW:
But how much money can we print? I mean, the people are already saying, in the latest NBC News Wall Street Journal poll they're as concerned about the deficit as they are about almost anything else going on in their lives.
BUFFETT:
Yeah, well, they should-- they should be concerned about the deficit. But they should be more concerned about getting the economy working right. I-- I don't-- I mean, the-- there are consequences to printing money. And-- and they're not pleasant.
I-- I-- so there is no free lunch. And if we do the things we need to do now there's a cost to them. But we are in a war. This is an economic Pearl Harbor. And-- and, you know, we paid for the war later on, as (LAUGHTER) ... But-- but we-- we still-- knew we had to win the war first.
And-- and this is a war that needs to be won. And-- and the sooner the better. Because every-- every time you read about 523,000, or whatever, those people losing their jobs in December, that's-- those are 523,000 human tragedies. I mean, it-- it-- I can think of nothing worse than going home and saying, you know, to a family that, "I've lost my job and we've got mortgage payments and food to buy."
And so we need to solve that one. And-- and we will have consequences to the kind of deficits we're running up. And-- and-- and some of them will be unpleasant. But I would rather face those consequences than to face the consequences of doing nothing.
BROKAW:
Do you think there's a possibility that-- unemployment will go to double digits before the end of the calendar year, 2009?
BUFFETT:
Well, I'm not good at predicting. But it-- it-- certainly it-- it's a possibility. It's a possibility. And if we'd done the wrong things I think it would have been a certainty.
BROKAW:
And what happens to all those people?
BUFFETT:
I think it's very tough. And I think, in terms of unemployment benefits, I mean, I think that-- I think people like me should be paying higher taxes. And, you know, and you'll-- you'll hear from people who say, "Well, why don't you pay it voluntarily?"
But a voluntarily tax system is not (LAUGHTER) a very good system. I mean, it-- we-- we-- we need the rich of the country contributing more, you know, while the, frankly, a lot of the people, I mean, millions and millions and millions of families are suffering.
BROKAW:
You live in the same house that you've lived in in Omaha for how long now?
BUFFETT:
Fifty-- fifty-- a little over 50 years, yeah.
BROKAW:
Were you ever tempted, in the last five years, to build one of those bigger houses? (LAUGHTER)
BUFFETT:
No. No. I-- I'm happy where I am. I-- you know, some-- (LAUGHTER) somebody said, one time, that success is getting what you want, and happiness is wanting what you get. You know, and I got that house 50 years ago and I love it. (LAUGHTER)
BROKAW:
And the last time I was in Omaha you were driving a Cadillac.
BUFFETT:
I'm driving a Cadillac still.
BROKAW:
General Motors product.
BUFFETT:
Right. Right.
BROKAW:
Are you-- are you storing away extra spare parts? (LAUGHTER)
BUFFETT:
No. No. I-- I-- I'm all for the-- I'm all for them. I mean, you know, Rick Wagner got handed a very, very, very tough hand. And then this economy has just decimated the-- but they've gotta come up with a business plan that works.
BROKAW:
And do you think they're on that track?
BUFFETT:
They're-- they may be starting on that track. But I would be very tough, if I were congress however, handing money to-- to-- the big three-- to make sure they had a business plan that worked. And I-- I've said before, I would-- I would have the CEOs of those companies, and the head of the union, and anybody else that's-- a big party to this-- take the same downside risk as the American taxpayer.
For-- three quarters of their net worth. So if the American taxpayer ended up losing 20 percent of what they put up, these guys would lose along with them. Now I'd have a big bonus on the upside. But I think they ought to have-- they ought to have something meaningfully personally in the game when they come to congress and the president with a business plan and say, "This will work." Okay. Let them back it up.
BROKAW:
Should there be an automobile czar who reports to the president to make sure that they're hitting the markers that are expected of them?
BUFFETT:
Well, there ought to be some system for making sure they hit the markers. But the best-- best way to have them hit the markers, Tom, is to have them so that if they don't hit those markers, if-- if it doesn't work, what they tell congress, "We'll work." If it doesn't work they lose three quarters of their net worth or something like that.
BROKAW:
And what happens at the other end of the pipeline or the car dealers across the country?
BUFFETT:
Well, that-- that's why you want to have something that's gonna work in terms of the whole-- the whole system. And-- and-- part-- part of anything that's gonna work for the victory has to work for their dealers, or most of their dealers, eventually. And-- and-- and-- you want a realistic thing. Otherwise they'll just come up with a bunch of spreadsheets and-- and keep asking for more money.
BROKAW:
Let me ask you about some of the arguments that have been made, not just here, but around the country, in the last year or so. In Washington, Democrats will say, "What we're going through is all the fault of the Bush administration." Bush administration will say, "This all began with the Democrats. They're the ones who wanted to have cheap money and easy entrance into the housing market." Who's right?
BUFFETT:
I wouldn't worry about it. I-- I-- you know, if-- if-- if-- if this were December 7th, 1941, I wouldn't spend a whole lot of time, you know, wondering about who-- who got those ships in the harbor, you know, so that they were vulnerable or anything like that. I'd figure out how the hell we win the war.
BROKAW:
The other issue that we hear a lot about these days, or the-- the other subject that we hear a lot about these days is we got in trouble because greed took over America. You know, all-- everybody had to have more. And the greed became a corrupting force. And that famous line from the movie Wall Street--
BUFFETT:
Greed is--
(OVERTALK)
BROKAW:
Gordon Gekko said, "Greed is good because it motivates people." Greed good or bad?
BUFFETT:
Well, I-- greed is gonna be present. At-- at-- at-- if-- I would distinguish between greed and ambition. I-- I-- you know, (LAUGHTER) I mean, you know, Henry Ford may have been-- been ambition, or Thomas Edison, or all kinds of people, you know, that-- that they-- there's nothing wrong with wanting something better for yourself than you have today, or wanting something better for your family than you have today.
I mean, it-- it's been part of the American system. And it-- it's led to this-- these wondrous things that have happened. It-- when you start trying to create phony instruments that fool other people so you stick money in your pocket, or-- or-- or leverage yourself to the sky so that, you-- you know, that-- you're vulnerable to the least little-- interruption of-- of financial activity, or economic activity, you know, it-- it's a mistake. But people are gonna be greedy. You better-- you-- you-- you shouldn't design a system that essentially counts on people not being greedy. It's gonna-- it's gonna exist, but you-- you need to temper it in various ways.
BROKAW:
You're doing a fair amount of business in China. When you talk to your Chinese counterparts, and your friend and your clients over there, the people you're doing business with, do they say to you, "Mr. Buffet, what in the world is going on? You're supposed to teach us about capitalism"?
BUFFETT:
Well-- well, we've taught them a little about capitalism over the years. I-- I mean, China, for a long time, went no place. But, in the last 30 years, they just-- they've done fabulously. And-- and they-- and partly they've adapted parts of our system to do that. But-- you know, in-- in the end I don't tell the Chinese what to do, (LAUGHTER) and I don't expect them to tell us what--
BROKAW:
But they don't want to buy, now, some of our instruments. I mean, they're holding back saying, "We're not sure that we want to invest in American treasuries. And we have relied on them."
BUFFETT:
Well, they-- they have to invest. If-- if you think about it, Tom, if they're selling us a couple hundred billion dollars worth of goods every year more than we're buying from them we have to hand something to-- they're investing every single day.
They may be going into sovereign wealth funds instead of treasuries, or something of the sort. But the-- they're giving us what you might call vendor financing. I mean, because every day we ship money to the Chinese. And they can-- they can take those dollars and they can buy treasuries, they can buy U.S. equities, they can buy U.S. real estate. But we're force feeding dollars to the Chinese by our purchases. They have to invest here. So they're not gonna quit investing here.
BROKAW:
A lot of people are gonna be looking in on this, and wondering how has it affected Warren Buffet? Berkshire Hathaway stock is down. Significantly. Has your lifestyle changed at all?
BUFFETT:
No. (LAUGHTER) I-- I've never sold a share in my life. I-- I-- I've been through three earlier periods where Berkshire's stock's gone down 50 percent. I mean, it-- it-- it-- you shouldn't own stocks unless you can handle them going down 50 percent.
If you own a farm nobody tells you when it's gone down 50 percent 'cause you don't get a quote every day. But you really look to the farm and the-- what it's-- its pro-- what it produces to determine whether you made a good investment. Now if people look to the newspaper every day at the price of a stock to determine whether they made a good investment they're making a mistake.
They have to look to the business, the asset itself. If you own an apartment house you wouldn't get a quote on it every day. You'd just look at-- what the rent rolls were, and what your taxes were and expenses were. And if they all came in with-- in line with what you expected when you bought it you'd feel you'd made a satisfactory investment, and you'd never get a quote on it. So I don't-- I don't look at quotes. Mostly-- I can't tell you what Berkshire Hathaway is selling for today.
BROKAW:
You were a child in the Great Depression. You witnessed World War II. It was a very difficult time right after World War II, a lot of people forget about that. You've been through these-- cycles of boom and bust. Where does this one fit in your lifetime?
BUFFETT:
Well, this is-- this certainly is nothing like World War II. I mean, you know, the-- with the country threatened. And-- and it's not like the Great Depression. But it's a severe economic-- you know, this is-- this is number one-- the-- since World War II.
But, in the end, you know, it-- since 1776 it's never paid to bet against America. I mean, you know, (LAUGHTER) I mean we come through these things. There was a song during World War II that-- that said, "We did it before, and we can do it again." Maybe you can remember-- you know, I can remember it. And-- and the truth is we've done it before and we'll do it again. We-- we come through things. But it's not-- it's not always a smooth ride.
BROKAW:
And Barack Obama, as president of the United States, we know he has very strong oratorical skills, and the capacity to inspire people. Does he have to change, however, the way he governs from Washington and move around the country a lot more and become a kind of cheerleader for the economy and for the country's innate sense of optimism?
BUFFETT:
Yeah, he won't be-- he won't be a cheerleader for things beyond what he believes in-- he'll be a fact teller in-- in-- a way that's-- makes good sense to the American public. I mean, he-- he doesn't have to make up anything. Or the-- the rah-rah isn't called for.
What's called for is cool analysis and-- and a plan as to where you're going. And getting realistic expectations about the time it'll take to get there. And I think he's-- he has all those qualities. He is-- he-- he's not a rah-rah guy.
But he is-- he's a believer in-- in-- in the very things that have allowed this country to do what it's done. I mean, it-- we are the miracle of the, you know, of the world. Just think of seven for one improving the standard of living in a century. I mean, you can go back many centuries where it didn't move one percent virtually.
So we have a system that works. But it's gummed up. I think he'll convey that. And it-- the-- he-- he won't over promise. He-- he-- he will have a very clear vision of what he's trying to do. And-- and how long it's gonna take. I think he'll be very good at working with congress to get it done. I think he'll be very good at explaining to the American people why congress needs to do things.
BROKAW:
And the hardware dealer in North Platte, Nebraska, or the banker in Savannah, Georgia, or in Amarillo, Texas, the guy who's got a couple businesses in town, maybe an auto parts store and something else, they just hunker down during '09 and hope for better times and-- and--
BUFFETT:
They-- they work through it, just like, you know, 1931 my dad-- lost his job in-- (LAUGHTER) in Omaha, and he had two little kids, and he owed $55 a month on a mortgage, and no job. And he worked through it. And-- and he came through for the country, and the country came through for him. And that fellow in Savannah, or in North Platte, his kids are gonna live better than he did, and his grandchildren are gonna live better than his kids did. The-- the system works.
BROKAW:
The tricky part for the new president is to give people hope and make their dreams soar. But simultaneously, in this climate, to ask for sacrifices. To make them understand they are gonna have to go through some pain. How does he do that? How do you put those two pieces together?
BUFFETT:
Well, it was done-- you know, it was done after December 7th, 1941. I mean, we-- we knew we were going through-- a period of enormous pain. I mean, the ultimate pain in terms of sending-- sending-- primarily the-- young men off to-- off to war. And-- and we knew that we weren't gonna be able to buy consumer goods. Everybody is going to go to work in defense plants and that sort of thing.
But they couldn't buy cars. Or couldn't buy refrigerators. All of that. So, they accepted that. And they knew it was gonna take a long time. They didn't know how long it was gonna take. They didn't know whether the war was gonna be one year or four years. They-- they did feel the United States was gonna prevail in the end. And so, that same sort of message that is in the same time table, not exactly the same situation ..
BROKAW:
But they were conditioned by the Great Depression, war. And they were used to not having things.
BUFFETT:
Yeah.
BROKAW:
And so, it was one more era of sacrifice for them. We're used to having everything, including credit cards. (LAUGHTER)
BUFFETT:
Yeah. Yeah, yeah.
BROKAW:
Put it down and sometime, we'll pay.
BUFFETT:
That's right. But-- yeah. I would say this, the last six months, I think has been-- has been a-- a big bucket of cold water though I-- in terms of I-- I would say-- I would say the American public's expectations, in some ways, have been reset by events of the last six months to a year. And-- now, they-- they'd be happier for a-- a-- a little less of a-- a credit propelled economy.
So I-- but that can-- Obama can talk to the American public about that. I mean-- they'll want to listen to him. And he's very easy to listen to. And you can learn a lot by listening to him. So I-- I think this is gonna be an educational experience for the country.
BROKAW:
You've been in the room. You've-- you've heard him on the phone on conference calls. You're not the first very high powered person in the financial word-- world that I've heard say, "The guy's really impressive."
BUFFETT:
Yeah.
BROKAW:
But what is it about him that makes him impressive in those meetings?
BUFFETT:
Well, he's smart. He listens. He doesn't-- he doesn't delegate decision making over to anybody. I mean, in the end, he-- he-- he absorbs what people are saying. And in the end, he comes out-- you know-- with better ideas than I come out with when I'm listening to the same thing. And he just-- he has an ability to-- to extract from other people a lot of information, a lot of analysis. And-- and take the best of it. And--
(OVERTALK)
BUFFETT:
He's like a great editor in a sense. I mean you could-- you could argue that he's a great editor-- of people's ideas. And-- and-- and that he's not afraid to act. I mean, he's got a confidence about him which is warranted. It's not an arrogance. It's-- it's-- but it's a confidence. And he-- he-- he believes in himself. He believes in his country. And-- and-- and-- he'll get the job done.
BROKAW:
And one of the things you always worry about with a president is whether they develop hubris.
BUFFETT:
Yeah.
BROKAW:
Whether they--
BUFFETT:
A leader of any kind.
BROKAW:
Right.
BUFFETT:
A leader of any kind.
BROKAW:
Right. And do you think that he'll be tempted in that regard?
BUFFETT:
Well, I-- I-- I think-- I think any leader who has everybody coming around him telling him all the time how wonderful they are, you know, and-- and bowing-- and-- playing "Hail the Chief" when they walk into a room. I-- I mean, it's something to be guarded against. I-- I-- but I'm sure he's more conscious of that than-- you know, than I am.
I-- but it's-- it's-- it's something that, whether you're a general or a pope or-- (LAUGHTER) you know, or a CEO or a president, it's-- you're gonna have-- you're gonna listen to an awful lot of people who tell you how wonderful you are. And there are very few people will say, you know, you're just-- you put on your pants one leg at a time. So it's-- it's-- it's-- it's something to be guarded against. But I'm not worried about that (UNINTEL).
BROKAW:
During the course of the campaign, when he'd talk about his economic policies, a lot of his opponents said, "He's a socialist." I mean, they started shouting it at-- from-- from-- and he would say, "Look, if I were a socialist, would I have Warren Buffet-- (LAUGHTER) as one of my advisors and one of my friends?"
BUFFETT:
Yeah. No, he believes in an America where there's more and more goods and services to go around. But he does believe in having everybody get a better shot at it than-- than has existed in the last 20 years. I mean, it-- in any country-- we're a country that has, you know, 46,000-- $47,000 of GDP per capita. And we've got 20 percent of the households making $21,000 a year or less. So they're-- they're-- there is a chance-- you know, I'm-- I'm very lucky.
I mean, I'm-- I'm the right guy in the right place at the right time sort of. But I-- I didn't have anything to do with that. And-- and it's fine that I'm motivated to keep working and make more money and all of that sort of thing. But there should be a system. Because this system delivers these goodies to me, there should be a system to make sure that they're-- that at least-- that there's some reasonable level of-- of prosperity enjoyed by almost everybody in the country.
BROKAW:
At one point during the course of the campaign, I asked the two of them who they wanted as their treasury secretary. Your name came up from both of them. Even John McCain said.
BUFFETT:
Yeah, but Ralph Nader never got on board. (LAUGHTER)
BROKAW:
He-- he wouldn't have, Warren.
BUFFETT:
No. No it's not-- it's not for me. But-- but I'm-- you know--
(OVERTALK)
BROKAW:
But why wouldn't it be? I mean, your father was a congressman. You-- you were a child here. You have a lot of strong ideas about this--
BUFFETT:
It takes--
BROKAW:
Paul Volcker is your age. He's gonna come back into government.
BUFFETT:
Yeah. Well, I wouldn't have the energy for it, frankly. I-- and-- and-- and-- and-- I'm spoiled. You know, I get to-- I get to do what I like to do every day with people that I like doing it with. And I-- I would not be good at reporting to 535 members of congress and answering questions from every one of 'em. I-- I'm better at something else.
BROKAW:
A lot of people are concerned that the government is just throwing money down a rat hole with the bailout program, with the 700 billion dollars of troubled assets. And the kinds of money that we're handing out to Detroit and other places. Is there an economic component to all of this that will pay off at some point?
BUFFETT:
Well, that's exactly what we did in 1933. I mean, in 1933, when Roosevelt came in, there was something called the Reconstruction Finance Corp, RFC. Actually, Hoover enac-- it got enacted under Hoover in '32. But-- Roosevelt appointed Jesse Jones in 1933. And they put preferred stocks into the banks. They concentrated on banks, but they went into other things.
Incidentally, Jesse Jones was-- when he put that money in, he told 'em what the compensation rate was gonna be too. I mean, he was a tough tsar. And it helped take the United States out of a depression. I mean, the RFC was-- was an important component. And I'm sure they got criticized at the start. And they said, "People, you're throwing money into the wrong things and all that."
I'm sure he made mistakes. But when you're fighting a war, I mean you don't expect every single maneuver to be a huge success. What you want to do is win the war. And-- and the-- it's a component making sure that the financial system does not get dysfunctional, which was-- it was-- it was there almost. That's an important part of it.
And there is no way-- you may want to-- you may-- you maybe want to punish Wall Street or something (UNINTEL). But you can't-- you can't separate Wall Street, Main Street, side streets. We are connected. This is one big community. And-- and you better have credit flowing.
BROKAW:
But who are our other allies in this war? When-- Bill Clinton took office, for example-- he was helped a lot by your friend Bill Gates and the other people in Silicon Valley who created a whole new industry that had an enormous economic impact on this country.
As you look down the road or over the horizon, where do we get help now? Is it gonna be from Asia? Is it gonna be from China and what they're doing? And can green industries do as much as a lot of their proponents say that they will for the American economy?
BUFFETT:
It'll be from the American people, big time. I mean, when you think about it, you know, you go back to the mid 1800's or something. And people thought, you know, if you had done-- if you-- come along with-- well, it was later than that. The tractors or the combines or that sort of thing. And put all these people out of work. But they found other things to do. Could I have predicted that the motion picture industry would have sprung up?
Or the electric utility industry? Or-- to make it later, the semi conductors or software? The American genius is that it frees up millions and millions of people with all kinds of potential. Sometimes, potential they didn't even know. To come up with things that I can't dream up myself. I will guarantee you that 30 or 40 years from now, you will see all kind of things being turned out in the United States that people hunger for but that-- they couldn't conceive of them themselves.
But somebody did. That-- that it was-- it was out there. Inspired by-- partly inspired by the system we have. Because we have-- we do have a-- we have a market system that-- that people are-- goods and services. And a lot of people figure out ways to get it to 'em. And we got the-- we-- we-- you know we have equality of opportunity to quite a degree. Not perfect. But-- but we can-- we can let a fellow like Jack Welsh, you know, end up running General Electric.
And-- and on the other hand, we got Mike Tyson fighting for the heavyweight championship. And we don't have Jack fighting for the heavyweight championship. You know? (LAUGHTER) And Mike Tyson running General Electric. We get people in the right jobs doing the right things with the right talents. And that will continue to exist. And that will deliver goods and services you and I can't dream of.
BROKAW:
And how long will it be before Warren Buffet is tooling around Omaha in an electric car?
BUFFETT:
Well, we have this investment -- (LAUGHTER) in a Chinese company. I'm going to have-- I'm going to have an electric car at the annual meeting at Berkshire next year.
BROKAW:
And is that gonna be the future of this country as well?
BUFFETT:
Well, I-- I think an electric car is-- is definitely part of the future. I mean I-- it-- it makes so much sense. I mean, the battery, obviously, is the big stumbling block. But we-- we'll figure out how to do that. I mean, we figured out a lot of things in this-- I-- I will predict that within-- certainly within five years, there is a-- a reasonably priced electric car that will go a long way with a plug in arrangement.
BROKAW:
Paul Krugman, among others, says we're not doing enough. That we've got to even-- open the valves even greater than we have been. A lot of people are concerned about the deficit and what the consequences are gonna be down the stream. Are we doing enough?
BUFFETT:
I don't know the perfect answer. Nobody else does either. I mean, Paul Krugman doesn't know it. And Barack Obama doesn't know it. And (Treasury Secretary-Designate) Tim Geithner doesn't know it. All we know is we have to do something on a very major scale. And if we find out six months down the road that we've-- you know, we've gone a little off course, left or right, we-- that can be adjustment-- we do not want to sit around and debate for six months what the perfect solution is.
We wouldn't know it if we found it. The-- the important thing to do is do what we know we need to do now. And-- and we'll always-- there will always be critics on that. That-- that-- the important thing is, that the person that's there takes the action that makes sense at the time. Did we handle the-- the aftermath of Pearl Harbor the next month perfectly? I don't know whether we did or not. But I would doubt that. You know, somebody now can come up with a better system. The important thing is, we got going.
BROKAW:
A year ago, some of your big business friends and Republican friends were pretty critical and pretty skeptical about Barack Obama. Have they come around?
BUFFETT:
Well, I-- I would say this. I-- I've never quite seen the amount of good will. I mean that-- the people that didn't vote for him-- I've got plenty of friends that didn't ... -- are-- are-- they were critical of him. They want him to succeed. I mean, there's-- people realize this is something very big and something important. And so, they are not-- nobody is hoping he falls on his face. So they are-- they are going to be behind him. And-- in a big way. I--
BROKAW:
And they've been impressed by his appointments.
BUFFETT:
Yeah, they've been impressed by his appoint-- they've been impressed by what he's said-- since-- since-- election day. I mean-- you know, I-- I have heard amazingly little-- carping at-- at-- at Obama since-- since the election by people who, you know, they-- they didn't want to-- they didn't vote for him. And you know, he doesn't quite stand for what they believe in. But boy, they-- they want him to succeed.
BROKAW:
Do you think you'll ever get him to stop by a Dairy Queen? (LAUGHTER)
BUFFETT:
I think-- my guess is he's been to the Dairy Queen. I'll work on his girls. (LAUGHTER)
Warren Buffett's affinity for a group of financial stocks probably is dragging down Berkshire Hathaway's vaunted equity portfolio this year.
EVEN GREAT INVESTORS MAKE MISTAKES. Warren Buffett's affinity for a group of financial stocks, including American Express (ticker: AXP), Wells Fargo (WFC) and U.S. Bancorp (USB), is likely hurting his equity returns in 2009.
Buffett's Berkshire Hathaway has sizable holdings in that trio, and the sizable declines in their share prices this year are dragging down Berkshire's (BRKA) vaunted equity portfolio, which totaled $76 billion at the end of the third quarter, the latest reporting period.
We estimate Berkshire's equity portfolio could have dropped 14% in 2009 through Thursday, against an 8% decline in the S&P 500.
Our estimate is based on the change in value of Berkshire's 16 largest equity holdings. These holdings historically have accounted for over 85% of Berkshire's portfolio. The tough 2009 follows a good showing in 2008, when Berkshire's equity positions declined -- by our estimate -- about 25%, 13 percentage points better than the S&P 500. Our calculations for 2009 are based on Berkshire's reported holdings on Sept. 30. There admittedly may have been some changes since.
Wells Fargo is Berkshire's biggest loser in 2009, as shares of the California bank were down nearly 50% through Thursday to about 16. Buffett couldn't be reached for comment, but his view on the financial sector has been to buy quality. At Berkshire's annual meeting last May, Buffett said: "We like the culture at Wells Fargo, M&T and U.S. Bancorp. In all three cases, I understand the DNA of management. That doesn't mean they won't have problems," according to a meeting attendee. (Berkshire owns a stake in Buffalo's M&T Bank [MTB].)
Our guess is that if any of these companies needs an equity investor, Berkshire stands ready to help. And the stocks are so volatile they could turn higher at any time.
The paper losses on Berkshire's equity portfolio this year, plus losses on its short position in some $37 billion of equity puts, have depressed Berkshire class A shares, which finished Friday at $86,250, down 10% in 2009. Barron's wrote bearishly on Berkshire in late 2007 when the stock traded at $144,000 and we turned bullish in late November with the shares just above current levels.
When it reported third-quarter results in November, Berkshire said shareholder equity fell by $9 billion, or nearly $6,000 a share, through the end of October given weak markets. We estimate book value probably ended 2008 around $70,000 a share. Current book value may have dropped close to $67,000 a share. If we're right, Berkshire trades for a still-reasonable 1.3 times book value and 14 times projected 2009 earnings of around $6,000 a share.
After a flurry of high-profile investments in early October, including $5 billion in Goldman Sachs preferred carrying a 10% dividend, and a similar $3 billion deal involving General Electric , Berkshire hasn't unveiled any big new investments. Why? Our guess is that its once-enormous cash hoard has been depleted.
Berkshire's insurance cash holdings, which stood at $27 billion on Sept. 30, likely fell to $13 billion after the Goldman (GS) and GE (GE) deals, as well as a $6.5 billion investment in junk bonds and preferred stock of Wrigley, which was bought by Mars. Berkshire also is on the hook for a $3 billion convertible preferred-stock investment in Dow Chemical (DOW) if it completes its purchase of Rohm & Haas (ROH). Some investors say Berkshire likes to keep $10 billion of cash to deal with unexpected insurance claims arising from an earthquake or hurricane. This wouldn't leave Berkshire much cash for a big investment unless it sells something or takes on debt.
Our guess is that if Berkshire did make more fourth-quarter investments, they were focused on the battered junk-bond market. Berkshire will disclose more on investments in its annual report, due around March 1.
Warren Buffet's changes to his US$59bil stock portfolio
OMAHA, Nebraska: Billionaire Warren Buffett's company has bought a nearly US$60 million stake in Exxon Mobil, and has cut holdings in oil rival ConocoPhillips.
Berkshire Hathaway also nearly doubled its holdings in Wal-Mart Stores during the latest quarter.
Omaha-based Berkshire disclosed the changes to its US$59.7 billion U.S. stock portfolio in a Securities and Exchange Commission filing Monday.
During the quarter ended Sept. 30, Berkshire Hathaway bought nearly 855,000 shares of Exxon Mobil.
Its stake in ConocoPhillips was cut from more than 64 million shares at the end of June to more than 57 million.
Berkshire Hathaway's stake in Wal-Mart now stands at 33.6 million shares, up from nearly 20 million. - AP
I know you own Berkshire Hathaway, so I have to ask you what you think about Buffett’s purchase of Burlington Northern.
It’s a crazy deal. It’s an insane deal. We looked at Burlington Northern at $75 and I’ll give you the exact calculation we did. You don’t have a high earnings return. They are paying 18 times earnings, but it’s really much worse than that. They report maintenance cap-ex very carefully. They report depreciation and amortization, and they report only about 70% of the maintenance cap-ex. So they are under-depreciating, and their profit numbers are lower than the true profit numbers – and in a bad way, because the tax shield for the depreciation is undergone too. Their profitability is much lower than it looks.
Buffett’s paying 18-times [at $100/share] and at $75 he was paying 16-times. Our calculation is he was paying 21-times.
Secondly, there are two kinds of assets. There are the rights-of-way, which you can’t get rid of. So there’s no issue about having to earn a return on them because you have to keep it in the business, and because there’s nothing they can do with those rights-of-way. If you look at the asset value of the non-right-of-way equipment, and you write it up because it’s more expensive than it was originally, you get an asset value that’s very close to the earnings power value. We didn’t see a lot franchise value or hidden asset value.
The other thing is that if you try to calculate sustainable earnings, you have to cope with the fact that earnings are up enormously since 2003, when oil went up. There is a simple calculation you can do, which compares the cost-per-ton-mile for freight for a truck versus a railroad. If you build the increase in the price of diesel fuel into the post-2003 experience, when revenues suddenly start to grow, what you see is that the entire growth of the revenue is accounted for by the energy advantage that the railroads have and therefore how much business they can capture from the truckers, and how much pricing they can get because the competition is now more expensive.
There is nothing special about the railroads. It’s entirely an energy play.
If you look at what their margins should have gone up by, given the energy efficiency, the margins go up by only about half of that. So you don’t have a good aggressive management over these five years producing outsized returns.
We looked back at when they did the merger with Santa Fe, because then they did increase margins. But they got bored with it, and margins started to come down. The same thing happened recently. We don’t see a lot of hidden profitability in the culture of the company.
It looked to us like an oil play. He has a history of making bad oil play decisions. And that was at $75/share, we thought there were better oil plays. At $100/share we think he has lost his mind.
DECEMBER 14, 2009 In Year of Investing Dangerously, Buffett Looked 'Into the Abyss'
By SCOTT PATTERSON
Warren Buffett believes his best deals during the economy's biggest belly flop since the Crash of 1929 may well turn out to be the ones he didn't do.
Mr. Buffett slammed the door on one opportunity after another during the most harrowing stretch of his storied career. That impulse, he says, left him with the financial firepower he needed last month to strike the biggest deal he has ever done -- Berkshire Hathaway Inc.'s $26.3 billion purchase of railroad Burlington Northern Santa Fe Corp.
In a series of interviews with The Wall Street Journal, Mr. Buffett gave his most complete account of his epic deal negotiations, including anxious phone calls he fielded from wounded companies such as Freddie Mac, Wachovia Corp. and Morgan Stanley.
"I bought my first stock in 1942, and this roller coaster surpassed anything that I've seen," says the 79-year-old investor. "We didn't do all the smartest things. We didn't do anything really dumb."
On March 28, 2008, Mr. Buffett, Berkshire's chairman, took a call from Richard Fuld, then head of Lehman Brothers Holdings Inc. Mr. Fuld wanted to know whether Mr. Buffett would inject about $4 billion into the investment bank to stanch losses.
That night, in his offices in Omaha, Neb., Mr. Buffett pored over Lehman's annual financial report. On the cover, he jotted down the numbers of pages where he found troubling information. When he was done, the cover was dotted with numbers. He didn't bite. Six months later, Lehman filed for bankruptcy protection.
"Everybody was looking for money in those days," Mr. Buffett recalls.
He didn't say no to everyone. He invested $5 billion in Goldman Sachs Group Inc. and $3 billion in General Electric Co. But for Berkshire shareholders, the bigger story may be the deals that he passed up.
"I don't think Buffett gets enough credit for all the pitches he doesn't swing at," says Paul Howard, an analyst at Janney Montgomery Scott. "And he gets a lot of pitches."
Some investors did strike big deals during the market turmoil, to their detriment. TPG, one of the world's largest private-equity firms, lost $1.35 billion on struggling thrift Washington Mutual Inc. In late 2007, investors in Abu Dhabi plowed billions into Citigroup Inc., whose shares plunged.
This account of Mr. Buffett's vetting of deals during the financial crisis was pieced together from interviews with him and representatives of some companies that approached him.
The requests for bailout financing began March 15, 2008, a Saturday. Mr. Buffett received a call at Berkshire's headquarters from New York private-equity investor J. Christopher Flowers. Mr. Flowers and a team of bankers were trying to arrange a last-minute buyout of Bear Stearns Cos., the struggling investment bank.
After listening to a pitch for about 10 minutes, Mr. Buffett said he wasn't interested. The next day, J.P. Morgan Chase & Co. struck its own deal to take over Bear.
Two weeks later, Mr. Buffett rebuffed the request from Lehman's Mr. Fuld. Mr. Fuld didn't respond to requests for comment.
As the housing market cratered, companies laden with securities backed by home mortgages were teetering. Later that spring, Morgan Stanley bankers representing Freddie Mac, the mortgage giant, reached out to Mr. Buffett for an investment. He thought Freddie Mac's troubles were too severe.
"I said no fast on that one," he recalls.
The Treasury Department took over Freddie and its sister lender, Fannie Mae, later that year. A spokesman for Freddie declined to comment on its request to Mr. Buffett.
Mr. Buffett remembers September 2008, when the financial crisis came to a head, as one of the most hectic months of his career. It started with a request from Robert Steel, then the chief executive of Wachovia, for an investment of as much as $10 billion. Mr. Buffett, who thought Wachovia had recklessly dived into subprime mortgages during the housing boom, turned him down.
Wachovia eventually was purchased in a fire sale by Wells Fargo & Co., in which Berkshire is a stockholder. A spokesman for Wachovia declined to comment.
Then, on Sept. 12, a Friday, Robert Willumstad, then the chief executive officer of troubled insurer American International Group Inc., called to ask Mr. Buffett for an investment of about $5 billion.
Mr. Buffett says he was aware AIG needed to raise capital quickly. "Don't waste your time on me," he recalls telling the AIG chief.
Mr. Willumstad says Mr. Buffett "basically said the company was too complicated."
Mr. Buffett did, however, agree to consider making an offer for some of AIG's property-and-casualty businesses. Later that evening, Mr. Willumstad called back. "How about the whole thing?" he recalls asking Mr. Buffett, referring to all of AIG's property-and-casualty businesses. He said the price was $25 billion.
Mr. Buffett said he would look over information about the deal. He swiftly concluded it was too big. Berkshire would have to borrow a lot of money, potentially threatening its coveted AAA credit rating.
The next day, Mr. Buffett flew to Edmonton, Canada, for a charity concert, headlined by Seal and Paul Anka, for families with children who need organ transplants. At about 6 p.m., he got a call at his hotel from Barclays PLC President Robert Diamond Jr. and an adviser, former Citigroup Inc. banker Michael Klein. The bankers were trying to broker a last-minute deal for Barclays to buy Lehman, which was facing bankruptcy.
U.K. regulators wouldn't approve such a large deal without shareholder approval, they told Mr. Buffett, which could take several days or even weeks. Regulators were worried that Lehman's trading partners would panic, refusing to do any more business with the bank. Would Mr. Buffett, for a fee, guarantee Lehman's trading positions until a shareholder vote?
Mr. Buffett needed to leave for the concert. He asked the bankers to send him a fax laying out deal terms. When he returned to his hotel around midnight, he didn't find any fax, so the deal went nowhere.
Mr. Klein had left a message on Mr. Buffett's cellphone. But Mr. Buffett says he doesn't use cellphones much, so he didn't even realize the message was there. He says he didn't get it until 10 months later, when his daughter, Susan Buffett, discovered it. He declines to discuss what Mr. Klein's message was, other than to say that receiving it that night wouldn't have led to a deal.
Messrs. Diamond and Klein didn't respond to requests for comment.
That same weekend, another AIG deal was in the works. Berkshire executive Ajit Jain, who runs its massive reinsurance unit, held discussions with an investment group led by Mr. Flowers and Kohlberg Kravis Roberts & Co., the New York private-equity giant. They were trying to line up a deal to provide reinsurance for some AIG operations, which would have eased some of the company's capital constraints.
Back in Omaha on Sunday, Mr. Buffett thought a deal was likely and left for a dinner at the Happy Hollow Club, a local country club, with Google Inc. co-founder Sergey Brin and Mr. Brin's wife. He expected to review the terms afterwards. But the deal fell through because AIG's financial troubles proved too severe and complex. Later that week, the U.S. government announced an $85 billion bailout.
By this point, Mr. Buffett was beginning to worry about the entire financial system. In phone conversations, the normally loquacious Mr. Buffett was less talkative and sounded nervous, according to one person who was speaking with him regularly at the time.
Shares of giant investment banks Morgan Stanley and Goldman Sachs were spiraling lower amid worries that they would be the next firms to fail. The commercial-paper market, which helps finance the day-to-day operations of businesses around the country, was seizing up. On Sept. 16, the Reserve Primary Fund, a big money-market fund, revealed huge losses, due in part to holdings of Lehman's commercial paper.
If the commercial-paper market had frozen completely, more major financial institutions and possibly even household names such as GE would have failed, Mr. Buffett says, "because their checks would have failed to clear." That would have triggered panic in the nation's money-market funds, which held about $3.5 trillion in assets, because some of them held commercial paper. The resulting chaos, Mr. Buffett concluded, could have crashed global financial markets, threatening Berkshire.
"I felt that this is something like I've never seen before, and the American public and Congress don't fully understand the gravity" of the problems, he recalls. "I thought, we are really looking into the abyss."
At a birthday party for a wealthy friend in Omaha, several guests asked Mr. Buffett if their money-market funds were safe. He found the questions worrisome: They suggested widespread fears about the safety of funds long perceived to be invulnerable to losses.
"When people who drive Rolls-Royces are worrying about their piggy banks, you know you've got a problem," he says.
On the morning of Sept. 19, Morgan Stanley Chief Executive John Mack phoned Mr. Buffett in hopes of arranging a deal, possibly a large credit line Morgan could tap. Exact terms weren't discussed. Mr. Buffett told Mr. Mack he wasn't interested because he wasn't familiar enough with the bank.
Mr. Buffett says he still felt the government had the tools to head off calamity. He stayed in close touch with government officials, fielding phone calls from then-Treasury Secretary Henry Paulson, who was cobbling together a bank-bailout package and was interested in Mr. Buffett's thoughts about structuring it. Senators seeking guidance about the package also phoned him.
As the government swung into action, Mr. Buffett recalls, he gained confidence that the crisis would be resolved. A government guarantee of assets in money-market funds, which came days after the Reserve fund's troubles emerged, was a big step forward, he says.
In late September, Mr. Buffett decided to strike.
Goldman Sachs, like Morgan Stanley, was in need of cash. The bank already had made several pitches to him. None had enticed him. But he remained open to offers, partly because he was familiar with Goldman's operations, having worked with the bank for many years on various deals.
On Sept. 23, Goldman banker Byron Trott, who had long worked closely with Mr. Buffett, called to ask what it would take to do a deal.
Mr. Buffett laid out his terms. Hours later a deal was struck. Berkshire purchased $5 billion of Goldman preferred shares with a 10% annual dividend, as well as warrants to buy $5 billion worth of Goldman shares for $115 apiece. The shares now trade at about $166.
The deal, Mr. Buffett says, was based partly on his faith that the government would stave off the kind of financial catastrophe that could have endangered even Goldman. Another factor: attractive terms for Berkshire.
Not long after that deal, Mr. Buffett agreed to buy $3 billion of General Electric preferred shares with a 10% annual dividend. He also got the right to buy $3 billion of common stock at $22.25. GE's shares rose 31 cents Friday to $15.92 on the New York Stock Exchange.
Having put $8 billion into those deals, Mr. Buffett went on a public-relations offensive, in what appeared to be an effort to bolster markets and urge the government to take strong action.
On public television's "The Charlie Rose Show," he called the market turmoil an "economic Pearl Harbor" and reiterated his faith in the nation's long-term strength. In a New York Times opinion piece, he wrote that he was buying U.S. stocks in his personal account.
On Oct. 6, he sent a letter to Treasury's Mr. Paulson laying out a plan for relieving the financial system from some of the pressure created by billions of dollars of toxic mortgage assets held by banks. He proposed pooling private assets, including Berkshire's, with Treasury funds to purchase mortgage securities from banks.
Mr. Paulson thought it was "the seed of a good idea," says one person familiar with the matter, but the Treasury was scrambling to put out brush fires and didn't have time to pursue it.
Continuing stock-market declines were taking a toll on Berkshire.
In February, the company reported that its book value per share -- a measure of asset values it uses to gauge performance -- had dropped 9.6% in 2008. That was the steepest decline since Mr. Buffett took over Berkshire in 1965. It suffered major losses on its stock holdings, including American Express Co. and Moody's Corp., and a big paper loss on derivative contracts it had written to insure customers against long-term declines in global stock indexes.
The toughest blow came in April, when Moody's stripped Berkshire of its AAA rating, citing the stock-market decline. The move has constrained Berkshire's vast insurance operations from writing some policies against major losses. Berkshire's stock also has suffered, down about 30% since mid-September 2008.
The Burlington railroad deal reduced Berkshire's earnings-growth potential, analysts say, since railroads tend to track overall economic growth. But it also trimmed Berkshire's exposure to risk-prone financial operations, potentially giving it a more solid foundation for when the next crisis hits.
Mr. Buffett has some regrets about his decisions during the financial crisis. He says if he'd waited to deploy his cash until March 2009, when the market hit bottom, he could have made a killing.
"I made plenty of mistakes," he says. "I didn't maximize the opportunities offered by the chaos. But in the end, it worked out OK."
Report: Investor Li Lu could be successor to Buffett
NEW YORK: Li Lu, a Chinese American investor and hedge fund manager, could be in line to take a top investment role at Warren Buffett’s Berkshire Hathaway and even succeed the legendary US investor, the Wall Street Journal reported on Thursday.
In an interview with the newspaper, Berkshire’s vice chairman Charlie Munger said he felt it was “a foregone conclusion” that Li, a hedge fund manager who largely invests in Asian technology stocks, would become one of Berkshire Hathaway’s top investment officials.
The Journal reported that Li, 44, is in line to become a successor to Buffett, 79. Buffett, who has built an estimated US$47bil fortune running the Omaha, Nebraska-based company, does not have any current plans to step down, but speculation about his eventual successor has increased in the past few years. Berkshire operates about 80 businesses and has tens of billions of dollars invested in US companies.
A spokesman for the company was not immediately available for comment late on Thursday.According to the Journal, Buffett declined to comment on Li, but did not rule out bringing in an investment manager while he is still running the company, or potentially splitting up the top investment job at the company into two roles.
Li declined to discuss a potential Berkshire position with the Journal, it said. Li founded his fund management business Himalaya Capital Management in 1997, according to the firm’s website (http://www.himalayacapital.com). A message left at the firm was not immediately returned on Thursday. — Reuters
Berkshire net down 40 pct on derivative losses
Written by Reuters
Sunday, 08 August 2010 16:10
NEW YORK: Warren Buffett's Berkshire Hathaway Inc said on Friday, Aug 6 second-quarter profit fell 40 percent, as declining stock prices depressed the value of his derivative contracts.
Operating profit nevertheless soared 73 percent, helped by the takeover of railroad operator Burlington Northern Santa Fe Corp, improvement in insurance underwriting results, and a turnaround in performance at the NetJets corporate plane unit.
Net income fell to $1.97 billion, or $1,195 per Class A share, from $3.3 billion, or $2.123, a year earlier.
Excluding investments, operating profit rose to $3.07 billion, or $1,866 per share, from $1.78 billion, or $1,147.
Analysts on average expected operating profit of $1,360 per share, according to Thomson Reuters I/B/E/S.
"The numbers look good," said Michael Yoshikami, president of YCMNET Advisors in Walnut Creek, California, which invests $1 billion and owns Berkshire stock. "What people often miss about Berkshire is that, while it is perceived as an acquirer of staid companies, it is a very good operator that extracts as much free cash flow as possible."
In Friday trading on the New York Stock Exchange, Berkshire Class A shares closed down $785 at $120,600, and its Class B shares closed down 36 cents at $80.47.
DERIVATIVES
Berkshire recorded $1.41 billion of losses on derivatives, including long-term contracts tied to equity indexes, compared with a year-earlier $1.53 billion profit.
Buffett has said these indexes are the Standard & Poor's 500, the FTSE 100, the Euro Stoxx 50 and the Nikkei 225, which fell between 11.9 percent 15.4 percent in the quarter.
Berkshire must incorporate its derivative gains and losses each quarter on its balance sheets, which added to quarterly earnings volatility. Buffett has nevertheless repeatedly said he expects the contracts to be profitable.
In a regulatory filing, Berkshire added it does not believe the financial regulatory overhaul signed into law last month by President Barack Obama will materially affect results or force it to post extra collateral on its contracts.
Nonetheless, stock market fluctuations do affect book value, Buffett's preferred measure for performance. Berkshire's book value per class A share, fell 3 percent to $86,661 as of June 30 from $89,374 as of March 31.
Results included $603 million of profit from Burlington Northern, in the first full quarter since Berkshire in February paid $26.5 billion for the 77.5 percent it did not already own of the second-largest U.S. railroad company.
Insurance operations, Berkshire's biggest business, saw operating profit jump 23 percent to $1.55 billion, including a sevenfold increase in underwriting profit to $462 million.
Berkshire said NetJets posted a $57.5 million pre-tax profit, compared with a year-earlier $252.5 million loss, after Buffett installed David Sokol, who chairs Berkshire's MidAmerican Energy Holdings unit, to turn that unit around. - Reuters
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