Warren Buffet, Interview on CNBC, Feb 2017, after publishing on
Berkshire’s 2016 annual letter
GDP Growth
Quick: I can't believe we've gotten to this point in the
program and we haven't asked you your take on the economy. Where is the economy
right now?
Buffett: The economy is – everything I see has been the same
since 2009 – the fall of 2009. It keeps moving ahead at a couple percent a
year, which is terrific, incidentally. Not as terrific as 3 percent or 4
percent would be, but if it just stays at 2 percent, you'll add in one
generation 19,000 of GDP per capita to our present economy. We'll have so much
more stuff then than we have now, it'll be fabulous, one generation away. So
your kids are going to live better than you do. But people – would rather have
3 percent or 4 percent, and maybe we'll get it. But 2, we're moving forward.
Quick: We just spoke with Treasury Secretary Mnuchin last
week and he said he sees a way for us to get to 3 percent growth based on a few
things, if it's tax reform, if it's cutting regulations and other things that
go along with that. Do you see us getting back to 3 percent growth?
Buffett: I just don't know. I mean I wouldn't bet on it, but
2 percent will be – will do perfectly. 3 percent would be better. Anything –
well, I shouldn't say anything – but there's a lot of policies that might bring
it to 3 percent. If they do, I'm all for it.
Quick: What do you think would help us improve growth?
Buffett: Well, productivity is the only thing that gives you
growth. I mean, if we hadn't changed productivity since 1776, we'd be living
like we were in 1776. If 80 percent of the people had to be on the farms to
feed us, we wouldn't be producing much of anything else. So it's all
productivity over time that counts.
Quick: Well, we got a lot of people who wrote in about
artificial intelligence and robots and where you think they are moving along.
Are they hurting our productivity?
Buffett: Yeah, I don't really know anything about robots.
But I'll put it this way. If you eventually got the world so that one guy could
push one button and everything that's being produced now would be produced from
him pushing that button, it'd be a better world. Now, you'd have to make sure
that guy didn't keep all the output, but the idea of getting more productive,
it benefits everybody. And I shouldn't say it benefits everybody. It benefits
society. It can hurt individuals in their given industries. But we should long
for more productivity. That'll give a fewer hours worked, it'll give more
output per capita, it'll give better living for people. And that's what we've
done, actually, in this country. We saw it dramatically in farming. I mean,
it's unbelievable what has happened in farming. And we now have 2 percent of
the population working on farms, doing way better than when we had 80 percent.
But if we didn't have tools and fertilizer and all those things, we'd be an
agrarian economy and we'd be living like we did in 1776.
***
Buffett: Yeah. If you go back to 1790, Joe, there were four
million people, roughly, in the United States of whom 700,000 were slaves.
There were 900 million people around the world. So we had at that time a half
of 1 percent of the world's population. And it was a friendly country in terms
of the soil, and the minerals, and the temperature and all of that. But there
were other friendly spots around the world. And so why did this ... why did
these four million people do something that 900 million people hadn't been able
to do before, where progress had been very slow? And I would say that it was a
combination ... none of these perfect, but I think the market system was
absolutely essential to it. It was not a planned economy and I would say that
rule of law was important, never perfect but far more than many places. I would
say that equality of opportunity was a factor. I would say that immigration did
select for people that to some extent selected for people that were ambitious
and really wanted a new life. But I would ... if I had to pick one thing I
would say the market system ... was the overwhelming factor that contributed to
it.
Kernen: You know what? Life is weird too, because I think
it's weird that Adam Smith wrote that book in 1776 and it...
Buffett: Yeah, exactly.
Kernen: That's not a coincidence. That when you're able to
own an idea, and you got, like, a court system that will back up your ownership
of patent law, and then you can commercialize it, I think maybe that was it. I
think intellectual property, and property rights, and things like that. Because
prior to that, after 10,000 years of spinning our wheels no one ... What was
the average GDP per person? And then all of a sudden, starting when you were
able to own an idea and commercialize it, suddenly it exploded, GDP, like, in
multiple times.
Buffett: It unlocked human potential, Joe. I mean, you know,
we aren't smarter now than they were 240 years ago, and we certainly don't work
harder. But once you started opening up human potential,the sky's the limit.
And it's just starting.
Quick: Yeah, there are times, Warren, where you hear pundits
or other people saying, "Look things are at risk at this point. Our
American way of life, our system is under threat." And I've heard this
from all sides at all different times. Is there ever a point where you thought
that was the case?
Buffett: No, and you say you've heard it at all times from
all sides. I've been hearing it, you know, all my life. And in the spring of
1942 I was 11 years old, and the Dow was at about 100. And we were losing the
war in the Pacific at that point, that was early ... was shortly after Pearl
Harbor. And there was no doubt in this country we were going to win over time.
I mean, and people said, "Well, this is let's wait till things are clear,
let's wait till we start winning the war." There's always a reason to wait
and I've listened to that all my life. You know, when I got out of school the
Dow had never been above 200. There'd never been a year when the Dow had not
been below 200 during the year. Even in 1929, when it got to 381, the low was
below 200. Never been a year. Well, so what, you know? But that was a big
subject at that time. And then you know, we ran into price controls, we ran
into the oil shocks, you name it, just all kinds of things. And those are
diversions. So all my life I've been hearing, "You know, maybe there's a
better time to invest, you know?" Or, "Things are more unpredictable
now." They're always unpredictable. I can't predict what's gonna happen
tomorrow. I mean, you could have anything happen tomorrow. We've had October
19th, 1987, 22 percent down in one day. So I can predict what'll happen ten or
20 years in a general way, but I have no idea what'll happen tomorrow. And the
important thing is if you got these wonderful assets out there, to own 'em, and
which ones do you own? I mean, if you ... if you save money you can buy bonds,
you can buy a farm, you can buy an apartment, house, or even buy a part of
American business. And if you buy a 10-year bond now you're paying over 40
times earnings for something whose earnings can't grow. And you know, you
compare that to buying equities, good businesses, I don't think there's any
comparison. But that doesn't mean the stock market can't go down 20 percent
tomorrow. I mean, you never know what it's going to do tomorrow, but you do
know what it's going to do over ten or 20 years. And people talk about 20,000
being high. Well, I remember when it hit 200 and that was supposedly high. The
Dow, I mean, the Dow, in your lifetime. You know, you're going to see a Dow
that certainly approaches 100,000 and that doesn't require any miracles, that
just requires the American system continuing to function pretty much as it has.
Interest Rates – Act like
a gravity
Quick: Although you have had times where you thought stocks
were incredibly cheap, like in 2008, 2009, when you talked about that, even on
our program. You thought that there were times that stocks were greatly
overvalued where you've said, "Forget it, don't do it." Are we near
an inflection point right now, as best as you can tell?
Buffett: Well ... I've been talking this way for quite a
while, ever since the fall of 2008. I was a little early on that actually. But
I don't think you could time it. And we are not in a bubble territory or
anything of the sort. Now, if interest rates were 7 or 8 percent then these
prices would look exceptionally high. But you have to measure, you know, you
measure everything against: interest rates, basically, and interest rates act
like gravity on valuation. So when interest rates were 15 percent in 1982
they'd pull down the value of any asset. So, what's the sense of buying a farm
on a 4 percent yield basis if you can get 15 percent in government's? But
measured against interest rates, stocks actually are on the cheap side compared
to historic valuations. But the risk always is, is that — that interest rates
go up a lot, and that brings stocks down. But I would say this, if the ten-year
stays at 230, and they would stay there for ten years, you would regret very much
not having bought stocks now.
Dollar
Quick: Very quickly, the dollar has continued to climb. Is
that good news or bad news for America?
Buffett: That depends whether you're an exporter or
importer. It makes it very tough if you're exporting. But it's, you know, with
interest rates being what they are in Europe, you know, compared to here, the
dollar just has gotten stronger. And when people tell you what the dollar's
going to do, they'll be very careful. I mean, it just suggests they take up
currency trading for a living and see how they do.
Investing
Stocks are safe for
the long-term, very unsafe for tomorrow
Buffett: Yeah. But if
you're going to need – you shouldn't borrow money against stocks. And you
shouldn't – if you're going to need some money for college or something in a
year, you don't want to be in stocks because you don't have any idea what
stocks are going to sell for in a year. It's inappropriate. But stocks are safe
for the long run and they're very unsafe for tomorrow. If you call unsafe being
will you be bothered by a decline in market prices. But Berkshire, three times since I took over, has gone down roughly 50
percent. Did I feel poor then? No, not at all. I mean, you know, but I didn't
owe it on borrowed money. I knew it was going to be worth more over time.
American business is going to be worth more over time. You know, that's what
you're buying, is a business. You're not buying a stock, you're buying a piece
of a whole bunch of businesses. Are those businesses going to be worth more ten
or 20 or 30 years from now? Of course, they are. But if you think you can jump
in and out or that you know the time to come in, then I think you're making a
mistake.
Quick: In my lifetime, you said, you wouldn't be surprised
to see the DOW go to 100,000?
Buffett: Yeah, well, you're probably, what, 30, 35 and you
got another 50 years or 60 years left—
Quick: You're kind.
Buffett: You'll see it. You know, I mean, it's going to go.
I mean, they retain earnings every year. Just retained earnings. A fellow named
Edgar Lawrence Smith wrote a great book about that in 1924. It was the
rationale for the great bull market in the '20s. But you know, he pointed out
how retained earnings actually add-- to values. And if you owned a private
business and you retained the earnings every year, Berkshire's done that. And
it gets to be worth more money. And that's what's happening in this world.
Quick: "What does he think about the stock market right
now?" There are a lot of concerns from investors who have watched things
run very rapidly over the last few months. We've watched the DOW go past
20,000, watched the S&P go past 2,300. And there are investors who feel
like, "Wow, I missed my chance. I've been sitting on the sidelines. Now I
have to wait for a pullback." What would you say to those investors?
Buffett: Well, I don't have the faintest idea what the stock
market's going to do tomorrow or next week or next month or even next year. I
do know that over time – and we'll talk ten years of something of the sort –
that equities will do better than bonds, which is the main alternative or bank
deposits or whatever it may be. Fixed dollar investments for people. And
they're not going to be able to pick the time to come in. I don't know how to
pick the time to come in. I bought a lot of stocks in the last couple months.
They turned out – the stock market goes down 20 percent or 30 percent. But that
won't bother me if I like the businesses I bought.
BECKY QUICK: There was a question that came in from a
viewer, and I don't know the number on it you guys, if you can find it, the
gist of the question was does the market still have plenty of GEICO's out there
that you could find that are great investments, that are going to continue to
grow phenomenally? Or is it just a different market, is it a different time?
Buffett: It's tougher than it was, obviously, 50 years ago.
I mean, my best year actually was 1954. So see how far I peaked very early. But
I was working with tiny amounts of money and in a market that was not combed
over the same way as presently. So there are way more people looking to compete
with. And I think still think, because of temperamental differences, I think
there are a fair number of people that, with small amounts of money, can do
well. But the chances that the average person is going to be – pick them out or
that the person sitting across from you, trying to sell you, is that person, is
betting against the odds. Significantly against the odds.
Kernen: I have one more philosophical question Warren. And
it goes against what you normally speak to. But just in terms of looking at the
market and whether it's had, like, a run where it's done too well and it needs
to regress to the mean, or where it hasn't done well enough and it'll come
back, if you look in an eight year analysis, let's say it's triple in eight
years. That's, like, 16 percent a year or something I think because it doubled twice.
Or not quite. But it if it tripled, that's one way of looking at it. But if you
go back to 1999, 17 years it's only doubled. So that's only 4 percent a year.
So which is it? Has this market gotten ahead of itself because it's tripled in
the last eight years? Or it's taken forever to go from 10,000 to 20,000, so we
aren't necessarily in this rarified era. Do you have an opinion on that?
Buffett: Yeah. Well, I would bet my life well, it doesn't
mean much when I'm 86 to bet my life on a 30 year bet. But I would bet my life
that stocks over 30 years outperformed the 30 year bond. I would come close to
doing it, betting that over ten years, they'll do better than the ten year
bond, versus the one year bond or two year bond. I have, you know, no idea whatsoever.
But stock if you look at American equity, basic business of America, American
equity earns a tremendous return on tangible net assets. That's what the
business is about. That's what the farm is producing. Now, a bond is limited in
what it can produce. But when you say reversion to the mean, I'm not sure what
the mean is. I mean, the mean is going to be based upon returns on equity, the
amount of equity reinvested and reemployed. And I would say there the prospects
are so much better than in fixed dollar investments, that, you know,
admittedly, I liked stocks a lot better a few years ago. And I've said that on
this program. But the stocks versus bonds right now, it's not close. Now, bond
yields can change a lot. If bonds go to 15 percent, I may be recommending
bonds.
Buffett: It is someone who is not a professional. I'm a know
nothing doctor, I'm not in that business. The idea you're going to be in a game
you're not trained for or spent your life, not saying a zero IQ, you can have
200 IQ and not be involved in investments. I don't know why light switches go
on. I think I'm generally reasonably intelligent but I don't know. I'm a know
nothing physicist.
***
It says, "You only find out who's swimming naked when
the tide goes out. Do you feel that there are many naked swimmers right
now?"
Buffett: Well, it's not like during the internet boom or –
and there have been various real peaks – I've written a couple of times when I
thought things were getting out of hand on the high side. And-that's not now.
Now, if interest rates dramatically upward, then these valuations would come
down, in my view. But I don't see the games being played on a big scale that
you had in the late '60s or that you had around the internet time, you know. I
don't see lots of just fallacies being promoted. Or games being built on
accounting tricks and that sort of thing.
Quick: Is it fair to say though, you point to interest
rates. Is it fair to say that much has been built on the idea that interest
rates are not going to necessarily rise rapidly or dramatically anytime soon?
Buffett: Yeah. Low interest rates push stocks up. You know,
I mean the ten-year bond is selling at 40 times earnings. And it's not going to
grow. And if you can buy some business that earns high returns on equity and has
even got mild growth prospects, you know, at much lower multiple earnings, you
are going to do better than buying ten-year bonds at 2.30 or 30-year bonds at
three, or something of the sort. But that's been true for quite a while. And
I've been talking about it the whole time. I said people were idiots in 2008 to
put their money in cash. I mean, it was the one thing that wasn't going to go
anyplace. And interest rates are enormously important over time. And that's –
if bonds yield a whole lot more a year from now than they do now, stocks may
well be lower.
***
Investing - Timing
Quick: It's a very common message for you. But is there a
reason that you chose to put it so high in the letter this year?
Buffett: Well, I usually put it pretty high in the letter
because it's the dominant theme that's run through my life since I bought my
first stock in the spring of 1942 when I was 11 years old. And it overwhelms
everything else over time. I mean, we have hiccups in the economy and we even
had a panic in 2008. And we had a war during that period that when they started
we were losing the war, actually, in the spring of 1942. But this country
always comes back and wins. And it's astounding when you think about it, what's
happened in 240 years. That is less than three of my lifetimes. And let's look
at this place, I mean, there wasn't anything here 240 years ago. And
civilization is gone on, you know, for centuries, and centuries, and centuries
with people making very little progress in their lives. And then America showed
the way and it ... and we have not lost the secret sauce.
Quick: In terms of what the message is you want to get
across to people, I mean, when we're looking at markets at such high levels, as
Joe was just alluding to, it has a lot of doubters and a lot of people saying:
"Wait, it's too late for me to get in. I've missed it. We're past Dow 20k,
now I have to wait for the pullback." What would you say to someone like
that?
Buffett: Well, I would say they don't know, and I don't
know. And if there's a game it's very good to be in for the rest of your life,
the idea to stay out of it because you think you know when to enter it-- is a
terrible mistake. I don't know anybody that can time markets over the years. A
lot of people thought they can. But, if you were buying a farm and you decided
that farms were gonna be worth more money ten, or 20, or 30 years from now and
that would be a productive asset, go out and buy it unless it was just ... some
absurd price. And the best thing with stocks actually is to buy 'em
consistently over time. You wanna spread the risk as far as the specific
companies you're in by owning a diversified group, and you diversify over time
by buying this month, next month, the year after, the year after, the year
after. I ... but you ... making a terrible mistake if you stay out of a game
that you think is going to be very good over time because you think you can
pick a better time to enter it.
Quick: Although you have had times where you thought stocks
were incredibly cheap, like in 2008, 2009, when you talked about that, even on
our program. You thought that there were times that stocks were greatly
overvalued where you've said, "Forget it, don't do it." Are we near
an inflection point right now, as best as you can tell?
Buffett: Well ... I've been talking this way for quite a
while, ever since the fall of 2008. I was a little early on that actually. But
I don't think you could time it. And we are not in a bubble territory or
anything of the sort. Now, if interest rates were 7 or 8 percent then these
prices would look exceptionally high. But you have to measure, you know, you
measure everything against: interest rates, basically, and interest rates act
like gravity on valuation. So when interest rates were 15 percent in 1982 they'd
pull down the value of any asset. So, what's the sense of buying a farm on a 4
percent yield basis if you can get 15 percent in government's? But measured
against interest rates, stocks actually are on the cheap side compared to
historic valuations. But the risk always is, is that — that interest rates go
up a lot, and that brings stocks down. But I would say this, if the ten-year
stays at 230, and they would stay there for ten years, you would regret very
much not having bought stocks now.
Selling
Buffett: Well, there's a section in the report which has
been there for 30-some years saying that we won't sell a business just because
we get offered a fancy price for it or anything. But if it ever has one of two
things happening, that it promises to lose cash forever, or we have major labor
problems of some sort, we would consider selling. But I've gotten calls on
businesses saying, "I'll pay you way more than it's worth," and I
say, "I'm not interested." People have interpreted that-- in fact,
one of our directors had interpreted that as meaning it applied to the stocks
as well. Well, the truth is, we keep selling stocks a and we-- our favorite
holding period is forever. I mean, it'd be nice to find stocks. I've owned
Berkshire forever, I mean, for 52 years. So I followed myself, and I-- a lot of
my family's followed it. But we don't commit to owning anything-- stocks
forever. We do commit-- when a fellow sells me his business-- I commit that
we're gonna keep it. We're not gonna resell it to anybody. It's-- we're not a
private equity firm. And if it's disappointing, we'll keep it unless it gets in
that those two categories. But that one section in what I call the-- ground
rules-- that proved ambiguous is proved by the fact one of the directors
actually mentioned it to me. So I just thought I'd better make-- clear it up.
Quick: should that lead us to think that you might be
selling any of your ultra long term holdings? If I think of Wells Fargo or Coca
Cola or American Express, stocks that have seemed like you've owned forever.
Buffett: Yeah, we've got no intention of selling those. On
the other hand, let's say the world's greatest deal (LAUGH) came up. I mean, I
have not-- there's no self-imposed ban on selling-- those. I've got no plan to
sell 'em, but I just wanted to clear up that one point because it was-- the way
I'd said it earlier wasn't clear.
Bonds
Quick: Let's go to a question. T129 from Paul Howard. He
says, "What would you to do tackle the country's debt? Would you like the
50- or 100-year bond idea?"
Buffett: Well, I think that when rates have been where
they've been the last five or six years, or even a little longer, selling very
long bonds makes sense for the same reason I think it's dumb to buy them. I
wouldn't buy a 50-year bond, you know, in a million years at these rates. So if
it's that dumb for me to buy it, it's probably pretty smart for the entity to
sell them if I'm right. So I would say that the Treasury – I would've been –
there's a lot of considerations they have. But I would be shoving out long
bonds. And of course at Berkshire, you mentioned we had $80-some billion in
very short stuff. I mean, everything we buy in the way of bonds is short.
Buffett: I-- it absolutely baffles me who buys a 30 year
bond. I just don't understand it. And-- they sell a lot of them so-- clearly,
there's somebody out there buying them. But the idea of committing your money,
you know, at roughly 3 percent for 30 years-- now-- I think Austria sold some
50 year bond here, you know, at-- below 2 percent. I just don't understand
the-- in Europe, there are certain inducements actually for the banks in terms
of capital requirements to load up on governments. But it doesn't make any
sense to me.
Insurance Industry
"Self-driving car technology continues to advance
rapidly. How do you see it affecting GEICO earnings?"
Buffett: Well, self-driving cars will be adopted if they're
safer. If they're safer, there's less in the way of insurance costs, that brings
down premium by significantly. So, if all the cars – if a safe autonomous car
had been developed, then there's 260 million vehicles on the road, so it takes
some time to break in. The average age is about 11 and a half years or
something. But if the day comes when a significant portion of the cars on the
road are autonomous, it will hurt GEICO's business very significantly.
Quick: It sounds like you potentially see something like
this happening sooner maybe than you had anticipated a few years ago. That's
the case with me, but—
Buffett: It's the last 1 percent though that's the problem.
I mean it's going to happen one way or another, but, you know, who knows? You
had that situation in St. Louis a year ago and if you were driving down the
road and somebody took control of your car, only one or two experiences like
that can slow it down a lot. But it'll come. If I had to take the over and
under ten years from now on whether 10 percent of the cars on the road would be
self-driving, I would take the under. But I could very easily be wrong. You've
got very, very, very smart people, lot of them, working on it. You've got the
big auto companies – I mean, it's something that billions and billions and
billions of dollars are being spent on, and brains are being involved in it. So
it could easily come sooner than I think. But it will be negative for auto
insurers.
Buffett: Oh-- well, it's not predictable, but it's been--
the frequency of Florida hurricanes, for example, has been quite low-- for the
last ten years or so, compared to history. That's not been true in the-- you
know, in--in Asia. I mean, New Zealand had a quake a while back that would've
been equivalent to, in relation to their population, probably three times or so
what we've ever seen in the United States. But-- most of the cap covers do
relate to the United States. If you see ha-- Matthew came close last year to
being a big one. But-- it's been remarkably benign in terms of Florida, Texas,
the southeast-- for quite a while. But--that doesn't tell you anything about
next year.
Buffett: Well-- last year-- , tornados were unusually
frequent. And if you wrote comprehensive auto, or you wrote homeowners in
Texas-- you probably lost a lot of money on that line. We have, I don't know,
25 auto dealerships-- or thereabouts in Texas. And we had losses that were I
think seven or eight times the premium we paid, for example, on cars damaged at
our auto dealerships through tornados. So Texas got hit hard-- well, a lot of
places got hit hard. So what you've seen in the last few years is there's more
tornadoes than you might expect and-- fewer hurricanes. But who knows what's
gonna happen next year? You know, you've seen--you actually had a big quake
over in New Zealand not that long ago.
Retail Industry
Buffett: Yeah, well, Walmart's a fabulous company. And what
Sam Walton and his successors did, I mean, that's one of the great stories of
American business. I think retailing is too tough for me. Just generally, I--
we bought an department store in 1966 and I got my head handed to me. I've been
in various things in retail. B-- we bought Tesco over in the-- in the U.K. and
I-- it wasn't we. I bought Tesco over in the U.K. and got my head handed to me.
It-- retailing is very tough. And I think the online thing is very hard to
figure out, you know? Now, we own we're sitting in a retailer we own that does
very well. I mean, I think this particular business is relatively immune from
the online business, although we do a lot of online-- business here. But this does
very well. I think it'll continue to do well. But I think that-- I think Amazon
in particular-- is someone that's going to-- it's an entity that's gonna have
everybody in their sites. And they've got delighted customers. And it's
extraordinary what they've accomplished. And a lot of people like-- they like
the delivery, they-- you know, and that is a tough, tough, tough, competitive
force. Now, Walmart's pushing forward online themselves and they've got all
kinds of strengths. But I just decided that I'd look for a little easier game.
Quick: That investor then asked me, "Why don't you own
shares of Amazon?"
Buffett: Well, that's a good question. And-- but I don't
have a good answer. Obviously, I should've bought it-- long ago because I
admired it long ago, but I didn't understand the power of the model-- as I went
along. And the price always seemed to more than reflect the power of the model
at that time. So it's-- one I missed big time.
Quick: Is it too late or you just don't know?
Buffett: I just don't know. Yeah. I d-- retailing is tough
for me to figure out. I mean, it-- I-- if you go back to when I was a kid, in
every town, the guy that owned the big department store was king, I mean,
whether it was Marshall Field or, you know, or Dayton or Hudson in Detroit or
Frederick and Nelson, Seattle, or you name it, , the department store was king.
And people said, "What can happen to it?" You know, it's down there
where the streetcar lines crossed and the women took the streetcar to shop
there. And they could see 500 spools of thread and 500 wedding dresses. And
they couldn't see anything like that. That-- it offered this incredible array
of goods. And then somebody came along with a shopping center. And instead of
making it vertical with all this display owned by one person, they spread it
out, owned by many. And now comes the internet, and that's the ultimate variety
of things that you can get to very easily. So people love variety. They love
low prices and a whole bunch of things. So it's-- it just keeps evolving. And
the great department stores, many of 'em have disappeared and the rest are
under pressure.
Airline Industry
Buffett: That's so true. He'd a saved him a lot of money. If
you look at the last 30 years you can look it up on the internet, I think there
have been almost 100 airline bankruptcies. I mean, that is a lot. So it's true
that the airlines had a bad first century.
Quick: I'm sure that this was a horrible business, what's
changed?
Buffett: It's a very tough business because it's got the
marginal cost of a seat ... is practically nothing. You have these huge fixed
costs, and yet if you take one more person on there's virtually no cost to it.
So you're very tempted to sell that last seat too cheap, and if you sell the
last seat too cheap it becomes the first seat for, in a way, so it has- it has
this dynamic to it. And unless the airlines operate in the well over 80 percent
capacity — what kills ya is when they really have too many airplanes around. I
mean, they do what anybody else does. If they got too many airplanes around
they just think it down to marginal cost, and marginal cost cause you to go
broke over time in the airline business. I- the hope is that they will keep
orders in reasonable relationship to potential demand. And-- lately they've
been operating in-- in the 80s now for a while. But it's a business you can
always mess up.
***
And we do have a question that came in from a viewer, James
Lee, it's T51, folks, who says, "Why do you believe that managements in
boom and bust industries like the airlines will act prudently and rationally
for a long time?"
Buffett: Well, that's the question. But hey, it's certainly
easier to act rationally when you're doing 80 percent plus loan factors than if
it was a lot less. So the big problem if they get too many airplanes around you
know, you can be sure that it'll be a lousy business for a while.
Quick: Does that mean that's a number you watch, kind of
like the canary in the coal mine – is the loan factor itself?
Buffett: Well, you can see what the orders are and all of
that and delivery's expected to be. And airline usage – will go up over time.
You know, not necessarily dramatically, but that will increase. So it isn't
like demand is ever going to go away. If you get too much supply, you got a
problem.
Furniture Industry –
75% is imported
Buffett: Yeah. I would still say I think the economy will be
better off four years from now, even though I disagree with some of the
specific policies. But I disagree with the policies of most administrations –
of some policies. Border adjustment tax, I mean, it's an import tax, and an
import tax is a sales tax. You're looking – we're here at the Nebraska
Furniture Mart. This store is in several buildings, does over $400 million a year;
75 percent of what you see is imported. I mean, if we pay an import tax on it,
our customers are going to pay for it. It's a sales tax, and it's a sales tax,
in this case, on items that are not yachts or anything like that. They're
things that the ordinary person buys. So it would be a big sales tax.
Apple – stock purchase
And at this
point he now owns $17 billion worth of Apple shares. That gives him about 2.5
percent of the shares outstanding of Apple, and is now the second largest
holding after Wells Fargo for Berkshire Hathaway. Very close to Coca-Cola?
Buffett: Well, I've, yeah, I had learned that from a fella
named Phil Fisher who wrote this great book called "Common Stocks and
Uncommon Profits." And he calls it the scuttlebutt method. And Phil was a
remarkable guy. And I first used it back in 1963 when American Express had this
great Salad Oil Scandal that people were worried about it bankrupting the
company. So I went out to restaurants and saw what people were doing with the
American Express card, and I went to banks to see what they were doing with
travelers' checks and everything. And clearly American Express had lost some
money from this scandal, but it hadn't affect their consumer franchise. So I
ask people about products all the time. When I take my great-grandchildren to
Dairy Queen they bring along friends sometimes. They've all got a iPhone and,
you know, I ask 'em what they do with it and how ... whether they could live
without it, and when they trade it in what they're gonna do with it. And of
course, I see when they come to the furniture mart that people have this
incredible stickiness of — with the product. I mean, if they bring in an
iPhone, they buy a new iPhone. I mean, they're ... it just has that quality. It
gets built into their lives. Now, that doesn't mean something can't come along
that will disrupt it. But the continuity of the product is huge, and the degree
to which their lives center around it is huge. And it's a pretty nice, it's a
pretty nice franchise to have with a consumer product.
Quick: Hey, Joe, you can relate to that, the stickiness of
the product and being hooked into the Apple eco-sphere, right?
Diplomacy
Buffet: Now, I might mention you know, it reminds me
of that old story about the difference between a diplomat and a lady. I don't
know whether you've ever heard that or not.
Quick: No.
Buffett: Well, if a diplomat says yes, he means maybe. If he
says maybe, he means no. And if he says no, he's no diplomat. And if a lady
says no, she means maybe. And if she says maybe, she means yes. And if she says
yes, she's no lady. So he probably got a maybe and didn't know whether it was
coming from a diplomat or a lady, essentially. I mean, that's what frequently
people get. I don't work on acquisitions that way myself, I just go in and say,
"If you want me to make an offer, I'll make one. If you don't want me to
make an offer, I won't make one. And I'll tell you a price if I do it."
But there's usually much more of a mating dance than that. And so you get this,
"I'll take it to the board," and all that. And you're dealing with
different kinds of people. Some people are different cultures, they're more
polite than others, and so on.
***
Source: http://www.cnbc.com/2017/02/27/billionaire-investor-warren-buffett-speaks-with-cnbcs-becky-quick-on-squawk-box.html?curator=alphaideas&utm_source=alphaideas
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