Warren Buffett (WB)was interviewed for three hours on CNBC today from 6 a.m. – 9 a.m. The highlights of this interview are:
(1) WB strongly endorsed Berkshire’s investment in IBM, which is one of its (BRK) four largest holdings. Berkshire is IBM’s largest shareholder and owns almost 80 million shares or about 8% of its shares, currently valued at over $13 billion. WB added to his position during the first quarter of 2015. IBM has reduced its shares outstanding from 1.6 billion 10 years ago to about 985 million today through stock buybacks. It has also reduced its employee stock options from 250 million shares 10 years ago to just a few million today. IBM is buying back stock at prices below what the stock is worth and therefore adding to shareholder value. Wells Fargo and American Express are large customers of IBM as is Geico (Watson data analytics). IBM is trusted and innovative. Although its share of the cloud is small, it will do well in the future since this is not a winner take all business as is search. Since IBM has no net tangible equity it is earning infinite returns. (At the BRK annual meeting on May 2, both WB and Vice Chairman Charlie Munger (CM) endorsed their investment in IBM — CM said they “voted 2 – 0” to invest in IBM.) IBM CEO Ginni Rometty said IBM’s data analytics business grew 7% last year and at 12% during the first quarter. IBM has been returning $10 – $11 billion to shareholders per year through stock buybacks and dividends.
(2) Stocks are cheap relative to bonds. If interest rates rose to normal levels, then stock prices would be high (but not excessively high). If interest rates stay low for 10 years, then stocks are greatly undervalued.
(3) WB vigorously defended Clayton Homes against charges made in the Seattle Times about predatory pricing.
(4) In response to NetJets pilots picketing the annual meeting on Saturday, WB mentioned that they are paid an average of $145,000 per year which is higher than their competitors and they are also treated better with 7 days on duty and 7 days off. NetJets pilots are not leaving BRK to go to its competitors. On the contrary, pilots from its competitors are lining up to join NetJets. The NetJets pilots union is objecting to Berkshire’s plan to have the pilots contribute to the cost of their health insurance.
(5) WB deflected criticism about its partnership with 3G Capital leading to large layoffs at Heinz (HNZ). WB stated that HNZ was inefficient with too many employees. Also plants that were shut down were losing money. 3G Capital turns inefficient firms into efficient firms. Both BRK and 3G Capital are long term investors and plan to grow the company (HNZ) and not sell it after a few years as is typically done by private equity firms.
(6) BRK is not too big too fail. Regulators have not contacted BRK about being possibly designated a Systemically Important Financial Institution (SIFI) which would require additional regulations and capital requirements.
(7) Both WB and CM agreed that earned income tax credits are a far better solution to income inequality than raising the minimum wage.
(8) WB is concerned about the Federal Reserve raising interest rates when European and other countries are lowering them.
(9) WB is not concerned about the amount of sugar in Coca-Cola and Heinz Ketchup. These products have had sales increase for over 100 years and will continue to do so. WB said that 1/4 of his calories comes from Coca-Cola and he has never felt better. (At the annual meeting WB said that if he had to eat broccoli he would not live as long since he would not be happy. “People who shop at Whole Foods do not look happy”.)
(10) WB thinks the European Union will evolve and change over time.