Highlights of Warren Buffett’s Interview on CNBC – March 2, 2011

Warren Buffett appeared for three hours this morning on CNBC (6 a.m. – 9 a.m. EST) and answered questions from both CNBC staff and viewers.  His responses to these questions included:

(1) The recent rise in oil prices will have no impact on Berkshire Hathaway owned GEICO and its large investment in Coca-Cola five years from now.  He does not know where oil prices will be in the near future.  Demand for oil is inelastic, so small interruptions can lead to a big change in price.  Markets anticipate this. 

(2) The American economic system works.  Once in awhile the economy falls off the track as is did in the Fall 2008.  Berkshire’s businesses are now inching forward.  Its TTI electronic components business is booming.  Its railroad (Burlington Northern) has recovered 60% from its bottom and is improving each quarter.  January was a record month for its Iscar machine tools.  However, its businesses depending on residential construction are not moving.  2010 was a better year for Berkshire than 2009, with Berkshire doing some net new hiring.  By election day in November 2012, the unemployment rate will be in the low 7% range (vs. 9% now).  Housing will be better in one year.  The demand for housing is increasing from new household formations, while the supply of new housing is slowly decreasing from current under building, which will help offset  the previous oversupply.

(3) Buffett does not like short term or long term bonds as investments at current interest rates.  The U.S. is currently running a budget deficit equalling 10% of GDP.  This is providing a large fiscal stimulus.  Commodities are for speculators who are betting that their prices will go up and hope that someone will pay them a higher price later.  On the other hand, assets such as rental property or stocks can be expected to earn income over time.  If the stock market were to close for 10 years, he would not worry about his investments in Coca-Cola or Wells Fargo since they will continue to produce over time.  The current value of all of the gold in the world equals $7 trillion, which approximates 1/3 of the value of all stocks in the U.S., or equal in value to all of the farmland in the U.S. (1/2 of the land in the U.S.) and 7 ExxonMobils plus $1 trillion in walk around money.  Buffett prefers the farmland and the 7 ExxonMobils to the gold.

(4) Stocks still look attractive vs. most assets, although they are not as cheap as they were.  It is harder to make deals now.  Buffett had an iron in the fire a couple of days ago, but someone else beat him out.  There is nothing of high probability at the moment.  The deal he lost out on was a “zebra”, not the “elephant” he referred to in his annual report.  His “itchy finger” in his annual report was a free advertisement.  Any acquisition he makes must be at a good price so he will get his moneysworth from earnings.  He is more likely to pay a fair price for a privately owned business than he would after paying a 20% premium for a publicly traded company.  Mars (candy company) is a wonderful business but Buffett is currently partners with Mars with respect to its Wrigley’s subsidiary.  If private owners want to sell their business to Buffett (and he wants to buy it), he will advise them to keep it.  The money the private owners will collect cannot be invested in better businesses.  But sometimes there are tax or family issues that would lead to the sale.  A good business should not be sold just to get money. 

(5) Buffett is interested in investing either in the U.S. or outside of the U.S.  He was lucky that he received a letter from Iscar (Israeli machine tool company that he purchased).  He had not heard of the company before.  Maybe he will get another letter tomorrow.  There is a 10% limit on owning a bank (Wells Fargo), so he cannot buy a bank.  He would rather buy an entire business.  But he owns about $60 billion of pieces of businesses (stocks).  He is happy to own shares in Coca-Cola and Wal-Mart.

(6) When he bought Burlington Northern, he sold his shares in Union Pacific and Norfolk and Southern railroads.  He did not have to sell — it was a mistake.  He was planning to buy more of those shares prior to the acquisition.  He prefers railroads in the west such as Burlington Northern and Union Pacific.  Managers of Burlington Northern are now happy that they are owned by Berkshire, in part because  they no longer have to spend 20% of their time talking to analysts.

(6) Buffett once announced a stock buyback when its shares were selling in the low 40,000’s.  But it was self-defeating, since the the share price jumped with the announcement.  Shares should be bought back if their price is below intrinsic value.  Then you are buying a dollar for 60 cents.  Recently companies have been buying back their shares at any price, not when they are cheap.

(7) This is the fourth year in a row that Buffett is sitting down with CNBC after its annual report is released.  It plans to make about $8 billion in capital investments this year, with almost all  being made in the U.S.  His railroad and electric utility are capital intensive.  Netjets will be purchasing 50 Bombardier jets with options on another 75.   It would require at least $43 billion for a new competitor to replicate the tracks, tunnels and bridges of Burlington Northern.  That is too expensive for anyone to build. 

(8) Berkshire’s investee BYD’s success depends on it succeeding in the field of battery technology.  It is a tough competitive game, but Charlie Munger thinks BYD will be the winner.  Buffett would not answer the question as to whether he would buy more shares (he owns 10%) at the current low price.

(9) Buffett likes to act fast on acquisitions.  If a deal is offered to him on a Friday, he wants it done by Sunday.  Burlington Northern underperformed the week before he agreed to acquire the 77% of shares he did not already own.  Otherwise people talk and the share price runs up.  (He was referring to the recent SEC charge against a Goldman Sachs director who is alleged to have leaked information about Berkshire’s planned investment in Goldman Sachs in October , 2008.) 

(10) It was unfortunate the way Wells Fargo’s CFO  Howard Atkins was dismissed without a public explanation.  But Buffett read Wells Fargo’s 10K this past Saturday for four hours and he is satisfied that there is no financial problem with Wells Fargo. 

(11) Moody’s has a duopoly in the rating of corporate and municipal bonds (along with S&P) but they missed the mortgage market.  This is a natural duopoly but Congress and the people got upset.  Moody’s franchise is not as bulletproof as before.  However, the threat is receding to some degree.

(12) As a result of Buffett’s full ownership of Burlington Northrn he has learned that its competitive position relative to truckers has increased significantly in the past year.

(13) GEICO gained 130,000 new policyholders in February 2011.  When Berkshire bought the balance of GEICO in 1995, GEICO was spending $20 million per year on advertising.  Now it spends $900 million per year.

(14) When Lou Simpson retired last year, Berkshire sold all of his stocks.  Todd Combs will be selecting his own stocks.  Neither Combs nor Buffett wish to inherit someone else’s investment decisions.  Bank of America and Nike were Lou Simpson’s picks.

(15) Goldman Sachs is paying Berkshire $15/second on its preferred stock.  As soon as the Federal Reserve permits Goldman to buy back this preferred stock, it will.  General Electric will buy back its preferred stock in October, 2011 by contract. 

(16) Berkshire has received permision to sell insurance in India.  This permission has been received within the past 48 hours.

(17) The CEO of a company should be its chief risk officer and should go away poor if he/she has ruined his/her company and harmed the country.  Instead, failed CEO’s have walked away with hundreds of millions.  Incentives are very important.  They can help set the right limits on leverage.

(18) The mortgage market should involve large private organizations, backstopped by the government.  Then the discipline of the market will prevail (instead of Fannie and Freddie).

(19) With respect to “too big to fail”, shareholders of Citigroup and Wachovia lost a lot.

(20) Equities will outperform short term and long term fixed income securities over 10, 20, and 30 years.  Investors should not buy stocks with borrowed money.