Warren Buffett Talks About His Outlook On Markets.
Warren Buffett Talks About His Outlook On Markets, Tax Reform, Pilot Flying J And More (Full) | CNBC
Becky: We are here this morning with Warren Buffett the chairman and CEO of
Berkshire Hathaway and Warren we want to thank you very much for your time this morning.
Warren: Thanks for having me.
Becky: You know we’re just coming out of this story about Las Vegas and well unfortunately it seems that we as a nation are becoming more and more inured to hearing about shooting stories. This one is different in the scale and the scope of it and the stories that are coming out right now. Do you have any reaction to what you heard?
Warren: You never should get inured to this and the one thing I would say is that I heard that the shooter got off 200 rounds in 90 seconds or something like that. And I think the Las Vegas Metro police did an incredible job in getting there. I mean when somebody is shooting at that rate the police force may have saved maybe even hundreds of lives by reacting as fast as they did but you’ve got 325 million people in this country. And a certain percentage of them their brains don’t work like the brain should.
Becky: And you see a situation like this develop. Obviously our hearts and our thoughts are with the people of Las Vegas and the people who have travelled around to be there today but we are talking about business. And as much as we should not become inured to this. If you look at the markets it’s hard to see much of a reaction. The markets have ignored just about any potential bad news lately, with the Dow setting another record yesterday and with eight quarters in a row now gains for the markets. Is that a market that makes sense to you? Do valuations here make sense? Well valuations make sense with interest rates where they are. I mean in the end you measure laying out money or an asset in relation to what you’re going to get back. And the number one yardstick is US governments. And when you get to 230 on the on the 10 year I think stocks will do considerably better than that. So if I have a choice of, I’m gonna take stocks at that point on the other hand if interest rates were on the 10 year were 5 or 6 we’d have a whole different valuation standards for stocks. And we’ve talked about that you know for some time now.
Becky: It’s been years that you’ve been talking about how this is in relation to gravity in pulling the markets down and how it’s not happening here.
Warren: Interest rates or gravity. If we do interest rates were going to be hero from now until Judgment Day you know. You can pay a lot of money for any other asset. You would not want to put your money out of zero. And I would have thought back in 2009 that rates would not be this low eight years later but it’s been a powerful factor and the longer it persists the more people start thinking in terms of something close to the race they’re seen for a long time. So the one thing I’m sure of is that over time stocks from this level will be bonds for this level. If I could be short the 30-year bond 3% or something in long the S&P; 500 and just have it put away for 30 years stocks are going to far outperform bonds. And the question is which variable is gonna change? And everybody expects interest rates to change but they’ve been expecting it quite a while.
Becky: So does that mean, I mean if the one factor is interest rates we know that the Fed is looking at raising rates. It’s going to do so slowly and gradually over time. At least that’s what they’ve been telegraphic to this point. Would you bet on that continuing for the next couple of years? I mean 2.3% to 5% is a long way when you’re moving at quarter point increment.
Warren: Yeah that’d be a long way and I would guess I don’t try and guess the stock market I just buy businesses I like, but if I were to guess, if interest rates, if the 10 year moved up to 5% I think stocks would be somewhat cheaper.
Becky: You’re not betting that that’s going to happen in the next couple of years?
Warren: No. no all the time I’m gonna own stocks. I mean it’s been so wide I’ve written about it in their annual reports. I mean stocks have been so much more attractive than bonds for a long time now and that’s partly intentional on the part of the Fed. I mean they want assets to increase in value. And the way to do it was to reduce that gravity force of higher interest rates.
Warren Buffett’s take on the Tax Reform
Becky: The Fed has been sounding a little more hawkish even Janet Yellen has been sounding a little more hawkish. Does that concern you, are people getting complacent, thinking rates are going to be low for an extended period of time?
Warren: Well I think they expect them to increase but the question is how much. I mean if the three years from now interest rates are 100 basis points higher than the stocks we’ll still achieve at these prices. If they’re 300 or 400 basis points, they won’t look cheap. And Yellen doesn’t know what she would do 3 years from now. I mean she’s got more of a job that’s simple factor of the stock market. It’s really interesting because the Fed had said. They like to say 2% inflation. I mean that’s fairly recent, Paul Volcker would not have slapped 05:20 inaudible] in the 80s but if the US government is borrowing at 10 years from you at 2.3% and their own instrument the Fed is saying we would really like money to become worth 2% a year or less. They’re not promising you very much in terms of real terms for saving.
Becky: Right, so Janet Yellen you said she’s got a big job. The question is does she keep that job or does president Trump appoint someone else? And it seems like two of the leading figures right now are either Kevin Warsh or Jerome Powell. As an investor do you have to spend some time thinking about who’s running the Fed to think about what stock prices are going to do if interest rates are the most important factor?
Warren: Yeah, I don’t spend time thinking about it, it wouldn’t do me any good to think about it. I wouldn’t know the answer in the end and most of the time the Fed is not that important. Occasionally it’s everything.
Becky: It’s been awfully important the last 8 or 9, 10 years.
Warren: It could be the only game in town. There is only one person that was a member of 2008 could walk out like the sheriff into the street and say you know that this isn’t going any further we’re going to do whatever is necessary and have the power to do it. I mean the Fed is of enormous importance during a panic and if people tend to hang on their every word in between. We don’t pay any attention to it.
Becky: But you have said that interest rates are the most important factor. So anybody who’s trying to play the market and figure things out maybe not as long of a term investor as you’re going to be, what these things should be thinking about this.
Warren: Well but if they really think they can figure it out they might go play the bond market. 07:07 inaudible] get over to the stock market. But I can’t remember a decision we’ve ever made based on the Fed except for the fact that I felt that Bernanke and Paulson and Geithner but I felt the Fed would do the right thing in the fall of 2008. We had an incredible economic machine that was in the hospital and the Fed could bring it out.
Becky: I realized that interest rates are not something that you often think about other than on a very broad scale. You’ve also said that taxes aren’t something that you think about other than on a very broad scale. Is that the case this time around?
Warren: Well I think about them plenty right now because we may or may not have a change in the tax code and we have lots of stocks with lots of games and we have a few stocks with losses. And here we are in October and if something happens, the change of the tax rates significantly on January 1st it would pay assuming that they would reduce rates on capital gains or corporate rates. It would pay me to sell the losses now and defer the gains until next year and I think there’s a lot of that going on because I think there’s an expectation that if they have a tax act, they will cut the rates, certainly corporate rates and it would be kind of foolish they have a gain now and pay 35% tax on it if by waiting a few months you were likely to pay 25%. So it actually very seldom enters into our thinking. On balance we’d rather sell things with loss in the game but right now we’re sitting and watching because within 3 months, actually less than that we’ll know the answer on this as to whether this was the year to take losses and not games and we’ve got actions on both sides that we would take.
Becky: So you’re actually stopping what you’re doing as at Berkshire. This is not just your personal account. At Berkshire you are actually holding off potential losses?
Warren: Potential sales and realizing losses.
Becky: So that’s an actual change in your behaviour that I’ve never heard you say anything.
Warren: It doesn’t happen very often. As you’re in the month of October with a major Tax Act being a real possibility. Who knows what, it’s a 20% chance, 50% chance but one thing I know is I’ll know the answer within a month or two. I mean there’s not that many days left to legislate and I would feel kind of silly if I realized a billion dollars were the gains that paid 350 million of tax on it. If I just waited a few months it would have paid 250. Now if enough people were doing that. That may mean that the markets being affected fairly substantially.
Becky: Right what is the broader play in the markets as a result because if you’re doing it you’ve got to imagine lots of people are doing it.
Warren: I think that’s true, I think that’s true.
Becky: You’re talking about billions of dollars of potential sales.
Warren: Well maybe hundreds of billions 10:21 inaudible]. And you may be talking about people, it would tend to depress stocks that have behaved badly because people would be taking the losses now and it would tend to defer gains and reduce the sellers currently, there would be in stocks with very large depreciation. I can tell you it’s an actual factor at Berkshire and it’s very very very seldom and by 87 years it has ever been a factor.
Becky: So what might we see if? But first of all what do you think the odds of a tax planning getting passed are?
Warren: Well I personally think they’re higher probably than most people think because I think that having had the health care bill go the way it has and just generally and no infrastructure, if you take maybe the three big items this is the only one left to do this year. I would think the Republicans controlling both houses and the presidency, they would not want to have a shutout in the first year and of top priorities. And I think they can get it done I mean it’s not a tax reform act, it’s the tax cut Act. And I think that any politician that can’t pass a tax cut probably is in the wrong line of business. I mean it’s a different thing with the Health Care Act but I think there could be a lot of compromise and I think it could be bipartisan to a degree.
Becky: Okay I know Joe has a question but before we get to it Warren I know that we’ve had 12:03 inaudible]. Let’s get that back in before Joe asks this question but Joe make sure that this working before. Is that okay?
Warren: I think so.
Becky: Okay Joe go ahead try that out.
Warren: I guess what Joe asked, whether it’s okay?
Joe: Yeah, if you don’t like the question you can say well 12:19 inaudible]. Hey Warren you know I’m jealous of you.
Warren: I’m already practicing.
Joe: Yeah exactly, you know I’m jealous, envious but sometimes I see you do things where I mean, I would, if I could by Flying J I wouldn’t care if I ever made any money. I would just like to own Flying J. Do you ever do things just because you can? Just say I mean are you gonna make money on this? Like Dairy Queen you buy Dairy Queen I don’t think you’re trying to make money. You like Dairy Queen, what about C’s Candies you like C’s Candies? And I want to own. Why flying J. I love those places there’s showers, there’s restaurants. I mean you’re out on the road, you’re like a cowboy and with the truckers and everything. You do things just because you can I think right?
Warren: Well Joe if you feel that way I mean bring money. I’ll send you a map of all the locations.
Joe: Do you stop there? Right. Becky have you’ve been in a Flying J? I mean a lot of times.
Becky: I have I’ve been in plenty of them.
Joe: It’s like an oasis.
Warren Buffet as a Pilot Flying J
Becky: There’s one right on the interchange where you get off 295 in New Jersey and get on to exit 7. And there’s one right there but I was just talking to the Flying J CEO. The pilot Flying J CEO who happens to be here and will be our guest on this block.
Joe: I know he just buys cool things.
Becky: I went on the one to Indiana and back.
Joe: So my question is does it have to be in good a good investment Warren or you just buy whatever the hell you want because you like it?
Warren: Well you know they’re not mutually exclusive. I do like the products of virtually all our companies. I suppose if we ever bought a funeral parlor or something I wouldn’t be as 14:01 inaudible] but generally speaking I like our product but I kind of like good economics to go along with them too.
Joe: You do, I mean obviously you’ve been. How smart are you in terms of like, I mean how profitable is like Geico? I mean you got an eye for things that are really really profitable but there are times where I just wish I had a lot of money. I’d just say you know what I really like that place. Remember that guy Victor Chaim. I liked it so much I bought it.
He bought the razors because he liked the way they set. Maybe you know, maybe when you get to a certain point you just do that you know.
Warren: Well if you do what you’re doing with your own money and not Berkshires. But I wouldn’t argue against that. I mean if you have a lot of money and there’s something you like and it isn’t profitable you buy it but you don’t buy it with Berkshires money you buy it with your own money.
Joe: Most of Berkshire you own anyway Buffett. What are you talking about – how much of
Berkshire is yours?
Warren: Well every single share is gonna be given away.
Joe: I know but it’s fun, you know you get to do cool things.
Warren: It’s fun, absolutely I mean the high point are bricks. Joe I sent you a brick.
Joe: I know you did.
Warren: I’ve never want to say this publicly but you really not show the proper appreciation.
Joe: Now I know, thank you. You own Net Jets and I mean the advance was. Like would it really break the bank if you send me a few hours on a Net Jet plane you know you sent me a brick instead?
Warren: Well I didn’t get any response from the brick so maybe I’ll try on that Jets.
Joe: Okay alright can I get a 15:40 inaudible].
Warren: I can’t see your face.
Joe: I think you did send me one, it just had my name but it was not good for anything. It was like one of those you know Taco Bell card that’s been all used up anyway, sorry thanks.
Warren: I do have very quick guards.
Becky: Alright we are going to be back in just a moment. We’re gonna take a very quick break here.
Good morning everybody and welcome to squat box we are live in Omaha Nebraska this morning with two special guests. We have already introduced you to Warren Buffett who’s the chairman and CEO of Berkshire Hathaway but joining us right now is Jimmy Haslam. He is the CEO of pilot Flying J and just this morning in the last 15-20 minutes there was a deal that was announced that Berkshire Hathaway is buying a 39.6% stake in pilot Flying J. Jimmy thank you very much for joining us.
Jimmy: Thanks for having us on Becky.
Becky: So how did this deal come together? What happened, explain? How did you two meet?
Jimmy: We have a mutual friend Byron Trot who Warren is actually known longer than we have and Byron’s company BDT owns 5% of our company and he introduced the two of us back in May and over the last several months we were able to put together a deal that we think makes a lot of sense for both companies.
Becky: Let’s talk through that deal. A 39.6% stake that will then go to an 80% stake in the year 2023. Why that structure?
Warren: I think it’s 38 points.
Jimmy: Yes 38 point.
Warren: Well I’d be glad to make it 38.
Jimmy: You negotiated hard for 39.
Becky: So why set up that structure? I mean Warren this is not a situation where you’re short of cash?
Warren: Well we’ve set up a lot of different structures that what the managing party would like to have and you know when the bumpkins 17:21 inaudible] in 1983 it’s the same structure. So there situation in terms of their family and their partnership and everything, made this logical. And we have this two-step arrangement and we’ve got other two-step arrangement. Marmon with the Pritzker family we had a three-step arrangement. So we try to fit what the seller would like and you know with families and everything you’re gonna have different arrangements.
Becky: Jimmy this is a situation where this is a family-run company for almost 60 years. We’re talking about the number 15 on Forbes list of private companies in terms of size. 750 retail locations in 44 states. Some of the metrics are pretty amazing. Fourth largest tanker fleet in the nation just by what you’re sending around to make sure you have enough fuel at all those stops. Talk about the company how you built it and why make this transition?
Jimmy: It’s like a lot of companies, Warren as bought into a family-owned, family-run company started by my dad in 1958 with one gas station. We’ve changed over the year’s gas stations, sea stores, truck stops and we’re now a huge distributor of fuel, gasoline and diesel fuel. We sell more diesel fuel over the road than anybody in the United States and it’s a big logistics company. Every 22 seconds we drop a load of petroleum somewhere in the United States or Canada at one of our stops. Also a big food company. We sell over a billion dollars in food and over two billion dollars retail this year when 44 states and US and Canada.
Becky: Well you must have a pretty good idea of what’s happening in the US economy at any given point given some of those metrics. How are things?
Jimmy: Warren and I were talking earlier. I think we’d say it’s pretty good, it’s pretty good. Particularly strong in Florida. Particularly strong in California and of course Texas with the return of the oil boom in fracking is really strong. So it’s certainly better than it was several years ago.
Becky: Two of the states that you just mentioned are states that have just been hit pretty hard by the Hurricanes that came through. Do you see a blip on the screen for that? Is it something that’s picking up or how do you 19:17 inaudible] that.
Jimmy: Hurricanes are obviously very unfortunate for the people involved. From a business standpoint it does create more business. There are homes that need to be rebuilt. There’s new cars being sold etc. So our business is up substantially in both Florida and in Texas.
Becky: Wow why does Berkshire seem like a good fit for you?
Jimmy: Long-term investor. I think I’m right Warren of the companies you bought not equities. I don’t think you’ve ever sold one. I think you told us is that right?
Warren: Yeah that’s right.
Jimmy: Long-term investor hands off he truly wants us to run the company. Wants us to maintain the culture and of course if there is an opportunity for us to grow the company substantially he’s got plenty of capital. So it’s just a marriage that we thought made a lot of sense.
Warren: Jimmy is based in Knoxville and we bought another company in Knoxville 14 years ago, Clayton Homes. Their employment has gone from 5,000 to 16,000 and they’ve seen me exactly once. They might have done better if they had me more than one time but Jimmy knows and the families know each other. So they’ve got a chance to check and see exactly how much we do interfere with operations. And the truth is I wouldn’t know how to build a manufacturer at home or trucks travel centre. We depend on management.
Becky: Jimmy you have seen some pretty phenomenal growth. I think you increased the number of stores you’ve had in the last two years by 10%, is that correct?
Jimmy: Yeah we’ve been a growth company and like I said from the get-go and we have a pretty large market position now but we’re always looking for opportunities Becky to grow either organically, to grow, to buy a single stock. Last year we partnered with marathon petroleum on 41 stops in the southeast. Over the last couple of years we’ve added 71 stops and still think there’s an opportunity to continue to grow the company.
Becky: Where are you not right now that you’d like to be?
Jimmy: We really, we’re in 44 states, we’re not in Alaska and Hawaii, in some of the north-eastern states that are small or tough to get in for the truck stop standpoint. So I think the growth will continue really in all segments of the country. Texas obviously with the natural growth, Texas has coupled with the oil industry presents I think great opportunities.
Becky: Jimmy we want to thank you so much for joining us today and hope to see more of you in the future, really appreciate your time.
Jimmy: Thanks Becky appreciate you having us on.
Becky: We appreciate it. Joe and Melissa I’ll send it back to you in the studio.
Joe: Thanks Becky we’ve got to go but send me, how many as Jimmy been to, I just wander out of the 750. I’d like to visit, just cool. Anyway we will have much more with that.
Becky: Jimmy you’ve got an answer?
Jimmy: All but one.
Becky: Joe he said all but one and I just named one. I said there’s one in New Jersey I’d describe kind of where it was he said oh yeah in Bordentown he knew exactly.
Jimmy: We just open one in Lathrop California hadn’t been to it yet.
Joe: That’s unreal.
Jimmy: It’s in a lot right next to our house.
Joe: See that’s worth it.
Jimmy: It would make a terrific location.
Joe: That’s worth it right there. I was thinking Alaska would be cool but people aren’t really driving across, so you know, you get to a destiny it’s not really like going somewhere but think about it. Anyway we’re gonna hear much more from Becky and Warren Buffett throughout the hour stay tuned.
Becky: Welcome back to squat backs everybody. We are live in Omaha Nebraska today and our special guest is Warren Buffett. He’s the chairman and CEO of Berkshire Hathaway. We’ve been talking about a lot of different issues this morning. Warren I want to thank you for your time again but while you’re here today it happens to be the same day that Wells Fargo CEO Tim Sloan is headed to Capitol Hill. This has been a long messy process of trying to find out what happened at Wells Fargo. Tim Sloan is just the latest person who’s being called before Congress with this but already there’s been a lot of santim theory before he gets there. I want you to listen to a sound coming from Senator Warren who was speaking with Jim Cramer recently on Mad Money. Go ahead, listen to what she had to say.
Elizabeth: You know we had a hearing a year ago when John Stumpf, who had gone on your program. First one out of the barrel and said hey listen I take personal responsibility for what’s gone wrong at Wells Fargo. And then it turned out what personal responsibility meant was firing thousands of people who made 15 bucks an hour. So we got John Stumpf in front of us, asked a few questions, stumpf is no longer the CEO of Wells Fargo but let’s face it there’s still a lot of folks running Wells Fargo who were there at the time of the crisis.
Becky: Again that was Senator Warren speaking to Jim Cramer of Mad Money very recently talking about what he can expect coming in today. What do you think about what Senator Warren has to say on this front?
Warren: Well I didn’t hear all of what she had to say but she’s absolutely right that you should send the 24:00 inaudible] to Solomon. I had 8,000 people and four or five of them that caused the problem and the the job is to remove the stain from almost all of the 8,000 and get it where it properly belongs with the people that either perform the acts or condone them after they were performed. And that’s what we did at Solomon I think that’s what they’ve been working at it at Wells. And you can’t do that necessarily in a day or a week.
Becky: Sure you can’t do it in a day or a week but it’s been quite a bit longer than that. Would you say that the actions that have taken place to this point with John Stumpf getting clawbacks, with the other woman who was in charge of the banks getting clawbacks with some of those issues? John Stumpf leaving and new people being put in these positions. Is that sufficient in your view of what happened?
Warren: Well I proposed actually in the annual report of Berkshire maybe four or five years ago, sometime after 2008. The problem is that the bank gets fined and the shareholders are the ones that pay for it. They didn’t have anything to do with it basically and I suggested that that probably more extreme actions than Senator Warren in terms of clawing back all the directors’ fees for I think five years. I think that you really want, as much as possible you want the people that we’re responsible to pay and ideally you would have the people that were innocent not pay but it doesn’t work that way in the American judicial system. I think that if you have a company, a very large company, Berkshire is large you have a hotline. I think the CEO has to be very attentive to what comes in on the hotline. Now most of it is silly self but there’s real stuff comes in too and you get anonymous letters and you’ve got to follow through on the ones that actually sound like they have real meaning and clearly you couldn’t have activity as broad as it was at Wells without the hotline here. So somebody messed up and the job is to find out who messed up and ideally to make the penalties, these sites that discourages other people in the future from doing similar things.
Becky: You know the part of the concern has probably been how the news has dribbled out over time when it comes to Wells Fargo, that it wasn’t just the fake accounts that we heard about in the beginning. It turned out that was more widespread than we’d realized. It turned out that there was auto insurance that was being sold to people who didn’t need it. There was life insurance being sold to people who didn’t need it. That continual drib drab just eats away at the reputation of the bank.
Warren: Sure and I say when you’ve got a problem and you’re gonna have problems. I mean if you had a very big, you can’t have two hundred and eighty thousand people working without something and most things are minor but to get something systemic you’ve got a big problem. And once you find out about it you’ve got to get it right, get it fast, get it out, and get it over. And getting it right is hard I mean because you turn over rocks and sometimes you find some things and it’s very seldom there’s just one big thing going wrong at a big institution or something like that’s going on. So you’ve got to get it right and the one thing you don’t want to do is be wrong about it.
Becky: A lot of the things that you just said are not exactly how things have gone at Wells Fargo. You’re the largest shareholder in Wells Fargo do they still have your faith? Are you still behind the bank?
Warren: Yeah Tim Sloan has my faith and like I say it happen to me at Solomon but Solomon had my faith. That doesn’t mean every person at Solomon had my faith after I got there. And I got and I had some surprises. I mean I was worried about surprises every day but the truth was that 99% of the people were perfectly decent people. They were just like the people working at Goldman or some other place and somebody gone off, totally gone haywire and other people didn’t report it but when you find a problem you have to jump on it. I mean that’s just basic.
Becky: You just said that Tim Salon has your confidence. Have you have you spoken with him before he goes before Congress?
Warren: Well actually I was in Las Vegas last week talking to about 400 Wells people and
Tim was head of this. It was their top group from around the country. I did the same thing about five or six years ago four Wells in Chicago. I did it for 29:02 inaudible] maybe seven or eight years ago. I mean every now and then they ask me to come around just so that people can see who owns a lot of shares. So I must have talked for at least an hour just last week.
Becky: And did you talk to him at all about this, his testimony before Congress?
Warren: I mean he knows that I testified many years ago in connection with Solomon both to the House and the Senate and I I told him something of my experience but it’s all on tape, 29:33 inaudible] being able to see it anyway. But I told him what I would do.
Becky: If he has your confidence are we right to assume that you have not sold any shares of Wells Fargo?
Warren: Only enough to stay under 10% which was something that the Fed requires and had. Since Wells repurchases their shares and we were right up against 10% that way we went over it because they repurchase shares. Not because we bought. So we keep, we will sell enough to stay at around 9.8 but that’s to avoid becoming a bank holding company act.
Becky: So if we see the SCC filings that show you’re selling, we should not assume that?
Warren: You’ll find we’re just keeping a little below 10%. We’ve not sold to share except for that purpose.
Becky: Okay you are a major shareholder in Bank of America too.
Warren: That’s correct.
Becky: What’s your favourite bank?
Warren: What’s my favourite Bank? Well what’s your favourite child? But the Bank of America is not a sensational job under Brian Moynihan. Brian had all kinds of problems what he came in I mean they were not of his own doing but he had a ton of problems and he had a lot of rocks that turned over. And it costs a lot of money and he just set out step by step to bring the bank back. And he’s gone from two hundred and eighty or so thousand people down to two hundred and ten thousand. He’s gone from a run rate of expenses in the 70 billion down to 54 billion. I mean he has really done a job and now we will be, we’ll be 31:06 inaudible] in BMA stock for a long long long time.
Becky: Warren we’re gonna take a quick break right now I will send it back to Joe and Melissa. We have much more to come with Warren after this.
Becky: Good morning everyone welcome back to squat box here on CNBC. We have a special program where we’re live in Omaha Nebraska this morning with Warren Buffett who’s the chairman and CEO of Berkshire Hathaway. We’ve been talking about lots of issues today from the market to what’s been happening on Capitol Hill. And Warren we touched briefly on taxes earlier but we didn’t dig deeply into what you think about what’s happening with this tax bill right now. This is an area that you’ve written on, that you’ve spoken on pretty extensively in the past. You said earlier that this is not a tax reform bill it’s a tax cut. What do you think about it?
Warren: Well I don’t think I need a tax cut but for example the current proposal eliminates the estate tax and it’s not a death tax. They’re going to be 2.6 million people died this year in the United States and there’ll be 5000 tax returns that people, the states that pay tax. So if you start going to a funeral every month it’s going to be 40 years on average before you go to one where there’s any estate tax due and it’s a very pejorative term. The truth is that they passed the bill but they’re talking about, I could leave seventy five billion dollars to a bunch of children and grandchildren and great-grandchildren. And if I left it to 35 of them they would each have a couple billion dollars, they could put it out at 5 percent, have 100 million. I mean is that a great way to allocate resources in the United States because that’s what you’re doing whether through the tax orders. You’re affecting the allocation of resources. So if they were lucky enough to come out of the right womb, have the right name Buffett they could sit there and build tombs for themselves like the Egyptians Pharaohs never dreamt of. They can do anything and capitalism was all about intelligent allocation resources. Now some people say well you don’t have to worry about that because they’ll blow it all but if they blow it all that means that they’ve done some dumb things with some important resources. And that’s not good for capitalism. I don’t think it’s good for the children, I sure don’t think it’s good for a society where there’s a ton of inequality to start with. So I think that’s a terrible mistake for example.
Becky: However play devil’s advocate here.
Becky: You have three children who have foundations that each of them are running. Do you think that they’re a better allocator of that money than the federal government?
Warren: I do but I don’t think that setting it up so children, grandchildren. Let’s say I died when they were 20. I don’t think they’d be the same individuals that they are. I didn’t encourage that foundation program until they were in their 40s and had I seen what they done with their lives and they’d have a chance to live for a long time going to public school of living just like other people in Omaha live but I don’t think we should have our Olympic game twenty years from now. Be the eldest sons of the Olympic game currently.
Becky: So it’s the dynastic?
Warren: The dynastic I don’t think a dynastic system with huge sums of wealth. And bear in mind the wealthy are so much wealthier now than they were 25 years ago. We’re talking about the 400 now having 2.4 trillion against 90 billion. 25 times as much money. So you have sprinkled around, you have these children and grandchildren that just for those 400 could have to 2.4 trillion passed down to them. That’s a lot of the resources in this country with a 20 billion dollar GDP and not even quite a 20 billion dollar GDP. I think it goes totally against what’s built this country and what this country stands for. And if those 5000 people can’t stand to spend the 20 or 25 billion, they’ve got lots left over believe me. Incidentally it would be bad for philanthropy. I mean a certain number of people would like to set their kids up with you know billions and billions of dollars rather than have it go to 35:26 inaudible] but I don’t think that’s the primary reason but I do think that’d be a by-product.
Becky: The estate tax is just one part of this, let’s talk about the corporate tax, first of all. Corporate tax is from 35% to 20%?
Warren: Well if I haven’t lost all my friends by now I’ll finish it off. We have a lot of businesses 60 or 70 I don’t think any of them are non-competitive in the world because of the corporate tax rate. I mean American business earns a return on tangible equity under the present tax system that is extraordinary compared to history, the last hundred years in America. I’m talking about tangible equity but that’s the money actually invest. You could add the five largest companies in the United States by market value that’s almost ten percent of the value of the market. They don’t need capital. It is not like the old days were the big steel companies and auto companies and oil refineries were huge amounts of capital were needed but we are among the high earners of the world in terms of return on tangible assets.
Becky: But just looking at the tax code 35% is what we’re supposed to be paying or what corporations are supposed to be paying most of them don’t. A lot of them don’t and the ones that do are penalize because they’re not taking advantage or they’re not able to take advantage of the massive number of loopholes that have been built into the system. Isn’t there an argument for saying let’s simplify this, let’s level the playing field. Make sure everybody’s paying the same amount that you can’t snake your way around into a lower rate. And let’s set up a tax code that by the way doesn’t incentivize companies to keep cash overseas. Bring it back here and potentially put it to work right here in America.
Warren: Yeah but if you make it very easy to take back money from jurisdictions in which you pay very low rates that’s going to encourage even more investment over there because you’d sell the higher rate in the United States. It’s American, listen on a personal basis and for Berkshire Hathaway shareholders I hope they do change it downward. I mean I think I would like it in the sense that it would be good for a million shareholders of Berkshire in terms of their net returns but I do think some of the arguments. I think people may find their nose growing a little bit after they make them.
Becky: Melissa has a question too, Melissa.
Melissa: Warren I completely get your argument that a lot of companies don’t actually pay the going tax rate but Wells Fargo for instance pays a tax that would be higher than the proposed corporate tax rate of 20%. Right their effective tax rate as of the second quarter was 27% or so. So it would benefit, so broadly speaking what do you think that tax rate to 20% would mean for the broader markets? Would that mean you know a 5% increase in stocks? I mean what’s your estimate?
Warren: Well I a decrease in taxes would mean an increase in profits. It might not be totally the amount of the decrease in taxes but it would it would increase earnings. There’s no question about it. So the question is whether that’s already built into the expectations? I doubt if it fully is built in the expectation. So the lower the taxes, they’ll actually. If you had a negative tax rate for corporations it would really be great but you’re right about banks incidentally. Banks tend to pay a pretty full rate unless they own some tax exempt bonds but that’s not a big item. Some of them do some low income housing tax credits and that sort of thing but the tax rate on banks is right up there among the top of various industries. Berkshire most of our income is taxed at 35% but we do have a lot of unrealized depreciation and securities close to a hundred billion that hasn’t been realized yet but if we were to sell all of the stocks we owned today we would we would pay 35% on about 80 or 90 billion dollars. So I can say this the banks are doing okay. They’re not doing as well as they were eight or ten years ago. That’s primarily because of the capital requirements. Capital requirements can kill the return on equity and banks and they’ve reduced it significantly from what was available ten or twelve years ago.
Joe: So I’m just trying to just get exactly what you’re saying Warren. So if the money came back it would be a good thing but you don’t want to induce them to send it over there in the future? So if you really did go to 20 and you really did bring it back and because you’re at 20 and there’s no longer an inducement to go over there, why can’t you just say outright that’s a good thing? Why do you have to say well people are hyping it and their noses will grow? Why can’t you just say if we did it 20% would be better here and it wouldn’t go over there anymore so the money might stay here and the jobs might stay? Why isn’t that a good thing? Give us an endorsement of that if they could do it.
Warren: Well let’s just say the rate in some country was 2% and you charge people 10% for bringing it back and you had a domestic rate that was 25 or so.
Joe: Well it’s not 2%. The lowest is 12 probably in Ireland. You think there’ll be a race to the bottom if we do this?
Warren: There’s rates lower than 12. You’re right about Ireland but there’s rates a lot lower than 12.
Joe: Okay so it’s a race to the bottom, you think it’d be a race to the bottom then at this point?
Warren: Well there’s some of that and one thing is interestingly enough Joe the money is coming back to some extent. When Berkshire Hathaway sells a bond issue guess what the the foreign subsidiaries of certain very cash rich American companies buy those
bonds. So the money comes back to Berkshire Hathaway. We pay interest to the foreign subsidiary of the cash rich country over there, but that money ends up in the United States.
Joe: Right there’s trillions over there. Isn’t there 2 or 3 trillion I’d much rather have that back here. Do some infrastructure.
Warren: Let’s say you have two companies. Company A and Company B and they both have a trillion dollars over there and company A borrows a trillion from Company B and Company B borrows a trillion from company A. Now you’ve got all two trillion back here
and it’s available for investment.
Joe: You’re so smart you know how to do all these things before they actually get done that’s why you love that second to die insurance. You don’t care about estate taxes because you’ve got more things going on to get around it. You’re just too smart, you’re too smart. If everybody had you running the money we wouldn’t need any any tax reform.
Warren: I can tell you exactly the secret of not having any estate tax. Just give it all away. It would eliminate all estate tax.
Joe: Exactly that’s true.
Melissa: Warren just one follow-up just to underscore a point you said that a lower corporate tax rate will increase profits. Does that mean that you also believe that a lower corporate tax rate will cause the markets to go higher?
Warren: Well anything that increases profits tends to push tight. I mean there can be ten other variables happening you know for other but as a single variable in the equation for profits and profits determine stock prices over time. No it is a plus for American business you know like I say I’ve got a million shareholders at Berkshire Hathaway and they would all love to see a 43:16 inaudible].
Joe: You also said if my kids had grown up quicker and become mature quicker then I would want them to keep it and not give it to the government. I mean there’s all these qualifiers in some of your arguments Warren. So if you could keep it in the private sector but you didn’t have crazy twenty year olds blowing it on god knows what then then you would, so you see what I’m saying. Maybe we should have a wealth tax on you. Maybe we should have taken twenty percent of what you have right now because you got too much
right now you can’t possibly use it. So maybe we should just take you know just
reallocating it now. You don’t need that much.
Warren: Well we’re good I’m with you Joe.
Joe: No not a wealth tax! Actually I’ll be safe.
Warren: I’m got to tell if you can tell me how to have your kids mature at age 20. Send me
Joe: How about maturing at age 60.
Warren: Neither have I, I’m more for the other way.
Joe: There’s no guarantees.
Warren: There’s nothing like an inmature billionaire. I mean an old one.
Joe: Get to do whatever you want like buy Flying J because you like their truck stop.
Warren: We’ll put one right next to your house.
Joe: I love those promises. I can shower there.
Warren: Yeah well you have meaning to the truck convenient store.
Melissa: Let’s talk about the markets again because you have a long running bet that’s almost up it’s in the final stages, the last year of the bet about what does better the S&P 500 index over ten years or someone who you made a bet with for a million dollars who got to go pick five edge funds. He created a fund to funds based on five edge funds and between the two of you the S&P; 500 index has been the massive out performer over the nine and a half years of the bet.
Warren: Yeah it will absolutely kill every one of the fund to funds that bear in mind each one of the fund of funds had a strong financial incentive to pick the best funds they could find ten years ago. I mean it ment real money.
Melissa: 45:23 inaudible]
Warren: Yeah, so it was overwhelming and passive investment you know I’ve written about it, a passive investment is going to be active investment because of fees.
Melissa: You did this as a result because you wanted to show people that they didn’t need to be trying to beat the market all the time. That they could just to be investors over the long haul and that would be a way to make money.
Warren: And they didn’t have to pay two or three percent a year to somebody to get those. An average results were going to be very good and they were good. They’ve been good all my life and in these ten years they’ve been good. You’ve done perfectly okay with passive investment.
Melissa: So you’ve done great with passive investment especially in the last seven or eight years. There are people out there who are saying he just got lucky, he picked the right ten years. He did it right before quantitative easing came around. There’s a guy Mark Usko at Morgan Creek who’s been saying he wants the next ten years bet and thinks he can outperform in that time. What do you what do you say to something like that?
Warren: Well they’ll put up a substantial part of their net worth. I get letters all the time from people who say I’d like to do it, I’ll put up $100 you know or something and they’ll become famous. So they love the idea of me giving them a lot of publicity. If anybody wants to put up a significant percentage of their net worth.
Melissa: Million dollars does that cut it?
Warren: It depends on their net worth, but if they if they want to put up a significant percentage of their net worth, their family’s net worth and they want to make a bet on ten years on active versus passive you know maybe that my estate has to be the one to settle with them. At 87 anything involving 10 years is kind of a triumph of Hope over statistics but nevertheless the ones that have written me they really want to get their name in the paper basically.
Melissa: But you’ll take anybody who puts up a substantial portion of their net worth, you’ll take that bet?
Warren: They can pick a group, you got to pick a group you know and because I’m picking a group of 500 at S&P. And they can pick the date of the start. The date of the start had nothing to do with it and the truth is the markets behave fairly typically in terms of aggregate returns for the decade. This is not some extraordinary period in the least. There’s nothing unusual about this. The thing that was unusual is the size of the fees and that’s ate them alive basically. The managers of these funds did very well during this period and the managers of the underlying funds did very well and their investors got killed compared to something they could have done.
Melissa: You know one quick story it’s picked up around this week that Oprah may be considering a run for the presidency. I know you know Oprah have you talked to her about this?
Warren: No I haven’t, I haven’t talked to Oprah for quite a while.
Melissa: Have you had any Democrats who have come to you who are looking to fundraise to run in 2020?
Warren: Nobody’s come to me t fundraise. I’m not a great prospect. No solicitors allowed yet or something on the other part of the door. Now it’s going to be a very interesting run-up to 2020. I mean there’s gonna be a lot of people who think about getting into this race because well you have somebody come from totally outside politics to get elected president. It starts the wheels churning with a lot of people.
Melissa: It does, Warren I want to thank you so much for your time today, it’s really been a pleasure.
Warren: Thank you for having me.