Billionaire Investor Full transcript: Billionaire investor Warren Buffett speaks with CNBC’s becky quick on “Squawk Box” today
Q4 2019 hedge fund letters, conferences and more
Following is the full unofficial transcript of a CNBC interview with Berkshire Hathaway Chairman, CEO and billionaire investor Warren Buffett on CNBC's "Squawk Box" (M-F, 6AM-9AM ET) today, Monday, February 24th. Video from the interview is available on CNBC.com.
All references must be sourced the CNBC.
Transcript of Billionaire Investor Warren Buffett interview with CNBC
JOE KERNEN: Good morning-- and welcome to Squawk Box here on CNBC Live. From the NASDAQ market side in Times Square I'm Joe Kernen along with Andrew Ross Skin, Becky Quick live in Omaha with Warren Buffett. Good day to have him. Hey, Beck, we'll get-- to them in just a minute. First, the breaking market news. We're right around down 800. I was glad to say we're down 799 when I started read this read but-- we're back below-- 800 again. U.S. Equities futures plummeting as the Coronavirus outbreak widens and worries about-- global growth and the effect that-- the all-important supply chain that China provides for the rest of the world-- that really what's dampening-- expectations this morning. On a percentage basis, not the end of the world. But it-- it'll get your attention. And if it's down 800 in the pre-market session you might see a-- you might see four numbers up there eventually--
ANDREW ROSS SORKIN: You might.
BILLIONAIRE INVESTOR WARREN BUFFETT: --at some point. I'm not forecast-- maybe it recovers. I heard some comments from Warren Buffett a couple minutes ago about-- you know, when stocks are cheap that's when I like to buy. When-- they're cheaper than they were the day before. Maybe he can assuage-- market participates fear at this point. Let's look at the treasury yields. Looking at the ten-year which you would expect-- bonds to be strong this morning and you do see the yield at some of the lowest levels on the ten-year that we've seen-- in a while. Down below 1.4, 1.389.
ANDREW ROSS SORKIN: Okay, let's-- break down what's going on here with the latest-- on the Coronavirus this morning. China now reported 150 deaths. And 409 new cases. That happened overnight. South Korea raising its Coronavirus alert now to the highest level after the number of cases. They're ballooned from 31 to more than 750. And that took place in less than a week. Now stocks in Asia are plunging overnight. Honk Kong, Hang Seng falling 1.8%-- South Korea-- the exchange there three-- down 3.9%. Now shares of-- South Korea's two largest airlines tumbled as they canceled flights to the city-- to go where many of these new cases were detected. Meantime, Italy's government is scrambling itself to deal with the biggest outbreak of the Coronavirus outside of Asia. And you're looking at stocks there tumbling as well. Now-- off about four-- over f-- nearly 5% this morning. The government there placing at least ten towns in Northern Italy under quarantine. Canceling the last few days of the Venice Carnival. Elsewhere in Italy, schools, museums, universities and cinemas were all closed. And major soccer matches were canceled as well. And all of this contributing-- to the red arrows that you're seeing on your screen. But as-- Joe mentioned earlier-- Becky's gonna be talking to the one and only Warren Buffett right now-- who may have some unique views about all of this. So we wanna get-- to both of them in Omaha. Good morning to you, Becky.
BECKY QUICK: Hey, good morning, Andrew, good mooring, Joe. It's good to see both of you. We are here in Omaha, Nebraska this morning with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He has just released his 55th annual shareholder letter to the shareholders over this weekend. And this is actually the 13th year that we are now in Omaha talking to him after that letter. This is a show that we call ask Warren so the people can write in their own questions to Mr. Buffett after they've read that shareholder's letter. But obviously this morning given the news there are a lot of other questions that people have concerning the stock market. Let's jump right into it with Mr. Buffett who is here with us right now. And-- Warren, thank you for being here today.
WARREN BUFFETT: Oh thanks for having me.
BECKY QUICK: It's good to see you. I wanna talk about the letter-- obviously one of the things that you touch on the level-- on the letter is when people should be buying stocks. We're gonna dig into a lot of it. But when you're looking at the futures down about 818 points this morning, I think probably the first thing viewers wanna hear from you are your thoughts on what's happening with the Coronavirus, if this is a reason to panic and if you were worried about this.
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, I-- don't know if I have any special thoughts beyond the news on the Coronavirus. The very first day I bought stocks was March 12th, 1941 '42. And-- the stocks were down about 2% that day as it turned out. Unfortunately I bought in the morning. So when I came home in the evening and my dad told me the execution price it was down 2%.
If you're buying a business-- and-- that's what stocks are, businesses, in fact, people would be better off if they say, "I bought a business today," not a stock today because that gives you a different perspective on it than presumably good and buy a farm, if you buy an apartment, a house, if you buy a business you're gonna own it for ten or 20 or 30 years. And the real question is is has the ten-year or 20-year outlook for American businesses changed in the last 24 hours or 48 hours?
And we're gonna-- you'll notice many of the businesses we own-- partially own, American Express, we've owned it for 20 years, Coca-Cola, we've owned it for 40 years-- but those are businesses. And—you don’t buy or sell your business based on-- on-- today's headlines. And-- if it gives you a chance to buy something that you like and you can buy it even cheaper then it's-- you're in good luck basically.
BECKY QUICK: Although there are a lotta people who look at the market and say, "Look, I wanna buy but I don't wanna buy when the market's sitting at new highs, when it's been hitting new records every day. Maybe it's off 800 points this morning but maybe there's more of a decline to come because the effect of the Coronavirus is going to be an impact on the global economy." IMF said that over the weekend. You are going to see weakness as not only China but other countries try and address this.
You're right, it may not change things over the five or ten-year span of things. But if I think I can buy something for potentially 10% cheaper, maybe more than that if I wait a week or a month, maybe that's what I'm sitting around--
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, if you think that then you gotta-- you're gonna get fabulously rich if you're right. All you have to do is just keeping buying in ten-day intervals and keep making your ten-day prediction. If I knew what the market was gonna do obviously. But you-- don't-- I don't think anybody knows what the market's gonna do. I think you know-- do know whether you're making an intelligent purchase at a given price. Everybody when they buy a stock, if you're gonna buy, say, General Motors that has a billion-- 400 million shares out, you should be able to take a yellow pad like-- there and on one page say-- let's say it's selling for 30. It isn't selling that low but that'd be $42 billion.
You should say, "I am buying the General Motors company for $42 billion because--" and you should get it on a piece of paper. And then if you wanna have a separate piece of paper that says, "I think I know what the stock market's gonna do so I know whether it'll be higher or lower in a week," but you don't. You don't have that--
BECKY QUICK: You don't but if I worry that the economy is gonna slow down, not just for the quarter but for the year that would impact how many cars I think they might be able to sell or even produce.
BILLIONAIRE INVESTOR WARREN BUFFETT: I guarantee you cars are gonna slow down some day. (LAUGHTER) They-- and-- in 1932 General Motors had 19,000 dealers. That's more than all the auto dealers in the United States today. There are only 125 million people. But they had 19,000 dealers. They produced-- or sold and-- there was one month I think when they sold less 1/10 of a car or right at a 1/10 of a car per dealer. That was a terrific time to buy General Motors. And-- forget about the market, if you can put a good market, you know, you don't even have to read balance sheets. You don't-- you don't even need-- you don't even read any-- you certainly can't predict the market by reading the daily newspaper.
That is for sure. And you really can't-- you certainly can't predict the market by listening to me. But you're buying businesses. And if you plan to buy a local service station yesterday and it was closing today I don't think you'd tear your hair out or anything like that. You'd have already looked at it where it was located, the contract that they had with the suppliers and made a decision on competition.
People-- because they can make decisions every second in stocks, whereas they can't with farms, they think an investment in stocks is different than an investment in a business or an investment in a farm or investment in an apartment house. But it isn't. If--- you get your money's worth in terms of future earning power over the next ten or 20 or 30 years you're gonna have made a good investment. And you can't pick them from day to day. If you can do that you can, well, I haven't met anybody yet that-- that knows how to do it.
BECKY QUICK: You-- made a point of that in a letter this year where you-- highlighted a book that was written by Edgar Lawrence Smith back in 1924. And you said until he came along nobody really realized the compound interest effect of buying stocks. Not just buying businesses but buying stocks themselves.
BILLIONAIRE INVESTOR WARREN BUFFETT: Edgar Lawrence Smith changed the world with that book. And people have forgotten all about it now. Although in the 1920s it became more and more gospel as the boom went on. But Edgar Lawrence Smith set out, "I'd like to write a book on bonds versus stocks." And he said-- he went in with the idea that bonds would be a better investment in times of deflation and stocks would be a better-- investment in times of inflation. And the first line of his book was to say that he'd been wrong. But he had enough sense to look at his evidence.
And, I mean, I think Darwin said if you found evidence that was contrary to what you already believed write it down in 30 minutes or your mind will just block it out. I mean, people have a great resistance to new evidence. And he said, "If a stock yields 4% a bond yields 4%," which is what he was talking about then,
"The stock was going to outperform the bonds because there were retained earnings that we're building beyond that yield." And that's-- that has been true for a long, long time but nobody paid any attention to it. We don't get rich on our dividends that we receive. While we happy to receive them. We get rich on-- the fact that the retained earnings are used to build new earning power, repurchase-- shares which increases your ownership in the company. And- Berkshire has retained earnings ever since we started. That's the only reason Berkshire is worth a lot more as we retain earnings.
BECKY QUICK: That-- led Caines to actually say that this was an important book. People paid attention to it. But you're right, it added to the frenzy that built up to 1929.
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, that is true because you can get-- an old boss Ben Graham told me very early on, "You can get in more trouble with a good idea than a bad idea," because the good idea works. I mean, it's a good idea to buy a home, for example. And then people go crazy sometimes. A good idea works and it works and it works. Stocks work out better than bonds most of the time. And after a while, people forget that there were some other limiting conditions. With Edgar Lawrence Smith's book it was that when bonds yield the same as stocks, which was the case then, that stocks are gonna outperform because they have this retained earnings.
So stocks started going up in the '20s. And all of a sudden they were selling at five or six times the prices as when he bought the book. And the original correct-- perception on his part had experienced changing conditions. But people just looked-- they-- they got their confirmations for the stock price. And that's what happens in bull markets. People-- start out thinking stocks are cheap and then they start thinking stocks have gone up. And-- a stock can be a good buy or a bad buy. A bond can be a good buy or a bad buy. It depends on price.
BECKY QUICK: And-- but that leads us to today. I mean, if his premise was that stocks are always going to be a better-- a better investment than bonds that's kinda what you hear today which we've been hearing for a while is TINA, there is no alternative. Right? You have to buy stocks because bond yields are so low because interest rates are so low.
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, if you look at the present situation, we've talked about this before, that you get more for your money in stocks than bonds. That doesn't have to be the case. I mean-- but it's usually been in the case in America. Very usually been the case. And-- if you buy a 30-year bond today with yield 2% you're paying 50 times earnings for an investment where the earnings can't go up for 30 years.
Now if somebody said to you, "I wanna sell you a stock that's at 50 times earnings. The earnings can't go up for 30 years," you'd say that doesn't sound very good. Stocks are way better than 30-year bonds. I mean, it's--that's clear. And--that's one of the alternatives people h-- people really have three basic alternatives, short-term cash which is an option of doing something later, long-time bonds or-- long-term stocks. And stocks are cheaper than bonds.
BECKY QUICK: Charlie said recently-- Charlie Munger, vice chairman at Berkshire Hathaway had his daily journal meeting just a couple weeks ago. And at that meeting he said that there's a lot of wretched excess out there and that there's a lot of trouble coming as a result. Do you agree with that?
WARREN BUFFETT: There's always trouble coming. Yeah, there was trouble coming in 1942 when I bought that first stock. All kinds of trouble. Phillipines were gonna fall pretty soon. there's all kinds of trouble in 1949. There was trouble-- certainly trouble in 2008 when I wrote an article for The New York Times. I said, "Trouble is coming." But I said, "Buy stocks."
BECKY QUICK: Would you repeat that this time, if trouble's coming would you still say buy stocks right now?
BILLIONAIRE INVESTOR WARREN BUFFETT: I would say buy stocks if you get enough for your money. You know, we buy a few stocks. But we don't look at-- we're not buying the stock market. We're saying I am buying-- say American Express. We own American Express. There's 815 million shares out. And sells at-- this morning it was $126 or something like that. So it's selling for roughly $100 billion. Now the real question is whether the company's worth or more less than $100 billion. It isn't what the stock is gonna do tomorrow or next week or next month.
BECKY QUICK: You said-- just a few minutes ago when we asked you on worldwide exchange, right now Berkshire Hathaway is a net buyer of stocks. You are in a net buying position?
WARREN BUFFETT: We've been a net buyer of stocks-- or I've b-- actually been a personal net buyer of stocks ever since I was 11, every year. And-- there's been 15 American presidents in my lifetime, more than 1/3. I've lived under 1/3 of the I didn't buy stocks under Hoover. I was only about six months old then. But there've been seven Republicans after that and seven Democrats. I bought stocks under every one of 'em. Now I haven't bought stocks every day. There've been a few times I've bought stocks where-- were really quite high. And I've even written an article once or twice. But that's very seldom.
BECKY QUICK: But you wrapped up your partnership at one point too.
BILLIONAIRE INVESTOR WARREN BUFFETT: I wrapped up my partnership once because of that.
BECKY QUICK: Because you thought it was too expensive.
BILLIONAIRE INVESTOR WARREN BUFFETT: Yeah.
BECKY QUICK: Okay. But this is not a time like that?
WARREN BUFFETT: We own $240 billion worth of stocks now. We look at that as $240 billion worth of businesses-- that we own parts of. But-- I love owning those businesses.
BECKY QUICK: You've also got more than $125 billion in cash sitting around.
WARREN BUFFETT: Yeah, well, that's-- we'd like to buy more businesses.
BECKY QUICK: All right, we're gonna talk more about that in just a little bit. When we come back we have much more from Warren Buffett. Right now though I'll send it back to Joe and Andrew. Guys, back over.
JOE KERNEN: All right, thanks, Becky. Much more to come-- from The Oracle.
BECKY QUICK: Good morning, everybody. And welcome back to Squawk Box here on CNBC. I'm Becky Quick, I'm live in Omaha with Warren Buffett, the chairman and CEO of Berkshire Hathaway. He's just released his 55th annual letter to shareholders over this weekend. We've been taking questions from you. We'll be getting some of those questions in through this morning. We are here, Warren, with you at Berkshire Hathaway's headquarters building. This is upstairs in the room that's called the cloud room. And this is a room where you often take students, kinda talk to them about questions they have when they come to visit you. You also do some other things up here too, other presentations.
BILLIONAIRE INVESTOR WARREN BUFFETT: Yeah, I-- have students here for dozens of years. And-- for many years, 40 schools would come in. They'd come in groups of eight-- at-- five days I'd spend-- a year. And they-- come from all over the world. We have them from Peru, we have them from China, we have from Israel. And-- we have a good time obviously. Ag-- I've given it up now. I-- but I-- started teaching when I was 21. And I-- when I got to about 88 I thought I'll take a rest.
BECKY QUICK: Well, there are a lotta questions that are coming in from viewers that have been hitting here today. They're waking up this morning, looking at the stock market indicated down by almost 800 points for the DOW. We're actually off our worst levels of the morning which is something to say when you're still looking at the DOW down by about 786 points. But people have a lotta questions about the economy. They're wondering what's happening right now, particularly with the Coronavirus out there. You have a lotta economic data at your fingertips because not only are the many businesses that Berkshire owns but the businesses you own pieces in. What-- are you seeing right now around the globe?
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, it-- affects various businesses. I would say that I received commentary-- I get some commentary monthly with-- from-- from almost all of the companies. And-- a good many of them had some comment about how it was affecting them and how it was affecting them at-- that time I'm sure it's sure it's accentuated. But they've been affected by-- they were affected by tariffs, they're affected by taxes, they're affected by-- the most thing is they're affected by competitors and supply and demand over time.
And I don't have the faintest idea what our businesses will be doing six months from now or 12 months from now. I do think that not only our businesses but American business generally will be doing fabulously better 30 years from now or 20 years from now. And the-- long-term is very-- in my view is very easy to predict in the general way. But an important way. I don't think there's any way to predict what the stock market will do ten minutes from now, ten days from now or ten months from now.
So I work on what I think I-- I'm able to do. And as desirable as it might be to know what was gonna happen ten minutes from now that's just-- not something I'll ever be able to master. So fortunately I can come to a pretty firm conclusion that 20 or 30 years from now American business and probably all over the world will be far better than it is now.
BECKY QUICK: What are the momentary implications that you've seen from Coronavirus? What's an example of the business--
WARREN BUFFETT: Well, an example-- is that we have maybe 1,000 Dairy Queen-- franchises in-- China here. And they're just treat only, so they're-- the old type of-- food. But-- a great number of them were closed. But the ones that were open weren't doing any business to speak of. And-- Apple is-- I mean, a much bigger holding is Apple. We own 5.6% of Apple. And-- the company came out and said that it's affecting not only its stores but all kinds of things, supply chain and I find that certain of our companies have got supply chain arrangements that are being affected that I didn't even know I had those.
BECKY QUICK: Like what?
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, I got one-- from John Mandal the other day, for example, you wouldn't normally think of them as having a big supply chain, but Shaw Carpets or you name it. I'll guarantee you that a very significant percentage of our businesses one way are affected by this. But they're being affected by a lot of other things too. And the real question is where are those businesses gonna be in five or ten years. They'll have ups and downs. Our-- candy business is a wonderful business. But it loses money seven months out of the year. But the nice thing is Christmas comes every year.
BECKY QUICK: When you look at the economy and how things were kind of chugging along, let's say, beginning of this year, when-- first things-- first picked up, how would you gauge the U.S. economy at that point?
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, it-- it's-- strong but a little softer than it was six months ago. But that's over a broad range of-- you look at car holdings-- railcar holdings, that-- that's moving goods around. And there again, that was affected bythe tariffs too because people front-ended purchases, all kinds of things, all-- a lotta variables. But-- business is down. And-- but it's down from a very good level. So I would say that looking at our 70 businesses-- and that actually-- they represent hundreds-- in addition-- they're a little softer. And on the other hand I was out with the fellows from the Nebraska Furniture Mart just Saturday night and--their business was up quite a bit in February. But that's because weather was good. So you have a lot of variables that hit.
BECKY QUICK: Why--do you think business was down, let's say, the last six months? Is it-- a decline in confidence or is it coming off of levels where there was unusual activity ahead of that?
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, it isn't really down. It's just-- it leveled off and a little softer maybe now. But, look, tariffs the-- tariff situation was a big question market for all kinds of companies. And--still is to some degree. But that-- that was front and center for a while. Now Coronavirus is front and center. Something else will be front and center six months from now and a year from now and two years from now. Real question is-- where your-- where are these businesses gonna be five and ten and 20 years from now? Some of them will do sensationally, some of them will disappear. And overall I think America will do very well-- you know, it has since 1776.
BECKY QUICK: But you still watch things like railcar load--
WARREN BUFFETT: Oh yeah.
BECKY QUICK: --very closely.
WARREN BUFFETT: I watch everything. But I don't do it to make in-- specific investment decisions. I-- it-- but I-- enjoy, I mean, I-- wanna know what's going on. But I also don't think that I can make money by predicting what's gonna go on next week or next month. I do think I can make money by predicting what's gonna happen in ten years.
BECKY QUICK: All right, tell us more about what's going on just since you like knowing about those things.
WARREN BUFFETT: Well, I-- as I say-- you know, the-- certain businesses depend on weather to quite an extent. In retail, for example, in given months-- but the big trends you see are going on, I mean, in terms of movement-- to online commerce. And, I mean, the big stuff-- keeps moving. But we've got a big investment in airline business and I just heard they're-- even more flights are canceled and all that. But flights are canceled for weather. It so happens in this case they're gonna be canceled for longer because of-- Coronavirus. But if you own airlines for ten or 20 years you're gonna have some-- ups and down in current business. And some of them will be weather related and s-- they can be all kinds of things. The real question is you know, how many passengers are they gonna be carrying ten years from now and 15 years from now and what will margins be and-- what will the competitive position be? And-- but I still look at the figures all the time. -- I'll admit that.
BECKY QUICK: You-- you mentioned the airlines. And you own stakes in all the major airlines but--
BILLIONAIRE INVESTOR WARREN BUFFETT: All.
BECKY QUICK: --not as much as Delta. I think you own-- north of 11% of Delta at this point?
WARREN BUFFETT: Well--
BECKY QUICK: Or right--
WARREN BUFFETT: --we-- the-- our largest position is in Delta-- three of the four positions are mine. One of the positions is one of the other fellows-- the four positions. But we own a very roughly ten-- close to 10% of-- the four largest airlines.
BECKY QUICK: There's been a lotta speculation. In fact, some of the questions that came in over this weekend-- were questions about those airlines. Wondering if you would buy any of them outright. Have you considered buying any of those companies outright?
BILLIONAIRE INVESTOR WARREN BUFFETT: It'd be very unlikely that we would do that. I'm not saying it's impossible. But-- it's complicated.
BECKY QUICK: Why?
WARREN BUFFETT: Well, for one thing, they're regulated and-- there's an interplay. I'll just give you an example, not that we would be doing. But with Delta we own 18% of American Express and American Express is a bank holding company and bank holding companies have limits as to what they can do. And we're a passive holder of a bank holding company with American Express. But instead we own an airline that was tied up with them they'd have lots of arrangements. There's-- a lot of complications because it's--a regulated industry. Anytime you get in a regulated industry you-- have more complications and---- in transactions.
BECKY QUICK: So, is it fair to say you like these stocks and you would own more if it wasn't complicated?
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, we – to go beyond 15% in any company we'd have to go in on – I mean, there's a lotta rules as you increase your ownership. Obviously almost anything we own we like to own more of.
BECKY QUICK: Are you buying more of any of those stakes right now? Apple shares –
WARREN BUFFETT: I get pretty closed mouth when it comes to what we're buying.
BECKY QUICK: You thought about that for a second.
WARREN BUFFETT: All of a sudden, I feel my jaws lock up.
BECKY QUICK: But fair to say--
BILLIONAIRE INVESTOR WARREN BUFFETT: But it's fair to say that anything that we own we like. You know, and there's very few stocks that we own and I look at them as part ownerships in businesses. There's very few that are selling at some price where I would sell them a little higher.
BECKY QUICK: All right, well, let me ask a question that came from Tony Dickinson. He said, "In the fourth quarter Berkshire sold 55 million shares of Wells Fargo. Should shareholders view this as a lack of confidence in the new CEO turnaround plan? And what is Warren's future outlook for Wells Fargo?"
WARREN BUFFETT: Well, I won't give him any advice specifically on Wells Fargo. But it's absolutely true that we've sold down our position. Some of it was sold down to avoid being over 10% because then you do have some filings with the Fed and so on, but—
BECKY QUICK: They’ve sold well more than that.
WARREN BUFFETT: Yeah, we've sold – more than that.
BECKY QUICK: I think it's 8.4% was the last—
WARREN BUFFETT: Yeah. That sounds right. And now we sold Wells Fargo in the fourth quarter and we sold earlier.
BECKY QUICK: Can I ask why? Only because I did get a number of questions about--
BILLIONAIRE INVESTOR WARREN BUFFETT: Yeah, well, I can understand that. But we don't want to give any advice on what we're doing because I could change what I'm doing tomorrow. We talk about everything except we don't give stock advice.
BECKY QUICK: Ok. I'll try one more from Tony Dickinson just because I think I got 15 or 20 different questions on this. "Berkshire owns 32.58 billion of Bank of America and 17.39 billion of Wells Fargo, one position's been increasing while the other's been decreasing. Does Warren like Bank of America twice as much as Wells Fargo? And how should shareholders see the holding?"
WARREN BUFFETT: Yeah, well, I think they’ve sees that we've bought Bank of America and we've sold some Wells Fargo.
BECKY QUICK: All right, let me ask you a broader question that comes in just on interest rates and the impact that they might have as well. Varun Jain writes in on Facebook, "Hi, I'm a huge fan and student of Mr. Buffett. Please ask him what impact does the zero-interest rate environment across places like Japan and Europe have on their banks, whether the business is still good. And does the prolonged low-interest rate regime in the United State hurt the prospects of American banks like JPMorgan, etc.? And in such circumstances do Indian banks which have high return on equity look attractive to Mr. Buffett?"
BILLIONAIRE INVESTOR WARREN BUFFETT: Yeah, well, I can't comment on that, but–
BECKY QUICK: I know that, but—
WARREN BUFFETT: Generally speaking, but there are a lot of other variables too – but the banks are going to make more money if there are higher rates with a steeper curve. The curve makes – is more important than there was the ten year versus short-term rates. They make more difference than the absolute level. But American banks have made very good money with very low interest rates. Around the world, if you look in the U.K. or Europe or Japan even lower rates have made it pretty tough for banks. The returns on equity are not as high. And they have to use more leverage to even get the same returns and I don't like that as well.
BECKY QUICK: If you were talking about the curve that we're looking at this morning, the five-year, two-year is inverted. Two-year ten is not right now. But the ten-year's below 1.4% this morning.
BILLIONAIRE INVESTOR WARREN BUFFETT: And think of it, the ten-year at 1.4% that means you're paying 70 times earnings for something that can’t increase its earnings for ten years.
BECKY QUICK: That's a good way of looking at it.
BILLIONAIRE INVESTOR WARREN BUFFETT: If somebody came to you with a stock and said, you know, "This is a terrific stock. It sells at 70 times earnings. The earnings can't go up for ten years," you'd say, "Well, explain that to me again." But no – we've never seen a situation like this in the world. Literally. I mean, you can go back and read Caines and you can read Adam Smith and you can read, you know, all the great ones. And they don't talk about negative interest rate. It never crossed their mind. Always supply and demand and all these marginal costs. But brilliant economists never really anticipated that you would have negative – you've got 13 trillion or something like that – worldwide at negative interest rates. And we don't know what that means. And we've got a lot of people that can speculate what it means.
But ten years from now or fifteen years from now we'll look back and say, "Well, it was obvious what would happen with that, and we'll see it." But it is not a normal situation. And well, interest rates are the basis of all value. I mean, you know, if you knew interest rates we're going to be zero for 100 years you would think 1% was a great rate of return. But you also would know if you bought something was yielding 1% or that was what it paid and rates went to 8% you'd lose practically all your capital. So, it's an enormous factor.
And we don't know the answer, central banks don't know the answer. All we know is that it's been useful in stimulating things, and particularly asset prices now for ten years and what we thought was temporary in 2008 and '09 in the way monetary policy to stimulate we've just put our foot on the gas even further. The whole world has.
BECKY QUICK: You made a point in the letter of saying that you don't know how long these interest rates will last. You and Charlie never try and figure these things out. But we did have St. Louis Fed president Jim Bullard on the program last week. And he said that he expects to see these low interest rates for a long time to come. That does raise a lot of questions. If that happens about what this means for the stock market, what that means for banks, what that means for insurance companies, which you touched on in the letter too.
BILLIONAIRE INVESTOR WARREN BUFFETT: It's bad for insurance companies. But it's good for stocks.
BECKY QUICK: Bad for insurance companies and what happens to the insurance companies as a result? Are they getting more – are some insurance companies going to push out risk?
WARREN BUFFETT: Well, the ones that really get hurt on it are either life or annuity companies that have promised returns. Property casualty business doesn't promise returns. It still holds money, so it hurts them. But if you promise somebody an annuity that's clearly to pay them 3% or 4% and now you find that you're reinvesting your money at 1% or something, you know, you're going to disappear.
BECKY QUICK: Are insurance companies being forced to make riskier and riskier bets?
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, they shouldn't. I mean, the answer – if you need to get 3% and you're only getting 1%, the answer is to quit giving 3%. It's not to try and get the one up to three and do more dangerous things. You should always adapt your consumption to your income. You shouldn't try and adjust your income to your consumption. That's a basic principle for individuals, businesses and everything else. And reaching for yield is really stupid. But it's very human. I mean, and I understand it. People say, "Well, I've saved all this money all my life and now I can only get 1%. What do I do?” The answer is you learn to live on 1% unfortunately. And you don't go and listen to some salesman come along and tell you, "I've got some magic way to get you 5%."
BECKY QUICK: Do you think though that's what should be happening. Do you think that there is more risk-taking place in the insurance market as a result?
WARREN BUFFETT: Sure. And you see that in – they call leverage loans and weaker covenants. No people are reaching for yield. There's no question about that. And that's stupid. And it has consequences over time. But it's very human.
BECKY QUICK: Consequences that could have a big market impact?
WARREN BUFFETT: Depends how far it goes. Yeah. Yeah. it's something that – things that get built in slowly, people going crazy and tech companies in the late 1990s. It could take a lot longer than you think. But eventually you get to midnight and everything turns to pumpkins and mice.
BECKY QUICK: You know, that's the downside of low interest rates, pensions, savers, anybody who gets left in a raw position of that. On the alternate side of things, if rates were to rise rapidly or maybe not even so rapidly, what does that mean for the federal debt?
WARREN BUFFETT: Well, it depends on the average maturity of the debt. But our maturities are fairly short. They've got lengthened a little. But if you take 20 trillion and you're borrowing at 2%, you've got 400 – what have you got? Two trillion – 200 billion. I mean, you got 40 billion of the expense. But close to 5% you got 100 billion of the expense. I mean, no at 5% you got a trillion of expense. I'm sorry. We are benefiting enormously in our national budget by the fact that inverse rates are very low. And so, interest cost has not gone up as you would've anticipated if you were looking at the scene 20 or 30 years ago with the increase in national debt. You know, Wall Street issued 100-year bonds. You know, but 2% or thereabouts. And then they've gone way, way up and that – maybe they yield 1.1 or something like that. I don't know where they are now. But it's great if you're a borrower, gee, maybe everybody should refinance their mortgage.
BECKY QUICK: Is that an argument for the federal reserve or I'm sorry, for the treasury department here issuing longer notes?
WARREN BUFFETT: Well, yeah, but I would've said the same thing five or six years ago and been wrong. But if we – under the present slope it still would cost more to lengthen it out. But you're lengthening it out at very, very low rates. And it would be what I would be inclined to do if I were secretary treasury. But I would have missed a lot of bets in the last ten years too.
BECKY QUICK: All right, we're going to have much more with Warren Buffett when we come back. We'll talk a little bit about conglomerates and whether Berkshire Hathaway is being discounted in the market because it's a conglomerate. But, guys, right now I'll send it back over to you.
BECKY QUICK: Hey, Joe, thanks very much. Warren, again, for people who are just waking up, they're tuning in and they want to know what you think about this sell-off this morning. To see the DOW down 700, 800 points in the morning, what's your reaction when you see something like that?
WARREN BUFFETT: Well, my reaction is that I like to buy stocks, so I don't wish ill on anybody else. But I like to – if they want to sell them to me cheaper, I prefer it. So that's you know, roughly a 3% decline or thereabouts. I don't know how many 3% declines I've had in my lifetime but there have been a lot of them. And I can't think of one that you shouldn’t have bought on. You know, basically – not as many stocks are going to go up or down next week or next month or next year. But if there's something – if you like to own American businesses, you're getting a chance to buy it 3% cheaper. I don't consider that a lot cheaper. I mean, but how can it be bad news unless you have to sell stocks? Now if you have to sell them for some reason, you're worse off. If you don't have to sell them, I mean, somebody can come around and offer you a quote on your house today. And it could be 2% less than they offered you yesterday. But if you like the house it really doesn't make any difference to you.
BECKY QUICK: Does that mean Berkshire will be buying stocks today?
WARREN BUFFETT: Well, we certainly won't be selling. And yeah, we could easily be buying something, sure.
BECKY QUICK: Okay. Let's talk a little bit about a Barron's cover story that was just out last week. The good news on the cover story is they think that Berkshire is worth more than it's selling for right now. The bad news is they said think that's in part because it's got a big conglomerate discount. And they think if you weren't running it that it might get broken up. What your response to that line of logic?
WARREN BUFFETT: Well, conglomerates have had a bad name and for good reason over the years. I mean, I closed my partnership up at the end of the 1960s. And there was a run, a very abusive run in conglomerates where they played with numbers and they had dirty pooling as they call it of accounting. They wanted to have their stocks up and put out stories to do it so they could issue more stock. They were kind of chain-letter arrangements. There have been a lot of bad conglomerates. And probably disproportionately so compared to sort of honest to God single-industry businesses over time. We don't think we're that kind of a conglomerate. We've certainly never wanted to issue shares. We never touted shares. You know, it's done for business reasons in our case. The interesting thing is, of course, is the American public has been going wild in their enthusiasm for conglomerates in the last few years, if you think about it. I mean, it's been an incredibly popular area. But they call them index funds. You buy 500 businesses—
BECKY QUICK: I was trying to figure out what you were talking about.
WARREN BUFFETT: Yeah, well, 500 businesses all put together. I mean, that's the ultimate conglomerate, isn't it? I mean, I recommended index funds to lots of people and when they do it they're buying into 500 businesses. And they're going to have 500 businesses a year from now and five years from now. They think that group of businesses will do very well. And I think our group of businesses will do okay.
BECKY QUICK: The difference with an S&P 500 index is it's 500 different companies run by 500 different management teams who are all focused on their business. Maybe not having a centralized operation that is loosely running all of those businesses.
WARREN BUFFETT: Well, we've got – our businesses are run by separate people. I mean, we just finished Valentine's Day. And I did not select what pieces went in the boxes. And it's probably been ten years at least since I've been to a See's Candy factory. Now, you know, I get the figures every month. But I don't know how to make chocolate. You know, anything of the sort. I don't pick out the new locations. We have managers for our businesses that are very much like the managers we have for the businesses that we own pieces of like American Express or Coca-Cola. And there's a couple things we can do. We can determine the dividend policy of our subsidiaries. We can control their capital allocation to some extent. But on most capital allocation whether buy new equipment or anything like that they make the decision. The BNSF railroad is going to spend $3.5 billion on – I don't approve a single dollar of that in terms of capital expenditures. They know what they need to do, where they need to lay track, how many locomotives they need – whatever it may be. So, our managers are I would say in a sense they're almost more independent than the managers of the S&P 500 who go around and report to Wall Street week after week. They go to investor relation meetings and they're always explaining what they're doing and trying to get the approval of the analysts and all that sort of thing. And we just tell our managers to do what makes sense.
BECKY QUICK: Okay, outside of the idea of them not having to report to individual shareholders or the investment community, what's the advantage of having you there? The capital allocation part of it?
WARREN BUFFETT: Well, yeah, we can move capital within – if you move capital from one stock to another and you got a gain – particularly, I mean, you pay a tax. And then they pay a dividend tax or if you sell part – but there's a lot of taxes incurred in moving from one business to another. Either at the corporate level in some cases but certainly at the individual level. And we can move capital, well, just take See's Candy again. We bought that in 1972. We've moved a several billion dollars from the candy business to other types of businesses. And we'd love if it we can use it all in the candy business. But it just isn't that sort of business. And in addition to that we free up our managers from all dealing with Wall Street, dealing with bankers, dealing with all kinds of things that are what I regard as a less productive use of their time.
BECKY QUICK: However, you also have a situation where you have gotten some activists who have been interested in the stock, including Bill Ackman. He's built up a stake. Hasn't said too much about it. But I think he has made some comments about how maybe Burlington Northern Santa Fe's margins could be improved. You could look back at Bill Ackman's experience with the Canadian Pacific Railway and kind of wonder if he's building up a position because he would like to see you take a more active role there.
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, we notice what other railroads are earning and when their margins are better. I mean, and we certainly put way less pressure on than Wall Street might who would want them next week. But our managers are well aware of what's going on in other industries. And we've made changes where we don't think some businesses are performing as well as they should. But overwhelmingly, we've got managers there that are very, very good. They've got capital available to them for anything that makes sense. And we decide how much they distribute, where the capital moves. And sometimes it moves from one industry to another. On certain industries, a consolidated tax position really is very helpful to us.
BECKY QUICK: There's a viewer question that came in from Ben Comston and he asks, “it was recently pointed out by Bill Ackman that some subsidiaries like Geico, BNSF lag their peers in some areas. Would you agree with that? And how can your successor push improvement in subsidiaries while maintaining a decentralized management structure?”
WARREN BUFFETT: Well, at Geico we bought control in 1995. We had about 2.5% of the market for auto insurance. And we're at about 13.7% of the market. So, we've gone from 2.5 billion of premium volume or thereabouts to 35 billion of premium volume. We're number two now to State Farm. We were number six or seven at that time. So I would say that not due to Berkshire at all, but due to Tony Nicely during almost all those years. Geico's been the envy of every other company in the auto insurance business expect for Progressive.
They've done a good job too. But Geico is worth tens and tens and tens of billions more than when we bought it in addition to all the earnings we've gotten, just a good will value. So that's been extraordinarily well-run. And with Burlington, I think we paid a dividend of $5 billion last year. And we paid $35 billion for it. So, it's gained in market share and its business. Its operating margins have improved but they haven't improved as much as some other railroads.
BECKY QUICK: Do you believe in precision scheduling railroading?
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, we'll see. I mean, we've watched it plenty.
BECKY QUICK: And for those who don't know what that is, it's something that kind of irritates customers because it makes things a little more rigid. But it does improve –
WARREN BUFFETT: Yeah, it makes the customers adapt to the railroad more than the railroad adapting to the customers. And practically everybody's done it. And a fellow named Hunter Harrison was enormously successful—
BECKY QUICK: Who worked with Bill Ackman at the Canadian Pacific—
WARREN BUFFETT: Yeah, he worked with BNSF if you go back far enough. And there's a book about it. It's very interesting. But he did – at the Illinois Central, the Canadian National, the Canadian Pacific. And then he was going over to the CSX. He developed a method of railroading where the customer does adapt more to the railroad. And improved margins dramatically. Our margins are close to what the better railroads – well, there's only a few you get from precision railroading. I mean, and we've gained share—
BECKY QUICK: Because the customers don't like it.
BILLIONAIRE INVESTOR: because the railroads apparently – railroad customers like us better. And over the long-term we'll see. But it isn't like it's something we can't do.
BECKY QUICK: We've got more questions to come with Geico and Todd Combs’ role there. There were several questions that came in on that. But we do have to flip in a commercial break. So let's go back over to Andrew and Joe right now in New York.
BECKY QUICK: A global sell-off underway as investors track a surge in the number of coronavirus cases outside of China. The latest on the outbreak and the moves you need to make with your money from legendary investor and billionaire Warren Buffett.
ANDREW ROSS SORKIN: We're tracking stocks on the move, the sectors being hit the most, and market reaction.
JOE KERNEN: Warren Buffett's perspective on the global economic impact of the virus and his advice to investors is straight ahead as the second hour of Squawk Box begins right now.
ANDREW ROSS SORKIN: Good morning. Welcome back to Squawk Box right here on CNBC. I'm Andrew Ross Sorkin, along with Joe Kernen. Becky Quick is in Omaha this morning with investor and Berkshire Hathaway Chairman and CEO Warren Buffett. We're going to hear from them in just a second. Couldn't be a more important day to hear from them, in large part because U.S. equity futures at this hour are in the red. Getting marginally better, but not much better. Dow looks like it would open off about 702 points right now, in large part about-- because of increasing fears of the Coronavirus-- which has spread some the numbers over the weekend.
We'll talk about those in just a minute. NASDAQ looking to open down about 250 points. The S&P 500 looking to open down about 75 points all in. And check out European markets at this hour. The spread of the coronavirus in Italy really putting pressure on stocks there. You're looking at numbers across the board with 3% and 4% off, but we want to show you oil prices really quickly at this hour, as well. You're looking now at WTI crude, a barrel will cost you $51.35. and that's down about nearly 4% right now.
JOE KERNEN: And here's the latest on the coronavirus. China reported an additional 150 deaths and 409 new cases overnight. South Korea raised its coronavirus alert to the highest level after the number of cases there ballooned from 31 to more than 750 in less than a week. Stocks in Asia falling overnight. Hong Kong's Hang Seng fell 1.8%. South Korea's KOSPI fell nearly 3.9%. Shares of South Korea's two largest airlines down, as they canceled flights to the city of Daegu, where many of the new cases were detected. Meantime, Italy's government is scrambling to deal with the biggest outbreak of the coronavirus outside of Asia. Stocks there were lower overnight. The government placed at least ten towns in northern Italy under quarantine and canceled the last few days of the Venice Carnival. Elsewhere in Italy, schools, museums, universities, and cinemas were closed and major soccer matches were canceled. At this point, I mean, Boris Johnson out earlier today, Andrew, saying that the risk to U.K. citizens just over there remains low. I would say that our officials would say that here, too. The risk—
ANDREW ROSS SORKIN: Yes.
JOE KERNEN: --to U.S. citizens remains low. But there's a significant difference between-- supply chain disruption, slowing dozens and dozens and actually, hundreds—
ANDREW ROSS SORKIN: Absolutely.
JOE KERNEN: --of companies.
ANDREW ROSS SORKIN: Absolutely.
JOE KERNEN: And that's dampening global growth. What worries me is that we don't know, three months, six months, nine months. If it ever gets to the point where we start to see, in a lot of countries around the world, these breakouts where they don't even know the origin of some of these. And if they multiply like that, that's when I think it could really get-- at this point, it's still—
ANDREW ROSS SORKIN: No, that's—
JOE KERNEN: --it's still a global growth slowdown. Nobody in-- in most of the world is worried that they're going to catch Coronavirus.
ANDREW ROSS SORKIN: Right.
JOE KERNEN: --and they can't go out, and they can't, you know, go to the movies, or the health club, or to a restaurant. But that-- I just want to—
ANDREW ROSS SORKIN: But, look, there are—
JOE KERNEN: --we don't know.
ANDREW ROSS SORKIN: --major travel that's being changed right now. Conferences are being canceled. There was an article in Time Magazine speculating whether the Olympics in Japan over the summer will be canceled. So, there's real implications here that could reverberate. Having said that, the farther we get to the spring, the better it gets. There's weather. There's a whole sort of--about how the flu--you know-
JOE KERNEN: You know, I was looking at Jim's-- some of Jim's tweets earlier. If you go too far with the fear and the panic, you're accused of one thing. If you don't—
ANDREW ROSS SORKIN: Yep.
JOE KERNEN: --go far enough, you're accused of the other thing. So, we really just need to sit here and each day, report on the facts and try to remain detached. But there's something about a pandemic that just is different than other black swans. It's a frightening prospect. Anyway, let's get right back to our guest of the morning. Warren Buffett joins Becky in Omaha following the release of his annual letter to shareholders over the weekend. And, I mean, Becky, you took a plane. I mean, were you--it's in the back of our minds. Is it not—
BECKY QUICK: I did.
JOE KERNEN: It's just in the back-- there's nowhere—
BECKY QUICK: It is.
JOE KERNEN: And-- and the-- the risks are low—
BECKY QUICK: Joe, it goes back to 1918. It goes back to—
JOE KERNEN: Right.
BECKY QUICK: --1918. You know, if you look at the numbers of what happened in that pandemic when it came around the globe, up to 50 million were killed in that. It was a third of the planet's population that was infected. It was 500 million people that were infected at that point. 675,000 Americans died at that point. So, inevitably, your mind kind of goes back to what's happened in the past. Because, as humans, we always look back to history to try and predict the future. Doesn't always work. It's not always prophetic. But it does give you something of what to kind of play out if this were to get worse and worse. Now, Andrew brought up the idea that it's warm weather. We're approaching spring in a lot of parts of the country or a lot of parts of the planet. That may be good news. We just don't know if this time around if this is one of those viruses that does die off in warmer weather. Wait and see, and kind of hope.
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, I, actually--I think this, from what I've heard from people that know a lot more about viruses than I do that, unfortunately this will make it through the summer. And, in terms of having a vaccine, it's, you know, a long ways off. So, you've got-- you know, it is scary stuff. I don't think it should affect what you do in stocks. But, in terms of the human race, it's scary stuff when you have a pandemic.
BECKY QUICK: Yeah. I guess this one's particularly frightening because it's new. So, there's no natural immunity that's built up in any of the populations. And you wonder what happens, particularly in areas where there's not the same health care structure that we have in America or in some of the developed nations. I guess that's a big part of the question, too.
BILLIONAIRE INVESTOR WARREN BUFFETT: Yeah. And it's—well, I think about it in terms of our annual meeting. I mean, which is May 2nd. I mean, it could very well affect-- by that time, it could affect—
BECKY QUICK: We've got questions from viewers asking just that. Will the annual meeting be any different this year, particularly because you have a large Chinese contingency of shareholders who—
BILLIONAIRE INVESTOR WARREN BUFFETT: Yeah, I don't think—
BECKY QUICK: --will be here for that?
WARREN BUFFETT: Yeah. And-- and that certainly will be affected. And, incidentally, I mean, flu is particularly tough on old people. You are going to have two guys on the stage whose combined age is 185. So, we’ll-- we won't be looking for people that show are getting signs of contagion. But that's one of the problems with this, is it does have a long gestation period. And it's highly transmissible.
BECKY QUICK: And, again, you did talk about it earlier. It's something that you see in the results of the businesses. Even—
WARREN BUFFETT: It's true.
BECKY QUICK: --some of your own fully owned businesses--
BILLIONAIRE INVESTOR: Sure.
BECKY QUICK: --that you didn't anticipate.
BILLIONAIRE INVESTOR WARREN BUFFETT: Well, we own airlines, for example. No, it-- it affects businesses now. Actually, my dad used to tell me stories. He was 14 in 1918. And and he told me what went on in Omaha, you know, during the big Spanish flu epidemic. I mean, it was-- it was something in those days. And, pandemics will occur in the future. Now, what they hope to get is a universal flu vaccine. But, that's a long way off. It isn’t impossible. I mean, I asked my-- my own science advisor is Bill Gates, so I talk to him, I call him. I talked to him the last few days about it. And he's bullish on the long-term outlook for a universal prevention of it. But, this is not going to come, you know, for -- it's not going to be here in 10 years.
BECKY QUICK: What are Bill's concerns, as somebody who spends a lot of time traveling around the globe, as somebody who is trying to help medicine in some of the less developed parts of the world?
WARREN BUFFETT: Yeah. The Gates Foundation is very active in trying to be helpful on this. And Bill says the CDC is the best in the world. And, I mean, we've got terrific resources in this country. But a pandemic is a pandemic. And, there's just no evaluating. And--but I have heard that the summer is not likely to cause the end of this.
BECKY QUICK: Do you know why?
WARREN BUFFETT: But I don't know. And-- you know, you shouldn't be ask—I shouldn't be offering my opinion on it. Because I pass along things I hear from people I think are smart, but—
BECKY QUICK: I'm actually asking for Bill's opinion, not yours. (LAUGHTER)
WARREN BUFFETT: Yeah. Well, I shouldn't-- and I shouldn't really quote him, but I do--he's the guy I ask. And I did talk to him just a few days ago. He loves to talk science. And he can make it so I could understand it, which is-- quite a trick. Well, at the Gates Foundation, they're taking it very seriously. I'll put it that way.
BECKY QUICK: Is money going from the Gates Foundation to try and—
WARREN BUFFETT: I'm—
BECKY QUICK: --find a vaccine?
BILLIONAIRE INVESTOR WARREN BUFFETT: --I'm-- I'm sure they are expending human and financial resources.
BECKY QUICK: Have-- I mean, maybe this is more than you know. But do you know if they have put human resource out either into China or other places where there's—
WARREN BUFFETT: I don't know that. I don't want to comment on that. But I know that they're--that is-- something they've always spent, they've been very involved in, is human health. And, even particularly this. Bill knows a lot about vaccines.
BECKY QUICK: Let's talk a little bit about Berkshire Hathaway. We were in the middle of a conversation when we had to go to a break before. But there has been this question raised, not only about Barron's and the cover story there but by other places, too, about whether Berkshire Hathaway would be worth more if it were split up.
WARREN BUFFETT: That's a good question. And I will tell you that-- that if you were to say--and let’s say the stock market didn't change for two years and interest rates didn't change. So, if you had a two-year period and you said, ‘We'll sell off all the businesses,’ I don't think-- I mean, you have the expenses of selling them. Now, if you sold them all to people who leveraged them up to their maximum, you might get a little more than the stock is selling for. It would be very tax inefficient, very tax inefficient. Interestingly enough, up until 1986 it wouldn't have been. I mean, there was as general utilities doctrine that governed corporate breakups. And so, you could dispose of businesses or securities-- if you did right, you could dispose of securities or businesses that are depreciated without a tax at the corporate level. That was done regularly in various ways up till 1986. They revised the tax code big time. They killed general utilities. You can't do that now. Now, you can go-- you can have spinoffs, this business or that business. You probably have to lie a little in terms of your purpose in order to get the best tax ruling. And it takes time. But you cannot break up-- you cannot dispose of the entire business, business by business, without having very substantial tax liability. It would not produce a gain. On the other hand, having them together produces—there are some very valuable synergies in there. Now, we don't use leverages much as the people who would buy them piece by piece would do. So, we could leverage Berkshire up to the sky. I've promised people we won't. Because we have insurance promises to people out 50 or 100 years and we've got shareholders who are going to own the stock for 50 years, and they do not want us to leverage to the sky. But there would not be a profit if we were simply to announce that over the next 24 months that you could come in and buy any business we had, and we'd sell them to the highest bidder.
BECKY QUICK: You made a point of talking about this in the annual letter.
BILLIONAIRE INVESTOR WARREN BUFFETT: Yeah.
BECKY QUICK: You said: Key to my only Berkshire—or, key to my Berkshire-only institutions is my faith in the future judgment and fidelity of Berkshire directors. They will regularly be tested by Wall Streeters bearing fees. At many companies, these super salesmen might win. I do not, however, expect this to happen--at Berkshire.
WARREN BUFFETT: That's exactly true. And I think by writing it, it helps it a little, too. No, there's no question that Wall Street would love to come along and sell anything that we've got. I mean, there's a fee every time that there's a transaction. And, they are big fees. And, there's fees for the NASDAQ. I mean, there's—so, we've had all kinds of people snoop around. And they know they're not getting it done with me, but they're not-- they won't-- it won't get done later on either. I am leaving-- every share of Berkshire I have goes to charity, and it's 99% of my net worth. So, I've got-- nobody cares more than I do about getting the most money to those philanthropies over the years following my death. And that's going to take place over 15 years. And I say keep it all in Berkshire. But if I thought that it was going to be run in a way responsive to Wall Street, I would instead do something else, and have the money distributed to these philanthropies, and not have it all tied to Berkshire. But Berkshire has a very usual shareholder base. I mean, we have individuals that own Berkshire. And a lot of them have owned it 50 years just like-- it's-- people buy it to own for a lifetime. And we're going to run it in a way that they won't be disappointed.
BECKY QUICK: Do you think the people who are newer--relatively newer shareholders, buying the B shares, have the same mentality as the people who have been in it for 50 years in the A—
WARREN BUFFETT: Well, we try to because—
BECKY QUICK: --shares?
WARREN BUFFETT: --that's who we encourage. I mean, in effect, we don't want everybody to buy our stock. I mean, there's only so many seats. There's about a million, six-hundred-and-some thousand A shares out. All the seats are filled. I love the shareholders we have. I don't want to go to Wall Street and try and get some new shareholders that are going to replace the people we have. So, look, we want to have people in those seats that are in sync with us. You can run a French restaurant, or you can run a hamburger stand. And if you serve good hamburgers, you'll do good business with hamburgers. And, at the French restaurant, you can do the same thing there. But you can't run the French restaurant and then serve hamburgers inside, and you can't run the hamburger stand and serve French food inside. So, we advertise in our deeds, in our words, in every way we can what we're about. And we're looking to have the seats filled at our church by people who are in sync with us. And we do have them there.
We get the same people every Sunday. And I see no advantage in going out and telling everybody on Wall Street we're going to do wonderful things and having those seats replaced. Because the only way you can get a seat is to throw somebody else out of that seat. There's only so many seats, and they're all full. You want them filled with people who are in sync with the policies at the company. Therefore, you have to explain those policies and you have to live up those policies. And for 55 years, we've tried to.
BECKY QUICK: So, you get the shareholders you deserve.
WARREN BUFFETT: Exactly.
BECKY QUICK: Alright. Not to mix metaphors, but can you have a decentralized central office running both the French restaurant and the hamburger place?
WARREN BUFFETT: Well, they aren't trying-- we're not trying to have railroad management run the utility here.
BECKY QUICK: No, decentralized. That's what I mean. A decentralized headquarters that's in charge, a conglomerate in charge of all those different businesses.
WARREN BUFFETT: Well, you-- we could run-- we have decentralized management as it is. We could have somebody in charge of all the little companies, another one, the big. We could visualize it in all kinds of ways. I think we'd have more overhead. I think we'd have eight different sort of manager. Our managers like running their own businesses. And they like -- they never have to finance their businesses. I mean, we-- and they never have to go to Wall Street. They never-- they probably save 25% of their time. And, I want them to feel they own their businesses. And that's all they're responsible for. If we mess up some other way, you know, they still-- they get paid based on how they do. And, there again, we attract managers who like to operate on that basis. We don't attract managers particularly who think they're going to keep moving step by step through various divisions and eventually run the whole place.
BECKY QUICK: All right. We can talk more about succession later, because you did write an awful lot about that in the annual letter, too. But right now, we're going to send things back over to Andrew.
ANDREW ROSS SORKIN: Thanks, Becky. We're going to have a lot more from Omaha and Warren Buffett right after the break. Do take a look, though, at futures. As we speak, we're back to about being off about 700 points on the Dow. The NASDAQ looking to open down about 247 points. The S&P 500 looking to open down about 77 points. All on additional new fears about the spread of the coronavirus. We'll talk about that and so much more. The Oracle of Omaha right after the break when we return.
BECKY QUICK: Welcome back to Squawk Box. This is CNBC. We're here with a special show with Warren Buffett in Omaha, Nebraska. But before we continue with that, let's get a quick check on the financials this morning. If you've been watching the futures, you're going to see that overall the Dow futures are indicated down by over 700 points. We've seen levels of worse than 800 points off this morning. But you see a big part of that comes from the banks themselves. The banks, if you look across the board, are down by about 3%. If you're looking at Goldman Sachs, Bank of America, Citigroup down by 2.9%, JPMorgan Chase off 3%.
Wells Fargo down a little less, it's down by about 1.9%. Again, we're with Warren Buffett, the chairman and CEO of Berkshire Hathaway, today. And, Warren, one of the things that people wrote in--a lot of people had questions about the banks, about what's happening with the banks, what you've changed with some of your investments of over time. Jason Goldberg writes in. He says:
‘Please ask Warren about his views on the bank stocks in general and on Wells Fargo in particular. Over the last few quarters, he has sold almost one-quarter of his longstanding Wells Fargo stake. Also, in the fourth quarter, he dumped a third of his Goldman stock--Goldman Sachs shares, although, he still owns over $75 billion in bank equity.’ So, what do you think about banks? Not necessarily the sell-off today, because you don't look at day by day.
WARREN BUFFETT: Well, banking is a good business if you don't do dumb things on the asset side. I mean, basically. And, it's a business that the banks we own earn between-- the commercial banks earn between 12% and 16% or so on Net tangible assets. That's a good business. It's a fantastic business against the long-term bond, you know, at 2%. If you have a choice between a 2% instrument and a 12% instrument, which one's going to win over time? So, if you asked me whether I think banks are going to go down when they only earn 3% or 4% on tangible assets, I don't think that will happen. The question is really whether they do something massively dumb. I mean, which periodically a number of banks have done. And I feel very good about the banks we own. They're very attractive compared to most other securities I see. And, most of them are buying-- Bank of America's buying-- a lot of stock every year.
So, our ownership of the Bank of America this year probably will go up 7% or 8% without us spending a dime. I'd like to own any business-- any good business where my ownership goes up 7% or 8% every year without me spending any money and on top of it, I get a dividend. So, they're very attractive, both against interest rates and against-- or against bonds and against other stocks in my view.
BECKY QUICK: You say occasionally “they do dumb things.” Maybe you're talking about Wells Fargo with the scandal that it had? It just settled on Friday, with a number of the regulatory institutions that were kind of looking into it, the investing allegations that were taking place, for $3 billion.
WARREN BUFFETT: Yeah.
BECKY QUICK: Does this mean that they have kind of finally gotten through that and can move forward?
WARREN BUFFETT: I don't know the answer to that. I know that they're paying $3 billion because it was announced. I don't know what else is outstanding. But Wells Fargo's classic, in terms of one lesson. My partner, Charlie Munger-- he's-- you know, he says, ‘Whenever we have a problem, you attack it immediately.’ He says, ‘An ounce of prevention is not worth a pound of cure. An ounce of prevention is worth a ton of cure.’ And we've seen that time after time. And the interesting thing, I-- and I don't know the details at all, but the original thing was a bunch of-- whole bunch of phony accounts. Now, I don't know how if you open up a couple million phony accounts you make any money on it at all. I don't, the shareholders didn't make money. People say, "Well, the—
BECKY QUICK: Well, the incentive structure was set up so that some of the employees did--
WARREN BUFFETT: It was the dumbest incentive—
BECKY QUICK: --make most of the money.
BILLIONAIRE INVESTOR WARREN BUFFETT: --system you can think. And as soon as you learn, you can devise dumb incentive systems. We've done them ourselves. I mean, you can-- you can cause people to do the wrong thing. Because they will do what they're incented to do. And they had a—obviously, a very dumb incentive system. People started playing it various ways. And the big thing is they ignored it when they found out about it. I mean, you're going to do dumb things in business. And we do them every day, you know? But you absolutely have to attack a problem as soon as it occurs, and you know about it. And if that had happened, Wells Fargo shareholders would be a lot better off. But Wells Fargo shareholders did not profit from opening up accounts that were phony accounts that had nothing in them. I mean, somebody was getting paid so much per account. So-- and the practice spread because bad practices do spread if they're allowed to spread. And they were ignored, which is a total disaster. And look at the consequences. So, two or three years later, who's paying? The shareholders are paying for something that didn't do any good whatsoever.
BECKY QUICK: Is that why you've sold off some of the shares?
WARREN BUFFETT: No. Not specifically.
BECKY QUICK: I know you don't want to get specific on why you--
BILLIONAIRE INVESTOR WARREN BUFFETT: No, I'm not-- I'm not-- I'm not recommending it--it's what stocks--people have to make up their owns minds on that. But—
