This is part five of a transcript of his comments.
BECKY: Welcome back to SQUAWK BOX. We are live in Omaha this morning at the World Herald Freedom Center. This is the printing presses for the Omaha World Herald. We’re speaking to Warren Buffett, who’s the chairman and CEO of Berkshire Hathaway.
And, Warren, for people who are just tuning in, we should tell them we’re here because the Omaha World Herald is an acquisition that Berkshire Hathaway recently made.
How Warren Buffett Uses Discount Rates To Value Stocks
Warren Buffett has never detailed the process he uses to value the businesses he acquires for Berkshire Hathaway. However, over the years, he has provided some limited insight into his methods. Q3 2020 hedge fund letters, conferences and more Based on these comments, it is widely assumed that Buffett uses a discount cash flow model Read More
BUFFETT: Yeah. In December of last year, just a couple months ago, Berkshire bought the Omaha World Herald. I’ve been reading it since I was about six. I study these things a while before I write a check and, you know, it’s a terrific newspaper. I’ve read it every day, you know, throughout my lifetime, and it was employee-owned and there were some cash problems in terms of redemption of stock that was built into the system, so it become advisable to look for a new owner, and I’m glad they looked for me.
BECKY: Someone did write in and wanted to know if you had any say over the editorial content.
BUFFETT: Zero, zero. No, my guess is that next year that they will probably endorse somebody for president, and I’ll probably vote for the other guy. But who knows?
BECKY: OK. Let’s get back to the economy. We have talked an awful lot about how you see things going along. And in Berkshire’s 70 businesses or 70 some businesses, you have continued to see slow and steady gains. Is there a sign in any of those businesses yet that there really will be a turn in housing or is that just something your gut tells you at this point?
BUFFETT: It — if you look — if you really were looking for it you might find some little flicker someplace. But the important thing is if you take our five largest businesses, and they’re big.
BUFFETT: They all — you know the aggregate earning are over $9 billion. And they’re basic businesses, you know, whether it’s a…
BECKY: Outside of insurance.
BUFFETT: Outside of insurance, every one of them set an earnings record last year. I think it’s pretty likely that every one of them sets an earnings record this year. I mean, these — you know, they earned over $9 billion pretax last year. So these are big businesses. And, you know, the people — we’re hiring in those businesses. People don’t have to worry about their jobs in those businesses. So it — the economy is coming back every place except home construction, and it will come back in home construction, I can guarantee you that. I just don’t know when.
BECKY: There’s an impression that businesses are not investing in the United States, and that’s something a lot of people have said. But you point out in your annual letter that Berkshire is spending a lot of money on capital expenditures, $8 1/2 billion in 2011?
BUFFETT: Yeah. We spend — we spend 8.2 billion in — which was an all-time record by — it broke our record by $2 billion. Ninety-five percent of that was in the United States. And that 8.2 billion we spent last year, we’ll break that record again this year, and it’ll almost all be spent in the United States. There are all kinds of opportunities in the United States. And we have the cash to take advantage of those opportunities, and American business has the cash to take advantage of the opportunities. There is — there’s not a shortage of investment funds in the United States in any way, shape or form, and there’s not a shortage of opportunities.
BECKY: Do you believe the recent jobs numbers that we’ve been getting a look at, that indicate that hiring is starting to pick up a little bit and the unemployment rate is starting to come down?
BUFFETT: Yeah. Hiring is picking up but — it’s picked up in our businesses unless they’re related to housing construction. I pointed out in the report our housing businesses are down from their peak of 58,000 people to 45,000 people. When housing comes back, we’ll be hiring at those five companies. But a lot of jobs that aren’t called construction jobs in the United States are tied to construction. So when we go down 8,000 people or so at our carpet business, those are not called construction jobs, but they’re related to construction. Same thing with insulation and other things.
BECKY: You know, Warren, we talked to the CEO of the Gallup organization, and he pointed out some things that they’ve seen in their weekly and monthly polls that they run. They’re constantly talking to people. His concern is that we will see the jobless rate or the unemployment rate pick back up to about 9 percent when we get the next monthly report for jobs. Would that surprise you?
BUFFETT: Well, it would surprise me. But what counts is over the next year, two years and three years. We’ve been coming back. I mean, we — you know, it was — it was September of 2008 when I was on CNBC. I called it an economic Pearl Harbor. I’d never used that term before. I mean, that — it isn’t that I come up with that all the time. I mean, we went through something that this country hasn’t seen before in the way of a financial panic. The country almost stopped. And that financial panic bled over into the general economy very quickly and very severely. And we’ve been coming back now for three years from that, and we continue to come back. But I will predict that our businesses will have more people working for them at the end of this year than at the start of the year.
BECKY: Joe, you have a question, too?
JOE: I do. I’m amazed at how much mail we’re getting on a lot of this. Go back one more second, Warren, and we’ll get back to this current line of thinking. This gentleman writes in, pretty interesting, “Why would I ever consider sending more money to Washington, given the inept policies and investments of our government? Would Warren continue to send money into a business black hole if it had a similar track record?” And I was thinking, if the government was a business and Berkshire was looking at it, there’s no way Berkshire would even take a 1 percent stake in the government with their track record of investments. And I’ve gotten you to admit in the past that one of the reasons you think the Gates Foundation will do a lot better with your 50 or 60 billion is because even charities have a better — a much better reputation for watching how money is spend and for doing more good. So with all that in mind, can you at least see how someone might be sort of just, on an intellectual basis, opposed to just giving a blank check to such a profligate entity?
BUFFETT: Anytime an organization is as big as the US government or any other government, they are not going to be as efficient, obviously, as smaller organizations. But I’ve heard that argument since the late 1930s when my two sisters and I sat around the dinner — the dining room table and my dad presented it day after day. And it was true then, too. It’s been true every year that I’ve been alive. On the other hand, we have successfully defended the country, we’ve built the greatest industrial machine the world’s ever seen, we’ve built the richest population the world’s ever seen. We’ve done that with the government…
JOE: The government didn’t — the government didn’t do that, though. In that I think the…
BUFFETT: Oh, no. Having — I think the government…
JOE: But the question, Warren, if there’s only so much capital, there’s only so much capital in the world, and you look at where it’s going to do the most good or where it’s going to be treated best, shouldn’t we, at least in the back of our mind, think that the private sector’s a better place to keep it than in — than in the government sector? Because every dime that you give to the government, it’s not necessarily going to help the people that are in need that you’re talking about, Warren, for education. It’s going for political decisions benefiting cronies or benefiting ill-conceived venture capital-type Solyndra investments. I mean, they’re — there’s just a vast amount of waste.
BUFFETT: And, Joe, that’s been true throughout your lifetime. And you take — you take the 60 years or so since World War II, and we have sent 18 to 19 percent of our resources to Washington and they’ve been treated just like you described.
BUFFETT: And we have had — we have had an economy that’s been wonderful. It has a market system. Capitalism works.
JOE: But is it in spite of — in spite of — in spite of or because of?
BUFFETT: Both, both, both.
BUFFETT: No, I’m not kidding. It’s both. I mean, you know, you would not — you would have — you would have loved what the government was doing, you know, on December 8, 1941. You would have not seen…
JOE: I agree.
BUFFETT: …less money to Washington.
JOE: I agree.
BUFFETT: And so it’s in spite of and because. And — but the truth is, we can have a country that works wonderfully with 19 percent or so of revenues going to Washington and spending 21 percent.
JOE: It’s just that there’s so many different ways to get there. I mean, we were there a couple — we were there in 18 or 19 percent in 2006 and 2007 even after what you said decimated our revenue 10 years ago. So there was, even under the current — even under the current, when we had a good economy and low — you know, everybody was working at 4, 5 percent back in ’06 and ’07, we were getting 18 or 19 percent.
BUFFETT: The point is to average — the point is to average around 19 and spend around 21.
JOE: Right, right.
BUFFETT: And to have policies in place that do that with the greatest degree — I mean, one way or another you’re going to get it — with the greatest degree of fairness on the revenue side and the greatest degree of efficiency on the expenditure side.
BUFFETT: And there’s going to be a lot of slippage on both.
JOE: Ooh, slippage. That’s like shrinkage or leakage. None of those are good.
BUFFETT: Well, that’s true. Listen, Berkshire has some ways to — you know, it kills me but it does. The bigger you get, generally speaking, you know, the less efficient you get in many ways. Now, there’s certain advantages to scale in other respects.
JOE: You’re not — Andrew’s got another — you’re not going to want to…
ANDREW: I was going to…
JOE: You’re not going to ask him if we should to go 100 percent, are you?
ANDREW: No. I was going to…
JOE: Seventy’s not high enough for you.
ANDREW: I was going to save Warren — I was going to save Warren from you and change the entire direction of the conversation.
JOE: Save him from me? How can you — you don’t need to save a guy — you know what? Never be — never feel sorry for someone who has a private jet. That was someone that — someone told me that long ago and I — and it’s what I live by.
BUFFETT: Yeah, yeah.
JOE: Never feel sorry for someone who flies private.
ANDREW: OK. Warren, we don’t have much time…
BUFFETT: Keep preaching — keep preaching that, Joe, I’m with you on that.
ANDREW: Warren, I wanted to get some thoughts about the banking business, and I know we don’t have that much time here, so I’ll start with one question, maybe we can bleed into the next hour on this. But as I was reading your letter and some of your comments about Bank of America, I also noticed that you — and you’ve done this now several times, you’ve praised Jamie Dimon at JPMorgan, and yet I realize that you are not an investor in JPMorgan. And I’m curious why not.
BUFFETT: Well, we own stock in Wells Fargo, we got the Bank of America situation. And I’ll let you in on a little secret. I own some shares of JPMorgan.
BECKY: Personally, right?
BUFFETT: Personally, right, right. You just — you just got some news from me, Andrew. But what I — what I specifically reference, and this is important, Jamie Dimon, I think, writes the best annual letter in corporate America. I think you will learn — I think every viewer will learn something by reading his annual — they’ll learn a lot by reading his annual report. He is a — he thinks well, and he writes extremely well. And he works a lot on the report, he’s told me that. And that’s an annual report worth reading. Most annual reports aren’t worth reading, but that one is.
BECKY: Why would you buy that stock for your personal account and not for Berkshire?
BUFFETT: Well, because Berkshire doesn’t own it, and it’s one that I can buy without having any possible problems about conflict.
BECKY: All right. We’re going to take a quick break here. When we come back, we’ll have more from Warren Buffett after this very quick break. By the way, keep your emails coming. We are going through them, taking — looking at all of them. Don’t forget, you can also tweet your comments and questions. Make sure, though, if you do, that you include the hashtag askwarren. Right now, Warren is a trending topic on Twitter. Wow. I didn’t know that. As you’ve been talking, we’ve been picking it up and apparently lighting up the Twitter universe. By the way, tomorrow on SQUAWK BOX, we have another big lineup for you, including Pimco’s Mohamed El-Arian, who’ll be sitting down with us for two hours. Also, Roger Altman of Evercore. And a new segment that we’re rolling out, Trump Tuesday. Donald Trump joins us to talk markets, politics and much more. SQUAWK BOX will be right back.