Now is a good time to buy a home and finance it with a 30-year mortgage, says Warren Buffett, Berkshire Hathaway chairman/CEO. Buffett discusses why he wants to invest in more businesses, explains why he bought eight European stocks at the end of 2011 and also shares why he decided to invest in the Omaha World-Herald.
let’s start off our conversation with warren buffett. we do have some important topics to get to. first of all, we want to thank you very much for joining us. thank you for coming. we’re here at berkshire’s most recent acquisition. last year you went ahead and stepped in and i guess one of the key questions i have is why did you do that? why don’t we start off talking about that right at the top. william jennings brian was the editor of the world herald so if you go back to 1894 to ’96 and then of course he started running for president and he didn’t have too much luck until he lost three times. the world herald — newspapers face three major problems and two of them they can’t do much about but the third they can. the first problem they have is that the only reason you buy a newspaper is to find out something you want to know that you don’t know. and if you go back many years, if you wanted to know the box score on your favorite baseball team, if you wanted to know the closing prices on stocks, if you wanted to find an amount, the thup was primary. it’s lost its primariness in certain major areas of news but still remains in a number of items that are extremely important to people. and it’s vital they continue to be so. as long as they are of interest to you, that you can’t find some place else. classified, obituaries? yeah, obituaries are a good thing. you are not going to find out whether your friends are alive or debt anywhere else. take high school basketball or nebraska football, you will learn more from reading the newspaper than from any other source. the world herald will always be primary. you will know ten times as much about nebraska football than if you try to get your news from any or source. the same is true in local politics and people, when there’s a sense of community, people care with about that. now where there isn’t that sense of community, the second problem i have — but they still are — you start with trees up in canada and it’s very expensive. that doesn’t go away. electronic is not expensive. but the third thing is newspapers have been giving away their product at the same time they are selling it and that is not a great model. you’re competing with yourself and that you are seeing throughout the industry a reaction to that problem and an answer to it and that’s important. the answer is charging people online? yeah. in other words, you shouldn’t — you shouldn’t be giving away a product you’re trying to sell. rupert murdoch got there a long time ago and said this is something we should be doing and do you agree? the dow jones was doing it before rupert, too. and it’s being instituted in other ways. that’s key to the future of the newspaper. newspapers tell you a lot of things you can’t find out other places and most citizens are going to find them useful. you can’t give them away for nothing. we can talk more about this later. i want to start off while we’re here at this point the market, the dow and the s&p are sitting at about the highest levels in four years. we have seen an incredible run over the last several months and you are somebody who had stepped in four years ago or i’m sorry, back in 2008, when you wrote that op-ed piece for the new york times, the headline was buy american stocks. i am. we’ve come a long way in the market since is then. the dow was below 9,000. i want to know what you think about stocks at these prices. do you still think that this is a great time to be buying stocks? stocks are businesses. you have to invest in something. if you have your money in your wallet, it’s invested in something. it’s just zero. if you have your money in the bank these days it’s at zero or in treasury bills it’s invested at zero. i have a section in the report where i say that if held over a long period of time there’s no question in my mind that equities is going to outperform in my view dramatically paper money or nonproductive assets such as gold. no forecast for the next three months, six months, or a year. i think it’s obvious that owning really first rate productive businesses, and there’s hundreds of them, you have to compound over time. pay the money out, reinvest it, share in shares so your ownership goes up. equities are still cheap relative to any other asset class. but they’re not — i would say single family homes are cheap, too. you would? single family homes. if i had a way of buying a couple thousand single family homes and had a way of managing them, the management is a problem because they’re one by one not like apartment houses. but i would load up on them and i would take mortgages out at very low rates. if anybody is thinking about buying homes, five years ago they couldn’t buy them fast enough. interest rates are far lower. it’s a way, in effect, to shorten the dollar. you can take a 30-year mortgage. you can refinance lower. if it’s too low the other guy is stuck with it for 30 years. it’s an attractive asset class now. if you are a young individual investor at home and have your choice between buying your first home or investing in stocks, where would you tell someone is the better bet? if i thought i was going to live — if i knew where i wanted to live the next five or ten years, i would buy a home and i would finance it with a 30-year mortgage. it’s a terrific deal. and if i, literally, was an investor that was a handy type, which i’m not, and i could buy a couple of them at the stressed prices and find renters, i think that’s — and, again, take a 30-year mortgage, it’s a leveraged way of owning a very cheap asset now. i think that’s probably as an attractive investment as you can make. equities are very attractive compared to anything else. obviously they’ve come up quite a bit since you first were telling people you were buying them for your perfectly port foal yoe. you wait until you see the first robin, spring will be over. spring is over 0 but we’re not in the dead of winter either. stocks, we with were three years ago and stocks have almost doubled exactly since we sat down three years ago so they’re not as cheap as they were. but measured against the alternatives would you rather have cash, treasury bonds, rather have — you name it. i would rather own great businesses and we own a lot of them through stocks and we own a lot of them outright and i would love to buy another one this afternoon. when you look at stocks do you look at american stocks first? i look at stocks all over the world but, sure. the big market is here. i know the companies better here but we — at year end, for example, we have a subsidiary in germany. i bought seven international stocks. in fact, i may have — i put 175 million euros in each of h stocks and they were all european stocks. when was this? right toward the end of the year. yeah. i just picked eight of them. i do not know the eight as well as i know american express or wells fargo. i know them enough. you looked at the situation with the euro prices and you thought it was improving or at least they started to make progress on that? i thought the eight companies were terrific companies that were cheap. but why did you focus on europe? you’ve never done that before. i just — i just thought these eight companies were cheap and they obviously were affected by the european crisis and in the end those eight companies i bought are going to be there five, ten, 20, 50 years from now and there may be something else bothering the world five years, ten years from now. there will always be something bothering the world. these can companies will do fine regardless of what happens with europe. did you buy that for berkshire’s port foal wroe? sure. i don’t have — what are you doing in your perm portfolio? do you continue to buy stocks? every now and then. i don’t think about my own portfolio very much. i think about the portfolio of our subsidiary. that’s what i spend my time thinking about. okay. when you take a look at the housing market, you had told us last year when we sat down here you thought it could be the turning point and you said in your annual report you were dead wrong. we didn’t see the improvement last year but you do think we’ll see it this year? i think we’re likely to. i sat here a year ago and said it would happen by now. what i do know is that today there are more households being created than houses. well, if that continues, and it will continue, eventually it gets in balance and when it gets in balance, it is in different geographies and time. when it gets in balance we will need more than a million residential housing units annually and when we’re building, supply and demand will come into balance. it got way out of balance five years ago and that gave us time to work it off. but it does work off. the first year after the recession, after it hit in 2009, household formation went like this. that happens in recessions. but that’s changed. we have 4 million people roughly hitting each age cohort every year and we form households and they want to be in houses. there was an article that was out today talking about what economists are expecting with gdp and most of them, though they do see signs of improving will be growing at 2.4%. does that fit with what you see with the businesses you manage? i see our businesses getting better month by month and i’ve seen that since the summer of 2009 and the headlines have bounced around, the economist predictions have bounced around and looking at 70 some businesses leaving out the housing related businesses, the quarter by quarter ever since the middle of 2009, regardless of what the housing headlines were saying, the businesses kept getting better and they continue to. they’re not at some rate like that but they keep getting better. i don’t pay any ait tension to the gdp the gdp forecast. the corporate profits have risen yet we haven’t seen the jobs picture improve in days. that’s because of the housing related factor. this was not a recession for housing. this was a depression. this was every bit the equal of anything we’ve ever seen in terms of a crash for housing. and the ripples from that spread out and they spread out quickly in 2008. but it’s taken a long time for that to come back. but the housing related figure, if you look at the composition of employment, construction workers show us a number, but that’s not really the number. we have five companies that are related to housing. only one is directly in housing. we’re the largest home builder in the united states, but we have four other companies, shaw carpet, acme brick, insulation, and those companies are affected enormously and their employment has gone down from 58,000 to 45,000. you will see that all throughout the economy. we have a healthy economy except for housing but housing is such a big factor. housing was $22 trillion of americans $60 trillion. when that is held on leverage with mortgages, the effect is enormous. i know joe has a question as well. joe? it’s a sore subject, that stupid brick company. wait a second. i sent you a brick. clearly it didn’t have any effect on you. i asked for a card and you sent me a brick. one brick. one brick. i’ve seen the brick. it’s on your desk. i actually took it home. that’s a sore subject. you can’t win. i was read iing about berkshire net income down 30% because of derivatives. how did you possibly lose money in derivatives? you didn’t lose money. you made less than you made last year on the s&p derivatives, on the puts, right? you make $300 million, they still call you a slouch for having those derivatives. and actually if you priced them today versus december 31st, the markets going up not only here but europe and japan, we would show over $1 billion of profit today. whether or not that will be true on march 31st, it doesn’t mean anything. we have $4.8 billion stuck in our pocket. i know. anyway, we wrote with about it all. the other headline today that you knew was coming was buffett’s trust me on succession isn’t cutting it. the journal has an article, yeah, the board is comfortable. what, your shareholders are chopped liver? they can’t be comfortable, too? creates instability. why not just say who it is or are you still are worried about like maybe the guy that you’ve identified, maybe he falls out of favor so you still have the option of changing it? why not just tell everyone? yeah, well, we have four stocks, we have $45 billion invested in. american express, coca-cola, wells fargo and ibm. every one of those four companies, every one of those four companies has changed management since we bought our shares. i didn’t have the faintest idea who the successor management would be in any of those four but we put billions and billions and billions of dollars in there, in some cases it’s changed more than once. i don’t know hot next manager of those four companies will be. i don’t worry about that. they’re wonderful businesses and good boards of directors. they will pick the person that will do the best job. if they make a mistake, they’ll make a change. we’ve had had that — like i say, if you ask he who the next ceo of coke or american express or wells fargo or ibm would be, i don’t know the answer and i don’t care. they have wonderful businesses and they’re developing wonderful talent. the interesting thing at beck shir is normally if you run a business you are looking for somebody from production or manufacturing or sales or something who succeeds as ceo. at berkshire we have dozens who are running businesses. we have people running the bns. they are ceos already so we have a choice of dozens of ceos which is a luxury. i don’t know of another company that has it. in the end, it could be tonight. it could be five years from now. the board of directors knows who the person is the next morning and i don’t know, for example, amazon is now — i should say apple is now the largest company by market value in the country. exxon is number two. i don’t know whether you know who the successor is. it’s not matt rose. now i know it’s not matt rose because you just said he’s got to run the railroads. i was hoping it might be matt. i like matt. is it definitely not? i think you misread that. the person who is going to become ceo of berkshire is probably some ceo — oh, so it is hat mat rose. you’re breaking news here, john. you’re stretching to do 0 it. when you sit and talk to the board about a potential successor and you talk about the down sides of naming that person or naming a list of people, what are those down sides and i ask because there is all this fre pressure and it would seem — you just mentioned tim cook. there was a sense, though, i don’t know if it was said publicly that he clearly was going to be the successor and that gave some people a sense of stability around what was going to happen after a steve jobs. it was also clear that steve jobs had a real health problem. who is tim cook’s successor? it’s a great question. i don’t know. hot is jeff’s successor? who is jamie dimon’s successor? all of those people have somebody in mind. for various reasons, one of the reasons being they don’t know happens makes a difference and they also probably don’t like the effect of having a crowned prince. warren, this is the first time — this is the first time that in the annual letter you’ve laid out and told the shareholders that there is one person in mind. in the past it was always this idea it was one of three or four people. you can blame me for that because i have said at annual meetings that the board knows exactly which one they would pick the next morning. i probably haven’t made that as clear as i should have there’s always been the case though there were three or four possibilities they knew which one would be the designated one but they did have the backup candidates. i should have made that more clear and i tried to this time. but five years ago, if something happened to me five years ago, the board had one person in mind. they had a couple of backups at that time always. a year ago was it a different person they had in mind than now? no. david has since left the company. it would have been the same person a year ago as now. so it was not david? you can go back further than that. it was not david a year ago or if further back than that? no, not the one they would have picked. can you give us an update on what has happened with that situation? well, i really don’t know because it’s being investigated by various authorities and they talked to me last june, not a deposition or anything like that. just an informal — who did? well, i can tell you the s.e.c. did. and then that’s the last i’ve heard. now, unfortunately, i know that it must be fairly active because we have to pay dave’s legal bills under delaware law and we’ve paid like $1.4 million. i assume something is going on. i hate paying these legal bills naturally. if he’s found guilty of a crime, we can get those back at some point. the bills just come in. i read where fannie mae have paid $99 million on three people, and they’re not done yet either. that’s the american taxpayer paying that. it’s a very awkward thing when you have somebody who has been charged with something who was an employee and under delaware law you have the duty to defend them though you can get it back if they are found too much committed a crime and dave has plenty of money, so we would not have a problem getting it back if that’s the case. i have no notion, i’ve not talked to dave or the authorities. it’s their investigation and i’m on the sidelines but writing checks. andrew, did you have another question? no, no, no, you asked the exact question we were planning to ask. just in terms of what had happened with that situation? no, i was more interested in the fact that in the report he