Insight on the choice of his ultimate replacement, with Warren Buffett, Berkshire Hathaway chairman/CEO, who answers questions from viewers, including whether he thinks higher gas prices will derail an economic recovery.
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
for 200-plus years. it’s working well now in all well, they’re a minus but i don’t see them stopping things. i would rather have them a lot lower. of course we had them a lot lower when the panic hit. oil had been $147 a barrel prior to obama coming in and then when the panic hit, it hit everything and oil totally tanked. i do not think it will derail what’s been going on now for almost three years, two and a half years. we’ve had a steady recovery. does the price of oil make sense given that economic recovery or something people are too worried about what’s happening in the middle east or where you have speculators playing in the commodity market? i have no position in oil so i don’t really have a view. the one thing that’s extraordinary in oil which we’ve never seen and causes people to go broke, is you have $100 plus oil, $108 or whatever it was with $2.50 for natural gas. nothing like that has ever existed. the btu equivalent, people say that can’t happen. so people who have gone long natural gas and short oil are really feeling the pain. i wouldn’t be surprised if even the unwinding of some of those positions could cause some of what goes on in both markets. this is extraordinary. you would have said it couldn’t happen but that’s like saying long-term capital management that you couldn’t have 30-year treasuries for 30 basis-point spread. you want to be very careful. in your annual letter you said you had guessed wrong with where natural gas prices were heading and that was one of the issues. yeah, like a billion dollars worth plus. let’s get to some questions from viewers. we promised to bring some of those up and we were talking about berkshire. you had a lot of questions that came in both on twitter and our own e-mail of people asking more questions about that. one is from max rudolph who writes in while you are careful generally about how you write your annual report, nowhere has it ever said that the ceo that you have in mind is an internal candidate. it seems to leave open the possibility of a board member becoming ceo. certainly we’ve got incredible business talent on the board, and they’re intimately familiar with berkshire. i think it’s unlikely that we would have somebody better in the position of ceo. if we’re on a plane trip and the plane went down, the board would not be a bad place to look. but that’s not going to happen. if the person that the board has chosen to be your successor, does he know that he’s been chos chosen? no. okay. jeff webb writes in from washington and he says, will it be necessary for the next berkshire ceo to reside in omaha and will the annual shareholder meeting remain this in omaha? i would certainly hope so but i won’t be around to enforce it. maybe i will. i’ve left them all a ouiji board so they can stay in contact with me. i’ve threatened them in various ways. there’s every intention of the headquarters being in omaha 50 years, 100 years from now. it wouldn’t make sense for the ceo not to be located where the headquarters are. i think that’s a 99.9% answer yes. david lund from ogden, utah, writes in and points out when lou simpson retired his portfolio was liquidated. what will happen to your portfolio when you retire? well, i don’t know. that will be for somebody else to decide. what will happen is that todd and ted, who are already onboard now, will be managing the investments and they will be managing counting the cash $160 billion and they’re totally capable of doing that. my guess is that they would like some of the things we own very well, but it will be their call. they each, as i mentioned in the annual report, they’re managing about $1.75 billion. that will go up in 2012. i don’t know what they’re buying. they don’t have to check that with me. they could be each buying the same stock. i think in one case they’ve done that. it’s their baby. they are getting paid based on their results. it wouldn’t mean anything if i receives 80% of the performance compensation from his own investment results and 20% from his partners. he assumes if this is so they will help each other. can you elaborate? i’ve seen investment organizations where people are competing with each other. these fellows wouldn’t anyway. i do believe in having compensation systems to reinforce the values that we value and we certainly value cooperation among the people doing that sort of thing. performance is defined over a period of time. todd came onboard a year ago and did very well the first year. he didn’t come onboard until this year, but from this point forward they will participate with each other. andrew, you have a question as well? it’s on this topic. i’m curious if you imagine bringing on investment managers still. i recall you saying something to the effect of two to three to possibly more than that. do you feel there’s no more? i feel no need. i feel terrific with these two and they could easily handle the whole plate. it may well be that we find a thi third. i’m not thinking about that actively. if i thought it would add something to the picture, i wouldn’t hesitate to do it and todd and ted ted would not be surprised if i did it. i hope you are talking to me five years from now and it will be ten. they are terrific human beings. these are two fellows who were running, in effect, hedge funds. they were making more money than they could make with berkshire and getting an entirely different tax treatment. the money todd made last year, which was substantial, he would have made that same money if he’d have been running his hedge funneled and gone to work 0 at the same time in the morning, had a couple of assistants, the same people, reading the same reports, but he would have been taxed at less than half the rate he was taxed at because we pay it as ordinary income. he would have gotten it as long-term gain. doesn’t seem fair. seems crazy. gets us to the topic of tax policy. i know that’s a big can of worms we’re opening up this morning, too. you have had a huge role in the discussion around taxes and you’ve been someone who has come out sharply on president obama’s side. there’s the buffett tax named after you. that’s because alzheimer’s has already been used. i’ve always wanted a disease named after me. how do you feel about the turn that this has taken in the national discourse and how it’s put you front and center in a very contentious debate? well, a lot of people — by definition if you’re into something, you make half the people of the united states mad at you coming out of the chute, but that’s okay. we have an important problem in the united states, a very important problem. and it was man created and it can be solved by man. but it needs analysis. it needs thought and it needs action. to the extent that i can contribute either in the thought or the analysis or the action, i’ll do it. it isn’t like i have any magic facts. i just go on the internet and get the facts and see where they lead me. republicans and democrats know we need more revenue and lower expenditures. but that’s not necessarily something they would all agree to. plenty of people come on the show and say it’s not unnecessarily a matter of bringing in more revenue. you do that by lowering taxes and growing the pie. as a result of growing the pie, you can actually lower people’s tax rates and still bring in more money. the pie is going to grow and it will grow under the present tax rates. i have a table here that shows the tax rates back when i started in business. it was in the 30s on capital gains. they were 80% on ordinary — it’s grown — we have a wonderful market system that works. so we will have a growing pie. but a growing pie isn’t 9% or 8% of gdp. it never has and it never will. we fortunately the fact we have a growing pie does mean we have a two point or two and a half point gap between revenues and expenditures and have a sustainable economic picture. so the goal, should it be taken promptly, is to get the gap between expenditures and revenues down to a two to three point gap. that’s totally sustainable. the economy will grow. debt as a percentage of gdp will not grow as we get into that range and everybody realizes that and almost everybody says it has to come from expenditures and some from revenues. and then they get to the specifics and the biggest problem you have probably, because i’ve talked to republicans and democrats, they agree on that but they all want the other guy to go first. the republicans want the democrats to go first on expenditures and democrats want the republicans to go first on revenue and they feel there’s a tactical advantage of the other guy going first. so now we’ve gone to this it dance where no one wants to get on the dance floor. you’ve seen the figures if you let all the bush tax cuts expire, if you don’t do anything about that, i don’t know how much of the deficit but it’s a large part. a large part. a large part of that. you don’t see that coming from democrats. they only want to do it on 200 to 250 which solves very little. would you be — is that the best thing to do to let it — let all of the bush tax cuts expire or would that add to the income disparity or would that hurt on the fairness debate that no one under $200,000 or $250,000 should shoulder any of the deficit cutting or does it make sense to let it go back to the clinton years for everyone? i think if we hired 535 people to 0 run the government and to represent us, that they should not, in effect, act out of default basis and just say, well, we’ll let everything lapse back to where it was. they should would that add to the income disparity or would that hurt on the fairness debate that no one under $200,000 or $250,000 should shoulder any of the deficit cutting or does it make sense to let it go back to the clinton years for everyone? i think if we hired 535 people to 0 run the government and to represent us, that they should not, in effect, act out of default basis and just say, well, we’ll let everything lapse back to where it was. they should proactively say what is the best way to get revenues up to 18.5% or expenditures down to 20.5% and let’s do it now. this we can’t do anything because it’s an election year, why are we paying them? if they’re going to go home, we’ll pay them for three years out 0 of four. we’ve got, you know, a major, m major problem and the idea of putting it on a default setting is crazy. i can do that without hiring 535 guys. are so, no, i wouldn’t — i would approach it and say, look, we have serious propositions out there. we have to come up with something and get it for a vote. congress wants to vote it down, that’s one thing. to sit there and say we’re paralyzed because it’s an election year and let things drift along until the end of the year, all this stuff expires and kicks in and the payroll tax holiday ends and all of that, i think that’s a crazy way to run a government. warren, you bring up the idea and you are quoted on the front page of the new york times in this story about simpson bowles. the times puts forth this idea that president obama has actually taken huge chunks. mr. obama has come to adopt most of the major tenants of the members. though his proposals do not go as far. he has quietly put forward simpson/bowles. would you agree with that? i have not read the article. i would say this. both of them i know. they are high-grade people. one is a republican and one a democrat. they disagree on some things. you won’t find people of greater integrity. they are smart. they work, i don’t know, for 10 or 11 months. they compromise. they have people with diverse viewpoints as tom coburn of oklahoma who is a very high-grade guy but has different views than dick durbin who is high-grade guy from illinois. they got them to sign on. now having put that effort forth, they came up with a plan. i would like to see that lan voted on. what was the reason for sending them out to beat each other’s heads for 10 or 11 months? they got 11 is out of 18 signatures. i understand that simpson and bowles are actually taking recommendations and crafting it into a legislative bill. i heard that a month ago. i don’t know for certain that’s true. i would hope that that bill just gets presented. bring it up next month. let’s see how congress feels about it. they don’t like it, they can come up with something different. but conscientious, smart, decent people work 0 for months to come up with something. they were chartered to do it. i think congress owes them a vote on that and i would love to see that put up. and i would say this. if i wrote a letter to the ceos of the fortune 500 companies and said do you want to vote on this now, i think it would be almost unanimous. i think it would be the same with church leaders, you name it, up and down the line. it doesn’t mean they all agree with it. do you think it’s better than now? is it an appropriate response to a problem we all recognize we have? you can’t cherry pick the items you like from that and start breaking apart the plan? once you start cherry picking the whole thing disintegrates and then k street comes out in full force. money pours in supporting this little thing that helps this person or that person. in the end we’ll have a code that everybody, you, i, everybody — they’re not going to like some part of it. but i can guarantee they don’t like some part of this and this particular code is leaving us down a path unsustainable. why not a code that we don’t hike that is sustainable as opposed to one that is sustainable? andrew is this. warren, there’s an op-ed by rick santorum laying out his economic agenda and he proposes some new tax rates policies on corporate taxes he’s having down to 17.5% and on personal he’s in two brackets, 1078s and 28%. i’m curious beyond the simpson/bowles debate what do you think the right numbers are? what are the right brackets, and what is probably the highest — what do you think from a competitive perspective on a corporate basis the highest rate should be? well, the rate — what the rate should be is rates to bring in about 18.5% or so of gdp as revenue. now we’ve had rates like that throughout most of had that thr post-world war ii. it’s not impossible. and then we knock the heck out of rates. roughly ten years ago or a little less. so, the interesting thing about the corporate rate is the corporate profits as a percentage of gdp last year were the highest or just about the highest in the last 50 years. they were 10 and a fraction% of gdp. that’s higher than we’ve seen in 50 years. the taxes as a percent, corporate taxes as a percent of gdp were 1.2%, $180 billion. that’s about the lowest we’ve seen. so, our corporate tax rate last year effectively in terms of taxes paid for the united states was around 12%, which is well below those existing in most of the industrialized countries around the world. so, it is a myth that the american corporations are paying 35% or anything like it. incidentally, you know, 1.2% of gdp or 12 or so percent — 12 to 13 perce 13% that’s a rate far, far below what we’ve seen in the united states. i’ve got a chart here that — can you put that up? yeah, there’s a chart that we gave you guys. i think it’s e-1, the one you took a still shot of earlier, paul. yeah, here it is. yeah, here is — it’s on the screen. yeah. here’s the — here’s what’s happened over the last 60 years as percentage of gdp, that top blue line is individual income taxes. you’ll notice that they bounced around. but then fairly steady. the yellow line that’s accelerated is payroll taxes. payroll taxes have gone from a very small percentage of gdp up dramatically. at the same time, the is corporate attacks as a percent of gdp which were over 5%, if you go back a long period, and 4%. like i say, they were 1.2% last year. corporate taxes are not strangling american competitiveness — is that because people were able to write off — you can see the financial — that last dropoff right there is the financial crisis. if it were to go back — i mean, right? no. but if you take 2011 corporate profits were a record. right. but, for example, ge, which, you know, is the poster child because, you know, people can c conflate what ge did, they had a lot of tax laws, taxes carried from from ge losses in 2008 and 2009, it reduced the taxes in those squeubsequent years, 2010d 2011. if you were to normalize it without the financial crisis it gets back to 4% or 5%. using — no, no, no. where does it get back to? what does it get back to? . you can normalize it all you want but you can go back to 1980. you haven’t had a figure much above — you’ve had three a couple times. a a all these numbers at 2, 3%, nothing like 4%. the corporate tax rate was 52% of the united states and people paid it. our tax rate at berkshire, we didn’t have any loss carried forward, we didn’t have that much foreign income. our taxes in terms of taxes paid last year, a little higher than the national average. but because of 100% writeoffs and things like that, we paid $2 billion. we paid more than 1% of all the corporate attacks in the united states. but our tax rates on u.s. income got down to taxes paid got down to 15% or 16%. there are plenty of companies, especially small businesses we hear from all the time, that are paying much higher rates. the way the tax code is set up right now, they are the ones who get settled with paying these ex high rates. if they’re s-corporations and they make a fair amount of money, they will be paying at 35%. now, they may be getting accelerated deappreciation, 100% deappreciation, too. 23 they buy fixed assets they aren’t paying that rate. if you’re self-employed, have a couple of employees working for you, you’re in a difficult position to find any loopholes that work for you. people making small amounts of money are at a huge disadvantage to people making huge amounts of money under the present tax system. not only that, they pay their own payroll taxes, 30-plus percent. the system, all have you to do is look at that payroll tax that’s moved up dramatically. that is not paid by the super rich. my payroll tax, you know, last year was — i guess in 2011 would have been $13,300. it was nothing in relation to my tax liability. as the world gets more competitive, could you argue — maybe you don’t think that’s a fact, that the world has gotten more competitive, but as we have to compete more with china and a lot of emerging economies with their cheap labor, i mean, probably some people that say we need to — you know, it’s not 1930 or 1940 or 1950 anymore and that we want our corporations to be the best in the world and the leanest and the quickest to move. you know, there could be an argument — i’ve seen people argue corporation shouldn’t pay any taxes because their shareholders pay taxes, their employees pay taxes. i mean, you just dismiss that out of hand or — well, like i say, last year was 1.2% of gdp. incidentally, i mean, the place where we are very high cost compared to the rest of the world is ceo pay. our ceo pay is considerably higher than if you look around the rest of the world. nobody mentions that in items of competitiveness. you know, we are exporting as a percentage of gdp twice as much as we were back in 1970. our goods and services have — we’ve really had a lot of export success. the other side of it is, we like to import a lot. we’ve been able to print money which lets us import, so we exchange little pieces of paper for goods around the world and that’s a lot of fun.