Buffett CNBC Interview – Highlights

Buffett CNBC Interview – Highlights

Warren Buffett was interviewed on CNBC on February 26, 2018 from 6:00 a.m. – 9:00 a.m ET., primarily to discuss his annual Letter to Shareholders that was released on February 24.

The highlights of this interview were:

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(1) Berkshire Hathaway’s net worth increased by $65.3 billion in 2017, partially as a result of a $29 billion increase from the corporate tax changes of 2017.  Berkshire’s unrealized capital gains of about $100 billion will now be taxed at 21% rather than 35% when these securities are sold in the future (resulting in a saving of $14 billion).

(2) Tax reform provides a huge tailwind to businesses.  Berkshire’s future profits will be taxed at 21% instead of 35%.

(3) Starting in 2018, Berkshire will have to report unrealized capital gains (and losses) on its $170 billion common stock portfolio on its income statement instead of its balance sheet.  Therefore, net income will be further distorted (in addition to realized capital gains and valuations of derivatives).  Investors should focus on Berkshire’s operating earnings instead.

(4) At current interest rates, one should choose equities over bonds.

(5) Berkshire was a net buyer of equities over the past year.

(6) Berkshire has not recently acquired a large company because of the takeover premium (about 25%) that it would have to pay over very high current market prices.

(7) Buffett prefers to repurchase Berkshire’s shares rather than paying a cash dividend. He will currently buy back shares if they are selling for less than 120% of book value.  He may increase that threshold to 125% or 127% in the future.  If Berkshire pays a cash dividend there will be an implied promise to continue to pay a dividend every year.  (Berkshire currently sells for about 150% of book value.)

(8) Owning shares of Berkshire is like a having savings account.

(9) GE made many mistakes including “insurance reserving” for long term care insurance.

(10) With respect to Wells Fargo, Buffett has confidence in CEO Tim Sloan.  Wells Fargo had terrible incentives.

(11) He criticized using leverage to buy stock.  People who borrow risk what they have and need for what they do not need (“get rich quick vs. getting rich slowly”).

(12) He was wrong on IBM but he likes Apple.

(13) His effort with Jeff Bezos and Jamie Dimon with respect to health care is aimed at cutting costs without reducing quality.

(14) The airline industry is more competitive than railroads. “I would not rule out owning an airline”. Berkshire owns up to 10% of the four major airlines (American, Delta, Southwest, and United).

(15) The 10 year U.S. Treasury has recently gone from a yield of 2.4% to 2.9%.  However, businesses are earning a return on equity of 12%.

(16) Over time we want  more international trade.

(17) Buffett recommends the earned income tax credit (EITC).

David I Kass Clinical Associate Professor, Department of Finance Ph.D., Harvard University Robert H. Smith School of Business 4412 Van Munching Hall University of Maryland College Park, MD 20742-1815 Phone: 301-405-9683 Email: [email protected] (link sends e-mail) Dr. David Kass has published articles in corporate finance, industrial organization, and health economics. He currently teaches Advanced Financial Management and Business Finance, and is the Faculty Champion for the Accelerated Finance Fellows. Prior to joining the faculty of the Smith School in 2004, he held senior positions with the Federal Government (Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis). Dr. Kass has recently appeared on Bloomberg TV, CNBC, PBS Nightly Business Report, Maryland Public Television, Business News Network TV (Canada), Fox TV, American Public Media's Marketplace Radio, and WYPR Radio (Baltimore), and has been quoted on numerous occasions by Bloomberg News and The Wall Street Journal, where he has primarily discussed Warren Buffett and Berkshire Hathaway. He has also launched a Smith School “Warren Buffett” blog. Dr. Kass has accompanied MBA students on trips to Omaha for private meetings with Warren Buffett, and Finance Fellows to Berkshire Hathaway’s annual meetings. He is an officer of the Harvard Business School Club of Washington, DC, and is a member of the investment and budget committees of a local nonprofit organization. Dr. Kass received a Smith School “Top 15% Teaching Award” for the 2009-2010 academic year.
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