02/28/2017
Warren Buffett 3 hour appearance on CNBC "Squawk Box" February 27, 2017
This morning, Warren Buffett ('WB') was on CNBC's 'Squawk Box' for 3 hours with Becky Quick and Joe Kernen. Comments below are paraphrased unless in quotation marks, grouped in topics and may appear out of order. Content inside brackets is RW background, explanation or comment for people who are relatively new to Berkshire.
If you can find the video on-line, it's an entertaining watch. Becky is a very knowledgeable, gracious and good reporter. She and Joe know WB well. Joe kids with WB, which means they get more out of him than a more traditional approach would.
3 AM hour
American dynamism has overwhelmed everything else since WB bought his first stock in spring of 1942, when the Second World War was going badly. The DJIA (Dow Jones Industrial Average) was about 100. America was founded and grew to its current state in 3 of WB's lifetimes (86 years). A "terrible mistake" to stay out of a game that you think will be very good long term because you think there will be a better time to enter. WB is yet to meet anyone who can time the market consistently. There is always an excuse not to invest. Things are always unpredictable in the short term.
Best approach is to buy over time, and diversify over time.
The stock market is not in a bubble with the current level of interest rates; in fact, on the cheap side compared to historic valuations, based on interest rates. The risk is that interest rates go up significantly. Interest rates are like gravity to valuations.
Buying a 10 year Treasury bond is like buying a stock on a PE of 40x (2.5% yield) whose earnings won't grow. The stock market can always go down 20%.
Berkshire ('BRK') has spent about $20 billion on stocks since shortly before the election (November 2016), in 2 groups, because there were stocks he wanted to buy, provided interest rates don't rise dramatically: Apple and the airlines. "Spent a lot of money" since December 31 ... bought "a lot more Apple" (roughly doubled the position) since year-end, before the earnings report. Would rather own pieces of a business than bonds. One of Berkshire's junior money managers, Todd or Ted, owned 10 million shares, then WB bought 123 million ... BRK now holds 133 million in total (compared to 61.2 million at December 31, 2016 -- was the 6th largest holding at the time). Now roughly the fourth largest holding at market value. Not buying at current prices.
Apple has consumer product aspects. The book 'Common Stocks and Uncommon Profits' (by Phil Fisher) had an effect on WB. Recommends any investor read it, and the 'scuttlebutt method' -- find out as much as you can about how people like products. Apple has a sticky and enormously useful product. Thinks Tim Cook has done a "terrific job". Hasn't seen Tim Cook since BRK's initial ownership was disclosed, but normally sees him twice a year at events.
First used the 'scuttlebutt method' during the American Express salad oil scandal in the 1960's, which did not affect AmEx's consumer franchise. All of WB's great-grandchildren have iPhones and barely talk to him when he takes them to Dairy Queen on Sundays. Sees customers make repeat purchases of iPhones at Nebraska Furniture Market. Continuity of product, and way life revolves around it, is "huge".
(Joe is in the NASDAQ studio all on his Pat (Pat Malone = Australian rhyming slang for 'own'). Cue 'All By Myself' by Eric Carmen 😂 )
Todd or Ted owns 1 of the airline positions, American Airlines. WB has the other 3 (Delta, Southwest, United Continental). Berkshire likes to stay under 10% of companies due to 'short swing rule' in U.S. securities law (would have to turn over any gain on stock not held for 6 months to the investee company), and would be considered an 'insider', so would have to report trades in the stock within 2 days.
Airlines are all repurchasing shares. Went over 10% of Wells due to the Wells share buy-back program. Almost 100 airline bankruptcies in the past 30 years. Had been a disaster for capital. Airlines have huge fixed costs, but the marginal cost of the last seat is virtually nothing, so operators are tempted to sell that seat for virtually nothing, undercutting pricing. Airlines need 80%+ capacity utilization to do well -- been there for several years.
Viewer question -- has WB ever bought a position, changed his mind, and sold the stock before the position is disclosed in a 13-F filing (quarterly filings with the Securities and Exchange Commission listing Berkshire's investments)? Not that he can remember. BRK sold the 82 million common shares arising from the conversion of the Dow Chemical preferred before BRK received the 82 million shares from the actual conversion on December 30, 2016. Have never owned shares in chemical companies. Bought the Dow Chemical preferred for $3 billion in 2008. Made roughly $1 billion capital gain, plus $255 million in annual coupons.
4 AM hour
Joe questions:
-- why the improvement in the IBM price? Whole market has moved. Increased the dividend. No other information.
--Trump rally. At the 2016 BRK Annual Meeting, WB predicted that America would do fine under either Presidential candidate. A "big mistake" to mix politics with investment decisions.
Becky -- Berkshire Vice Chairman, Charlie Munger ('CM'), has 'mellowed' on President Trump, and agrees with the President on some positions. WB thinks that "A lot of regulations have probably gone too far." Will judge President Trump after 4 years based on (1) how safe the country is; (2) how the economy has done overall; and (3) how wide participation in the better economy is. If President Trump runs again in 2020, WB's vote will depend on who he's running against. (He vocally supported Secretary Clinton in 2016.)
Appointment of Rex Tillerson (former CEO of Exxon Mobil) as Secretary of State makes a lot of sense, and is the sort of person WB would have picked. Most appointments rise to the occasion. Wilbur Ross (Commerce Secretary Designee), Stephen Mnuchin (Treasury Secretary) and Gary Cohn (Chief Economic Advisor) are "all smart guys", but WB doesn't know any of them well.
The economy should improve over any 4 year Presidential term.
The proposed Border Adjustment Tax is a sales tax on things ordinary people buy. WB's guess is that the Republicans will want to accomplish something while they are in the rare position of controlling all 3 Houses (White House, Senate, Congress), and it'll be too difficult to do comprehensive tax reform. If the Republicans want to get something done, and there is a trade-off between speed and complexity, speed will win out.
Failed Unilever deal. Kraft Heinz and WB agreed to make a friendly offer to Unilever, if Unilever was open to it. At an initial meeting, the Unilever CEO was non-committal. At a second meeting, where a letter outlining a proposition was handed over, Unilever was again non-committal. When it became apparent that the Unilever Board did not want a deal, the proposition was withdrawn.
WB thinks Unilever is "a fine company". Unilever is the only deal WB looked at with Kraft Heinz. Pricing of the consumer stock group makes potential deals difficult, plus any deal must be friendly.
Although a lot of companies could do with a shake-up, BRK does not do hostile deals.
WB has not seen anyone better at marketing or product development than the 3G leaders running Kraft Heinz. Excel at every form of management.
BRK had $86 billion in Cash & Cash Equivalents at December 31, 2016. (WB likes to keep a minimum of $20 billion in Cash & Equivalents.) Would love to do something big, but "there's nothing close".
Viewer questions
-- are there many naked swimmers right now? (A reference to a famous WB phrase that you don't know who's swimming naked until the tide goes out.) WB doesn't think things are over the top like the late 1960's (conglomerate boom) or (2000) Internet boom. If interest rates rise dramatically, stocks would come down.
European and Japanese interest rates are very low.
-- effect of self-driving cars on GEICO (BRK's auto insurance subsidiary). Will bring down premium volume. There are 260 million drivers in the U.S.. If a significant number use autonomous cars, that will harm GEICO's business significantly. Autonomous cars will come, but if he could take the 'over or under' (a bet on whether a result will be more or be less than a certain number), WB would take 'the under' on 10% of cars being autonomous in 10 years.
-- National debt. While rates are so low, it's a good time for the Treasury to sell very long dated bonds. BRK will not be buying them!
5 AM hour
(Cue "One Is The Loneliest Number" -- Three Dog Night 😂 )
Good for there to be a Government-guaranteed 30-year mortgage.
The Annual Letter clarifies that BRK doesn't hold stocks forever. That comment applies to wholly-owned businesses. BRK's preferred holding period is forever, but BRK does not commit to holding stocks forever. No intention of selling long-standing holdings, but there is no self-imposed ban on selling them if an incredible deal came along.
Wal-Mart is "a fabulous company" but "retailing is too tough for me". A very tough business. Lost money on a department store business early on, and on Tesco (U.K. supermarket) stock. NFM (Nebraska Furniture Mart) is relatively immune from on-line competition. Amazon, in particular, will have everyone in their sights -- Amazon has delighted its customers -- people like the quick delivery. Amazon has all kinds of strengths. Jeff Bezos is the best manager WB has seen -- "one terrific business person". Who would have thought he could take over the world starting selling books on-line? The stock price has always seemed to reflect the power of the model.
The only 'papers WB thinks will make it, due to having Internet presence people will pay for, are The Wall Street Journal and The New York Times; maybe The Washington Post, which has improved its on-line presence under Jeff Bezos's ownership. Classified advertising is disappearing.
(Becky slipped and said 'a**hole' on the air 😂 . WB added that he and CM have a code word for people they think are real jerks ... CPA (Crooked Psychotic A**holes)).
It's beyond WB who buys 30 year Treasury Bonds yielding 3%.
Viewer question - Wells Fargo. Why has criticism been muted compared to Salomon Brothers*? BRK has to be a passive shareholder in Wells, unless it wants to become a bank holding company. Wells made a "huge mistake" not doing something about the bad incentive system when the problems were discovered. WB tells his managers that if a problem arises, attack it. WB thinks Wells saw the problem in terms of the size of the fine ($180 million vs $5 billion fines being dished out elsewhere), while the damage to Wells's reputation was much greater. The former Wells CEO knew about the problem and didn't do anything about it. The temptation then is to keep not doing anything and hope things will get better. The affair won't have an effect on Wells's earning power in 5 years.
Bank of America preferred. This is not included in the portfolio listing in the Annual Report, because it is structured as a preferred with warrants attached -- $5 billion principal, paying 6% ($300 million per annum), with warrants to buy 700 million shares @ $7.14. Berkshire will convert early if the B of A dividend goes up and exceeds the current coupon on the preferred. The critical annual dividend amount is roughly $0.43 (currently $0.30). Berkshire can use the preferred principal to exercise the warrants in a cashless transaction.
WB's best year was 1964. Markets now are much more carefully combed over.
Pension funds and wealthy investors seem to think that their big money will buy special performance. Most would do better to just buy index funds than hedge funds charging '2 and 20', etc. (2% management fee plus 20% performance fee).
You should not have money you will need in stocks, or borrow against stocks. Berkshire went down roughly 50% 3 times in price since WB took over.
* Salomon Brothers. This was an investment bank which Berkshire invested in through a preferred which BRK converted to common stock. WB and CM were on the Board. After a scandal about cheating in Treasury Bond bidding erupted, WB was called in to be the Acting CEO.
