Warren Buffett On Investment Strategy | Full Interview Fortune MPW

good morning all after her spectacular life they said Marta and I'm going to be asking some questions as usual and we will go to the audience a little bit later so get your questions Lauren I'm going to start unusually with current events because last week you announced that you were buying the fifth largest auto insurance auto dealership in the country van tile group of Phoenix now there may even be some people in the audience who think of the car business as ethically channel challenged but at any rate what I'd like you to do is spend a paragraph or two talking about what by Buffett's standards is a good business and then go into why does the car dealership business look like a good business to you a good news is the one that earns a high rate of return on intangible assets that's pretty simple yeah and the very best businesses are the ones that earn a high rate of return on tangible assets and and grow but even ones that don't grow if they're I return on tangible assets and then of course you if you don't pay too much they can be a good investment they're a good businesses start with by the high returns if you pay too much formu can turn a a good business into a bad investment but if you pay an appropriate price you can you can do all right now the big mistake which we made in early years was to try and buy a bad business at a really cheap price and it took me about 20 or 30 years to figure out that wasn't a good idea but this is that the car business the car dealership business it run well can be a very good business you you have no receivables to speak of you for plan your inventory you can you can lease your real estate we don't do that well on 95% of our real estate so you can have very little capital acts we invested in the business and you do a do a large-volume van tile which we bought I have 78 dealerships they'll average over a hundred a hundred million dollars a dealership so you can work on fairly narrow margins and seller and a high return on capital if you don't tie much capital into one hundred million of business and how many car dealerships are there in total in the United States there are over 17,000 car dealerships in the United States and the interesting thing is if you go back 40 or 50 years there were in the thirty thousand so while the country have grown dramatically and actually the number of a number of name plates in the in the car business of growing you've cut the dealerships almost in half so the average dealer now does far far greater volume than when I was growing up well by all means visit a bursar Hathaway car dealership and the next year and report back now and let's talk about let's go from that to some entirely different industry the big banks of the United States and the question of whether they are good businesses and the question of what's happened to that in the last few years are they as good of business as they were a few years ago no no the bank's earn on assets they don't earn on net worth you know you calculate it eventually as to what they are not an equity or net worth but they assets are the earning factors and they've changed the rules so that you have to have more net worth per per dollar of assets and obviously if you have more network per dollar of assets and you're earning a constant amount on assets your earnings on net worth go down now they they were ungodly profitable the better ones were back 15 years ago or 10 years ago even when they had high ratios of assets to net worth and some have even cheated in terms of having even more assets than the regulator's would have allowed and you had yet these sins as they were called Citigroup had a whole bunch of them so they were off-balance sheet ways of even controlling more assets but all of that sort of thing has been terminated and now now there have got much lower limits as to the assets to net worth ratio and the bigger the Bank to some extent the bigger the bank the lower that ratio can be so what was a very profitable business has been turned into a good business if executed well it's a pretty simple business I mean if you know you get your money cheap very cheap the Wells Fargo will have a trillion dollars roughly or close to that of depositors money and it's it's probably costing around 10 basis points now most people think you get a trillion dollars of money and pea tendril yeah but the the banks have always gotten in trouble on the asset side they've never gotten in trouble on the liability side basically but they and they really haven't they've gotten in trouble too much on the expense side but they go crazy occasionally on the asset side and what they do is they start copying what their dumb competitors are doing that's that happens in every business but it's particularly virulent in the banking business John Stumpf once said he said I don't know why we keep looking for new ways to lose money when the old ones were working so well but they do and then they copycat that that's a great danger in any business I've warned our managers against it all the time if anybody comes to me and says we want to do this because the other guy is doing it yet I say go back to square one and come up with a better reason but human nature is such that you do want to do what others are doing I one time was it a directors meeting where a leading property casualty insurance manager very well-known guy was making a presentation to buy a life insurance company that was going through all these kind of silly reasons why they should do it and he realized that the crowd was kind of catching on to the fact these reasons were too good so finally just throw both hands and say said oh all the other kids have won and basically there's a lot of business decisions made because all the other kids have won okay now let's move to the stock market of great interest to everyone here I'm sure you over the years you've generally been reluctant to to frame a big cosmic position on the stock market done it about five times I know but I think last spring if I'm to read correctly and correct me if I'm not you said that stocks were neither were greatly expensive are really cheap right what would you say now about stocks and an in answer you might also mention what people are now calling the Buffett standard I even know that a statistical comparison that fortune has used and promoted over the years and tell us how things right there well I did use in a talk I gave fifteen years ago at Sun Valley and got reprinted and portion a standard of total market capitalization to GDP and and that I used that because it showed at that time how extreme things had gotten I think they've gone through a high yeah they've got the from forty percent of GDP which had been kind of standard over the years they've gotten up to like 170 members cent or something so it wasn't designed to be a fine-tuning type of valuation but it showed things that really change in a big way a very high percentage of the time stocks are in what I call a zone of reasonableness this is not something you know we all know that pi is 3.14159 and little kids can sometimes give it out to hundreds of decimal places but the stock market's not like that there there's a range of reasonableness and most of the time throughout my lifetime it's sold in the range of reasonable that range changes over time as earnings accumulate interest rates change and all that sort of thing there's only been about five times in my life I think I've actually spoken out publicly to say it was outside the range in one direction or another the most recent one being in October I was early in October of 2008 that I said stocks were cheap and I wrote an op-ed in The New York Times but I'll probably have something some chance you know once every five or ten years to make a definitive statement there is a big zone of reasonable as anybody thinks they can pinpoint it is crazy you know it's not that precise and fortunately you don't need to you know if you if you buy good businesses at reasonable prices and hold them you're going to make a lot of money and that's true of stocks as a group it's true of individual companies so you're seeing that right now they are in a zone of reasonably and adult a reasonably safe okay okay all right we're going to move sharply to another directions to politics a question of very great interest to this audience is Hillary going to run now let me give you a background on Hillary because in 2008 Warren promised support to both Hillary and Barack Obama and then when he found out that he'd done that sort of he said well okay I'll just be a bigamist so he did he did back the only time I've been a bigamist and so okay tell us is Hillary going to run no reason to run Hillary's gonna run i'll since he's going to announce it she's going to announce that as late as possible uh-huh well how late is late well I I'm giving a direct quote I yeah okay all right next question but who's gonna be a reporter who would you get I don't know I didn't really thing isn't Mitt Romney he's getting more interested right but it her opponent will be whoever wins the Republican primary there's gonna be a lot of people want to do it well some people say that if Jeb Bush runs that MIT Romney won't do you believe that's the case I think I think when once they have the political bug anybody will run that they think can get it has a chance who thinks they can raise the money okay let's now love it's law now final question on that is Hillary going to win Hillary's gonna win yeah well I know I've heard just in the last few days that some of the political pundits like Edie Rollins are saying that that it really that it is going to be true I will bet money on it I don't do that easy anybody in the audience who would like to come on on the other side of Warren Buffett I want to tell you it's not too good at digging we did that on silver one I was I was selling short and you were buying right on silver that was right okay now a business issue that is constantly in the press is the security of corporate data has Berkshire had have you had personally any security problems I don't have anything to hack I'm the only I'm the only person without any an email so that and I'm girl being here to pull out my is the latest I've gotten in technology I really feel kind of women carrying out around I don't know how to use it understand about it but I like to pull a lot of occasion just to impress people ah and wasn't there in a case occasion where you didn't look at it for kind of a year well there was a famous case where during the Lehman weekend I received a call on Saturday night I was in Edmonton Alberta very late at night and well I first arrived there for social event at 6 o'clock and I got a call from Bob Diamond of Lehman or Bob Diamond of Barclays who was trying to buy Lehman and they wanted the British government had just told Lehman told Barclays I'm sorry so Barclays they could not buy Lehman and expose themselves to a loss of greater than 3 3 billion pounds without getting shareholder approval and they and they would need at least a month to get shareholder approval so Bob Dimon said to me what would you charge to ensure all parties doing business with us that their contracts would be fulfilled between when we make the deal and when we have a chance to have a shareholders vote approving it which would have been at least 30 days probably 60 days and I said well I've never heard of a contract like this how much do you want the indemnity before he said I want it to be unlimited well unlimited was not a great word in the fall 2008 so I said I'm going to this party I'll come back about midnight fax me how much you'll pay how you'll defined the terms of the contract but tell me how much you'll pay and I will get back to you no matter what hour it is there's a couple hours later in New York and and I'll let you know whether I'll do it so I went to the party and I came back at midnight there was no fax I went down to the desk and I said where's the fax and they said we don't have a fax and I've stayed up for another hour - finally I gave up that was September 2008 in July of 2009 I was going to Sun Valley and we got off the plane and I opened this very modern contraption I have in my pocket and it said message waiting or something like that I I don't know how to work that part of it so I gave it I gave it to my daughter it was there and I said tell me what this is messages on here and so she pulled it up and had it to me and I started listening and and she started talking to me said quiet I'm trying to listen to this yeah it turned out that it was a message from that night in September telling me that they would call me on Sunday and we try to work out all this things so if you really want to know the story why Lehman failed well wasn't there send smoke signals tell me if you have anything important to say so you haven't had any security problems I don't think Berkshire has got had any security bro how about is your wife loose or credit card one your first wife lose your credit card once oh yeah yes when my first wife allows regard I made no attempt to get it back because the guy was spending less than she was okay so okay now I knew one other current event issue a fascinating fascinating trial is going on in Washington in which AIG s former CEO Hank Greenberg is contending that Washington's regulators not only acted wrongly in 2008 in taking over AIG that was right after alumina the next day of it that right after Lehman failed but also wrongfully imposed onerous conditions on AIG charging it high sky high interest rates for example what's your opinion about the issues in that trial well I know certain aspects of it I don't know why there's we had been looking at AIG over that same weekend when I was up at Edmonton I came back and a IG had first engages well they tried to engage his numerous times that first engages on Friday preceding my going to Canada for that social fair and on Friday I went down to the office on Friday night and they they faxed me a whole bunch of material on the property casualty operations of AIG they also had a lot of life operations and unfortunately they had AIG financial products in general on a derivative operation that was at the parent up toward the parent company and I had to know whether the property casualty company's been contaminated by any Cross guarantees between they and AIG financial products and they assured me they had so another option and they sent me all this material and I looked at it for about an hour and then I called Bob Lowe instead and I said look don't waste your time on me because there is no way that I can come up with a number that will make any be of any help to you and besides I can't make I wouldn't be sure of that number even because it's such a mess of spaghetti basically and and don't you know you've got a you've got to come up with a solution by early next week so spend your time on somebody else but nevertheless they kept pulling in another fellow Ajit Jain and on Sunday he was working on everything so we had some big picture of it and then I got a call on either Monday or Tuesday from Tim Geithner who I never met before and Tim said that they were contemplating lending 85 billion the Fed was to the to AIG and in my opinion was there enough in the way of value there to warrant such an 85 billion billion dollar loan and I said nobody could know under the circumstances of that day there wasn't anything that was worth 85 billion or anything like it I mean it was total chaos but I thought that if they had staying power and if there weren't things there that I didn't know about which there could be probably the underlying subsidiaries would bring 85 billion in a normalized market and that was that I would say this that it's been proven that in a stabilized situation where people were not worried about the survival of AIG because the government was behind it those subsidies have been proved to be worth a lot more than 85 billion but I will also say to say this if the New York Fed had not put the money in within 24 hours unquestionably AIG would have been walking over to a federal judge's quarters with a petition of bankruptcy though they were gone they did not they had that at a downgrade coming where they under credit or they would have had to put a way more collateral on a bunch of things they done it in the financial products subsidiary so they were they were totally gone now it's up to a judge to determine you know the propriety of all these things but the one thing I'm I'm clear on is that there would have been a AIG would have been in bankruptcy absent the activities of the New York Fed within 48 hours of one Geithner called me I see so that's that's a big central point well it's a central point but I there's questions about the terms and all of that but you're going to be adjudicated and are being adjudicate right now and III just don't know the law on that but there was not there was no other option for AIG at that point and there was nobody that would have lent them the money or invested on terms that were twice as honors honors as the ones imposed by the New York VAT it was for those of you who may have missed the main show in 2008 it was it was a period like we've never had it this company and and one of the things during a period like that it really is like the fog of war I mean if you're Paulson or Bernanke you know sheila bair the you're getting reports from all these different fronts some of them are somewhat inaccurate you know some of them have a bias to them based on what the parties wants you to do it is total mass confusion and and on the other hand you have to navigate through it and and you have to navigate through it to some extent in cooperating with other people particularly Congress and it wasn't ungodly I've never seen thing like it I know the Oliver say anything like it again and I give great credit to Paulson and Bernanke and Geithner and Sheila Bair for what I give credit to the President Bush for the way they handled it you can criticize how what might have been done leading up to it but when Pearl Harbor happened they did the right thing and my final question here what about the political deadlock in Washington do you see any hopes you see how we get out of that well we'll get out of it somehow because no ever we you know I always say that buy stock in a business it's so good that an idiot can run it because sooner or later one will now if you want to you can make a mental jump on that over two governments and so on we do have a country that works over time I mean it's an unbelievable guy and it will continue it to work it it will it will get people well we had a civil war in this country about all kinds of problems in the past but this country it's unbelievable what's happened since 1776 and the game isn't over so I'm an optimist getting solved but if you asked me how it was going to happen I would say yeah I don't have the faintest idea he it's it's a terrible situation you know whether it's in a family and a business and a government when a significant portion of the people involved don't even really want to succeed they want the other person to fail and that's it you never want to bring that you know into any activity I mean but a significant percentage of people in Congress really want the president to fail and that is not good for the country in and we'll get we'll get past it one way or another but but it has been you know it has been a pretty ugly Schoelen in in recent years but don't don't ever do that should not affect in any way your business decisions Charlie Munger and I have been making stock decisions and business decisions one way or another together now for 55 years we have never let well the macro doesn't enter into it nor does political we haven't we have not made decision differently because one party or the others in power we have not made decisions based on whether we thought interest rates were going to go up or down or you know what was going to happen with labor negotiations in place you know you don't want to give up what you know how to do because of opinions which you don't know whether right or not and which you're going to be transitory in any event so you really go out there every day and do whatever makes the most sense so when we buy the auto dealerships last week we don't factor in anything about the Fed about the deadlock and politics about what's going on around the world those are all important things but they don't affect whether those dealerships which were buying to own a hundred years they don't affect whether they're going to make money in the year 2020 for the 2030 for 2044 and that the important thing is whether we get a good business with good management at a sensible price now let me turn to the audience where it's always hard to see up here but if you'll raise your hand other people will help me anything over here I wearing it's Catherine Keating from JPMorgan I want to ask you about your view on the economy you know a lot of economists have claimed coming out of the crisis that we have a prolonged period of slower growth and yet you're investing in car sales home sales trains transportation things deeply sensitive to the economy I'd love to hear your view well where you see us today yep since the fall of 2009 five years ago now we have seen both in our own businesses and we've got 75 or more businesses we've really got a lot more than that but because some of them own other ones but we have we're across the board and everything we're now in planes trains and automobiles among other things the but we're in all kinds of businesses and they interact with all kinds of businesses we have seen since 2009 really a rather steady not at the rate people hope but a rather steady increase in business right straight through we've heard talk and you heard talk during that period about double dips and all these things and acceleration we have not seen it accelerate much or decelerate much ever from us say a two percent IRR they're about rate and that's what we see today and we see it whether it's in freight car loadings we see all kinds of ways automobiles have been better than I would have anticipated housing has been worse than I would have anticipated but overall the economy's been moving forward now for five years now it's moving from a position that you know they talk about having eight or nine recession since World War two and how we've come out of them faster on this was way way way different than any other recession we've had post-world War two this was a recession where virtually everybody in this room and around the country was actually scared for a while I mean people go through recessions and they're unpleasant and all that but people literally they took Treasury bill raced down to a negative rate now when you were willing to take less money from a Treasury mill bill than you would get from putting money under your mattress you know that is a different phenomenon in economics from what we've experienced so you had the American people will be paralyzed by fear and coming out of that paralysis and the gain has been really I think quite satisfactory I mean you'd love to see it faster and let me point out one other thing we talked about 2% of your gains down everybody so that's terrible you know it's not our potential everything the population is probably going to be rode a little less than one percent a year so if you have two percent real gains that means in a generation in 20 years you will have greater than a twenty percent per capita gain in real GDP now real GDP is about fifty four thousand dollars per person in the United States if you get a 20 percent real gain per capita that's ten thousand dollars per person more per capita income in the United States in one generation that's fantastic I mean that it it may not be as good as we did in some of the decades after World War two but if you go back in history centuries went by without without getting anything like that and 20 percent gain how would you like to have that distributed somehow evenly across the population to be rid of all poverty and everything else so even at our present rates of gain this country is turning out more and more stuff per capita year by year and it will continue to do so we have a marvelous machine and it is it has worked extraordinarily since 1776 in my lifetime I was born in 1930 in my lifetime the real GDP per capita in the United States has increased six for one one person's lifetime you know I mean nothing like it's ever happened and and and it isn't because we're smarter and it isn't because we work harder it's because we have a system and unleashes human potential and you know let's just look at the people in this room I mean you know you you have more potential than you thought you had ten years ago or 20 years ago you certainly have more potential than your parents thought you had so it just it's just and you will find ten years from now you have a that you had a lot more potential that you thought you had today I mean this and you're gonna get a chance to use it in this country you know you're not condemned to a life that you know was ordained by by what your parents did before you or something that's art it's it's a wonderful wonderful system and it's still working and it will keep working here hi Jenny Johnson with Franklin Templeton Investments how do you know when to throw in the towel on an investment or business money throwing the towel on an investment or business or business yeah well you what you know you're doing too late I've done I I went the textile business by accident in 1965 and I threw in the towel about 20 years later and that was about 20 years too late he there's a great tendency to want to hold on justify old decisions I mean it's a human human trait and what when you really know you've got a bad business is when you have a good manager and you're getting bad results I mean it when you when you're getting bad results with a bad manager you still have to examine the question of whether you know you can get better results if you got a better manager usually you can't you know I've said in the past you know that when a when a management with a reputation for excellence Encounters of business with a reputation for bad economics it's the reputation of the business that remains intact and and I've proved that many times there are businesses that are just plain tough you know and there's the copy there there may be too many competitors but there's reasons why they don't drop out there's reasons well we we started out in textiles and we made over half of the the linings for men's suits in the country and we we went through World War two and got awards and and sears roebuck named us their supplier of the year and all of that sort of thing and then we'd say what we'd like to increase the price of of these linings a quarter of a cent of yard and service we got of your miners and other guys that will sell it to us of the old price and nobody ever went into a Sears store and said I'd like a a blue serge search blue shirt Serge suit with a half of a lining it didn't exist we had no connection to the consumer and there are lots of lousy businesses you know and there's lots of wonderful businesses and or my job over the years has been to try and figure out which is which and I've made plenty of mistakes I bought a company called extra shoes in the early 90s I paid four hundred plus million dollars for it and it made money before I bought it but you know as soon as I bought it they pulled some switch or something and immediately started losing money and and it was because of foreign competition so on earth it was because I don't know ah and it went to zero and the worst thing was that I paid for it in stock so that 400 million in stock I gave at the time is now worth about five billion so it so every time Berkshire stock goes down I feel a little bit better because of my opportunity long loss on this business but you know when I looked at Dexter shoe they had a good position in retailers they turned out good shoes they had a great workforce all kinds of things but I just forgot one thing that that they weren't going to make shoes in the United States anymore so you make you make mistakes and it does pay to recognize quickly when you made them if you've got a good person running a business in it isn't making any money you know you're in the wrong business and and you've got to face up to that and on her I think the other half the question was about investments the only rule of thumb about when you give up on her when you realize it well again I mean I love it one of the things we buy go down I mean that is I mean I just I get euphoric you know that stocks are down today and I buy more of something I was buying yesterday I'm buying a cheaper now when you go to the grocery store and you buy something cheaper than you bought it the day before you think that's terrific but people with their stocks they think that the stock knows more than they do so that they when stock goes down they say the stock is telling them something you know and it was selling me as I get more for my money but but they they take it as kind of a referendum on themselves you know and that's me versus the stock if ever gets back to what I paid I'm going to sell it stock doesn't care what you paid yeah you have to remember the stock doesn't even care that you own it you are nothing to the stock that's that's talking everything to you you know and you remember you paid ten dollars and 13 cents and therefore the stock should get to ten thirteen before you sell it yeah the stock has no feelings about you yeah I ain't dissolution on this but it just doesn't care and so the only question with every stock every day and you don't do it this frequently is can I get more for my money someplace else you've got a chance to be in thousands and thousands of great businesses and their prices change all the time so their relative valuation change and you can make the exchange at very low cost these days commissions or nothing and so you can always shift from one business other you have a huge advantage over Andrew Carnegie you know when he was in the steel business even the steel business a rock arose in the oil business he could not shift over immediately to retailing or something like that you you can rearrange your business empire which you owns or that little portfolio that you have you can rearrange that you know at a moment's notice with practically no cost it's a huge advantage which people turn into a disadvantage there is nothing about the price action of the stock that tells you whether you should keep owning what tells you whether you should keep owning it is what you expect the company to do in the future versus the price at which is selling now compared to the other opportunities of businesses did you think you know equally well and make that same comparison and that's all there is don't exacts question back there in the back are there two hands up together okay I'll let you choose back there hi he said obviously this recoveries been a little you know bumpy and some industries have done well and some not so well like home building many have articulated that for us to really see the full potential of our economy growing homebuilding is going to have to recover do you agree with that and what does that look like for you and what do you think the catalyst is to get us there oh well you said earlier that it had lagged yeah the question is what do you think about home building and whether how much of a problem is this well let's come back some but it's come back at a pace way less than I would expect now we over built like crazy in two thousand four or five and six we were building a couple million units and basically it ties in with household formation and household formation falls off dramatically in a recession at least initially I mean that if you look at 2009 I believe the household formation you know was almost flat people just that they put plans on hold but that isn't last long you know hormones kick in you know and and in-laws get tiresome do so so in the end you know if people would keep behaving as they have says out of it Eve you will have household formations in this country and and you will have them and you will not have them all you know wanting to live with their in-laws or some of their buddies they will want to have their own homes or apartment units now we've had more of a bulge in apartment units than we have at homes I mean there can be some movement between people's preferences within whether they want to live in an owner-occupied home or in an apartment but so far in this recovery and we're in the carpet business we are the largest home builder in the United States we own the company called Clayton Homes it actually will turn out about 30,000 homes this year but it's lagged significantly the rate of gain I would expect considering everything else that's happened in the economy and considering how low interest rates are I mean you know everybody in this room should get a 30-year mortgage now and you get the mortgage if it turns out interest rates go lower you call it off if they go higher you don't call it off you've got the option it's an incredibly attractive instrument for those you know it's it's a thirty-minute instrument if you've been wrong on interest rates and it's a thirty-year instrument if you've been right on interest rates and and it's it's it there I can't get that one side in it an instrument at Berkshire Hathaway I can only get it from Ari so you would think that people would be lining up now to get mortgages to buy a home and and it's a good way to go short the dollar I mean it's all good okay the short interest rates it's it's it's a it's almost it is a no-brainer but so far you know home construction pickup has been slower than I would to anticipate but I have a lot of faith in hormones you know and and the I don't really think that their impact will be less five or ten years from now so we will have a catch-up period we've had the catch-up period going on in autos at a much faster pace I think than most people anticipated I mean we're going to have close to a 17 million car a year here and I would not have guessed we'd have a 17 million courier at the same time that we have houses moving at the right there they are it'll it'll improve but I've been wrong on the timing so far so although they continue to be wrong well I'm afraid that the clock is telling us that it's our time is up and I hope we'll give you a warrant a great hand for both speaking and singing

Channel: Fortune Magazine

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Keywords: Fortune Magazine, most powerful women, #fortuneMPW, fortune's most powerful women, Warren Buffett (Organization Leader), warren buffett, ceo, berkshire hathaway, Interview, worlds richest man, america's richest man, business, management, energy, international, small business, Business tech, technology, discussion, fortune, startup, ideas, culture, company, software

Id: cSU3y0N60XU

Length: 38min 17sec (2297 seconds)

Published: Tue Oct 07 2014

Reddit Comments

[u/moojo]

Is it just me or did Buffett go knee deep into politics, talking about Hillary.