ANNOUNCER: This is a special presentation of SQUAWK BOX. For the next three hours, the "Oracle of Omaha." Warren Buffett answering your questions on the pressing issues affecting the country and your wallet. Get the market-moving plays that could change your financial future. It all starts now.
BECKY QUICK, co-host: Good Monday morning, everyone. Welcome to SQUAWK BOX here on CNBC. I'm Becky Quick, reporting live from the printing press floor of the Omaha World-Herald. We have a very special guest with us today, Warren Buffett. He's going to be talking to us for the next three hours. Also, Joe Kernen and Andrew Ross Sorkin are back at CNBC's headquarters. We do have a pretty exciting and news-packed morning ahead of us. Warren Buffett will be answering your questions this morning. But first, we do have a roundup at the top of the headlines at the top of the hour. And, Joe, Andrew, good morning to both of you.
ANDREW ROSS SORKIN, co-host: Good morning.
JOE KERNEN, co-host: Good morning. Good morning to Mr. Buffett as well. It's great to see him, and thank you very much. When you said printing press, I thought you were at the Fed for a second. But you're at a different printing press this morning, right?
BECKY: Yeah, a little different printing press this morning. This is the Omaha World-Herald.
JOE: Because if it was the — if it was the— if it was the Fed we probably couldn't hear you because it would be running right now I think.
BECKY: Because they'd be running.
JOE: Be like...(imitating sound of printing press).
BECKY: You're right, they would be running right now.
JOE: All right, let's see these headlines.
JOE: (Referring to the Academy Awards) But there was nothing for me, I'm sorry. There just was nothing for me and I didn't see any of it. So I'm glad you watched. So you're one person who's in the know.
ANDREW: I will bet some money, but I could be wrong on this...
JOE: Go ahead.
ANDREW: ...that Mr. B., Warren Buffet, might have watched a bit of it just because I know he likes movies.
BECKY: You're wrong.
ANDREW: I'm wrong? Warren, you didn't watch any?
BECKY: You're wrong. No, I didn't watch a minute and Warren...
WARREN BUFFETT (Berkshire Hathaway Chairman and CEO): No, when Ed Asner did not get nominated for his role in "Too Big to Fail," I decided to boycott them.
BECKY: Not a minute of it.
ANDREW: Perfect answer.
JOE: "Lou." All right. Well, Becky, enough about— I mean, is it fluff? Is it me? I don't— I don't— it's my cranky, cynical old age I think.
BECKY: But, guys, let's start off our conversation this morning with Warren Buffet. We do have some important topics to get to. And...(network audio difficulties)...of all, we want to thank you very much for taking the time to join us.
BUFFETT: Thanks for coming.
BECKY: We should point out that we're here at the Omaha World-Herald because this is Berkshire's most recent acquisition. Earlier— or last year, I should say— last year you went ahead and you 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.
BUFFETT: Well, the World-Herald, is— I should mention one thing. William Jennings Bryan 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 doing that. 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— you know, the only reason you buy a newspaper is to find out something you want to know that you don't know. I mean, news is what you don't know that you want to 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 apartment, the newspaper was primary for all those things. So it's lost primariness in certain major areas of news, but it still retains primariness in a number of items that are extremely important to people. And it's vital that they continue to be primary in those areas. As long as they're primary in areas that are of interest to you that you can't find someplace else, you're going to buy a newspaper.
BECKY: What do you mean? Is that classified, obituaries? What are the...
BUFFETT: Well, it can be— it can— yeah, obituaries are a good thing. I mean, you're not going to find out whether your friends are alive or dead anyplace else. But just take high school basketball. Take Nebraska football.
BUFFETT: You will learn so much more about Nebraska football if you read the World-Herald than you can get from any other source. Well, that's important not only to me but everybody in Nebraska.
BUFFETT: So the World-Herald will always be primary in that. They— you will know 10 times as much about Nebraska football if you read the Omaha World-Herald than if you try to get your news from any other source on that. The same thing is true in terms of local politics, and people— when there's a sense of community, people care about that. Now, if you're in an area where there isn't that sense of community, it's different.
Second problem they have— but they still are primary in plenty of areas, not as many as 30 or 40 years ago. It's expensive to turn out a paper. I mean, you know, you start with trees up in Canada and you end up with a kid, you know, throwing it on the door. So very expensive. That doesn't go away, and electronic is not expensive.
But the third thing is that newspapers have been giving away their product at the same time they're selling it. And that is not a great business model. So when they put papers up on the Internet and you get it free, you're competing with yourself. And that— you're seeing throughout the industry— you're seeing a reaction to that problem and an answer to it, and that's important for the...
BECKY: And the answer is charging people online?
BUFFETT: Yeah, in other words, you shouldn't— you shouldn't be giving away a product that you're trying to sell.
BECKY: So Rupert Murdoch got there a long time ago and had said that this is something we need to be doing. You agree with him on that aspect of it, that this is something that you charge?
BUFFETT: Yeah. Actually, Dow Jones was doing it before Rupert, too.
BECKY: Right. Right.
BUFFETT: I mean— and— whereas The New York Times, you know, held off for a long time, although they've instituted it recently. And it's being instituted in other places in other ways. So that's key to the future of the newspaper. But newspapers tell you a lot of things that you can't find out other places. And most citizens are going to find them useful, it's just you can't give them away for nothing.
BECKY: All right, let's— we can talk more about this later.
But I also want to start off while we're here— at this point the market, the Dow and the S&P, are sitting at just about the highest levels we've seen 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 then. The Dow at that point was below 9,000. And 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?
BUFFETT: Well, stocks are businesses and the question is you have to invest in something. If you get your money in your wallet, it's invested. It's just invested at zero. And, unfortunately, if you got your money in a bank these days, it's invested at zero. Or if you have it in Treasury bills, it's invested at zero. I've got 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 generally, a diversified group of leading companies, is going to outperform, in my view, dramatically, paper money or nonproductive assets such as gold. That's no forecast for the next three months or six months or a year, but it— I think it's obvious that owning really first-rate productive businesses— and there's hundreds of them— you just— you know, you get a compound over time. They either pay the money out to you, they reinvest it, they buy in shares so that your ownership interest goes up. So equities are still cheap relative to any other asset class.
BECKY: But they're not...
BUFFETT: I would say the single-family homes are cheap now, too.
BECKY: You would?
BUFFETT: Yeah, single-family homes— but if I had a way of buying a couple hundred thousand single-family homes and had a way of managing— the management is enormous— is really the problem because they're one by one. They're not like apartment houses. So— but I would load up on them and I would— I would take mortgages out at very, very low rates. But if anybody is thinking about buying a home— five years ago they couldn't buy them fast enough because they thought they were going to go up, and now they don't buy them because they think they're going to go down. And interest are far lower. It's a way, in effect, to short the dollar because you can— you can take a 30-year mortgage and if it turns out your interest rate's too high, next week you refinance lower. And if it turns out it's too low, the other guy's stuck with it for 30 years. So it's a very attractive asset class now.
BECKY: If you are a young individual investor at home and you have your choice between buying your first home or investing in stocks, where would you tell someone is the better bet?
BUFFETT: Well, if I thought I was going to live— if I knew where I was going to want to live the next five or 10 years I would— I would buy a home and I'd finance it with a 30-year mortgage, and it's a terrific deal. And if I— literally, if I was an investor that was a handy type, which I'm not, and I could buy a couple of them at distressed 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 and I think that's probably as an attractive an investment as you can make now. But I think equities are very attractive compared to anything else.
BECKY: But, obviously, they've come up quite a bit since you first were telling people you were buying them for your personal portfolio...
BECKY: ...with both hands essentially.
BUFFETT: Right. Yeah, well, I wrote that article— I said if you— if you wait till you see the first robin, spring'll be over. And— well, spring is over, but we're not in the dead of winter yet either. And stocks— we were— we were here 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, would you rather have Treasury bonds, would you rather have, you know, 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'd love to buy another one this afternoon.
BECKY: When you look at stocks, do you look at American stocks first?
BUFFETT: Yeah, I— but I look at stocks all over the world. But, sure, the big market is here. I mean— and I know the companies better here. But we— well, at year-end for example, we have a insurance subsidiary— reinsurance subsidiary in Germany. I bought seven international stocks then. In fact, I may have bought— I put— I put 175 million euros in each, I guess, of eight stocks, and they were all European stocks.
BECKY: When was this, at the— at year-end?
BUFFETT: Right toward the end of the year. Yeah, I just— I just picked eight of them. I didn't— I do not know those eight companies as well as I know American Express or Wells Fargo, but I know them well enough.
BECKY: You did this because you looked at the situation with the euro crisis and you thought it was improving or at least they had started to make some progress on that?
BUFFETT: I just thought these eight companies were terrific companies that were cheap.
BECKY: But why did you focus on Europe? You've never really done that before.
BECKY: Well, 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, 10, 20, 50 years from now. And there may be something else that's bothering the world 10 years or 20 years from now. There's always going to be something that's bothering the world. These companies will do fine regardless of what happens in Europe and there will probably be plenty that happens in Europe.
BECKY: Did you buy that for Berkshire's portfolio...
BECKY: ...not for your own personal...
BUFFETT: Yeah, I don't have 175 million euros times eight, no.
BECKY: Euros times eight. What are you doing in your personal portfolio? Are you continuing to buy stocks?
BUFFETT: Every now and then, yeah. Yeah. Then I— I don't think about my own portfolio very much. I think a lot more about that portfolio of our German reinsurance subsidiary. That...
BUFFETT: That's what I spend my time thinking about.
BECKY: OK. When you take a look at the housing market, you had told us last year when we sat down here that you thought last year could be the turning point, and you pointed out in your annual report this year that you were dead wrong on that call.
BECKY: We didn't see the improvement last year, but you do think that we'll see it this year?
BUFFETT: Well, I think we're likely to, but— and I'm somewhat chastened by the fact that I sat a year ago and said it would happen by now. But 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— gets in balance in different geographies at different times. But when it gets in balance, we will need more than a million residential housing units annually. And when we're building a billion units, supply and demand will come into balance. Got way out of balance five years ago and it's taken us a long time to work it off. But it does get worked off, and households are now being formed. The first year after the recession in 2000— after it hit— in 2009, household formation went like this. I mean, that happens in recessions. But that's changed. I mean, you know, we have four million people, roughly, hitting each age cohort every year, and we form households and they want to be in houses.
BECKY: There was an article that was out today talking about what economists are expecting for GDP, and most of them, even though they do see signs of improvement, expect that we'll be growing at about 2.4 percent this year.
BECKY: Does that fit with what you see with the businesses you manage?
BUFFETT: I see our businesses getting better month by month and I've seen that ever since the summer of 2009. And the headlines have bounced around, the economists' predictions have bounced around, and I will tell you that looking at some 70-some businesses, leaving out the housing-related businesses...
BUFFETT: ...that quarter by quarter, ever since the middle of 2009, regardless of what the housing— headlines were saying, our businesses kept getting better. And they continue to. Not at some rate like that...(gesturing upward)...
BUFFETT: ...but they keep getting better. And I see no reason why that changes. I don't pay any attention to the GDP forecasts of economists.
BECKY: But corporate profits have risen, yet we haven't seen the jobs picture come along and improve at the same sort of pace.
BUFFETT: Yeah. Well, that's— in my view, that's because of the housing-related factor. This was a— 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 very quickly in September of 2008. But it's taking a long time for that to— for that to come back. But the housing-related figures— if you look at the composition of employment, construction workers show up as a number, but that's not really the number. We have five companies that are related to housing. Only one is directly in housing, Clayton Housing. We're the largest home builder in the United States, believe it or not, Berkshire Hathaway.
BUFFETT: Nobody think of us as that. But we've got four other companies, Shaw Carpet, Acme Brick...
BUFFETT: ...Johns Manville Insulation, MiTek, and those companies are— have been affected enormously by this and they're employment has gone down from 58,000 at the peak to 45,000 at the peak.
BUFFETT: When housing comes back, they will go back up and you will see that all throughout the economy.
BUFFETT: We have a healthy economy except for housing, but housing is such a big factor. Housing was 22 trillion or so of America's 60 trillion of wealth a few years back. And when that goes— gets whacked and is held on leverage with mortgages...
BUFFETT: ...the effect is enormous.
BECKY: OK, I know Joe has a question as well. Joe:
JOE: Yeah, you know, he always— it's a sore subject, that stupid brick company that he has. You know...
BUFFETT: Wait a second, I sent you the— I sent you a brick. Clearly it didn't have any effect on you.
JOE: I asked for a Marquis Jet Card, you sent me a brick. One brick. One brick.
BUFFETT: One brick.
JOE: One brick.
BUFFETT: And what...
ANDREW: I've seen the brick. It's on your desk.
JOE: No, I took it— I actually took it— I actually took it home, but that's a sore subject, Warren. So, you know, you can't— you can't win, though, Warren. I was reading about Berkshire net income come down 30 percent because of derivatives, and I'm like, how did you possibly lose money in derivatives? Because you wrote all those S&P put— you didn't lose money. You made less than you made last year on the S&P derivatives, on the puts, right? But you can't win.
JOE: You make $300 million, they're still calling you a slouch for having those derivatives.
BUFFETT: Yeah. Yeah, and actually, if you— if you— if you priced them today vs. December 31st, because the market's gone up not only here but in Europe and Japan, we would probably show something over a billion dollars of profit today. Now, whether that'll be as true on March 31st, who knows?
BUFFETT: But it doesn't mean anything. I mean, we've got— we've got $4.8 billion stuck in our pocket five years going.
JOE: I know.
BUFFETT: And this— you know, anyway, it— we wrote about it all.
JOE: Yeah, I know. So, but that's just the way the headline— the other headline today that you knew was coming was Buffett's "trust me" on succession isn't cutting it. And I— you know, the Journal's got an article and— saying that yeah, the board's comfortable. What? Your shareholders are chopped liver? They can't be comfortable, too? It creates instability. Why not just— why not just say who it is? Or are you still worried about like a David Sokol thing where you— the guy that— maybe the guy that you've— that you've identified, you know, maybe something— he falls out of favor, so you still have the option of changing it at the last minute. Why not just tell everyone?
BUFFETT: Yeah. Well, we have four stocks that we have $45 billion invested in: American Express, Coca-Cola, Wells Fargo and IBM. Every one of those four companies with 45 billion, every one of those four companies has changed management since we bought our shares. I didn't have the faintest idea who the successor of management would be in any of those four, but we've put billions and billions of billions of dollars in there. In some cases, it's changed more than once. I don't know who the next manager of those four companies will be, but I don't worry about that. They're wonderful businesses, and they've got good boards of directors; and when the time comes, they will pick the person that will do the best job. And if they make a mistake, they'll make a change. And we've had that— like I say, if you ask me 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. I know they've got wonderful businesses, and I know they're developing wonderful talent. Now, the interesting thing at Berkshire is, normally if you run a business, you're look— you're looking for somebody from production or manufacturing or sales or something to succeed the CEO. At Berkshire, we have dozens of CEOs who are running businesses. We've got people like Matt Rose running the BNSF. I mean, they are CEOs already. So we have a choice of dozens of CEOs, which his a luxury that I don't know another company that has it.
BUFFETT: So you know, in the end, you know, it may be— it could be tonight, it could be five years from now. The board of directors knows exactly who the person is the next morning. And I don't know, for example, Amazon is now the— or I should say Apple is now the largest company by market value in the country.
BUFFETT: Exxon's number two. I don't know whether you know who the successor is to Tim Cook or Rex Tillerson.
JOE: But it's not Matt Rose. Now you just said it's not Matt Rose. So now I know it's not Matt Rose.
JOE: Because you just said he's got a— he's got to run the railroads.
JOE: So he can't run Berkshire.
JOE: So it's not— no. I was hoping it might be Matt. I like Matt. Now I realize it's...
BECKY: Is that universally it's definitely not?
BUFFETT: No, I think— I think you misread that. The person— the person who's going to become CEO of Berkshire is probably a CEO of some operation within Berkshire Hathaway.
JOE: Oh, so it is Matt Rose.
BECKY: Well, you said...
ANDREW: Hey, Warren...
BUFFETT: You're breaking news here, John.
ANDREW: Hey, Warren...
BUFFETT: You're stretching to do it, but you're— yeah.
ANDREW: When you sit and talk to the board about a potential successor, and you talk about the downsides of naming that person or naming a list of people, what are those downsides? And I ask it only because there is all of this pressure, and it would seem that, you know, 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, if you will, a Steve Jobs.
BUFFETT: Yeah. I think that was probably made clear, though, after it was also clear that Steve Jobs had a real health problem. I would ask you this, who's Tim Cook's successor?
ANDREW: It's a good question, I have— you— you're...
BUFFETT: Yeah. No, no.
ANDREW: It's a great question.
BUFFETT: No, no, nobody knows. Yeah. I don't— I don't know. You know, who's— you know, who's Jeff Immelt's successor? Who's Jamie Dimon's successor? It— all of those people have decided— they've got somebody in mind. I will guarantee you that. Their directors have discussed it. But for various reasons, one of the reasons being that they don't know when it'll happen.
BUFFETT: And when it happens makes a difference. And they also probably don't like the effect of having a crown prince.
ANDREW: Right. You...
BUFFETT: They— you know.
ANDREW: You were much more...
BECKY: Warren, this is the first time...
BECKY: This is the first time that in the annual letter you've actually laid out and told the shareholders that there is one person in mind.
BECKY: In the past, it was always this idea that it was one of three or one of four people.
BUFFETT: Yeah. Well, 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. But I probably haven't made that as clear as I should've that it's always been the case that even though there were three possibilities or four possibilities, they knew which one would be the designated one the next day, but they did have these backup candidates. I probably should've made that more clear, and I tried to make that clear this time. What— 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.
BECKY: Is— a year ago, was it a different person they had in mind than it is now?
BUFFETT: No, no.
BECKY: And I ask that because David Sokol has since left the company.
BUFFETT: Yeah. No. The same person— it would've been the same person a year ago as now. And you can go back further.
BECKY: So it was not David Sokol.
BUFFETT: You can go back further than that.
BECKY: It was— it was not David Sokol a year ago or further back than that?
BUFFETT: No. Not the one they would've picked.
BECKY: Can you give us an update on what has happened with the Sokol situation?
BUFFETT: Well, I really don't know because it's being investigated by various authorities, and they talked to me last June just— and not a deposition or anything like that, it was just an informal...
BECKY: Who did?
BUFFETT: Well, I can tell you the SEC did.
BUFFETT: And they— 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, I think, something like a million four, so I assume something is going on. I hate paying these legal bills, naturally. And now if he's found guilty of a crime, we can claw those back at some point, but the bills just come in. I read the other day where Fannie Mae, they have paid 99 point something million dollars on three people, Frank Raines, Tim Howard and one other fellow, and they're not done yet, either. And, of course, that's the American taxpayer paying that. And it's a very awkward thing when you have somebody that's been charged with something that was an employee and, under Delaware law, you basically have this duty to defend them. Although you can claw it back if they're later found to commit a— to have committed a crime. And Dave has plenty of money, so we would not have a problem getting it back if that's the case. But I have no notion, I've not talked to Dave, I've not talked to the authorities. I mean, it's their investigation, and I'm on the sidelines but writing checks.
BECKY: Mm-hmm. Andrew, I'm sorry, did you have another question?
ANDREW: No, no, no. You asked the— you asked the exact question that we were planning to ask.
BECKY: Just in terms of what had happened with that situation?
ANDREW: No, less on Sokol. No. I was more interested in the fact that in the— in the report, he identified— he said that he had one candidate in mind, and I was curious what had happened in the past year that was different from years past, but he answered that question directly, so.
BUFFETT: Yeah. I started all this trouble five or 10 years ago, facetiously I answered some question.
BUFFETT: I said, `Well, I've got this envelope.' I didn't have any envelope. But, `I've got this envelope,' and I made this crack that I said, "Well, I open the envelope, and I pull out the slip inside, and it said, `Check my pulse again.'" But somehow that all got into the fact that there really was an envelope, and I— for— another one of my jokes that's gone astray.
BECKY: All right. Well, Warren, we're going to take time right now to go get a check on the markets and when we come back, we'll have more of this conversation. Andrew.
ANDREW: Absolutely. We're going to come back in just a moment. Are we going to the markets right now? We are. We're going to go across the pond to see our good friend Ross Westgate who's standing by with the Global Markets Report. Ross.
ROSS WESTGATE reporting: Hey, Andrew. Good morning to you. Everybody here in Europe perking their ears up there when Warren says he bought eight European stocks towards the end of last year. Well, if they were German stocks, he would've done quite well because the Xtra Dax so far this year up around 16 percent.
BECKY: Warren Buffett sitting here, and he said that he's paying very close attention to what you're saying, too, now that he has those eight European stocks that he's watching.
All right. Right now we're going to pause for a break, but we have much more with Warren Buffett when we come back. He'll be answering some of your email and Twitter questions right after this.
The links to the remainder of the interview:
Part 2 Buffett on Taxing the Rich
Part 3 Defending His Tax the Rich Idea
Part 4 Buffett on the Buffett Rule
Part 5 Buffett Personally Owns JP Morgan
Part 6 Buffett On His Favorite Bank Stock and Advising Steve Jobs
Part 7 Buffett Changes His Mind on Auto Bailout
Part 8 Buffett on Buybacks and His Greatest Worry