Warren Buffett (Trades, Portfolio), Charlie Munger (Trades, Portfolio) and Bill Gates (Trades, Portfolio) did an interview with CNBC after the Berkshire (BRK.A, Financial)(BRK.B, Financial) meeting.
The interview is full of great insights, unsurprisingly. I’ve summarized the interview into a few parts. Below is Part I of my notes:
On Google
Buffett and Munger had some insights on Google because Geico was a heavy user early on when Geico was paying $10 or $11 per click. Buffett hinted that he wasn’t sure whether there was a first user advantage that would prevail or Bing or other companies were going to take away the market. Buffett also said that it is psychologically harder to buy Amazon (AMZN, Financial) and Google when you looked in the first place and passed at X and then buy it at 10x. He doesn’t feel the same way with Apple (AAPL, Financial) because the valuation was much more reasonable when he bought Apple. There's always an anchoring problem with buying stocks.
On Apple
Buffett can learn to determine Apple's competitive position and can learn very easily how consumers react to Apple easier than he can try to pick out what’s really happening at Amazon or Google at any given time. Apple has tremendous pricing power, unlike TV manufacturers. And it appears that Apple’s products are sticky with a high switching cost for its consumers. IPhone is also a high price product with 50 million units volume.
On railroads
Buffett gets the AAR figures (20 categories plus intermodal) every Wednesday morning. One thing that's helped with rails is that natural gas has gone up in price. There's a lot of coal that doesn't move at $2 natural gas that moves at $3. There's a lot of electric generation that a switch is flipped, and it's the input. Right now, natural gas is close to $3.25 on. And that dictates the use of coal a lot of places, where if it was $2.25, they'd be running natural gas. Coal shipments are actually probably up the most percentagewise of any of the 20 categories.
The truckers, who everybody always thought of as the railroads' biggest competitors, are also railroads' largest customers. J.B. Hunt (JBHT, Financial) and Schneider (SNDR, Financial) are all big customers to BNSF (BNSF loads the trucks and double stacks them). Trucking companies have an advantage just to start with in loading in a huge percentage of cases. But if you really are going to move heavy traffic, hundreds and hundreds of miles, bulk traffic, they're better off sticking them on the railroad and then picking them up the other end. At Christmas time, a lot of it will move by rail.
On housing
Housing is getting better, but it isn't booming. Both resale of existing homes and manufactured home product are up significantly this year. There was this huge shift after 2008 and '09 for people to rent rather than to buy. We had 69% home ownership, which dropped to 63%. And there's some reasons why maybe it will stay lower. For one thing, when people bought houses in the early 2000s, they thought almost for sure they could sell them for profit later on. So you had flippers or people that at least were convinced that they couldn't lose. People don't feel that way after what happened. And then anytime you have a recession, it affects matrimony. But that's wearing off.
Brick sales will be better and the earliest they have been so far this year. And they were better last year. And with carpet, now people are changing their minds about what kind of covering they want for their floor. They're going more to hardwood. There's been some change in preferences. But when new home sales pick up, you know, flooring sales pick up. When houses change hands, paint picks up. There's a big system there that feeds.
On 3G’s business model
Productivity gains are the only way that consumption gains come. If productivity per capita stays the same, consumption per capita stays the same. But when the benefit of productivity gain comes at the cost of your job, understandably, you feel that you're getting the short end of the stick. Society may be benefiting, but you're getting hurt.
The railroad industry, after World War II, had something like 1.6 million people working in it. It has less than 200,000 now –Â from 1.6 million to under 200,000 –”‹Â and it's carrying considerably more freight than it was at that time. Now it's true there was a passenger factor to that. But the improvement in productivity has been dramatic. Otherwise, there wouldn't be any railroad businesses existing like it did in 1946. That's easy to talk about. Berkshire tried to buy businesses that were already productive and keep them that way. Or to have their managers keep them that way.
3G has come into businesses where it really could do the same level of business with a lot fewer people. It's made the changes promptly when it happened, and it's been good about severance pay and all of that. It has followed the standard capitalist formula, Marxism formula, of trying to do business with fewer people. And that benefits everybody. It particularly benefits the owner. But it's a painful process. And sometimes there's a big political reaction to it.
The guts of capitalism is you don't have a lot of people doing something when fewer people can get the job done. You free those people up to work in other areas and innovate for them so that they bring out new products. And people live better when there's more output per capita. So you don't gain anything by having thousands of people around. You can afford to do it in some cases. Prosperous companies tend to be sloppier than companies that are in tougher businesses. You're forced to think harder. And packaged goods generally has been a very profitable business. If you look at the great companies in that field for decades and decades and decades, they earned high returns on capital. And so you probably found more sloppiness in employment.
On airlines
Obviously it's a terrible mistake (Dr. David Dao being dragged off a United Airlines flight). You really want people to be treating everybody they meet in business as if it's the person they love the most. At Geico there is a practice that people working at the call centers all have a picture of whomever they love the most so when they talk to the customers, it would be like talking to that person because it really comes through.
One of the things the airlines have found is that a high percentage of people are price conscious. A significant percentage of travelers would rather be treated that way and fly for X than have far more leg room and more all kinds of things and travel for X plus 25%. So to some extent they try to segment. And with airlines you often don't have a choice. More than 70% of the flights that are originated out of Newark are United Airlines (UAL, Financial) flights.
The one thing going for the airlines is they've become unbelievably safe. But they have also worked toward having higher load factors (capacity utilization rate). When they have load factors like they did in the past around '70, they went bankrupt. They need high load factors. And high load factors mean a fair amount of discomfort. And it has kept prices from going up.
If you want one figure that really counts in determining how well the airlines are going to work economically it's going to be the percentage of seat occupancy basically. And of course the industry is looking for all kinds of things through loyalty points and all that. To make it stickier but in the truth, when people are going to fly from X to Y, they can go to their computers and figure out very quickly how much it's going to cost them. And it's a tough business. It was a suicidal business for a long time. Having the consolidation that came about through the bankruptcies has made it an extremely competitive businesses. If they get down to running at 70% capacity or something like that, it'll be suicidal again.
One other factor in the airline industry currently is pilot shortage to some degree. And pilots come in from the military. And they're just not coming in as much. Which means that the pilot shortage has gained some strength relatively. Now, there are differentials as you work for the smaller airlines and all of that. But if you're running a big airline, one of the things on your list of things to worry about is labor costs going up. And you need experienced pilots. You have high requirements of hours for those people to be in those seats.
On the changing business paradigm
You take say the five largest businesses in the country by market value. It flips in and flips out. Let's assume we're out. Those five businesses have a market value of $2.5 trillion or more starting with Apple. You could run those five businesses with no equity capital. So you have close to 10% of the market value perhaps of the U.S. in five extremely good businesses that essentially take no capital.
Now that was not the case in the past. If you were at the turn of the century and you were talking about U.S. Steel (X, Financial) and the big railroads and all that, you made large sums or Rockefeller with the oil business by earning money with refineries or steel mills. And finally you earned enough so that you bought another one, and you borrowed some money along the way. But you had to build up equity capital dramatically as you went along. And even if you go back to the Fortune 500 of 30 years ago, the companies that were big took big capital. Now you've got the five highest value companies in the country. They don't take any capital. Even IBM (IBM, Financial) has net no tangible assets. If you take the GAAP equity, subtract the intangible assets, it's less than zero. So you could have a $2.5 trillion business in the U.S. and not need equity capital. And that is a different world than the past.
And now there's this huge shift to intangibles. And they produce products that people love. It makes a big difference. When people talk about capital shortages and how we need to bring the money back to the U.S. based on this conception of how business was 50 years ago and sometimes it's useful for the people in those businesses to play up that fact and not what really has happened in the way of change.
Jeff Bezos has talked about that in Amazon. He said, "Lookit, with Amazon, we needed the internet. Somebody else spent billions of dollars developing it. But it wouldn't have worked without the internet."
And he said, "We needed transportation. Somebody else had already built the railroads and UPS (UPS, Financial) all that sort of thing."
He said, "We needed payment systems. That would take billions of dollars to build. But that had already been done by Visa (V) and all –Â along the lines." So he took three huge requirements where the other guys had spent the money, and then he combined them in a way that he didn't have to spend the money.
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