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Grahamites
Grahamites
Articles (308) 

Notes From Warren Buffett's 3-Hour CNBC Interview

Interesting points made by Buffett during the interview

March 01, 2018 | About:

The “Oracle of Omaha,” Warren Buffett (Trades, Portfolio), did a fantastic three-hour interview with CNBC on Monday. As always, Buffett dispersed wisdom and great insights. Below are my notes from the interview (courtesy to CNBC for the transcripts).

On share repurchases (interesting to note that Buffett’s repurchase threshold might be bumped up higher in the future):

"We know that we're doing the continuing shareholders a favor if we buy it at that price (1.2x book value). And then that gets increasingly more questionable as you move along from there. And obviously I leave some margin of safety when I do the 120%. And if we were going to spend a lot of money to buy in stock at some time in the future, and it was 125% or 127% or something like that, we'd probably go that direction."

On GE (interesting to note that Buffett has committed to spend as much as a whole day to read GE’s 10-k once it’s out. He also hinted on what he would be focusing on when the 10-k comes out)

"And clearly there were mistakes made, and they made mistakes in long-term care. We made mistakes in long-term care. They weren't to the same degree, but that turned out to be a huge one. And I will read their 10-K when it comes out. I'll read it very, very carefully. It'll probably take me all day to do it, but I'll do it.

There's a lot of flexibility when you're booking either construction in progress or potential service contracts, everything. I'll be very interested in what they have to say on that. You know, I would say the accounting at GE (NYSE:GE) has not been a model at all, in recent years. But you can make mistakes in something like insurance reserving, big time. And long-term care has probably been the biggest single element of mis-reserving in insurance throughout the industry. And they were in it big time, but I was staggered by the amount of it. It was the Kansas department supervising them. And that doesn't happen overnight. So it'll be interesting to see just exactly what the correspondence was between the Kansas department and the company and all of that sort of thing."

On Samsung:

"And so we bought some when Samsung was at about a million won. You got to divide that by something over 1,000. We bought a reasonable amount. We did sell it when it went up. It's higher than this now. It went up to 1.8 million, or something. I think it's around 2 million, 2.3 million or 2.4 million. The won went in our favor a little bit too. So we did a little bit better in dollars."

On the difference between airline and railroads (interesting to note that Buffett wouldn’t rule out owning an entire airline):

"The airline business is different. You know, people can go in and form ultra low cost ones. I mean, Frontier is out there, waiting to go public, perhaps. So you're not gonna have these huge, huge trunk carriers necessarily more of those. But you can always compete. But you can't build a new railroad from Omaha to Chicago tomorrow or something of the sort. But you can add a flight if you're one of the airlines already there or you can perhaps come in and get in the gate and then fly. So it's a way different set of economics between the two industries. On the other hand, I wouldn't rule out owning an entire airline. But it's a different business. A very different business. In the railroad business, all the tracks have been pretty much laid and all of that. So that settled into a business. Now, it's regulated and means that your earnings, you're a common carrier. And many places, you compete with another railroad, and other places, you don't. And there're different rules that apply even in terms of pricing in those cases. But it's a perfectly decent business. It will lose volume in coal over time. And that's an important product. But it'll probably gain in other areas. So it's two different animals."

On Apple (NASDAQ:AAPL) and IBM (NYSE:IBM):

"Well I was wrong on at least I felt I was wrong on IBM. Now, I may have been wrong when I sold it, too. But I certainly was wrong when I bought it. And I've felt that Apple has an extraordinary consumer franchise. Apple's a different kind of business than IBM. They're both tech, obviously, in a major way. And they even have a joint venture, you know, on some things. But I think I understand consumer behavior perhaps better than I do the tech business. It wouldn't take much to beat it. And I liked it, I like Tim Cook very much. I like their policies. I see how strong that ecosystem is. It's to an extraordinary degree. I mean, I look at my grandchildren, my great grandchildren and everybody in the office, I mean, their families. I talk to the people at the Furniture Mart when the ten hadn't arrived, nobody goes over to, you know, buy an Android. I mean, you are very, very, very locked in at least psychologically and mentally, to the product you're using. I mean, you got all kinds of stuff up on there. It's a very sticky product."

On interest rates (interesting to note that Buffett seems to imply that a 100 bps movement of interest rate doesn’t make much difference but once the long-term rate is above 4%, it makes a difference):

"BECKY QUICK: And part of the reason that you've been so bullish on equities for many years at this point is the interest rate environment. You've looked at interest rates and said, "Interest rates are gravity on stock prices. And when interest rates are so low, stock prices inevitably are going to climb." There's been this really weird thing that's been happening in the markets. Where all of a sudden, good news that we got from a good jobs report made people start to worry that interest rates were going to climb and that the Fed was going to raise rates more than anticipated. People got really nervous around that. You can still see it every time we get up on the ten year back towards 3%. It gives investors, or at least traders I should say, some concerns about what's happening. How do you kind of gauge all of that?

WARREN BUFFETT: Becky, a bond, if you buy a 30-year government bond, it has a whole bunch of coupons attached. In the old days it does, now it's all electronic. But it has a whole bunch of coupons. And the coupon pays 3%, or whatever it may say. And you know that's what you're going to get between now and 30 years from now. And then they're going to give you the money back. What is a stock? A stock is the same sort of thing. It has a bunch of coupons. It's just they haven't printed the numbers on them yet. And it's your job as an investor to print those numbers on it. If those numbers say 10% and most American businesses earn over 10% on tangible equity. If they say 10%, that bond is worth a hell of a lot more money than a bond that says 3% on it. But if that government bond goes to 10%, it changes the value of this equity bond that, in effect, you're buying. When you buy an interest in General Motors or Berkshire Hathaway or anything, you are buying something that, over time, is going to return cash to you. Maybe a long time in terms of Berkshire, but it'll be bigger numbers. And those are the coupons. And your job as an investor to decide what you think those coupons will be because that's what you're buying. And you're buying the discounted value. And the higher the yardstick goes, and the yardstick is government bonds, the less attractive these other bonds look. That's just fundamental economics. So in 1982 or '83, when the long government bond got to 15%, a company that was earning 15% on equity was worth no more than book value under those circumstances because you could buy a 30-year strip of bonds and guarantee yourself for 15% a year. And a business that earned 12%, it was a sub-par business then. But a business that earns 12% when the government bond is 3% is one hell of a business now. And that's why they sell for very fancy prices.

BECKY QUICK: So 3% is a long way from 15% that you were just talking about.

WARREN BUFFETT: Absolutely. But I watched it go from 3-15% though, too.

BECKY QUICK: Right. Is there an inflection point on that way because people think, "Oh my gosh, we've gone from 2.4% to 2.9% and that is a big difference."

WARREN BUFFETT: It isn't much. That's not much.

BECKY QUICK: Historically speaking, that's still the way we should be measuring these things

WARREN BUFFETT: Absolutely.

BECKY QUICK: Not on the absolute movement or the percentage gain movement over time?

WARREN BUFFETT: 2.4-2.9% is nothing if you're comparing it with businesses that earn 12% on equity and reinvest. And the S&P, you can just look at the figures for decades, has earned on tangible equity, it's earned a lot more than that. And it translates into more, higher prices than it should.

BECKY QUICK: Is there a tipping point along the way, or is it a gradual decline in terms of these things?

WARREN BUFFETT: Nobody knows. Yeah. But it is gravity. I mean, if you told me interest rates were going to be 15% next year on bonds, you know, there's a lot of equities I wouldn't want to own now. And I would buy a lot of governments at 15%, and I kind of wish I had in 1982, but I didn't.

BECKY QUICK: If I told you that the long bond was going to trade at 4.5-5% next year, what would you (think)?

WARREN BUFFETT: It makes a difference. But it's been idiotic to own long bonds during the last, you know, I talk about this in the report. It's just been idiotic. And big, public pension funds and all that, they sat there and they owned bonds. Now, they may have bought them on a 4% or 5% basis. But if they go to a 3% basis, they're selling way above par. The way people think about it is that they do some very silly things."

About the author:

Grahamites
A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 4.9/5 (14 votes)

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Comments

mespenlaub
Mespenlaub premium member - 9 months ago

Anyone know where you can watch the actual video??

Grahamites
Grahamites premium member - 9 months ago

Mespheniaub- you can find the pieces of the interviews on youtube.

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