tv The David Rubenstein Show Peer to Peer Conversations Bloomberg June 3, 2017 3:30am-4:00am EDT
♪ mr. buffett: i said, "what do i do with this money?" he said, "investing it is about assigning the right use for the money." i did not want to go to college. my dad wanted me to go to college. i had $175,000. i thought that was all i would need to live the rest of my life. david: did you ever run into that guy again? mr. buffett: he needs protection now. david: when you had your first annual meeting, how many showed up at that? mr. buffett: we had about 12. you have to count my aunt katie and a couple of friends. david: any advice to a young investor who would like to emulate you? >> would you fix your tie, please? david: most people would not recognize me if my tie was not fixed. let's leave it this way. all right. ♪
david: i don't consider myself a journalist. nobody else would consider myself a journalist. i began to take on the life of being an interviewer even though i had a day job of running a private equity firm. how do you define leadership? what is it that makes somebody tick? ♪ david: i appreciate it. thank you. alright, well. right, right. we are at your favorite restaurant in omaha, gorat's. why do you like it so much? is it the food? the price? the combination of both? mr. buffett: it is the food, the price, the heritage. four generations of the gorat family were involved. we went to driver's school together. i have known the people over the years. the steaks are great.
the prices are right. i had lunch here earlier today. it was very good. it was not that expensive, and i quite enjoyed it. a lot cheaper than new york and washington. david: a lot. mr. buffett: i buy people lunch here. they invite me to lunch in new york. good arbitrage. david: you grew up in omaha, but then moved to washington when your father became a congressman. how did you start your business career in washington? with various pinball machines or golf businesses? mr. buffett: i had a couple of those businesses going in, and the best we had, the pinball was the best. the wilson coin-operated machine company. that was named after the high school my partner and i went to, but we had our machines in barbershops and the barbers always wanted us to put in the machines with flippers, which were just coming in, but those machines cost $350. whereas an obsolete machine only costs $25. we always told them to take it up with mr. wilson. this mythical mr. wilson, he was one tough guy, i tell you. david: when you graduated from high school, you were not interested in academics at that time? mr. buffett: i was not interested. david: and your high school
yearbook said he is likely to be a stockbroker because he is very good in math. why did you go to wharton, and why did you only stay two years? mr. buffett: i did not want to go to college, although my dad wanted me to go to college. we did not have sats then. he practically would have done the sats for me. in the truth, i always wanted to please my dad. he was a hero to me, and still is. he was kind of cajoling me a -- g and said, "let's fill out an application for the hell of it." he suggested wharton, and i applied there and they let me in. and after the first year, i wanted to quit and go into business. my dad said, give it one more year. so i went the second year and i said, i still want to quit. and he said, well, you know, you have got almost have enough credits. if you go to nebraska, which i was quite willing to do, for one year, you can get out in three years, so that is what i did. david: has wharton ever called you up and said you are a half graduate, you should give us some money? or do they not bother you? mr. buffett: so far they haven't tried that line, but they may after they watch this. david: after that, you wanted to
go to business school? mr. buffett: i won some minor scholarship in nebraska to go to any graduate school i wanted to. they gave me $500. so i applied -- my dad suggested harvard. so i applied. david: you did not get in? mr. buffett: i did not get in. it took 10 minutes -- i spent 10 hours going to see the guy who interviewed me, and he looked at me and he said, forget it. david: have you ever run into that guy again? heard from him since? mr. buffett: no. he needs protection now. [laughter] david: so i guess harvard does not come after you for money because they turned you down. but you went to columbia business school. why did you go to columbia? mr. buffett: i was at the university of omaha. what was then called the university of omaha. i was in the library in august, and i was leafing through catalogs, and i just happen to see columbia had graham and dodd as teachers. i had read their book but had no idea they were teaching. so, i wrote dean dodd, and i said, "dear dean dodd, i thought you guys were dead." i said "now that i know you are alive, i would really love to
come to columbia if you can get me in." david: so i assume you did well at columbia business school? mr. buffett: i did ok there. david: you worked for mr. graham? how did that work? mr. buffett: it was terrific in the sense that i was working for my hero. but then, he was going to retire in a couple of years, and so i was only back there for a year and a half. but every day, i was excited about being able to work for him. david: so what you were good at was picking stocks, according to his formula, which was to look for companies that were undervalued -- now we call that value investing. did you realize that he had some principles that were fairly unique and that is what you followed his guidance? mr. buffett: well, by the time i went to work for him, i probably could have recited his books. i read his books multiple times. and so it was more a question of being inspired by him than it was by learning something from him. david: why did you come back to omaha? mr. buffett: i wanted to come back to omaha. i had made many friends in new york, i had a lot of friends in new york, but we had two kids by
that time, and i lived in white plains. i take the train in. i take the train back. and it didn't strike me as much of a life compared to being here in omaha. both sets of grandparents were alive at that time. it was just -- uncles and aunts -- omaha was a more pleasant place to live. david: alright, so you buy a house here -- mr. buffett: i rent a house. david: you rented a house? mr. buffett: i rent a house for $175 a month. david: ok, and when did you buy the house you are still in? mr. buffett: 1958. when my third child was on the way. david: you started a partnership here. how did you raise money? mr. buffett: well, david, actually when i came back, i had about $175,000. i thought that was all that i would need to live the rest of my life to take it of everything. i planned on going to school, thought about law school. david: think about how successful you could have been as a lawyer. mr. buffett: that is true. i know, i have regretted it ever since. david: you first partnership, you had to cobble together some money. how much money did you actually cobble together? mr. buffett: we met one night early in may of 1956, and there were seven people there, aside
from myself. and they put in $105,000, and i put in $100, so we started with $105,100. we started with that amount. i gave them a little piece of paper called the ground rules. david: but ultimately you ended that partnership? mr. buffett: what happened was between may of 1956 and january 1, 1962, i started 10 more partnerships. i made a mistake. i had no secretary, no accountant or anything. when i bought a stock, i broke it into 11 tickets. i kept of 11 sets of books, filed 11 tax returns, and i did it all myself. i was worried. it was other people's money. so, i would go down to the bank, have things delivered. finally, i got wise and on january 1, 1962, i put all 11 of the previous partnerships
together and ran that until the end of 1969, at which time i dissolved it. david: you dissolved that one. then, in 1969, you started a new partnership? mr. buffett: no, in 1969, by that time we had $105 million in the partnership, and about $70 million or so of that was in cash to be distributed, and the balance was in three stocks. mostly berkshire hathaway that i distributed pro rata to everybody. david: ok. and then you started buying more stocks through the vehicle berkshire hathaway? mr. buffett: stocks and businesses. yeah. david: what would you say is the reason for your ability to do this? was it that you studied the companies more than anybody else?
you stuck to your principles? that you were smarter than other people? that you were better principled? people were just caught up with fads, and you did not get caught up in fads? what would you say is your reason for success? mr. buffett: the first two. we bought businesses that we thought were decent businesses at sensible prices, and we had good people to run them, but we also bought marketable securities in berkshire. over time, the emphasis shifted from marketable securities over to buying businesses. david: what was the theory behind buying a railroad, because people thought they were fossil businesses? mr. buffett: the railroad had a bad century. they were kind of like the chicago cubs. everybody has a bad century now and then. ♪
♪ david: over the years, you have bought a number of companies and had stakes in a number of companies. one of them i know well is the "washington post." how did that come about? mr. buffett: well, in 1973 -- the washington post company had gone public in 1971, right about the pentagon papers time. but in 1973, the nixon administration was sort of through bebe rebozo, a pal of nixon's -- they were challenging the licenses of two of the florida television stations that the post owned. so the stock went from 37 down to 16. now, at 16, there were about 5
million shares outstanding. so, the washington post company, which was intrinsically worth $400 million or $500 million, was selling for $80 million in the market. we bought most of our stock at about the equivalent of $100 million in the market. and it was ridiculous. you had a business that unquestionably was worth four or five times what it was selling for, and nixon wasn't going to put them out of business. david: when you are doing these analyses, then and now, do you have computers that help you? or how did you actually read all -- do you get printed materials to read about "the washington post," and how do you do it today? mr. buffett: well, pretty much the same way, except there are fewer opportunities now. but i met bob woodward and he just came out with "all the presidents men." all of a sudden, at 30 years of age, he was getting quite wealthy. and we had breakfast or lunch over at the madison hotel and he said, what do i do with the money? i said, "investing is just about assigning yourself the right
story." i said, imagine if ben bradley this morning said to you, what is the washington post company worth? what would you do if you have to write this story in a month? you would go out and interview tv brokers and newspaper brokers and assign value to each asset. i said, that is what i do, i assign myself the right story. it is nothing more than that. now, there are some stories i can't write. if you asked me to write a story on what is some glamorous, non-profit-making business worth, i do not know how to write the story. but if you ask me to write a story about what is potomac electric power worth, or something like that, i can write the story. that is what i am doing every day. i am assigning myself a story, and then i go out. david: so you get the annual reports and then you read them the way some people might read novels, and you do the calculations for how things are worth in your head? mr. buffett: sure.
david: or do you have computers that help you? mr. buffett: if you need to carry out something to four decimal places, forget it. david: do you use a computer today even? mr. buffett: i use it to play bridge. and i use it to research, a lot. david: so there is a computer in your office? i do not have one in the office, but i do at home. david: for your smart phone, if someone wants to get ahold of you, can someone get a hold of you on a smart phone or mobile telephone? mr. buffett: no, a smart phone is too smart for me. david: and a computer, you use rarely? mr. buffett: one of the trick questions that bill gates and i give when we are talking is -- who is on the computer more, excluding e-mail? and the answer is i probably am. because i probably play 12 hours a week of bridge on it. and then i use it for research. david: who do you play bridge with? is it anonymous people on bridge? mr. buffett: no, i go by the name of t-bone. and there is a woman i play with a woman in san francisco who goes by the name of sirloin. she is a two time world champ, and i am a two time world chump. so we have been playing together for decades. david: and are you at a world-class level after all these years? mr. buffett: no. no. i -- she -- you could not have a better teacher than she is, but
the student has limitations. david: now you mentioned bill gates. how did you actually come to know bill gates? mr. buffett: it came out, because meg greenfield, who was the editor of the editorial page of the "post," she called me in the late 1980's, and she said, "warren, i have always loved the pacific northwest," she was -- she had grown up there and said, "but i want to know if i would have enough money to purchase a house, a vacation-type house on an island near seattle." i said, "meg, anybody who asks me if they have enough money, does have enough money." so, she bought the house. so she invited me and others to the house, and she knew the elder gates. so she called mary gates. and then mary went to work on bill to try to get him to come. and bill said he was not going to come down and meet a stockbroker. but mary was a very firm type. and said, "you are coming." he said, "i am not going." finally, they started negotiating hours, and she said four hours, and he said one hour.
when we met, we talked for about 11 hours straight without being interrupted. david: so that was the beginning of the relationship. mr. buffett: yeah, we hit it off. david: but you never bought any of his shares? mr. buffett: i bought 100 shares just to keep track of what this young kid was doing. david: and he is now on your board? is that right? mr. buffett: that's correct. david: the relationship has become very close, and you get involved with him on philanthropic things as well. mr. buffett: oh yeah. we have a lot of fun talking. david: let me just ask about the philanthropic things you have done with bill and melinda. how did the idea of giving your money to somebody else's foundation come to you? mr. buffett: well, i originally had planned that my first wife would handle the disposition of, well, everything that we had. and we came to that conclusion when we were in our 20's. we started something called the buffett foundation over 50 years ago. but i did not give away a lot of money during those intermediate years, because i felt i was compounding at a rate that i could give away billions instead of millions if i waited a little
while. she died in 2004, so that plan disappeared. and then, i was faced with the question of, how do i give away this money in a way that goes to the people i want without me doing all the work? david: so you called bill or melinda one day and said, "guess what, i am going to give you the bulk of my fortune." what was their reaction? mr. buffett: it wasn't quite as elegant as that, actually. i don't remember clearly. at some point, i did call them up. it was done over the phone. david: you did not ask them to call it the bill and melinda gates and warren buffett foundation? you did not want your name on it? mr. buffett: i did not think that would do any good. david: you were on the board board of the bill and melinda gates foundation now? mr. buffett: that is true, but they run it. david: what are the highlights of some of the deals you are most proud of? let's take one you did recently. the biggest deal you have ever done was precision castparts, $37 billion. mr. buffett: yes. it was between $32 billion and $33 billion of cash, and then we assumed about $4 billion of debt.
david: so, to spend $37 billion, you spent a year studying the company? mr. buffett: no. david: how much time did you spend with the ceo? mr. buffett: i met the ceo i think on july 1 last year. and he happened to be calling on certain shareholders. and one of the fellows in our office had had a position in the stock for some time. so it was an accident i met him. if i had been out playing golf or something, it never would have happened. but i went in and i liked him. i heard him talk for 30 minutes. i said to the fellow in our office and tell him that i will call tomorrow. if you would like to receive a cash bid from berkshire hathaway, we would supply one. and if he wouldn't like to receive one, forget we ever called. david: that was it? do you ever hire investment bankers to help you analyze a company? mr. buffett: not to help analyze a company. sometimes, they are involved in the deal. we are perfectly willing to pay a fat commission. david: one time you told me a story about how an investment banker was hired by somebody you
were going to try to buy. mr. buffett: i said we would pay $35 a share for the company, then american energy, and they hired an investment banker. the investment banker came out and spent about a week. and they kept -- they wanted to send -- they sent a big bill at the end, and they said you have to increase your price to make us look good. i said, "i am not really worried about whether you look good." so, they hang around for a week, and finally they called up and pleaded and said, can't you increase your price somewhat so that we can send a bill and get paid appropriately for our non-services? and so i said, "ok, you can tell them that we will pay $35.05, and you can say that you got the last nickel out of me." so that is what we paid, $35.05. david: you normally make a price? mr. buffett: yes. david: do you ever do unfriendly deals? mr. buffett: no. no. berkshire hathaway was originally an unfriendly deal. but no, we are just not interested. not that unfriendly deals are necessarily bad. there are managements that should be replaced.
david: people must call you every day and say, "i have a deal for you. it is perfect." how often do any of these deals pan out? mr. buffett: they don't call every day. and we have made our criteria fairly clear. so, there are relatively few who call. and when somebody calls, i can usually tell within two or three minutes whether a deal is likely to happen or not. there are just half a dozen filters, and it either makes it through the filters or it doesn't. david: one time, i was told you got a letter from somebody from israel -- mr. buffet: correct. david: saying to take a look at our company. what are the odds that they would send you the prospect over the transom and you say you will buy it? and you did buy it. mr. buffett: we did buy it. we bought 80% of it for $4 billion, and we later bought the remaining 20%. david: before you bought it, did you go to israel to look at the company? mr. buffett: no, i did not go to israel. i hope it is still there. david: and you are happy with what you bought. mr. buffett: absolutely. david: and you bought one of the biggest railroads in the world. what was the theory behind that? people think of them as fossils.
mr. buffett: the railroad business had a bad century. they are kind of like the chicago cubs. everybody has a bad century now and then. but finally, the railroad industry got rationalized to quite an extent, and modernized, and the railroad business is a good business. it is not a great business, but it is a good business. in the fall of 2009, we already owned a fair amount of bnsf, northern santa fe, and the price -- it looked like we could do it at a sensible price. so that was a thursday. and on friday, i said we would pay $100 per share if the directors were interested. then he checked with the directors over the weekend, and the following sunday we had a contract signed. mr. buffett: somebody from the white house calls and says, "would you mind having a tax named after you?" and i said, "if all this diseases have been taken, why shouldn't i -- i will take a tax." ♪
david: but we were having roughly 2% or less, slower growth in the last couple years. you think it is ever possible we will grow 3% or 5% again in this economy? mr. buffett: there will be some years. but 2% growth, if you have a little less than 1% population growth, means in one generation -- 25 years, call it -- we will add maybe $18,000 or $19,000 of gdp per capita, per family of four, so we are just beginning. at 1% -- my life has been a product of compound interest. maybe it is better to do it at higher rates, but, if you have an already prosperous economy -- and we have the most prosperous economy the world has ever seen -- and you keep compounding it over time, people will be living far better 20 years from now than they are now. david: you have said your secretary pays a higher tax rate than you do. and you -- mr. buffett: counting payroll taxes, yes. still does. david: you favor changing that? mr. buffett: some years ago, somebody from the white house, not the president, called to say
that they had read my views on taxation, and said, "would you mind having a tax named after you?" and i said, "well, if all the diseases have been taken away, why shouldn't i -- i will take a tax," and so they refer to this. i really do feel that anybody making millions of dollars a year should have a combined payroll and income tax that is at least 30%. and in my office, everybody in the office does have that, except me. david: how do you think you became a democrat when your father was a big republican and you live in a very conservative state? how do you think that evolved? mr. buffett: civil rights more than anything else. i did not think about it when i was 12 years old or 14 years old. and i went to a school where there was a school for blacks a few hundred yards away, and it just never dawned on me how different life was for other people. and then, as i got to see more of the world, i noticed there were a lot of things that were unfair, and the democrats seemed to be doing a little bit more
about it. david: in berkshire hathaway today, you have an annual meeting that attracts roughly 40,000 people. mr. buffett: correct. david: when you had your first annual meeting, how many people showed up at that? mr. buffett: well, we had 12, but you had to count my aunt katie and my uncle fred, and a couple of managers. we usually had about two outsiders. david: when you started berkshire hathaway, did you ever in your wildest imagination think you could build a company that would become one of the biggest in the world? was that ever in your plans? or -- mr. buffett: no. no. i have always just put one foot in front of the other. david: what is it that you would like to have as your legacy? mr. buffett: i would like to be the oldest man that ever lived actually. no, i like teaching. and -- if i have been a decent teacher, and i have a lot of university students come out every year. david: and today, is there anything on your bucket list that you would like to do that you haven't done? mr. buffett: i would have done it. because if there is anything i want to do, i do it. money has no utility to me.
time has utility to me. but money in terms of going -- making trips or having more houses or having a boat or something -- it has no utility to me whatsoever. it has utility to other people. david: what motivates you to run a company when most people your age are playing shuffleboard or they are relaxing or doing something? mr. buffett: they spend all week planning their haircut usually. i get to do every day doing what i love with people that i love. it does not get any better than that. david: so, the greatest pleasure in your life -- other than doing interviews like this -- is what? looking at new companies? making investments? giving away the money? what gives you the most pleasure? your grandchildren? mr. buffett: all of the above. the truth is that i regard berkshire hathaway sort of like the way a painter regards a painting. the difference being that the canvas is unlimited. so there is no finish line at berkshire. and it is a game that you can continue to play.
david: any words of advice that you give to a young investor who would like to emulate you? what would you recommend they do to build something close to what you have done? mr. buffett: i think you should look for the job that you would want to hold if you didn't need a job. you're probably only going to live once. shirley maclaine may differ with that, or a few people, but you do not want to go sleepwalking through life. and you really -- whether you make x or 120% of x, it really isn't remotely as important as to whether in most cases you marry the right person and you also find something that you would do if you did not need the money. i have had that job for, you know, 50 or more years. and i was lucky in that i sort of found early on what turned me on that way, but don't settle for something if you can possibly -- don't worry about making the most money this week or next month. when i offered to work for ben graham, i said i would work for nothing, and i meant it. just the idea of being turned on. so look for the job that turns you on, find a passion. ♪
♪ [opera music plays] [singing in italian] ashlee: this is muriwai beach in new zealand. this is a sheep. and this is gandalf. most people come to new zealand to check out the country's unmatched beauty, and to get their middle earth fix, and that makes perfect sense. but on this trip, i'm hunting for something else, something less obvious.